Do biotech investments make sense?

After years of stagnation, biotech and healthcare stocks offer alluring valuations

Since the exuberant peak of the Covid pandemic, biotech and healthcare stocks have experienced a difficult period. However, now might be the ideal moment to think about making an investment in these neglected but rapidly expanding industries.

One conundrum you may have when deciding where to invest in 2026 is where to look for growth.

For the past three years, artificial intelligence (AI) stocks have dominated the market in this regard. However, given how stretched some valuations have gotten, worries about an AI bubble are making some investors think twice.

Before AI took center stage, growth investors were obsessed with biotech stocks. Think back to the Covid era, when biotech firms like Moderna (NASDAQ:MRNA) were very popular.

Ben Preston, portfolio manager for Orbis Global Equity Strategy at Orbis Investments, states that "anyone who was in healthcare, whether they were producing PPE equipment or working on vaccines or organizing testing, there was an explosion of need."

As a result, investment in the field skyrocketed. However, there was too much capital in the system once the pandemic subsided.

Preston explained, "That naturally creates the opposite side of the cycle where profits fall because there's just not enough demand." Investors are discouraged. A "

However, with valuations at all-time lows, might this be the ideal moment to make biotech and healthcare investments?

Why it might be a good time to purchase biotech and healthcare stocks.

According to Preston, the emergence of AI as the primary growth sector has exacerbated the post-pandemic decline in demand for biotech and healthcare.

If an investor wanted to participate in the AI boom in the years following the pandemic, they would probably have sold down their growth stocks, including biotech, if their portfolio included both growth-oriented and value-oriented investments.

As a result, valuations have further declined.

Trump's withdrawal of funding from some universities, such as Harvard, which have traditionally been at the forefront of biotech and healthcare research, has also had an impact on US research.

According to Preston, "if you're not putting enough money in to develop the new drugs that you need, that will end up not being great for society." "In order to complete the research, you will need to swing that pendulum back.

Given that it has historically controlled a sizable portion of the market, the US tends to dominate discussions about biotech and healthcare, but China's rise could also be a boon for the industry.

Ollie Kenyon, senior director of RTW Investments, stated, "We believe that the biotech industry is in the early stages of a potential multi-year recovery, and this is an extremely exciting time to be in."

China is becoming a significant player in the industry. It now accounts for 30% of trial starts worldwide, compared to 35% in the US, and has surpassed the US in total clinical trials. A "

AI benefits for healthcare and biotech.

Investors who are concerned about AI sector valuations may find that healthcare and biotech stocks provide an alternative avenue for growth, but they also stand to gain from the technology.

"We see the healthcare sector as a prime beneficiary of AI-enabled technologies when it comes to furthering innovation," stated Polar Capital Global Healthcare Trust fund manager Gareth Powell (LON:PCGH).

AI specifically has the potential to increase clinical trial success rates, which are one of the main causes of expenses and uncertainty for biotech firms.

"The historic returns on research and development have been really underwhelming across pharma," Preston stated. "Doing these tests and trials is very costly. A "

AI has the ability to narrow down potential treatments to a small number of promising candidates.

For instance, in November 2024, Google DeepMind unveiled the third iteration of its AlphaFold model. Researchers worldwide can use this to predict the structure and behavior of proteins based on their constituent amino acids using artificial intelligence.

How to put money into healthcare and biotech.

Purchasing a fund or investment trust that makes investments in biotech and healthcare is one strategy if you believe that these industries will be among the best to invest in in the coming years.

The top five investment trusts with a biotech and healthcare focus by market capitalization as of December 11th are as follows.

Worldwide Healthcare Trust (LON:WWH) RTW Biotech Opportunities (LON:RTW) Syncona (LON:SYNC) Polar Capital Global Healthcare International Biotechnology (LON:IBT) When it comes to individual stocks, Preston chooses Genmab (Copenhagen:GMAB), a Danish biotech company that makes bispecific antibodiesmolecules that can bind to both pathogens and the antibodies the body can more successfully locate the former.

The market is currently heavily discounting its flagship medication, Darzalex, because its patents will expire at the end of this decade and the beginning of the next. At the moment, Genmab is trading at about 12 times its anticipated earnings.

However, Preston thinks the stock is reasonably priced given the cash flows up to that point and the pipeline of treatments Genmab is developing.

He stated, "In essence, you're paying very little for the future pipeline."

For more ideas, you can look at these FTSE 100 pharmaceutical stocks.