In valuation terms, the market is becoming attractive again. Many market capitalizations are now trading at levels close to - or even below - the net cash held by companies. These discounts are whetting the appetite of big pharmaceutical companies, which are always on the lookout for strategic targets. In recent weeks, there have been several major transactions: Sanofi acquired Vigil Neurosciences, which specializes in neurodegenerative diseases, and Blueprint, which treats systemic mastocytosis, a rare orphan disease, for $470m and $9.1bn, respectively. Merck KGaA acquired Springworks, a company specializing in cancer treatments and rare tumors, in April for $3.9bn, while Merck & Co is set to acquire Moonlake for $3bn, according to the Financial Times. Finally, in Switzerland, Novartis has snapped up Regulus, which treats a genetic cause of kidney failure.

A paradigm shift in the approach of major laboratories

In recent years, major pharmaceutical companies have transformed their approach to innovation. Internal research remains a pillar, although targeted acquisitions of biotech companies have become an essential lever for strengthening drug portfolios and holding their own in an increasingly competitive environment.

There is growing fragmentation in research: around 21,000 drugs are in development worldwide, 85% of which are being developed by small, often highly specialized biotech companies. The number of these companies has exploded (+85% in 15 years), as has the market value (+80%). In France alone, there are nearly 900 such companies.

As a result, the number of acquisitions doubled between 2013 and 2023. Last year saw a slight decline in value ($92bn), but the volume of deals continued to grow, with 95 transactions compared to 81 in 2023. Another notable development is that acquisitions are increasingly taking place earlier in the development cycle. Phase 1 transactions accounted for 30% of deals last year, almost double the previous trend. This means that laboratories are taking more risks, but they are also increasingly taking over developments that are already at an advanced stage.

Biotech ETFs

In the United States, there are two main ETFs positioned on this theme: iShares Biotechnology ETF ($5.8bn in assets under management) and SPDR S&P Biotech ETF ($5bn).

The first is invested in 127 companies, with a relatively broad distribution. These include Alnylam Pharmaceuticals (3% of assets under management), Insmed (3%), Exact Sciences (3%), Blueprint (2.9%, the company acquired by Sanofi), Neurocrine Biosciences (2.8%), Natera (2.8%), Incyte (2.5%), Biogen (2.4%), Gilead Sciences (2.4%) and Amgen (2.3%).

The second portfolio has 261 positions, but is much more concentrated, with nearly half of the portfolio represented by the 10 largest weightings: Amgen (8.6%), Vertex Pharmaceuticals (8.6%), Gilead Sciences (8.4%), Regeneron (7.4%), Alnylam (3.7%), Iqvia (3.4%), Argenx (2.8%), Mettler Toledo (2.7%), Waters (2.4%) and Biogen (2.2%).

These two ETFs are not available for trading in Europe, but they are fairly representative of the state of the market. They have rebounded well in recent weeks, as can be seen. The movement could continue if we do indeed move towards a less restrictive monetary policy in the coming months.

In Europe, you can find iShares Nasdaq US Biotechnology UCITS (ISIN: IE00BYXG2H39), which includes 263 companies, including many of those contained in the ETFs mentioned above. The others (Global X Genomics & Biotechnology UCITS, First Trust NYSE Arca Biotechnology UCITS ETF Acc, etc.) have only small assets under management.