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This Week's Bonus Story
2 Ways to Play the Big Pharma Patent CliffWritten by Nathan Reiff. Publication Date: 5/15/2026. 
Key Points
- Big pharma faces uncertainty for nearly $200 billion in drug sales that will lose their exclusivity in the coming years.
- The ensuing M&A flurry as firms try to shore up their drug portfolios may present opportunities for investors.
- Two broad industry-focused ETFs, XBI and IBB, can be a place to start.
- Special Report: Elon’s “Hidden” Company
Major pharmaceutical firms like Pfizer Inc. (NYSE: PFE) and Novo Nordisk A/S (NYSE: NVO) have been spending heavily on smaller companies in the space in recent months (the former completed an acquisition of weight loss drug maker Metsera in November 2025). While M&A activity is sometimes a sign of aggressive expansion, in this case it may also reflect a response to a looming threat: a patent cliff that could strip many top-selling drugs of exclusivity in the years ahead. Major drugs with collective annual sales of close to $175 billion will face this fate over the next six years, and the figure rises even higher when smaller names are included. For many of the biggest pharmaceutical companies, this is a serious challenge. For investors, however, it also creates an opportunity. The coming years are likely to bring an increasingly urgent wave of M&A activity, which could produce new winners in the space. While it may be difficult to predict which firms will come out on top, a pair of exchange-traded funds (ETFs) can help investors position themselves to capitalize on industry volatility. Broad Access to the U.S. Biotech Space, With a Focus on Smaller Firms
The SPDR S&P Biotech ETF (NYSEARCA: XBI) tracks the S&P Biotechnology Select Industry Index, a collection of biotech names from the S&P Total Market Index. The index uses a modified equal-weighted approach and provides exposure to biotech names across the market-capitalization spectrum. This is important for investors in the space, as smaller names can sometimes post major breakthroughs and stellar performance if a drug candidate is approved or a blockbuster new medicine emerges. Investors may want to note that mid-cap names make up about half of the portfolio, with small-caps representing nearly another 30%. XBI is more focused than a broader sector fund and is unique in that it is one of only a limited number of ETFs specifically targeting the biotech industry. Its nearly 150 positions represent a wide swath of the U.S. biotechnology space and, as a result, can capture many domestic drugmaker gains. The largest holding in the fund still accounts for less than 2% of total invested assets, so diversification helps limit the impact of underperformance by any single company. On the other hand, a single company's outsized gains may also be diluted in XBI's performance. Still, XBI has done well in 2026, outperforming the broader market year-to-date (YTD) with returns of about 11% (compared with about 9% for the S&P 500). The fund also provides a modest dividend. Considering that this niche industry fund is relatively unique, investors may also find its 0.35% expense ratio reasonable. A Somewhat Different Approach for Broader Exposure but Higher ConcentrationThe iShares Biotechnology ETF (NASDAQ: IBB), a direct rival to XBI, takes a somewhat different approach. While it is generally focused on U.S. biotech names like XBI, it also includes some international stocks, such as Dutch biopharma firm argenx (NASDAQ: ARGX). It also holds a broader basket than XBI, with close to 250 positions overall. On the other hand, IBB is more heavily concentrated in a small number of names than its SPDR peer. The four largest holdings in its portfolio represent about 28% of invested assets. It also has more of a focus on large-cap names, with 61% of the portfolio allocated to larger firms. Like XBI, IBB pays out a modest dividend, which investors may find to be an attractive buffer against some of the potential volatility in the biotech industry. In terms of performance, IBB has lagged behind XBI so far this year, returning only about 2% YTD. Over the past 12 months, though, its return of more than 40% is quite compelling and noticeably outpaces the S&P 500. One other consideration for IBB is that its expense ratio is higher than XBI's, at 0.44%. Investors looking for the broadest possible access to the biotech space may be willing to make that trade-off and pay a bit more for the fund. However, its recent performance record is not as compelling as that of some other funds in the sector. Still, while IBB is more expensive than XBI, it remains cheaper than several other funds in the relatively narrow biotech category. |
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