Over six months have passed since Cherry Reynard wrote about the biotech and healthcare sector for us in this article – The biotech bust: a case study in hype, hubris but now hope. The period since then has been an eventful one. The table below, which uses data as at the close of play on 12 February 2026, looks at the short-term returns on these trusts.

For the most part, the six-month numbers are strong, but shorter-term the picture is less rosy.

So, what is happening? If you didn’t buy last summer, have you missed the boat? And what is the outlook for the biotech and healthcare sector?

The strong returns from trusts such as Biotech Growth (BIOG) and International Biotechnology (IBT) reflect a recovery in biotech valuations after a prolonged spell in the doldrums. A key driver has been the revival of M&A activity as big, cash-rich pharmaceutical companies – concerned about looming patent expirations – look to replenish their drug pipelines by acquiring promising assets. As RTW Biotech Opportunities (RTW) says in its latest factsheet, “big pharma is increasingly buying innovation rather than building it internally, leaving well-positioned biotech companies central to both strategic deal flow and long-term value creation”. The trend has continued into 2026, as we noted here.

In part, this revival reflects breadth of innovation within the sector, with entirely new classes of therapy becoming viable. Speaking at Winterflood’s annual conference on 22 January, Worldwide Healthcare (WWH)’s Trevor Polischuck reeled off a long list of potential breakthroughs that they are hoping to see in the coming years. These include advances in treatments for Alzheimer’s, a proliferation of new GLP-1 type drugs which could have benefits beyond weight-loss, new targeted cancer therapies, breakthroughs in immunology, and far more gene therapies.

However, while drug discovery tends to grab the headlines, it is far from the only growth driver for the sector. Advances in robotic surgery, for example, or improvements in monitoring and diagnosis of patients are also significant areas of development.

Another positive driver has been an easing of concerns about Trump’s healthcare policies. Drugmakers have struck deals with the US government on pricing, while promising to reduce imports, and build US-based manufacturing facilities, thus helping them sidestep Trump’s high tariffs. Although, whether those commitments would outlast a change in government remains to be seen.

In addition, concerns about whether the FDA would slow the pace of approvals of new therapies proved ill-founded.

The macroeconomic environment is generally supportive. Interest rates are still on a declining trend (rising rates in 2022 were the main trigger for the sector’s earlier de-rating), for example. The long-term drivers of healthcare spending – principally around an ageing population that needs more healthcare services and drugs, and the expanding access to healthcare in emerging markets – are also intact.

Valuations are off their lows, but healthcare stocks still trade at meaningful valuation discounts to the wider market, which suggests that there is still upside. When Cherry was talking to IBT manager Ailsa Craig last summer, Ailsa said the sector was at “peak despair”. We are past that, but we are still a very long way from peak exuberance.

Perhaps this chart taken from a recent Polar Capital Global Healthcare (PCGH) presentation illustrates this best. It is looking at the relative performance of US healthcare relative to the wider market. The recent bounce is barely visible, which could mean that there is a long way to go. It also illustrates that there are always reasons to fret about the future of the sector, but the long-term trend is still upwards.

Healthcare is still the poor relation when it comes to capturing investor attention, which is very much focused by thoughts of AI and its likely impact. While there are potential AI effects in areas such as drug discovery, reducing the cost of drug trials, and in diagnosis, the sector isn’t faced with the same existential threats that overhang software, for example.

In fact, as investors fret about the likely returns on the vast amounts of capital being deployed by the big AI players, they are increasingly recycling money to less hyped areas of the market, including healthcare, and away from the US. That suits PCGH which, by virtue of its stock selection decisions rather than any deliberate asset allocation move, has ended up with a substantial underweight exposure to US healthcare relative to its MSCI ACWI Healthcare Index benchmark.

However, as recent share price moves suggest, not everything is moving in the right direction. It may be that investors are adopting more of a risk-off stance. However, US health insurers were hit at the end of January when Trump suggested cutting funding for Medicare yet again. In addition, this week, the FDA rejected Moderna’s application for its mRNA-based flu vaccine, a decision that many believe was based on the vaccine scepticism of Robert F Kennedy Jr rather than science.

In the investment companies sector, as we recently reported, we are getting closer to the crunch time for Columbia Threadneedle to take on the mandate for Bellevue Healthcare (BBH) after a run of poor returns for that trust.

With the exception of RTW Biotech Opportunities (RTW) and Syncona (SYNC) discounts look reasonable. PCGH has even been able to issue stock.

My sense is that healthcare is set for a good year in 2026. It makes up a decent slug of my portfolio, how about yours?