This $400 Billion Problem Could Create Big Stock Gains

Editor's note: The bull market has spread far beyond AI. As Joe Austin of our corporate affiliate Chaikin Analytics explains, another sector is about to see a wave of activity. In this issue, originally published in the free Chaikin PowerFeed daily e-letter, Joe explains what's happening in this space... and how investors can take advantage of it.

AI isn't the only "gold rush" on Wall Street these days...

Big Pharma companies are entering a less-understood boom of their own. And it has nothing to do with data centers or chatbots.

It's all about a looming "patent cliff." That's what it's called when several drugs' patent protections run out, allowing generic drugs to flood the market.

Between 2026 and 2030, drugmakers will face the largest patent cliff in the pharmaceutical industry's history.

All told, 190 drugs will be impacted by 2030, including 69 "blockbusters" – drugs that bring in more than $1 billion a year in revenue.

But it doesn't stop there. New Medicare pricing rules are making this cliff even steeper...

The Inflation Reduction Act, passed in 2022, lets Medicare negotiate drug prices years before patents expire. Add that to the mix, and as much as $400 billion in revenue could be at risk.

When a shift like this plays out, major drug companies don't sit on their hands and watch billions in sales disappear...

They go shopping. And for investors, there will be a chance to profit from the coming wave of mergers and acquisitions (M&A).

Biotech Companies Are a Great Opportunity Today

We've seen this play out before. The last big patent cliff, between 2011 and 2015, turned into one of the best stretches ever for biotech stocks.

Two major biotech benchmarks, the State Street SPDR S&P Biotech Fund (XBI) and the iShares Biotechnology Fund (IBB), gained about 180% during that period. That works out to roughly 30% average annual gains across five years.

The State Street SPDR S&P Pharmaceuticals Fund (XPH) didn't do too badly either. It gained about 70% total, or roughly 14% a year.

Patent expirations cause brand-name drugs to lose between $20 billion and $80 billion in sales every year. When one of its patents runs out, a drugmaker typically loses 80% to 90% of its market share within a year.

And when many blockbuster drugs go off patent in a short time frame, the losses can pile up.

During the last major patent cliff, drug companies lost about $255 billion in sales.

Now, all of this is a genuine problem for pharmaceutical firms. But for investors... it's a once-in-a-decade opportunity.

Patent cliffs can create these stock rallies because of M&A activity. Big drug companies start looking for smaller firms to acquire. And right now, the M&A wave is already underway.

Per business-management consultant Ernst & Young, biopharma companies had an estimated $2.1 trillion ready to spend on M&A deals this January.

And in the first half of the year, life sciences companies signed about $196 billion worth of deals. That's up 140% versus the first half of 2025.

Three Ways to Capitalize on the Patent Cliff

I see three potential ways to play this trend...

1. Buy individual stocks. At Chaikin Analytics, we use a tool called the Power Gauge to analyze the markets. It combines investment fundamentals and technicals into a simple rating of "bullish," "neutral," or "bearish."

The Power Gauge currently rates 82 stocks within the biotechnology and pharmaceutical industries as "very bullish."

Buying these stocks is a fine strategy, but it puts the burden on you to find the winners.

2. Buy a broad pharmaceutical or biotech fund. I mentioned three pharmaceutical exchange-traded funds (ETFs) above. And the Power Gauge sees potential in all three right now...

You can see the breakdown in the images below. The green bars show the number of these funds' holdings rated as "bullish." The yellow bars show those rated "neutral," and the red bars show those rated "bearish."

Let's start with XBI. The Power Gauge gives the fund a "bullish" rating...

The fund also holds 45 stocks with "bullish" ratings. On the other hand, more than two-thirds of XBI's holdings rate as "neutral" or "bearish." So there are still a lot of weaker stocks in the fund.

Our system is more optimistic about XPH, which it rates "very bullish." While a majority of its holdings are "neutral," its ratio of "bullish" to "bearish" holdings is better than 5-to-1...

Lastly, our system also gives IBB a "very bullish" rating – which is buoyed by 79 "bullish" holdings. Take a look...

Buying broad funds is a fine strategy. But keep in mind that an ETF exposes you to a broad swath of the industry. That means you'll end up owning both the winners and the losers.

3. Buy an actively managed biotech or pharmaceutical ETF. The benefit of this option is that you're investing with someone who should know what they're doing.

These are industries where a little expertise goes a long way. And handing your money to an active manager means that a real person with experience in the field is picking the stocks.

That's not a guarantee of success. But it can stack the odds in your favor.

I ran a quick Internet search for 15 of the largest actively managed biotech-focused ETFs. The Power Gauge gave 12 of them a "bullish" or better overall rating.

The bottom line: Across these strategies, the Power Gauge is flashing some positive signals.

The AI boom is still making money. But make sure you pay attention to the rest of the market. The last patent cliff turned into a moneymaker for investors... and this one looks to be even bigger.

Don't let this opportunity pass you by.

Good investing,

Joe Austin

Editor's note: Chaikin Analytics founder Marc Chaikin is about to reveal a major "divide" in one booming corner of the market – and it isn't biotech. Marc believes this will open the biggest AI moneymaking opportunity of the next 12 months, starting on August 26. He's even sharing two free picks to take advantage of it... Find out how to get ahead of this disruption.