Healthcare and biotech stocks have had a rough run since the giddy heights of the Covid pandemic. But now could be the perfect time to consider investing in these beaten-down but high-growth sectors.
If you are considering where to invest for 2026, one dilemma might be where to look for growth.
Artificial intelligence (AI) stocks have led the field on that front for the last three years. But concerns over an AI bubble are giving some investors pause for thought, especially given how stretched some valuations have become.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Before AI stole the show, biotech stocks were all the rage among growth investors. Cast your mind back to the Covid era, and biotech companies like Moderna (NASDAQ:MRNA) were all the rage.
Latest Videos FromMoneyWeek
“Anyone that was in healthcare, whether they were producing PPE equipment or working on vaccines or organising testing, there was an explosion of need,” says Ben Preston, portfolio manager, Orbis Global Equity Strategy at Orbis Investments.
That led to an explosion of investment into the field. But once the pandemic ebbed, that meant too much capital in the system.
“That naturally creates the opposite side of the cycle where profits fall because there’s just not enough demand,” said Preston. “It puts investors off.”
But with valuations at historic lows, could now be the perfect time to invest in healthcare and biotech?
Why now might be the time to buy healthcare and biotech stocks
The post-pandemic drop-off in demand for healthcare and biotech has been compounded, in Preston’s view, by the rise of AI as the dominant growth sector.
An investor whose portfolio contains some value- or income-focused investments and some growth-oriented investments, who wanted to buy into the AI boom in the post-pandemic years, would likely have sold down their growth stocks – including biotech – in order to do so.
That has further depressed valuations.
Research in the US has also been hit by Trump’s withdrawal of funding from some universities, like Harvard, which have historically been at the forefront of research in healthcare and biotech.
“If you’re not putting enough money in to develop the new drugs that you need, that’s going to end up not being great for society,” says Preston. “You’re going to need to swing that pendulum back so that the research is being done.
While the US tends to dominate the discussion over healthcare and biotech, given it historically controls a huge amount of the market, the emergence of China is also a potential tailwind for the sector.
“We think now is an extremely exciting time to be in biotech, which is in the early innings of a potential multi-year recovery,” said Ollie Kenyon, senior director of RTW Investments.
“China is emerging as a major force in the sector. It has surpassed the US in total clinical trials and now accounts for 30% of global trial starts, compared to 35% for the US.”
AI tailwinds for biotech and healthcare
While healthcare and biotech stocks could function as an alternative source of growth for investors wary about valuations in the AI sector, they also stand to benefit from the technology.
“We see the healthcare sector as a prime beneficiary of AI-enabled technologies when it comes to furthering innovation,” said Gareth Powell, fund manager of the Polar Capital Global Healthcare Trust (LON:PCGH).
In particular, AI has the potential to improve the success rate of clinical trials, which is one of the biggest sources of costs and uncertainty for biotech companies.
“The historic returns on research and development have been really underwhelming across pharma,” said Preston. “It’s really expensive to do these tests and trials.”
AI offers the potential to filter down prospective treatments to a handful of likely candidates.
Google’s DeepMind, for example, released the third generation of its AlphaFold model in November 2024. This uses AI to predict the structure and behaviour of proteins based on their component amino acids, and is available to research scientists all over the world.
How to invest in biotech and healthcare
If you think that biotech and healthcare could be one of next year’s top sectors to invest in, one approach is to buy a fund or investment trust that invests in the space.
As of 11 December, the five largest healthcare and biotech-focused investment trusts by market cap are:
- Worldwide Healthcare Trust (LON:WWH)
- RTW Biotech Opportunities (LON:RTW)
- Syncona (LON:SYNC)
- Polar Capital Global Healthcare
- International Biotechnology (LON:IBT)
In terms of individual stocks, Preston picks out Danish biotech company Genmab (Copenhagen:GMAB) which produces ‘bispecific antibodies’ – molecules that are able to bind both to pathogens and to the antibodies the human body produces, enabling the latter to more effectively track down the former.
Its flagship drug, Darzalex, will see its patents expire from the end of this decade and early next; as such it is currently heavily discounted by the market. Genmab currently trades at approximately 12 times its projected earnings.
But based on the cash flows until then, as well as the pipeline of treatments that Genmab has in development, Preston believes the stock is attractively priced.
“Effectively, you’re paying very little for the future pipeline,” he said.
You can also explore these FTSE 100 pharmaceutical stocks for further inspiration.
