M&A Fever Hits Healthcare and Investors Should Pay Attention

The healthcare sector includes a broad range of industries. Each presents different risk-return characteristics, allowing investors to tailor their exposure based on strategy and preference. Pharmaceutical companies are central players, known for extensive R&D and pipelines targeting everything from common illnesses to rare genetic disorders. These companies often have high fixed costs but can generate substantial revenue when a drug gains regulatory approval.

Understanding the Healthcare Sector

Healthcare services include hospitals, clinics, and insurance providers. Demand here is less volatile, given the essential nature of services. The move toward value-based care, where providers are rewarded for outcomes rather than volume, offers new efficiencies and performance incentives.
Medical device makers are responsible for technologies ranging from pacemakers to imaging equipment. These companies benefit from ongoing innovation, and many are incorporating AI for better patient outcomes. 
Biotechnology firms represent high-risk, high-reward plays. While many are early-stage and focused on R&D, the potential payoff from a successful therapy can be massive. These firms are often acquisition targets for large pharmaceutical companies, further enhancing return potential.

Portfolio Role: Resilience and Growth

Healthcare stocks can play a dual role in investor portfolios. On one hand, they provide defensive characteristics due to consistent demand. On the other, they offer exposure to innovation and secular growth themes. Quality healthcare companies can deliver attractive returns through cycles, backed by structural tailwinds like aging demographics, rising global health expenditure, and constant innovation.

A Sector Set for Revival

After falling out of favour post-pandemic, the healthcare sector is poised for a significant rebound in 2025. While other cyclical sectors outperformed during the economic recovery, healthcare lagged, frustrating many investors despite strong underlying fundamentals. However, with a brighter earnings outlook, a wave of new innovations, and persistent long-term tailwinds, now may be the ideal time for investors to reconsider healthcare exposure.
In 2024, around 75% of healthcare companies beat earnings expectations across the first three quarters, outperforming every other global sector, including the ever-dominant technology sector. Forecasts for 2025 suggest healthcare will deliver its strongest year-on-year earnings growth in nearly two decades (excluding the COVID years). In fact, healthcare is already among the top-performing sectors in the S&P 500 so far this year.

Healthcare Stocks Thrive Amid Political and Economic Uncertainty

Healthcare stocks have delivered strong performance in 2025, despite the uncertainty surrounding the new Donald Trump administration. Often viewed as a defensive sector, healthcare tends to hold up well during periods of economic volatility, as consumers are unlikely to cut back on essential medications, medical procedures, or doctor visits, even in a downturn.
According to projections from the Centres for Medicare and Medicaid Services, U.S. healthcare spending is expected to grow at an average annual rate of 5.6% through 2032. This sustained growth, driven in part by an aging baby boomer population, presents compelling long-term investment opportunities in the sector.

From Disappointment to Opportunity

Despite the sector’s recent underperformance, especially through 2023 and parts of 2024, the fundamentals of healthcare companies have remained robust. Innovations in treatments, increased utilisation of services, and a pipeline of new products position the sector for long-term outperformance. Yet, valuations remain depressed, creating a mismatch between fundamentals and market sentiment. This dislocation has been highlighted by ETF outflows and generally weak investor appetite.
New product cycles, particularly in previously underserved or untreated therapeutic areas such as Alzheimer’s, obesity, and certain cancers, are set to drive revenue momentum. A second wave of robotic surgery, increased utilisation of medical devices, and demand driven by aging populations are additional catalysts. Though political headwinds, especially from U.S. policy changes may create short-term noise, the structural opportunity remains intact.

Innovation Driving Growth

Healthcare’s innovation engine remains powerful. In 2023, the U.S. FDA approved the second-highest number of new products in 30 years. These approvals cut across a wide spectrum, from biotech breakthroughs to medical devices and robotic surgery. Many of these innovations target conditions that have historically been underserved or difficult to treat.
High R&D productivity, rising utilisation, and the increased integration of artificial intelligence and machine learning into healthcare technologies suggest the pace of innovation will accelerate. Regulatory approvals in the U.S. for novel medical technologies are also at all-time highs, further affirming the sector’s momentum.

Healthcare Stocks are Undervalued and Overlooked and May Be Poised for a Rebound

Despite these compelling growth drivers, healthcare stocks are currently undervalued. The sector trades at a discount to the S&P yet offers strong earnings growth potential. This sets the stage for a significant re-rating if earnings materialize as expected.
The disconnect is even more pronounced in the small and mid-cap space, where high interest rates have weighed heavily on valuations. With central banks now easing monetary policy, these valuations are likely to revert higher. Many high-quality small- and mid-sized companies offer exceptional growth potential but remain undervalued. 

Long-Term Tailwinds Reinforcing the Investment Case

The healthcare sector benefits from multiple long-term trends. Chief among them is demographic transformation: aging populations worldwide are increasing demand for elective procedures, chronic disease management, and medical support services. 
Emerging markets are also expected to drive global healthcare returns. As populations and incomes rise in countries like China and India, per capita healthcare spending is projected to grow.

As Patent Expirations Loom Biopharma M&A is Heating Up

Industry consolidation is another key theme. With approximately $150 billion in product revenues facing patent expiry between 2025 and 2030, roughly 20% of total sector revenue, large pharmaceutical and biotech firms are expected to pursue mergers and acquisitions to fill pipeline gaps. History shows that this often delivers consistent mid-value M&A, with takeover premiums frequently exceeding 50%.
After a sharp slowdown from the M&A frenzy of 2021, activity in the healthcare sector, particularly among biopharma companies is beginning to rebound. While the volume of deals picked up in 2024, rising 17% year-over-year, the total value of transactions dropped significantly as buyers favoured smaller, strategic acquisitions under $5 billion. This “bolt-on” approach reflects a change in focus toward acquiring targeted assets that align with a company’s existing therapeutic strengths, rather than making splashy megadeals. 

Companies are increasingly seeking innovative therapies to replenish their pipelines and sustain growth. At the same time, declining interest rates and expectations of a more M&A-friendly regulatory environment under Donald Trump’s second administration are expected to fuel further consolidation in the sector.

Against this backdrop, attention now turns to identifying which biopharma companies are most likely to become acquisition targets. Drawing on expert commentary and market speculation, several companies stand out as good potential takeover candidates. These firms are seen as strategically valuable to potential buyers thanks to promising drug pipelines, commercial traction, or clinical breakthroughs.