Biotech's Comeback Continues: Why Investors See Long-Term Value

Biotech’s Comeback Continues: Why Investors See Long-Term Value

Last updated: July 23, 2026 7:54 am

1 week ago

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Biotech stocks have staged a significant comeback, with major ETFs like XBI and IBB posting impressive gains. Investors are optimistic due to anticipated M&A activity driven by patent expirations, improved clinical trial environments, and a supportive regulatory landscape.

Companies like Revolution Medicines are showing strong clinical results, positioning the sector for continued growth, further bolstered by the integration of artificial intelligence.

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Biotechnology investors remain optimistic about the sector's future, even after a significant rebound this year. This healthcare subsector has emerged as a compelling investment opportunity, with leading exchange-traded funds (ETFs) showing substantial gains. The SPDR S&P Biotech ETF (XBI) has surged nearly 80% in the past 12 months, while the iShares Biotechnology ETF (IBB) has climbed over 40%, significantly outperforming the S&P 500's 19% gain over the same period.

Several factors are fueling this optimism. Large pharmaceutical companies are facing patent expirations, which could spur merger and acquisition (M&A) activity. Additionally, a recovery in clinical trial activity and a more favorable regulatory environment are supporting the sector's growth. Evan McCulloch, lead portfolio manager of the Franklin Biotechnology Discovery Fund (FBDIX), stated, "M&A is always a very important driver for us, and we do think it will continue."

The FBDIX fund itself has a strong track record, consistently ranking in the top quartile of its category over various timeframes. While its year-to-date performance has been closer to its benchmark, McCulloch anticipates stronger results in the second half of the year, driven by upcoming key data releases and major product launches.

One of the standout performers is Revolution Medicines. The clinical-stage oncology company's shares have more than doubled this year, fueled by positive Phase 3 trial results for its pancreatic cancer drug, daraxonrasib. The drug has shown promising efficacy, doubling survival length and significantly reducing the risk of death compared to chemotherapy. Revolution Medicines is now preparing for FDA approval, a development that McCulloch describes as "practically a shoe-in for approval." As of June 30, Revolution Medicines was the seventh-largest holding in FBDIX.

Despite the recent run-up, investors are becoming more selective. McCulloch notes that many biotech stocks, particularly midcap ones, are now more fairly priced. However, the sector also faces risks, including potential shifts in Federal Reserve interest rate policy. Matt Bartolini, global head of research strategists at State Street Investment Management, warns of continued volatility in the biotech sector. The XBI ETF, while outperforming this year, is known for its high volatility.

Nevertheless, M&A trends and the integration of artificial intelligence (AI) continue to be tailwinds for the sector. Douglas Yones, CEO of Direxion, sees biotech as a key area benefiting from AI, predicting geometric growth in the healthcare and pharma industries over the next five to ten years.