Pharmaceutical stocks remain stagnant in the U.S., trapped in a policy negative zone following five years of COVID impacts.
In the ever-evolving world of investments, the global healthcare sector presents a unique blend of opportunities and challenges. After a slump post-COVID, global healthcare companies showed strong earnings in 2024, with 75% of firms in the MSCI ACWI Healthcare Index exceeding expectations, the highest among sectors. This recovery has driven renewed inflows into healthcare ETFs, with over US$155 million net inflows so far in 2025, indicating growing investor appetite.
However, despite the inflows, healthcare stocks remain relatively cheap by historical standards. They trade at about 15.9 times forward earnings, which is an 11% discount to their long-term average and 20% below global equities. This undervaluation is largely attributed to policy risks, especially uncertainties over U.S. drug pricing reforms and looming tariffs on pharmaceutical imports, which cloud earnings outlooks.
The sector, particularly biopharma and oncology, remains active in mergers and acquisitions as companies look to bolster pipelines amid these challenges. However, 2025 is expected to see fewer megadeals and more smaller or strategic alliances and joint ventures. Emerging areas of interest include biotech, GLP-1 drugs, telehealth, healthtech, and consumer healthcare.
Trade tariffs under the current U.S. administration may increase costs for healthcare companies, pressuring margins. However, some companies like Eli Lilly and Novartis are viewed as relatively strong investment candidates because of their innovative capacity, solid financial performance, and proactive measures such as expanding domestic manufacturing to mitigate tariff risks.
Investing in global healthcare stocks in 2025 is a balance between attractive valuations and strong underlying fundamentals, weighed against policy and trade uncertainties. UK-based M&G Investments has been selectively adding to healthcare, emphasising the need for a catalyst before considering investment.
Whether the current state of healthcare stocks represents a buying opportunity or a value trap depends on how and when the policy uncertainty clears. A selective approach focusing on resilient, innovative companies with solid fundamentals and strategies to counteract tariff impacts may be advisable amid ongoing sector volatility.
One notable shift in market sentiment is the move from cautious optimism to cautious pessimism about the healthcare sector due to intensifying U.S. policy risks, as expressed by Stephanie Aliaga, global market strategist at J.P. Morgan Asset Management. Alberto Conca, CIO at Swiss wealth manager LFG+ZEST, has been adding exposure to pharma, biotech, and medtech due to strong cash-flow yields and the prospect of U.S. rate cuts boosting this rate-sensitive sector.
In conclusion, the global healthcare sector presents a nuanced investment landscape in 2025. While the undervalued stocks and strong earnings recovery offer attractive opportunities, the policy and trade uncertainties necessitate a cautious approach. A selective strategy, focusing on resilient companies, could potentially yield returns in this volatile market.
[1] MSCI ACWI Healthcare Index 2024 Q4 earnings report [2] LSEG Datastream data as of March 2025 [3] Merger and acquisition reports from various sources as of March 2025 [4] Company financial reports and analyst opinions as of March 2025
- Despite the inflows into healthcare ETFs, healthcare stocks remain relatively cheap, trading at about 15.9 times forward earnings, offering enticing opportunities for investors.
- The policy risks, such as uncertainties over U.S. drug pricing reforms and tariffs on pharmaceutical imports, are contributing to the undervaluation of healthcare stocks and clouding their earnings outlooks.
- Companies like Eli Lilly and Novartis, which are viewed as strong investment candidates due to their innovative capacity, solid financial performance, and proactive measures, may be well-positioned to navigate the tariff risks in the healthcare sector.
