5 years after COVID, pharma shares languish

Global healthcare stocks have not been this cheap in decades and fund inflows into the sector are picking up, yet the shares remain in the doldrums, highlighting uncertainty over drug pricing policies since Donald Trump returned to the White House. Pharma companies' earnings outlook is being obscured by concerns over revived "most-favored-nation" drug pricing rules in the lucrative US market and potential 200% tariffs on pharma imports into the US.

Money flooded into drugmakers' shares during the COVID-19 pandemic but more recently there has been an exodus as investors shifted into Big Tech, leaving the sector cheap but unloved, reported Reuters. At 15.9 times forward earnings, healthcare trades 11% below its long-term average and 20% below global equities, its steepest discount in 16 years, just above a record discount in 2009, based on LSEG Datastream data.

"We've moved from cautious optimism to cautious pessimism," said Stephanie Aliaga, global market strategist at J.P. Morgan Asset Management in New York. "Valuations have gotten even cheaper, but for a reason," she added, referring to intensifying US policy risks.

But some investors are starting to look past the Washington policy fog and at long-term positive drivers, such as aging populations, RNA-based therapeutics, and breakthroughs in weight-loss and diabetes drugs, Reuters reported.

Alberto Conca, CIO at Swiss wealth manager LFG+ZEST, has been adding exposure to pharma, biotech and medtech in recent weeks, drawn by strong cash-flow yields and the prospect of US rate cuts boosting this rate-sensitive sector. Interest rate cuts typically support healthcare by lowering R&D funding costs and boosting the value of future cash flows.

"These are quality companies with good growth and defensive features being priced as if we're heading into an 'Armageddon scenario', which I believe is unlikely," he said. UK-based M&G Investments has also been selectively adding to healthcare, according to its latest allocation report. Healthcare funds have seen net inflows since 2024, more than reversing the outflows from late 2022 through 2023, fund tracker EPFR data shows. Although year-to-date, inflows total $7.2 billion, down 41% from last year.

Innovation is accelerating, pipelines are maturing and M&A is showing signs of picking up — yet stock prices are unmoved.

Whether that represents a buying opportunity or a value trap hinges on how and when the policy uncertainty clears, investors said.

Historically, healthcare has traded at a modest premium to world stocks, thanks to its defensive profile and steady earnings. But that narrative has unravelled under political pressure from Washington and investors' love of Big Tech.

Over the past three years, US healthcare has underperformed the S&P 500 by more than 60 percentage points, making it the worst sectoral performer on Wall Street. Its valuation has deepened to a near-record 27% discount, from parity to the S&P in 2023.

"Markets don't like uncertainty, and that shows up in valuations," said Eddie Yoon, healthcare sector leader and portfolio manager at Fidelity Investments in Boston. "Being cheap isn't necessarily a reason to buy. You need a catalyst."

For now, that catalyst is elusive. The policy uncertainty makes it difficult to forecast future earnings, he said, though he hopes for more clarity by year-end - potentially also paving the way for more M&A in the industry.

Talks with the Trump administration have yet to clarify how and when drug prices will fall, executives from Eli Lilly and Merck said at a May industry conference.