Capital Ideas^™ 
Investment insights from Capital Group

Lingering pressures in the health care sector appear to be easing, and the gap between company valuations and underlying business strength may be creating opportunities for selective investors. Several factors are contributing to this shift, including a robust pipeline of new drugs, appealing stock valuations and a pickup in merger and acquisition activity.

Confidence among pharmaceutical, biotechnology and health care services leadership teams is growing, particularly around U.S. drug pricing, following a period of regulatory uncertainty. At the same time, enthusiasm remains strong for medical innovation, especially in areas where new treatments could address significant unmet needs and open up new markets.

“Health care, particularly drugs and pharmaceuticals, feels more structurally durable than most sectors, even amid rapid technological change,” says portfolio manager Alan Wilson. “Demand is anchored in fundamental human needs rather than discretionary behavior or business cycles.”

Investing in health care is inherently idiosyncratic. Long development timelines, uncertain clinical trial results, patent expirations and changing regulations can lead to wide differences in company performance. As a result, strong leadership and disciplined use of capital remain critical. This environment reinforces the importance of detailed research and a long-term perspective when evaluating potential returns.

Still, market pricing suggests investors are assigning limited value to long-term opportunities. The pharmaceutical pipeline remains broad and increasingly diversified across oncology, metabolic disease, immunology and neuroscience. AstraZeneca and Roche stand out as leaders in terms of breadth of indications, although a comprehensive assessment across the sector remains essential.

Drug development is vast and competitive

Valuations across the sector continue to reflect a degree of skepticism. This is notable given how biopharmaceutical companies are typically valued, with stock prices closely tied to expectations for future drug development. While recent policy changes have shortened the period of exclusivity for some products, the economics of drug development remain long term in nature, and innovation tends to build over decades rather than quarters.

Health care has experienced a modest rerating from recent lows; valuations remain attractive relative to both the broader equity market and historical norms. Pharmaceutical stocks in particular continue to trade at a meaningful discount to the S&P 500.

Pharma appears undervalued

Sources: Capital Group, FactSet, S&P Global. As of February 28, 2026. F12M = forward 12-months. P/E = price-to-earnings.

Meanwhile, technology is beginning to reshape how health care companies operate. Artificial intelligence is increasingly being used to manage large data sets, improve clinical trial design and streamline operations. While AI’s impact on discovering new drugs may take time to fully materialize, its operational benefits are becoming clearer.

Looking ahead, additional developments could prompt a reassessment of the sector. Merger and acquisition activity is expected to accelerate further following the uptick in 2025.

Finally, health care remains a sector where outcomes are less influenced by broad economic trends. With valuations still reflecting caution and innovation pipelines continuing to expand, opportunities may increasingly lie in careful stock selection rather than broad exposure to the sector.