Something big is brewing in the pharma-biotech industry. We’ve seen it before, and it’s led to some impressive sector returns.

Scared of heights? This one’s a 456ft Kingda Ka that’s got the pharma execs on high alert.

The pharma industry is reaching a major patent cliff. What is it, and why is this a major opportunity for biotech investors? First, let’s get you up to speed…

Time for a 3-point history lesson

1/ When drugs are approved, the company is granted a 20-year patent — before competitors can enter with cheaper generics.

2/ Between 2012-2013, patents on several blockbuster drugs expired — exposing pharma companies to a large sales drop.

3/ To replenish lost sales, these companies went on a buying spree — acquiring smaller biotech companies with promising drugs.

That brought significant returns to the market. Between 2012 and 2016, the iShares Biotechnology ETF (NASDAQ:IBB) rose 220% — nearly 4x that of the S&P 500’s 62% increase.

Patent cliffs are scary (for pharma execs)

Following generic entries, “80% of the market can be gone in 30 to 90 days,” per a life sciences intellectual property specialist.

Here’s a chart of upcoming drug expiries and their projected sales (dotted line):

We’re about to enter an even larger “patent cliff”

Through 2030, over $200B in annual revenue is at risk, with EY’s health sciences market leader Arda Ural saying, “this is of tectonic magnitude.”

Big pharma is left with two options: Develop new products internally or buy smaller biotech companies that have drugs near FDA approval.

And here’s why a wave of acquisitions could be coming:

• Pharma giants are flushed with cash.
• Biotech stocks have fallen so low they’re cheaper than they’ve been in many years.
• Smaller drugmakers are running out of money and are left with few options.

But things are a bit more complex this time. Last year, Biden doubled down on efforts to rein in drug pricing – which could impact the profitability of these industries.

Dive deeper: Watch our YouTube vid covering the history and upcoming problems with the biotech industry.