Healthcare Acquisitions Ramp Up

Acquisition activity in the healthcare sector is picking up pace in 2025. This surge comes amid continued underperformance from large cap pharmaceutical companies and may also point to flaws in their previous allocation of capital—particularly around research and development. The strategic pivot toward acquisitions may signal a broader shift as companies look externally for the growth they have struggled to produce organically. Investors are watching closely to see whether this wave of consolidation can reinvigorate long-term earnings power and shareholder returns.

Large cap pharmaceutical stocks, as proxied by the iShares US Pharmaceutical ETF (IHE), have significantly underperformed the broader market over the previous decade. From December 31^st, 2014, through March 31^st, 2025, IHE has realized a price return of roughly 40%, compared to a 172% return for the S&P 500 (proxied by SPY), according to FactSet data. Shorter-term results have also disappointed pharmaceutical investors, with IHE gaining only 13.7% since December 31, 2022, versus 46.3% for the broader market.

While there are myriad reasons this underperformance could occur, one straightforward explanation is that the long-term earnings power of these companies has been overestimated. Of the seven largest constituents in IHE, only Eli Lilly has seen upward revisions in its expected 2025 earnings per share (“EPS”) over the last 2+ years. Since the end of 2022, LLY has brought to market innovative treatments, such as its GLP-1 franchise, and analysts have taken up their 2025 estimated earnings as a result. However, as shown in the table below, the remaining six constituents have seen their projected 2025 EPS decline by an average of 11% over the same timeframe, with Pfizer suffering the steepest revision at -32%.

This decline in earnings expectations is particularly striking given the increase in research and development (R&D) spending. With the exception of Abbvie, the six other large cap pharmaceutical companies have allocated a greater share of operating expenses to R&D. In 2021, the average large cap pharma company spent approximately 45% of its operating expenses on R&D, which rose to 48% by 2024. Despite these growing investments, new breakthroughs and corresponding financial returns have been elusive.

With limited success from internal R&D efforts, these companies are increasingly turning to acquisitions as a strategy to bolster growth and reinvigorate investor confidence. Notable healthcare and pharma-focused M&A announcements so far in 2025 include:

• Johnson & Johnson’s proposed $14.6 billion acquisition of Intra-Cellular Therapies (ITCI)
• Stryker’s completed $4.9 billion acquisition of Inari Medical (NARI)
• Merck KGaA’s proposed $3.5 billion acquisition of SpringWorks Therapeutics (SWTX)
• Eli Lilly’s proposed $2.5 billion acquisition of Scorpion Therapeutics’ PI3Ka program
• AstraZeneca’s proposed $1 billion acquisition of EsoBiotec’s CAR-T therapies

These transactions alone position 2025 as one of the most active years for healthcare acquisitions on record—and there’s still ample time left in the year.

Looking ahead, investors should closely monitor whether these deals mark a turning point for large cap pharma or are merely a costly conclusion of lackluster growth strategies. While acquisitions may offer near-term catalysts and pipeline diversification, successful integration and the ability to extract long-term value remain critical. Companies that can translate deal-making into durable competitive advantages and consistent earnings growth will likely emerge stronger. For now, the market remains cautious, weighing the promise of acquired products against a backdrop of prolonged underperformance. Whether this acquisition wave can truly rewrite the narrative for big pharma is a question 2025 may begin to answer.

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For more content by Blake Anderson, CFA®, Associate Portfolio Manager click here.

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