Healthcare in the US historically has generated similar returns to US tech but with a lower volatility. The average 30-year volatility was 15% vs US tech at 24% (pre 2020). However, in recent years the sector has struggled for a number of reasons. It has underperformed for the last three years and even had one of the worst earnings reporting quarters in recent years in Q2 2025. But is the tide changing?
For some context, the healthcare sector obviously went through a surge of investment and R&D during the pandemic. In that period businesses expanded capacity in order to develop and manufacture a vaccine. Pfizer for example rose over 60% in 2020 and 2021. Following this the companies were then left with an overhang of supply and earnings pressure as the world opened up again.
Then came the Trump administration which created a number of policy uncertainties. The administration was set to make large funding cuts to medical research projects via the National Institutes of Health (NIH). This pretty much hasn’t happened due to Federal Courts stepping in but caused uncertainty for the healthcare sector. The amount of grant money spent by the NIH in 2025 YTD has remained in line with previous years, however the number of projects being funded has dropped by over 11% vs the same time period in 2024, and the types of projects being approved has changed. High-risk high-reward projects have dropped and there is also a reduced number of new projects looking into Alzheimer’s, cancer, and HIV/AIDS.
Another recent policy concern coming from the Trump Administration is the proposals for the “most favoured nation” drug prices. US drug prices are on average 2.5-3x higher than in other OECD (Organisation for Economic Co-operation and Development) countries. The Most favoured Nation policy would reduce US drug prices by 5-10% but would impact US large cap pharma earnings (estimated to be around a 9% drop by 2031).
US tariffs on pharma are still pending and could be a big deal for the sub-sector. A lot of large US pharma companies import profits from other countries, such as Ireland, and therefore pay much of their corporation taxes outside the US. This isn’t just unique to the pharma sector, but it is something the US government has its eye on. The UK currently has a deal with the US for 0% tariffs for UK pharma exports for the next three years.
So why is the tide changing? I’ve read quite a few articles and been to a few healthcare events in Q4 and there is a lot to be positive on.
Covid overhang on earnings has eased. After a poor Q2 2025 earnings, Q3 then provided more clarity and hope for the sector. Healthcare companies in Q3 beat estimates by 13% and are positive going into 2026 for earnings growth.
In Q3 we had an update on the Most Favoured Nation drug pricing incentive. Pfizer came to an agreement with the US government on its drug pricing. This set the standard for others to follow and so companies and analysts are less concerned about the outlook or impact this will have on earnings.
Patent concerns are still there as many large US healthcare businesses have drugs coming off patent in the next decade. It is estimated that over $150billion worth of revenue will come off patent, on average 35% of pharma revenues will be off patent by 2030. However, many have strong R&D results and drugs in FDA approval phases. The FDA has remained consistent despite some difficult headwinds from the US government; it has been approving new drugs at the same rate as previous years. So, it is business as usual.
Another key positive for patent concerns is M&A activity. M&A is used in a number of sectors in the same way, to sustain and grow pipelines. Healthcare is no different. And 2025 is looking to be the strongest M&A year since 2021, biotech has averaged a deal per week since September. However, healthcare equipment and pharma have also seen a pick-up in M&A.
The good news is that the healthcare sector has strong fundamentals but are still trading at discounts so a few big investment firms are upgrading their sector guidance. Strong return on capital, dividends and cash flows mean this could be an attractive time to look at the sector. A number of our fund managers have been increasing the sector and we also have a few healthcare specialised funds in our client portfolios.
Emily Cave – Research Analyst
FPC25600
All charts and data sourced from FactSet
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