Biopharma stocks have struggled in recent months, with the healthcare sector’s market capitalization weight in the S&P 500 index and its price-to-earnings (P/E) ratio hovering near historic lows.
A combination of macro and policy factors—such as tariffs, a cyclical rotation in the equity market, and interest rates—in addition to industry-specific challenges—like patent expirations—have weighed heavily on valuations. But could a short-term recovery be on the horizon? A number of catalysts could potentially restore investor confidence.
1. Greater Clarity on Drug Pricing and Policy
Tariffs continue to cloud the outlook for biopharma companies, disrupting supply chains and adding uncertainty, despite recent announcements of deals between the U.S. and some of its trade partners. Additionally, the Trump administration introduced a “most favored nation” (MFN) policy, which would cap Medicare drug prices at the lowest levels paid in other high-income countries.
“Investors would welcome more visibility on both MFN and tariffs,” says Terence Flynn, who leads coverage of U.S. Pharma and Biotech at Morgan Stanley Research. “We are likely getting closer to a resolution on tariffs, but MFN is more difficult to predict.”
Policy clarity around drug approvals by the Federal Drug Administration (FDA) is also critical, especially as competition from China intensifies.
“If the FDA executes on drug approvals, clinical trial starts, and manufacturing inspections it offers investors confidence that U.S. innovation can advance to patients and keep pace with global competition,” Flynn adds.
2. Interest Rate Cuts
Biotech stocks historically perform well during cycles of interest-rate cuts as the sector benefits from more favorable financing conditions and an improved outlook for consolidation. A new monetary easing cycle could start in September, as indicated by Federal Reserve Chairman Jerome Powell in his annual speech in Jackson Hole, Wyoming.
“We think the equity market's focus is shifting toward a more accommodative monetary policy environment,” says Morgan Stanley U.S. Equity Strategist Andrew Pauker. “This should benefit biopharma.”
3. Progress on Patent Expiration Challenges
Competition with generic drugs is another factor weighing on valuations. Morgan Stanley Research estimates that drugs accounting for about $175 billion in revenue for large U.S. healthcare companies will go off-patent by the end of the decade.
Biopharma companies could boost investor confidence by getting approvals for new drugs and developing robust pipelines to offset the impact of patent expirations. Increasing adoption of artificial intelligence could improve and accelerate drug discovery and development.
4. M&A Acceleration
Biopharma companies rely on mergers and acquisitions to accelerate innovation and expand their drug pipelines. After a sluggish 2024 and early 2025, M&A activity picked up in the second quarter, despite ongoing uncertainties about tariffs and drug pricing policies.
“We continue to believe that the micro conditions for M&A are favorable and are starting to see green shoots. However, investors would benefit from more visibility on some of the macro dynamics,” Flynn says.
5. Earnings Revisions Improvement
Earnings Revisions Breadth (ERB)—the ratio of upward to downward earnings estimate changes—has rebounded for the S&P 500 since April. Factors such as easing tariff concerns, positive operating leverage and a weaker dollar have contributed to the recovery.
Although biopharma’s ERB has lagged the rest of the market, recent data show improvement on this basis for in pharma/biotech/life sciences and healthcare equipment/services.
“Revisions breadth for both of these areas has just entered positive territory, with more upward than downward revisions—a clear, positive shift from a few months ago,” Pauker says. “This development is another reason why investor sentiment could improve for biopharma more broadly.”
6. Demand for Defensive Stocks
As tariff concerns eased and market volatility declined after the initial impact of the announcement of the U.S. trade policy in April, investors favored cyclical stocks—those whose performance tends to improve during periods of better macro conditions—over defensive ones, which are considered safe havens during periods of growth concerns, and include the healthcare sector. However, emerging growth risks—such as a weakening labor market—could reignite interest in defensive sectors.
“While this isn’t our base case, it’s a potential reason why healthcare could see better relative performance,” Pauker says.
