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Pharma – innovation at a discount?
Diana Wagner
November 25, 2025
Several years ago, the outlook for pharmaceutical companies looked bright. Rapid development of vaccines to fight COVID-19, advances in gene sequencing technology and new weight loss drugs all suggested a promising future.
While the pace of innovation is alive and well, valuations now reflect a different story. The pharmaceutical industry trades at a significant discount on a forward price-to-earnings basis to the S&P 500 Index, close to its steepest in 30 years.
Pharma valuations trade far below historical norm
Sources: FactSet, S&P Dow Jones Indices LLC. Relative P/E ratio represents the ratio between the 12-month forward P/E for the S&P 500 Pharmaceuticals Index versus the broader S&P 500 Index. Data as of October 31, 2025.
However, a rebound could be in the works that fuels a rerating in 2026.
“I like to think it’s darkest before its dawn,” says equity portfolio manager Diana Wagner. “Industry headwinds have made pharma easy for the market to ignore. But that is changing, and I believe the tide is turning in the right direction.”
For one, policy uncertainty is dissipating. Several large pharmaceutical companies, including Eli Lilly and Pfizer, struck deals with the Trump administration to lower prices on certain drugs and invest in new plants to manufacture drugs on U.S. soil.
Earnings forecasts have improved, and acquisition activity is picking up. So far in 2025, more than 400 deals were announced in the pharmaceutical and biotech sectors. One of the largest was Pfizer’s $10 billion acquisition of obesity drug developer Metsera. Merck and Johnson & Johnson also unveiled large buyout transactions.
A reason for depressed valuations among pharma firms has been the prospect of blockbuster drugs losing exclusive patent status. The ability to rebuild pipelines, whether organically or through acquisitions, is crucial for companies seeking a valuation reset.
Meanwhile, other health care firms are utilizing AI to reduce costs, generate quicker diagnoses and support clinical trials and remote care.
If there is an industry that’s been left behind in the AI-fueled stock frenzy, pharma would be high on the list. As the S&P 500 trades at record highs and valuations stretch for higher growth stocks, pharma may benefit from a rotation into less expensive areas of the market.
Learn more about
The S&P 500 Pharmaceuticals Index consists of companies within the broader S&P 500 Healthcare Index.
S&P 500 Index is a market capitalization-weighted index based on the results of approximately 500 widely held common stocks.
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