In the third of our global equity sector hub discussions, Joanna Tucka, healthcare sector hub lead, and Richard Saldanha, global equity portfolio manager, explore why all is not doom and gloom in healthcare.
Read this article to understand:
- Why pharma investors shouldn’t throw the baby out with the bathwater
- How value-chain links and dynamics reveal risks and opportunities in the sector
- The importance of finding a balance between positive views, selectivity and diversification
In the second quarter of 2025, relative to the S&P 500, the US healthcare sector produced its worst quarterly return in recent history (see Figure 1). In fact, the sector has been struggling since 2023 and appears very cheap on a relative basis. It is worth delving into the reasons why, and assessing whether it remains investable.
Figure 1: US healthcare valuations compared to the rest of the S&P 500 (per cent)
Past performance is not an indicator of future performance. For illustrative purposes only.
Source: Aviva Investors, Bloomberg. Data as of September 29, 2025.
Healthcare is currently caught in a perfect storm of policy, regulation, and stock-specific pressures. While these are largely driven by US political rhetoric, they affect all biopharma companies with commercial exposure to the US.
On the policy side, three plans by the old and new US administrations are affecting investor sentiment: ongoing Medicare drug-price negotiations following the introduction of the Inflation Reduction Act (IRA) in 2022, potential tariffs on pharmaceuticals, and the most-favoured nation (MFN) drug-pricing plan for government-funded healthcare.
Pharma companies often sell drugs at significantly higher prices in the US compared to other countries. The MFN proposal aims to force price reductions by benchmarking US drug prices against prices in a basket of developed markets. Implementing this plan would threaten the sector’s profit margins and has introduced considerable uncertainty for investors.
These difficulties have been compounded by layoffs within the US Food and Drug Administration and proposed cuts of up to 40 per cent in the National Institutes of Health (NIH) budget.1 Regulation is also impacting health insurance, through cutbacks and changes to the Affordable Care Act, Medicare and Medicaid.2
Meanwhile, several pharma companies are facing a huge patent cliff. Several “blockbuster” drugs are set to lose their patents in the coming years, setting up companies to shed profits as generics start selling lower-priced alternatives.3
As if this wasn’t enough, broader market trends have also weighed on healthcare – a defensive sector – as investor attention shifted toward artificial intelligence (AI) and tech stocks.
The good news
But it’s not all doom and gloom. With healthcare valuations nearing 35-year lows relative to the S&P 500, the bad news now appears priced in, and we think there are reasons to be more positive on the sector.
Despite initial concerns, DOGE-driven budget cuts don’t seem to have delayed drug approvals or commercialisation, and the FDA remains functional. And after fears of a 40 per cent cut, the NIH budget proposal looks set to at least remain flat.4
Pharmaceutical companies are adopting strategies to mitigate the risks
The sector is also continuing to prioritise innovation, with recent breakthroughs achieved in obesity, immunology and Alzheimer’s disease, as well as AI-driven improvements across different healthcare subsectors.
Moreover, the plans for pharmaceutical tariffs (Section 232 review), the next round of IRA negotiations and MFN pricing are still under review. Whatever happens with these, however, pharmaceutical companies are adopting strategies to mitigate the risks. Driven by tariff threats, they have announced multibillion-dollar capital expenditures to relocate to and expand drug manufacturing in the US.
Numerous major pharmaceutical companies are also embracing direct-to-consumer sales models to reduce drug pricing and improve patient access. And the Pharmaceutical Research and Manufacturers of America recently announced the launch of AmericasMedicines.com, a new platform connecting patients with manufacturers’ direct purchase programmes. The site is set to go live in January 2026 and aims to bypass pharmacy benefit managers, offering lower-cost access to prescription drugs.5
Fight or flight?
Our healthcare sector hub experts have analysed the sector’s key value chains, assessing links and dependencies, and analysing the sub-sectors against the complex background of opportunities and threats, fundamentals and long-term growth drivers.
As a result, we believe that healthcare doesn’t deserve to be shunned entirely. Instead, investors with the right research skills and a long-term view can find selective opportunities.
Is healthcare’s fall from grace creating an entry point?
Although history doesn’t always repeat itself, in previous cases, the sector has tended to spike once it recovers from peak fear. That has led to strong payoffs for those who had invested when policy uncertainty was at its highest.
Today, although there are headwinds, they seem to be reaching – or even to have reached – peak fear, and severe changes to US healthcare now look unlikely.
Despite supportive factors, the sector is trading at a discount
Additionally, tailwinds like new product launches are emerging. Long-term growth drivers such as industry consolidation, ageing populations and the growth of prevention and opportunities in emerging markets, also remain intact.
And despite these supportive factors and strong fundamentals, the sector is currently trading at a substantial discount. We find that compelling, creating attractive entry points for medium- and long-term investors.
Historical returns in the sector have been solid, and many healthcare businesses are posting robust cash flows, dividends, and returns on capital. The dislocations created by the entire sector’s fall from grace create opportunities, but given the difficulties also at play, investors need to be selective.
It’s all in the value chain
The context today requires thorough research, firstly because there is no overarching theme obviously driving company growth and prospects. A few years ago, themes like obesity drugs or robotic surgery generated a lot of demand and excitement, giving investors relative safety in selecting related stocks. Despite continued innovation and product launches, there is no such theme at play in 2025.
Secondly, some uncertainty remains as to where policy changes may go next, and because the healthcare sub-sectors are interlinked, none can really be said to be insulated from policy risk. But some value chains are benefitting from more supportive conditions than others.
MedTech has been a shelter in the storm
Medical technology (MedTech) stocks have performed well this year and some could even benefit from initiatives in the US administration. For example, US Secretary of Health and Human Services Robert Kennedy Jr. is advocating for every American to use wearables to track their health metrics.6 This could be a boon for companies like Abbott Laboratories that produce wearable glucose monitors, among other products.7
Figure 2: MedTech value chain
Source: Aviva Investors, as of September 30, 2025.
Given the value-chain links, when MedTech is doing well, hospitals usually follow suit (and vice versa) because many of the devices need to be implanted by surgery or are used in medical procedures (see Figure 2). Conversely, when MedTech and hospitals are doing well and usage rates climb, health insurance suffers as claims rise (if they have not forecast the rise appropriately).
Some hospitals in Europe have also been performing well this year. German healthcare company Fresenius is a good example. It owns a nutrition and pharma company that has little exposure to the US, and 60 per cent of its overall revenues come from its hospitals in Spain and Germany. As a result, it is unlikely to be impacted by US tariffs and other policy moves.8
Investors need to be selective on pharma
Meanwhile, pharmaceuticals have a lot to grapple with, from pipeline risk to tariffs, MFN pricing plans and a public perception that American patients are overpaying for drugs (see Figure 3). As a result, it is harder for investors to identify winners in this sub-sector. For instance, although AstraZeneca’s product pipeline is strong, investors seem to be less enthused in this market environment.9
Similarly, biotech funding and pipelines are rather thin, which continues to be a drag on this sub-sector.
Figure 3: Pharmaceuticals value chain
Source: Aviva Investors, as of September 30, 2025.
Pharma derivatives are on a winding path to recovery
On the other hand, some parts of the value chain look slightly more insulated, such as drug distributors like McKesson. Again, no sub-sector can be completely insulated from the sector risks, and distributors’ performance relies on drug sales. But being low-margin businesses, the distributors do not seem to be as much in the US administration’s firing line, and McKesson’s share price has risen considerably (by almost 22 per cent between January 2 and September 18, 2025).10
Growth is unlikely to return to stellar levels, but future prospects are attractive
Meanwhile, life science tools, CDMOs and CROs all depend on biopharma’s research and development (R&D) spend and have therefore been impacted. However, after the recent pushback against the US administration’s proposed cuts to the NIH budgets, we are seeing small signs of stabilisation in tools and CROs, although we expect the recovery will be bumpy.
Life science tools stocks appear very oversold and have seen more earnings downgrades recently given concerns around recovery in their end-markets. However, given the NIH budget now seems likely to stay flat – or maybe even slightly positive – and bioprocessing continues to post reasonable growth levels, it looks like it might be slowly bouncing back. Growth is unlikely to return to the stellar levels we saw before the COVID19 pandemic, but we do think that future growth prospects are generally attractive, especially in well-diversified names.11
Stay positive but diversified
Digging deep into these sub-sectors and their dynamics reveals opportunities through dislocations, overlooked areas and relatively insulated businesses. But it also demonstrates the importance of diversifying within the broader healthcare sector. Taking exposure to the largest names only in pharmaceuticals and health insurers would expose a portfolio to most of the sector’s key headwinds.
In contrast, adding the right names from sub-sectors like MedTech, healthcare facilities or bioprocessing can diversify some of those risks and create return opportunities. Other sub-sectors in separate value chains can also be good diversifiers, such as dental and animal health providers, whose services are typically paid for directly by patients – or their owners – and are not impacted by potential cuts to the NIH budget or other policy measures.
Long-term prospects: Keeping an eye on AI
Over the much longer term, AI is being touted as a game-changer for healthcare, from personalised medicine to new proteins and improved diagnostics. A few AI companies are now listed, and the big pharmaceutical firms are all partnering with one or more specialists, in a variety of areas. In its 2024 annual report, AstraZeneca said it was applying AI to 85 per cent of its small molecule programmes, from target identification to clinical trial design. And Thermo Fisher Scientific is actively integrating artificial intelligence across its operations, products and customer solutions, with a stated focus on cost efficiency, product innovation and growth.12
It is too early to tell how much of this is hype, but we see potential
It is too early to tell how much of this is hype and which areas will be transformed but, as discussed more broadly in our tech sector hub, we see potential in the technology.13 For example, given the length and complexity of getting a new drug to market – which can take decades – the possibility that AI could help optimise and shorten the process could save biopharma firms significant amounts on their R&D investments. In turn, that could bolster investors’ returns, and we will continue to follow developments closely.
Greener pastures?
Despite the perfect storm hitting healthcare in 2025, delving deeper into its details and dynamics shows we may have passed peak fear. It also reveals opportunities that lie hidden in the thicket of market anxiety. Many risks still lie ahead, of course, and it is important to remain diversified. But in the current conditions, all our global equity portfolios are overweight healthcare and we are positive on the sector’s potential.
