2 Ways to Play the Big Pharma Patent Cliff

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.

Major pharmaceuticals firms like Pfizer Inc. NYSE: PFE and Novo Nordisk A/S NYSE: NVO have been fighting to spend large sums on smaller companies in the space in recent months (the former of these companies completed an acquisition of weight loss drug maker Metsera in November 2025). But while M&A activity is sometimes a sign of aggressive expansion, in this case, it may signal a response to a threat: a patent cliff that could see the loss of exclusivity of many of the top-selling drugs globally in the years to come.

Major drugs with collective annual sales of close to $175 billion will suffer this fate in the coming six years, and the figure gets much higher when considering smaller names too. Though this is a dangerous obstacle for many of the biggest pharma companies, it is also an opportunity for investors. The coming years are likely to bring an increasingly desperate flurry of M&A activity, which could lead to some new winners in the space. While it may be difficult for investors to predict which specific firms may come out on top, a pair of exchange-traded funds (ETFs) can position investors well to capitalize on volatility in the industry.

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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 takes a modified equal weighted approach and provides exposure to biotech names across the market capitalization spectrum. This is key for investors in the space, as smaller names can sometimes have major breakthroughs and stellar performance if a drug candidate receives approval 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 another nearly 30%.

XBI is more focused than a broader sector fund and is unique in that it is one of only a smaller 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 wins. The largest holding in the fund is still under 2% of the total invested assets, so diversification helps to minimize the negative impact of underperformance by specific companies. On the other hand, a single company's big gains may also be diluted in the performance of XBI as well.

Still, XBI has done well in 2026, outperforming the broader market year-to-date (YTD) with returns of about 11% (compared to 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 find its 0.35% expense ratio modest.

A Somewhat Different Approach for Broader Exposure But Higher Concentration

The iShares Biotechnology ETF NASDAQ: IBB, a direct rival to XBI above, takes a somewhat different approach. While generally focused on U.S. biotech names, like XBI, it also includes some international stocks like 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 some 28% of invested assets.

It also has more of a focus on large-cap names, with 61% of the portfolio given over 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 of 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 greater than 40% return is quite compelling, noticeably outpacing the growth rate of the S&P 500.

One other consideration surrounding IBB is that its expense ratio is higher than that of XBI, at 0.44%. Investors looking for the broadest possible access to the biotech space may be willing to make that trade-off and spend a bit more for this 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 multiple other funds in the fairly narrow biotech category.