Pharma and life science tools: A quality growth revival

It has been an unusually painful period to own healthcare stocks. In the year to end-August, the MSCI World index has returned 11.3%, against 6.7% for the MSCI World Healthcare index. That gap is not about deteriorating fundamentals in pharmaceuticals or life science tools companies; it is almost entirely a story of capital rotation: trillions of dollars of incremental investment poured into hyperscalers and AI-infrastructure names, while healthcare, historically one of the market's largest and most defensive sectors, became a source of funds, even as the sector's underlying earnings kept compounding. That is a very different setup from prior healthcare corrections, which were typically driven by fears about the sector's own growth or regulatory outlook

That performance gap has started to close with investors rotating beyond tech, and for a reason that goes beyond healthcare's own fundamentals.

Pharmaceuticals bore the sharpest edge of that rotation. The sector went through a post-US-election slump that finally bottomed in August 2025, with a 39% discount to the market – its deepest underperformance in 35 years – as investors priced in worst-case outcomes on drug pricing and tariffs. Sentiment has since improved as the most severe policy headwinds have cleared, allowing the sector to return to only a modest discount to the market – broadly back to its normal historical range. The revival was sharp and broad-based, but in our view it has still left the sector's better growth stories significantly mispriced.

Growth cycles in the pharmaceutical industry are typically long, often lasting 10-13 years, and most are unrelated to wider macroeconomic cycles. Growth instead comes from revenue gains generated by innovative new drugs emerging from pipelines, net of revenue losses from patent expirations.

The novel drugs driving growth in the current cycle span many therapeutic areas – from the much-discussed GLP-1 drugs in the diabetes/obesity segment, to new disease-modifying treatments for historically untreatable neurodegenerative diseases, innovative cancer therapies, and new classes of drugs for a growing number of chronic inflammatory and cardiovascular diseases.

What is unusual in this particular cycle is that many of the companies with the lowest patent-expiry burdens (positive for growth) also have the most compelling late-stage pipelines (also positive for growth). Companies with the largest patent-expiry burdens (negative for growth) tend to have the weakest pipelines (also negative for growth). The spread between the three highest-growth companies and the three lowest-growth companies in the sector is especially wide over the period 2025-30, with an estimated EPS CAGR differential of 19.3%. That spread is more than double historical levels and, in our view, represents a compelling opportunity for long-only portfolio strategies – particularly following a sector re-rating that has largely ignored these significant differences in medium-term outlook.

As a result, the sector's top three growth stories now trade at an average 1-year forward P/E of 16.9x, just below their average 5-year compound annual EPS growth of 17.2%. Historically, such an undervaluation of quality-growth compounders in a long-cycle sector with high visibility and relatively low correlation to macro cycles is rare and usually short-lived but may have been prolonged by the dominance of the AI theme in the recent past.

The biggest overhang on pharma valuations through 2025 was the possibility of cuts to US drug pricing as well as the threat of blanket tariffs on branded medicines. That fog has now largely lifted. In April 2026, the administration imposed a 100% tariff on imported patented pharmaceuticals,¹but built in wide exemptions: a 0% rate for companies signing Most-Favored-Nation pricing and US-onshoring agreements (which most large & mid-cap pharmaceutical companies have now signed), 20% for onshoring-only commitments, and full exemptions for generics and biosimilars. Combined with Medicare's first negotiated prices taking effect in January 2026 under the IRA,² the policy picture for large-cap pharma is now clearer in the mid term in our view.

That clarity, together with the patent cliff ahead, has unlocked one of the stronger M&A cycles the sector has seen in years. Pharma faces more than USD 200 billion of global branded-revenue exposure through 2032, with the patent problems peaking in 2028, concentrated in oncology, immunology and cardiometabolic franchises.³ As a result, large-cap pharma companies are redeploying balance-sheet capacity into pipeline replenishment with Biopharma M&A reaching USD 106 billion across 201 deals in the first five months of 2026 alone – on pace to be the strongest year since 2019.⁴ GLP-1 and obesity-adjacent assets remain the biggest single draw, but dealmakers have broadened into antibody-drug conjugates, radiopharmaceuticals and next-generation immunology. For long-only investors, this is a second leg of the pharma thesis: companies with clean pipelines are being rewarded twice – once by organic growth, and again as scarce assets that peers are willing to pay up for.

As well as serving hospitals and some industrial segments, a majority of the life science tools sector’s revenue base sits along the pharmaceutical sector’s value chain and is hence leveraged with a time lag to the R&D investment and production cycles of the global pharmaceuticals industry. This healthcare sub-segment had enjoyed an exceptional double boost during the pandemic with Covid testing revenue added to vaccine production revenue but since the end of 2021 these tailwinds had reversed into growth headwinds with the sub-segment hitting an all-time low multiple vs the market as recently as May 2026, with much of the debate focused on whether life science tools would ever return to its historic mid-single digit growth dynamic. Many of these concerns have since begun to abate through what turned out to be a positive beat-and-raise Q2 2026 reporting season for most companies in the sector. Interestingly, however, despite the recent rally in the Tools space, it still only sits near the average of its 20-year multiple relative to the market. Given the strong recovery in the pharmaceutical industry’s R&D investment as well as continuing growth in its production facilities (boosted by US re-shoring in 2027-28) following the recent MFN deal signings, we remain confident in the growth outlook for the Life Science Tools industry.

The setup is not without risk. Oral GLP-1 formulations, if they launch successfully and cannibalize injectable share, could unsettle both the obesity-drug leaders and medtech names levered to bariatric and cardiometabolic procedure volumes. Pipelines themselves always carry clinical development risk. Proposed Medicaid reductions, expiring Affordable Care Act subsidies and the run-up to the 2026 US midterm elections could all reintroduce some policy uncertainty. And within healthcare, single-company shocks – as Boston Scientific and Zoetis⁵ illustrated in Q2 2026 when both companies cut guidance – show that a re-rating thesis for the sector still requires careful stock selection.

None of these risks strike us as sufficient to derail the broader re-rating case. Healthcare is increasingly showing up as a rotation destination rather than a defensive afterthought, as institutional investors remain structurally underweight the sector after two years of AI-led flows. Consensus estimates point to an acceleration in healthcare earnings growth in 2027, at a time when the sector still trades at a discount to its own history and to the broader market.

Improving fundamentals that are resilient to economic cycles, alongside still modest valuations relative to the market and history, provide a compelling rationale for the Robeco Global Stars strategy overweight position in the sub-segments of healthcare that we view most positively – pharmaceuticals and tools. The strategy’s focus on owning high-quality growth compounders that remain attractively valued is the basis of our stock selection, and we continue to find substantial opportunity in the healthcare sector.

Footnotes

¹ Drugmakers face 100% tariff unless they cut prices or produce drugs in US – Reuters – 2 April 2026
² Drug companies sign “Most Favored Nation” deals, then raise prices anyway – Drug Discovery & Development – 2 January 2026
³ The 2026–2032 patent cliff by the numbers: 11,000 patents, $200 billion at risk – Pharmadossier – 10 June 2026
⁴ ‘Buying stuff like it’s going out of fashion’: Biotech M&A on track for best year since pre-Covid – CNBC – 4 June 2026
⁵ The companies shown here are for illustrative purposes only. No inference can be made on the future development of the company. This is not a buy, sell, or hold recommendation.