A wave of dealmaking and clinical breakthroughs has delivered a much-needed jolt to the healthcare sector after years of mixed performance.
The iShares U.S. Pharmaceuticals exchange-traded fund and iShares Biotechnology ETF this year have gained 22% and 25%, respectively, beating a 13% gain in the S&P 500. In biotech, company-specific catalysts are driving a number of stocks to record highs. Moderna has surged nearly 716% on the back of positive cancer-vaccine trial data, while Revolution Medicines has more than doubled amid excitement over its "miracle" pancreatic cancer pill.
Will the good times continue? Asad Haider, managing director at Goldman Sachs, is in a prime position to know. Haider oversees the healthcare business unit within Global Investment Research and leads coverage of the U.S. pharmaceuticals sector.
In an interview with Barron's on Oct. 14, Haider outlined new challenges for the sector while expressing a "fairly constructive" outlook and offering three big-name picks. An edited version of the conversation follows.
Barron's: Mergers and acquisitions have been a major theme this year. The industry's deal volume in the first half of the year was practically as high as for all of 2025. What's going on?
Asad Haider: One of the biggest considerations for M&A is slowing growth, which comes from patent cliffs. Two massive cancer drugs -- Merck's Keytruda and Bristol Myers Squibb's Opdivo -- and several other blockbusters are set to lose exclusivity before the end of the decade. Beyond that, there are some patent cliffs in the early 2030s, so drugmakers have to externally source innovation to replenish their pipelines.
Recently there has been a slowdown in deal activity, with many transactions getting structured as option deals or asset licensing rather than outright acquisitions. For example, AstraZeneca invested $2 billion in Summit Therapeutics last month for the right to test ivonescimab alongside its own drug candidates. Sanofi and Regeneron Pharmaceuticals recently announced an expansion of their partnership on a number of pipeline candidates, while Sanofi's has ongoing collaborations with China-based biotechs to source other assets.
The industry has about $600 billion of M&A capacity globally, with the ability to put that cash to work. Deal activity will continue, but these creative ways of structuring deals may become a bigger theme.
Where has that shift from outright deals been most evident?
Ground zero has been biotech. A high velocity in M&A was the primary driver of outperformance for the State Street SPDR S&P Biotech ETF in the first half of the year. Now, a major theme is the underperformance of that ETF. [The fund has fallen 2.6% over the past month, while the S&P 500 is down 0.7% over the same period.]
Have there been other problems?
We're firmly in a Fed rate-hiking cycle, and rising yields are a big part of the macro story. Typically, that isn't good for biotech, particularly small-cap valuations based on discounted cash flows. And then there's the overlay of the midterm elections, where policy uncertainty may be a drag on boardroom sentiment as it relates to M&A.
So, what's your overall pharma outlook for 2027? Is there any silver lining?
I think the 2027 outlook still feels fairly constructive in terms of innovation momentum and the M&A substrate. There are some exogenous factors to keep an eye on, like the AI trade. The performance of AI-exposed tech stocks and healthcare stocks have had a largely negative correlation, creating a non-fundamental variable for investors to contend with. Valuations are in a fairly decent place, and while it's hard to make a sector-wide call, we try to pick the right stocks based on clinical catalysts, upward sales revisions, or earnings momentum.
If you had to single out your top stock picks in large-cap pharma right now, which companies make the cut?
On the large-cap side, where are you getting the best product-cycle momentum that'll drive top-line revisions? Revenue revisions are more important than earnings revisions because pharma companies can do all kinds of acrobatics -- things like buybacks and cost cuts -- to drive earnings. From that perspective, our top picks have been Eli Lilly and Johnson & Johnson, though for very different reasons.
Break it down for us. The conversation around Lilly has centered almost exclusively on GLP-1 medications. Is there more to the investment thesis?
There has been a lot of focus on obesity and cardiometabolic health, where Lilly continues to drive momentum. But we're increasingly interested in the non-incretin franchise, which is going to have some important trial readouts in the next year, including on the oncology side. [Lilly's incretin portfolio includes hormone-based therapies that target GLP-1, GIP, and glucagon receptors to regulate blood sugar and influence a patient's weight.]
J&J reported quarterly earnings last week. Where do you stand on the company following those results?
We feel good about what J&J has, both in terms of current commercial assets and also the emerging pipeline. J&J's largest drug, Tremfya, is a leader in large immunology indications, and it continues to propel ahead. More recently the company has launched an oral psoriasis pill, Icotyde, that is showing biologic-like efficiency. We just raised our estimates based on some early launch metrics. [Biologics are medications derived from living organisms; Icotyde directly competes with biologics for psoriasis.] J&J also has other product cycles unfolding across its Innovative Medicine franchise, including a bladder cancer drug called Inlexzo that has shown very good results. A recently approved immunology drug called Amavi could represent a $5 billion opportunity across multiple indications. Frankly, J&J has one of the best pipelines across the entire industry.
Aside from those industry giants, are there other companies you're keeping an eye on?
We've been very bullish on Merck. The company has a big loss of exclusivity coming up in 2028 as Keytruda goes off patent. But Merck has been striking smart deals, and there has been pipeline momentum. The stock is up about 42% this year, and that hasn't been driven by sales revisions, but de-risks across the pipeline. The stock has rallied sharply on positive data releases from its oncology pipeline, including the Moderna-partnered cancer immunotherapy, intismeran autogen. That has served to boost investor confidence on the potential trajectory of revenues following the Keytruda cliff.
That vaccine, intismeran autogene, has drawn a lot of attention to oncology, which already drove nearly 40% of clinical trial starts in 2025. What trends are you watching in the field?
One is cancer vaccines. Unlike traditional vaccines that prevent infectious diseases before they happen, these vaccines stop cancer from returning. Merck and Moderna recently announced Phase 3 results for intismeran combined with Keytruda in melanoma, which was a major step in validating this platform, with the potential to expand to other types of cancers. There will be additional data at the upcoming European Society of Medical Oncology meeting later this month, followed by data in renal cancer.
The second trend is the concept of novel approaches-things like antibody drug conjugates, which are better forms of chemotherapy. Merck's SAC-TMT is a potential frontrunner in that class. The company is running 17 trials within its SAC-TMT program, with readouts starting in 2027.
When I think five or 10 years out, I expect the oncology market to fragment across different indications and patient populations. That's great for patients, but very tough for analysts to model.
Moving to another hot market: The "diabesity" space -- comprising diabetes and weight-loss medications -- is effectively a duopoly between Eli Lilly and Novo Nordisk. Do you expect competitors to shatter that dynamic anytime soon?
The market remains highly dynamic, but we've probably reached the limit of how good GLP-1 medications can get. It's difficult to see anything beyond what Lilly already has with Zepbound and Mounjaro, so the focus has shifted to mechanisms and tolerability.
Amylins target a different pathway in the body to drive weight-loss, and Lilly has a potentially best-in-class drug there called L-oralinatide. In September, Lilly showcased Phase 2 data for a triple agonist called EloraTZP, which targets three hormone receptors simultaneously. The data showed the highest efficacy yet that we've seen from this combination.
There's a focus on oral medications, with Lilly's Foundayo and Novo Nordisk's Wegovy pill, as well as long-acting mechanisms. Pfizer's long-acting GLP-1 candidate is going to launch in 2028, while Amgen is pursuing its own. It's a cash-pay market, so the consumer ultimately drives where it goes. But at this point Lilly is still the frontrunner, both in terms of existing drugs as well as its next-generation portfolio.
Investors are eager to understand the role of artificial intelligence in drug development. Do you think it could have a transformative impact on the pharma sector, or is that potential overstated?
Conceptually, there are many reasons to be excited about the longer-term benefits of AI, whether it leads to more efficiencies or helps improve clinical trial designs. It's worth monitoring, but we need something that can be quantified, whether that's a financial impact or an actual drug. Several Chinese companies are trying to use AI to improve drug targets. One company, Insilico, is using generative AI to design new drugs. But it's still early days.
Before we let you go, any final thoughts on the macro or regulatory front -- specifically how the coming election cycle might impact the healthcare sector?
At a high level, the focus from this midterm election is going to be on potential signals to the 2028 presidential election cycles. There seems to be a downshift in biopharma-specific risks relative to other recent election cycles. Drug pricing containment efforts are now bipartisan, and the outcomes of most-favored-nation drug pricing and the Inflation Reduction Act seem pretty well understood, meaning they should be less central this cycle.
Other areas of healthcare are contending with a bit more uncertainty, particularly in the context of prediction markets implying a Democratic sweep. There is more focus on Medicare for All, which remains far from becoming a legislative priority but isn't great for sentiment in fields like managed care.
Thanks, Asad.
