Biotech stocks have revived after five years of stagnation. Why is growth far from complete?

After several years of decline, the biotechnology sector is back on a growth trajectory: in the last two weeks alone, its shares have risen by almost 9%. Investors expect that improving macroeconomic conditions and a softening political backdrop will help to further stimulate activity in the market, including new M&A deals.

The SPDR S&P Biotech exchange-traded fund with ticker XBI, which tracks a broad set of biotech companies, has gained 8.9% since Sept. 25 and is up about 16% since the beginning of the year, Barron's noted. By comparison, the main U.S. stock index, the S&P 500, has added less - 14.4% in 2025. This is an impressive result for a sector that has not shown significant movements since the beginning of 2021, Barron's noted.

The rise in biotech stocks over the past week has been attributed to the drug pricing agreement between Pfizer and President Donald Trump, which last week caused a surge in the stock prices of major pharma manufacturers, as well as a series of mergers and acquisitions, the publication explains.

Biotech stocks have not shown such a jump for about five years. This time it may be different: the growth of quotations gives Wall Street hope that after a long "winter" in biotechnology a thaw is coming, Barron's writes.

"Investors are nervous - previous rallies didn't hold for long. But now we're in uncharted territory: the sector is becoming increasingly profitable. Perhaps this time growth is truly sustainable?" wrote Cantor Fitzgerald analysts Josh Schimmer and Eric Schmidt.

The biotech sector plunged into stagnation in early 2021 - almost five years ago. Before that, in 2020, biotech stocks surged amid the first wave of the Covid-19 pandemic: low interest rates and increased attention to the pharmaceutical industry attracted a lot of investors to the sector. But in February 2021, the bubble burst, and by June, the XBI index had fallen by more than 50%, Barron's writes.

Since then, biotech stocks have remained a sluggish segment, the publication notes. This traditionally risky sector has faced funding shortfalls, company bankruptcies and falling investor interest. Too many dubious startups went public during the pandemic boom, freezing capital in unprofitable and unpromising projects. Rising interest rates have exacerbated the situation: speculative investments in cutting-edge science have become less attractive, Barron's says.

In 2023, XBI was up about 7%, while the S&P 500 index added more than 24%. In 2024, biotech remained flat, while the S&P 500 rose another 22%.

Now there are signs that the sector's structural problems are beginning to go away. The mass closure of weak biotech companies has freed up capital for specialized investors, and concerns about the Trump administration's pricing policies have begun to subside. At the same time, the expected rate cuts may bring back into the market large investors willing to re-invest in risky sectors such as biotech, Barron's believes.

"Biotech investors became increasingly optimistic during September as the rally that began after the April lows continued. After several quarters where the sector seemed to face headwinds from all sides, there is growing hope that macroeconomic factors are finally starting to turn in biotech's favor," wrote TD Cowen's biotech sector analysts.

The main reason to remain optimistic in the coming months is that major pharma companies are in dire need of new drugs to add to their product lines. Manufacturers such as Pfizer, Merck and Bristol Myers Squibb are facing approaching "patent cliffs" - expiration dates for rights to key drugs, Barron's added.

This means that a wave of M&A deals is likely, and an improving political and macroeconomic environment could push the entire sector up when these deals start to take place, experts say.

"While it remains difficult to predict M&A deals in terms of timing and specific targets, an easing of the tense political environment may help rather than hinder business growth in the industry," wrote Jared Holtz, a healthcare equity strategist at Mizuho.

This article was AI-translated and verified by a human editor