Pharma: a sector caught between geopolitical storms and structural growth
The pharmaceutical sector once again finds in the eye of the geopolitical storm in 2025. Trade conflicts, the risk of major regulatory changes and a weak dollar are creating turbulence. Yet pharma remains an anchor of innovation and necessity. We live in an ageing society, demand for care is rising and technological breakthroughs are following each other at breakneck speed. For retail investors, it is essential to look beyond the noise and recognise the fundamental strength of this sector. We talk to Liesbeth Van Rompay, Portfolio Manager at KBC Asset Management.
2025 was not an easy year for investors in pharma. Yet the reason for this has little to do with the fundamentals, but more to do with currency, trade policy and disruptive regulation. If we look beyond past that noise, we see a sector that is societally indispensable and technologically advanced.
Liesbeth Van Rompay, Portfolio Manager at KBC Asset Management
The challenges of 2025: geopolitics, regulation and currency
Although the pharmaceutical sector remains fundamentally strong, 2025 was a year of relative underperformance in the stock market. The MSCI Health Care index rose - until its tipping point in early October - by just under 5%, while the broader MSCI ACWI index recorded a gain of almost 19%. A sector made up some ground in the fourth quarter, with the gap between the MSCI Health Care index - showing a gain of around 13% - and the broader MSCI ACWI - currently recording gains of some 19% - narrowing from 14% to around 6%. Those figures are all in USD.
What explains the weak performance?
- Geopolitical uncertainty
2025 was a year of unexpected challenges. The US president announced the imposition of import tariffs of up to 100% on branded drugs, with exceptions being made for companies that build manufacturing sites in the US. For EU exporters, the European Commission pointed to the 15% cap set out in the deal agreed in the summer, but uncertainty remained. This created volatility around European players with heavy US exposure, such as UCB or Sanofi, for example. But US players are also under pressure, as many of them have outsourced a large proportion of their production to Ireland, for tax-efficiency reasons.
- The weak dollar
The US dollar had its worst year in decades, depreciating by more than 10% against the euro. For European investors this meant that, despite price gains in dollars, US pharma yields turned negative in euro terms. Additionally: European pharma companies, and by extension Medtech, are solid USD-earners. Roughly 50% of European pharma companies' sales are earned in USD. Turnover, which is factored into the share price, is therefore under heavy pressure when the USD is weak. A double whammy for that European investor, then...
- Sector rotation
Health Care lost its vitality with the rise of AI/ Magnificent Seven stocks. Medtech was outstripped by the hype surrounding technology companies.
- Issues concerning specific stocks
Some companies took hits due to failed pipeline results. Sanofi, for example, shed 10% of its value following disappointing Phase-3 results in trials of their eczema drug amlitelimab.
Fundamentals remain solid: valuation, earnings growth and dividend
Despite the stock market pressure, the sector's fundamentals remain intact:
- Price/earnings ratio (P/E): Pharma stocks worldwide are trading at a 5% discount to the ten-year average.
- Projected earnings growth: Pharma stocks worldwide are projected to deliver double-digit earnings growth in 2026.
- Dividend yields: Pharmaceutical stocks tend to offer stable dividend payouts.
Valuations are well below the long-term average, while earnings projections are holding up.
Liesbeth Van Rompay, Portfolio Manager at KBC Asset Management
For investors who dare to look beyond the current storm, the pharmaceutical sector offers:
- Defensive stability as well as growth potential for long-term investors.
- Strong cash flows and reliable payouts for dividend investors.
- An undervalued sector with solid fundamentals for value investors.
Pricing deals and their impact: The example of Pfizer
On 30 September 2025, the US government and Pfizer struck a major deal on drug pricing. The deal includes price cuts for Medicaid (US government insurance for people with limited income and resources: ed.) and links US drug prices to the lowest prices in other developed countries.
It is widely believed that the latter element of the deal could be detrimental to Europe, where there is a risk of new drugs not being launched.
Pfizer will receive a three-year tariff-free period in exchange for additional investment in US manufacturing. The financial impact for Pfizer is considered to be manageable, and the deal sets a precedent for the industry. The Biopharma and Life Sciences sectors did well after the announcement.
Some questions remain, such as what the Trump-European pharma deals will look like. But now that there is clarity on policy, investors' attention is expected to shift back to sector fundamentals.
Liesbeth Van Rompay, Portfolio Manager at KBC Asset Management
Demographics and innovation: the two drivers of growth
Population ageing as a megatrend
The world's population is ageing. By 2050, one in six people will be aged over 65 years, leading to sharply rising health costs. This will ensure continued demand for medicines and health care solutions.
In my view, the growing focus on health remains a megatrend. Not because the stock market confirms it every quarter, but because long-term health and innovative health care solutions win out over short-term volatility.
Liesbeth Van Rompay, Portfolio Manager at KBC Asset Management
Innovation: from cell and gene therapy to artificial intelligence (AI)
The innovative strength within the sector remains unmatched. Think of the breakthroughs there have been in cell and gene therapy, biologicals and AI-driven R&D. Or think of personalised therapies that respond to a patient's genetic profile, a revolution in the making.
AI is starting to shape health care more and more. Medtech is leading the way with AI-driven surgical robots and diagnostic systems. In the biopharma field, use of AI is still in its infancy, but the potential is huge: experts believe AI can drastically shorten the drug development process by reducing the number of years of research from years to just months.
It’s well known that all major biopharmaceutical companies have AI projects under way, and the number of strategic alliances with technology companies is growing.
Liesbeth Van Rompay, Portfolio Manager at KBC Asset Management
Big tech companies like Alphabet, Microsoft and Apple are investing heavily in health care.
Do your homework
- Medical Technology and Digital Health Care
Medical Technology is expensive and more sensitive to economic headwinds, mainly from China, but the negative impact of US tariff policy is already discounted in the share price, in our view. The theme is supported by healthy usage trends and a strong stream of innovative product launches.
- Biopharma
Pharma and biotech are struggling to take advantage of their defensive character due to negative headlines about US policy and price pressure. Despite this, the innovation engine is continuing to run and valuations are attractive.
- Europe
Fundamentally, the European pharmaceutical sector is more attractive due to its lower exposure to the upcoming widespread patent cliff and its greater growth potential. In the aftermath of COVID and the period of disrupted supply chains, many biopharmaceutical companies, especially the big European names, are already largely applying a US-for-US approach, limiting the impact of US tariffs.
- Themes and technologies
Look at the major under-treated disease areas. Examples of key players include AstraZeneca in oncology, UCB in immunology or Boston Scientific within the large, growing cardiology market.
Think of technologies that enable minimally invasive procedures, such as the surgical robots produced by Intuitive Surgical and Stryker, for example.
Pharma is more than just a defensive investment. The sector drives progress and responds to demographic and medical challenges. Moreover, the sector's innovation engine is expected to gain further momentum from advances in AI.
Liesbeth Van Rompay, Portfolio Manager at KBC Asset Management
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The information contained in this publication is for information purposes only and should not be considered as investment advice.
