Biotech is making money again. After a volatile year – for the markets broadly and biotech specifically – the sector had an extraordinary comeback, outperforming the S&P 500 and broader market index, and closing out 2025 with its best annual returns since the Covid-19 pandemic.
Considering biotech was a massive underperformer for much of 2025 only to roar back in the last few months begs the question: is the sector borrowing gains from 2026? And if the recovery persists, will the sector stay measured? The broader fundamentals suggest the recovery may have legs, but investors should keep their eyes on several key market dynamics.
A Volatile 2025
The past year saw broad macro volatility, but with three distinct phases for biotech: an early year collapse, a mid-year stabilization period, and a post-summer rally. Several elements contributed to the tough start, including RFK Jr’s confirmation as Secretary of Health and Human Services; turnover of top staff at federal health agencies such as the FDA and CDC; restructuring and funding cuts at HHS and NIH, respectively; tariffs; and new drug pricing mandates.
A reassessment period began in April, when the XBI – an imperfect but often-used benchmark for US biotech performance – hit a long-term trough. Investors started to feel that the sector had gotten past much of the regulatory and administrative uncertainty plaguing the sector earlier in the year and wondered if biotech could be a primary beneficiary of an easing tech trade.
Macroeconomic clarity then helped kick off a strong tailwind in the second half of the year. Interest-rate cuts, increased investment in US manufacturing, drug pricing agreements, and the pulling back of tariffs all factored into the new-found momentum. An uptick in M&A and the XBI hitting 90 in September – a key resistance level for the index – added to the surge.
The result was the XBI up 35 percent for the year and 75 percent since April lows, compared to +16 percent and +37 percent, respectively, for the SPX.
Borrowing from 2026?
In 2026, biotech remains attractive in our view. Of course, the fact that the sector’s outperformance has occurred over a very short period could imply we’re borrowing from 2026 and the rally may be short-lived. But these cycles can be multi-year, and looking at valuations alone, biotech is currently trading closer to a historical bottom versus top – a reminder of how difficult the sector has been for so many for so long. It also suggests there’s a lot more room to move. If these cycles are truly multi-year, then a few months of outperformance shouldn’t dictate the next 12- or 24- month period. Simply put, there is a lot of catching up to do.
What should investors be mindful of in the year ahead?
1. Stock picking remains important
While simply buying the basket in a year like 2025 would be enough to make anyone look good, biotech is a very crowded space – there are around 750 public biotech companies in the US – and shrewd stock picking will remain important for investors in 2026, regardless of therapeutic area.
2. A healthier and more measured IPO environment
When it comes to IPOs, there seems to be healthy tension in the biotech space, with dialogue that is constructive but measured. Investors will continue to reward companies where data is truly positive, VCs are being more selective, and there’s a higher bar to be public than in recent years.
3. Conditions favor M&A
Over the next five years, loss-of-exclusivity (LOE) exposure is expected to grow substantially, to one of the largest levels in the last two decades. Large-cap biotechs have ample cash and see innovation at the SMID-cap level, creating a market ripe for M&A.
4. Continued FDA volatility
The biotech sector is no stranger to risk – trial failure, commercial risk, and cash flow needs are typical challenges and will remain so in 2026. Perhaps the biggest risk in 2026, however, is continued FDA volatility, creating an uncertain environment sector-wide.
While biotech faces both opportunities and challenges as we enter 2026, disciplined stock selection and a focus on innovation remain key to navigating this dynamic landscape. Investors should stay vigilant regarding potential risks, but with strategic positioning and an eye on emerging trends, there is considerable potential for growth and recovery in the year ahead.
