For much of 2025, our thesis on the healthcare sector has been that fundamentals are solid and stocks are cheap, but clarity was needed on tariffs and US pricing to drive outperformance from the sector. Over recent weeks, some clarity on these matters has started to emerge.
Since Donald Trump assumed the US presidency, two major policy risks have weighed heavily on the sector: the threat of tariffs on pharmaceutical imports into the US and the potential introduction of a ‘most favoured nation’ (MFN) drug pricing framework for US government-funded healthcare. There have recently been important developments in both areas.
Industry-specific tariffs
First, Trump announced a 100% tariff on branded pharmaceutical imports, effective from 1 October 2025. While the headline rate appears severe, the duty will not apply to companies building or expanding manufacturing facilities in the US, including projects under construction. In recent months, most large pharmaceutical companies have announced significant investments in US capacity, meaning these tariffs should not apply to their imports. Although the finer details are yet to be clarified, the outcome appears relatively benign for the industry. In any case, removing the uncertainty should provide support for share prices
Big Pharma secures deals on pricing
Second, at the end of September, the US government and Pfizer reached an agreement under which the company will adopt MFN pricing for the Medicaid channel, lower prices in the direct-to-consumer market, invest in US manufacturing and commit to setting future launch prices at MFN levels. This will be achieved by avoiding undercutting US prices in high-income OECD (Organisation for Economic Co-operation and Development) markets rather than reducing US prices directly. In exchange, Pfizer secured a three-year moratorium on tariffs.
A few weeks later, AstraZeneca struck a similar deal. The company announced that, like Pfizer, it would offer MFN prices to Medicaid patients. It will also sell drugs and devices such as asthma inhalers on the newly established TrumpRx website (from January next year), through which consumers can bypass health insurance and access drugs at lower prices. AstraZeneca had previously announced a $50bn investment in US medicines manufacturing and R&D (research and development) over five years, to ensure all its medicines sold in the US would be made in the US.
We expect these agreements will be followed by similar arrangements between the government and industry, reflecting a willingness on both sides to negotiate in a way that preserves the healthcare sector’s ability to invest in innovation.
Further deals may pose downside risk to earnings in the short term, but the greater visibility should lead to improved sentiment and higher multiples in the sector.
There are still risks on the pricing side, but the extremely negative sentiment and positioning in the healthcare sector before these announcements has led to a rally in many healthcare stocks in response to this news.
We expect this rally to continue for the following reasons as there are convincing near-term catalysts:
1. Innovation: The pace of innovation in healthcare continues to accelerate, not just in respect of novel therapies but also because new devices are opening up new markets and technological advances are increasing efficiency. Despite worries at the start of the new US administration about Department of Government Efficiency (DOGE)-related spending cuts and controversial appointments at the US Food and Drug Administration (FDA), new products continue to come to market.
With regards to the FDA, the agency had approved 32 novel drugs by the end of September 2025 for the year to date, a figure that compares favourably with the 34 that had been approved during the first nine months of 2024.
2. Increasing utilisation: At the same time, increased utilisation is supporting revenue and profit growth across companies in a range of subsectors including healthcare distribution, healthcare equipment and healthcare facilities. This is stemming from demographics – older age groups tend to need more access to healthcare – and the clearing of waiting lists after the pandemic.
3. Mergers and acquisitions (M&A) are picking up: We expect ongoing consolidation in the healthcare industry, which remains highly fragmented. This will be positive for growth and returns as companies develop their research pipelines and positions in complementary technologies. Companies are often agnostic to the source of innovation or R&D, so are looking for external assets as well as encouraging internal developments. The pace of M&A activity has picked up in recent months, with 11 deals since the start of 2025.
The sector is attractively valued
The potential for recovery is supported by a strong valuation argument. Having been under pressure for the past two years, the sector is now trading at a significant valuation discount to the broader market.
Relative price to earnings at a 30% discount |
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| Source: Copyright 2025 Morgan Stanley Research, FactSet, 6 October 2025. |
With valuations attractive, it is not unreasonable for healthcare investors to look ahead with a high degree of optimism.
As policy fears in the US are appearing to ease, and the key regulatory bodies such as the FDA are functioning as normal, the outlook for healthcare investing feels much brighter now than it has for some time. With attractive relative valuations providing support, we believe the argument for a positive stance on the healthcare sector is very compelling indeed.
How is the Polar Capital Multi Cap Healthcare Strategy positioned?
Against this background, the Strategy has a broad-based exposure to healthcare. We can invest across the market-cap spectrum and see real value in a lot of different subsectors, which means we can take a very diversified approach. The Strategy has high exposure to biotechnology because of the new product cycles and potential for M&A. It also has significant exposure to small and mid-cap companies because that is where we see the potential for consolidation. It is underweight in the US and overweight in Europe and emerging markets.
