What is behind big pharma's underperformance?
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The pharmaceutical industry is caught between a rock and a hard place. If the pricing concerns sparked by the recently enacted Inflation Reduction Act are not enough, the Federal Trade Commission has stepped up scrutiny over merger deals, hurting prospects for a buyout spree that was expected to offset an upcoming patent cliff.
Highlighting investor worries, the VanEck Vectors Pharmaceutical ETF (NASDAQ:PPH), which represents 25 of the largest global pharma stocks, has added only ~3% over the past 12 months, trailing the ~16% gain in the S&P 500. The SPDR S&P Pharmaceuticals ETF (NYSEARCA:XPH), a benchmark of the broader pharma industry, has remained flat, as indicated in this graph.

A major wave of patent expiries is expected to occur in 2025â2030, when some of the leading pharmaceutical brands are set to go off patent, allowing the market entry of low-cost biosimilars and generics in the U.S. and EU.
In January, AbbVie (ABBV) met with the first U.S. biosimilar for its blockbuster arthritis therapy Humira when Amgen (AMGN) launched its low-cost version as the first of many knockoffs expected this year.
With a Sell rating on XPH in April, Seeking Alpha analyst Hunting Alpha calls the loss of patent exclusivities a major headwind for pharma. According to observers, big pharma is not yet ready to offset an estimated >$200B loss expected during 2022â2030 when some of their best-selling medications go off patent.
The Biden administrationâs recently implemented drug pricing reforms have added fresh concerns. The leading pharma lobby group, the Pharmaceutical Research and Manufacturers of America (PhRMA), as well as Merck (MRK) and Bristol Myers Squibb (BMY), have already brought legal challenges to the law.
Worries over drug pricing concerns and the looming patent cliff have led to biopharma's recent hunger for deals.
Data from Stifel suggest that pharma and biotech firms have splurged $85B on acquisitions during the first five months of the year, compared to ~$36B and ~$49B spent during the same period in 2022 and 2021, respectively.
This could mean eye-popping deals for smaller biotechs as big pharma hunts for bolt-on acquisitions. Over the past year, the SPDR S&P Biotech ETF (NYSEARCA:XBI) has added ~12%, outperforming both the XPH and PPH.
Seeking Alpha analyst BiotechValley Insights maintained their Buy rating on XBI, arguing that the "M&A wave in the biotech sector presents a prime opportunity for investors to profit from the rising valuations of small and mid-cap firms" in the ETF.
However, the upsurge in M&A activity has already drawn regulatory scrutiny. Amgen (AMGN) is fighting the Federal Trade Commissionâs (FTC) attempts to block its $28B acquisition of Horizon Therapeutics (HZNP), which was set to become the largest biopharma M&A deal last year.
In May, Pfizer (PFE) shares came under pressure amid concerns
that the FTC could target its $43B deal to acquire cancer drugmaker Seagen (SGEN) next.
More misery could be ahead for big pharma as the political rhetoric over drug pricing grows louder during the upcoming election year, a period when healthcare companies have historically underperformed.
Seeking Alpha analyst Valkyrie Trading Society thinks that better opportunities lie elsewhere. In a recent article on PPH, the author warned against a large-cap approach and suggested that regulatory tightening on big pharma has only just begun.
More on pharmaâs regulatory challenges

Seagen, Prometheus Biosciences fall amid news of FTC planned block of Horizon/Amgen deal
AbbVie, Amgen among firms targeted for Medicare inflation penalties
Medicare publishes initial guidance on drug price negotiations