Investors in the global healthcare sector, long accustomed to its reputation as a defensive stalwart, have navigated a turbulent decade. The primary culprit has been a persistent fog of uncertainty around drug pricing, compounded by the recent era of rising interest rates, which together have hampered the performance of the benchmark MSCI World Healthcare Index.
What makes up the healthcare index?
The MSCI World Healthcare Index is a comprehensive basket, capturing the full spectrum of the industry. It includes the giant pharmaceutical groups, more innovative smaller-cap pharma and biotechnology firms, generic drugmakers, and medical-device manufacturers. It also encompasses service providers, notably the major US health-management organisations (HMOs), which are effectively health insurers, and private hospital operators. Geographically, the index is diversified across the US, Europe, and Japan, though it notably excludes exposure to emerging markets.
Despite this breadth, the index has significantly underperformed broader markets. Between mid-2015 and mid-2025, the S&P Health Care Select Sector index gained 60%, dwarfed by the 300% rise in the S&P 500. The pure-play S&P Biotechnology Select Industry index went nowhere over the same period.
The twin headwinds: politics and the cost of money
The underperformance stems from two major headwinds. First, pharmaceutical pricing became a political football, creating years of uncertainty for the sector. This was a key theme in the US presidential election between Hillary Clinton and Donald Trump, leading to price controls under Joe Biden and a further tightening of the regime when Donald Trump returned to power.
The second, more macroeconomic, issue was the rise in interest rates. Higher borrowing costs reduce the present value of future profits, disproportionately hampering growth stocks like the smaller, research-driven biotech firms.
There are signs the political pressure is now crystallising into a known quantity. According to Sven Borho, co-founder of healthcare investment firm OrbiMed, the Trump administration has cut a deal with the sector. The government will pay lower prices for future drugs and for current ones supplied to Medicaid and Medicare programmes using “most-favoured nation” (MFN) pricing, matching prices offered to a basket of other developed countries.
Patent cliffs and the M&A imperative
This new pricing reality coincides with a formidable challenge for Big Pharma: a wave of major drugs losing patent protection. When a drug goes off-patent, prices can collapse by 98% as generic competition floods in. Merck’s $30bn-a-year cancer drug Keytruda goes off-patent in 2028, and each major pharmaceutical company faces a similar “patent cliff” between 2025 and 2028.
Facing this double whammy, large companies are turning to mergers and acquisitions to replenish their pipelines, as internal research and development alone is rarely enough to fill the gap. They are seeking products with annual sales potential of $3bn and above, putting any specialty pharma or biotech firm with such an asset firmly on the shopping list. This M&A wave is a central thesis for some investors; OrbiMed’s Worldwide Healthcare Trust, for instance, has 30% of its portfolio in biotech companies, with a dedicated 12% “basket” of stocks deemed most likely to be acquired.
The urgency is underscored by the arduous nature of drug development. Only one in ten drugs makes it from pre-clinical trials to regulatory approval, a process that can take 10 to 15 years. The cost has soared, now exceeding $2bn to bring a drug to market, with enrolling a single patient in a clinical trial sometimes costing $300,000.
The transformative drivers: AI, robotics and weight-loss drugs
Looking beyond these immediate pressures, the sector is on the cusp of transformation driven by technology. Artificial Intelligence is often discussed for drug discovery, but its most profound impact may be in the diagnosis and treatment of disease. AI’s ability to amalgamate vast datasets—from blood tests to MRI scans—and compare new information against them could make it far more accurate than a human GP at diagnostics. This shift could dramatically alter patient pathways, potentially reducing the need for initial GP consultations altogether.
The cost-saving potential is vast. In the US, healthcare spending constitutes a fifth of GDP, with drugs accounting for a steady 12% of that total. The remaining 88% covers hospitals, surgeries, and practitioner fees. AI-driven diagnostics and the rise of robotic surgery promise deflation in this large portion of expenditure, helping to counteract the rising costs of an ageing population.
Robotic surgery, in particular, is moving from novelty to mainstream. Companies like Intuitive Surgical, a manufacturer of robotic surgical systems, are at the forefront. The technology already enables a surgeon in London to operate on a patient in New York, pointing to a future where manual surgery may become a historical footnote.
Alongside technological transformation, a new therapeutic category is reshaping the market: weight-loss drugs. While cosmetic benefits spurred early adoption, the profound impact is on chronic diseases linked to obesity, namely cardiovascular disease, cancer, and diabetes. Data suggests these treatments can cut the risk of developing Type-2 diabetes by 80%, with significant spillover effects reducing conditions like sleep apnea and the need for joint surgeries.
The next stage of growth will be driven by oral treatments, broadening accessibility beyond injectables. Eli Lilly is a leader here, but firms like Structure Therapeutics are closely watched. Its oral obesity treatment is about to enter final-stage Phase III trials and is considered a likely acquisition target. The consensus is that weight-loss treatments will become the largest drug category for years to come.
Geographic innovation and the China opportunity
Investment innovation is not confined to Western markets. OrbiMed’s trust, for example, holds a 5% position in China’s Jiangsu Hengrui Pharmaceuticals, providing access to extraordinary efficiency in drug development. The company has an R&D pipeline of approximately 150 projects, the world’s second-largest after Pfizer’s, and an estimated 500 projects including pre-clinical work.
The speed and cost differential is stark. Jiangsu Hengrui can move a drug from pre-clinical stages to early human trial data in one-third of the time and at 90% less cost than Western companies, thanks to lower R&D costs and a lighter regulatory burden for early-stage trials. The scientists are equally qualified, with many trained in the West.
The bottleneck emerges in later-stage trials. The US Food and Drug Administration does not fully trust Chinese trial data, and political sensitivities complicate the process. Therefore, Chinese firms typically license out their drugs to Western counterparts for Phase III trials and commercialisation in Western markets, a process that sees Western R&D heads frequently travelling to China to negotiate potentially massive deals. Jiangsu Hengrui is described as the “Chinese biopharmaceutical equivalent of Nvidia,” a dominant innovator whose quality of compounds is considered first-class.
This blend of political resolution, technological disruption, therapeutic innovation, and geographic opportunity is redefining the risk and reward profile for healthcare investors, shifting the focus from past headwinds to future drivers of growth.
