By Paul R. La Monica
Big Pharma companies are constantly searching for the next hot new drugs -- and it's often a lot easier to buy them than develop them. That's great news for biotech investors. Merger activity is starting to heat up again in the sector.
There were three notable deals in March alone. Biogen just announced a deal to buy Apellis Pharmaceuticals, a developer of immunological and rare disease medications, for $5.6 billion, a takeover premium of nearly 140%. Mounjaro owner Eli Lilly is buying sleep drug maker Centessa Pharmaceuticals for $7.8 billion. And Merck said it would buy Terns Pharmaceuticals, which is working on a drug to treat leukemia, for $6.7 billion.
This is probably just the beginning of another wave of deals. According to consulting firm Alvarez & Marsal, biopharma M&A volume nearly doubled in 2025 and the company said in a 2026 outlook report that M&A activity in biopharma is likely to remain strong this year. It is likely that both deal values and volumes will surpass 2025 levels.
Alvarez & Marsal also noted that more biotechs are deciding to sell out rather than go public.
"There were significantly fewer biotech IPOs in 2025," Alvarez & Marsal said. "Biotechs are now increasingly favoring M&A as their preferred exit path."
It's no secret why major drug companies are looking to smaller biotechs for growth. Many of the pharma giants are facing looming patent expirations for blockbuster medications in the coming years. And near-term earnings growth projections for Big Pharma firms are sluggish when compared with biotech as well. According to FactSet, pharma companies are expected to report a 30% year-over-year decline in earnings for the first quarter, compared with forecasts of 13% earnings growth for biotechs.
Trying to find the next takeover targets can be tricky. But with Big Pharma companies all (cue Huey Lewis) wanting a new drug, investors can take advantage of the M&A frenzy through exchange-traded funds.
The Barron's Investor Circle recommended the State Street SPDR S&P Biotech ETF in February. The fund is up nearly 5% this year, so it's not just outperforming the broader market, it is also doing better than the State Street Health Care Select Sector SPDR and State Street SPDR S&P Pharmaceuticals ETFs. The fund also takes an equal-weighted approach, which helps mitigate the risk of having significant exposure to just a few stocks.
Several other biotech funds, such as the iShares Biotechnology, First Trust NYSE Arca Biotechnology Index Fund and VanEck Biotech ETFs, are also beating the S&P 500 and Big Pharma stocks year to date, but they are either flat or down slightly.
Mergers won't be the only catalyst for biotechs. Analysts at Cantor pointed out in a report in March that they expect about 80% of the companies in the State Street SPDR S&P Biotech ETF will have approved drugs by the third quarter of next year. This, according to the Cantor analysts, suggests the industry is "still early in its growth cycle" and that "revenue and profitability trends are quite robust."
And biotech analysts at Bank of America recently highlighted Argenx, KalVista Pharmaceuticals, Ocular Therapeutix and Vertex Pharmaceuticals as top picks due to promising pipelines and trial results.
Biotechs aren't for the faint of heart. But for investors who are looking for actual growth in healthcare, these stocks are better bets than stodgy Big Pharma firms and their aging drug portfolios.
Write to Paul R. La Monica at paul.lamonica@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 31, 2026 16:36 ET (20:36 GMT)
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