By David Wainer

After months of threats, President Trump eased up pressure on drugmakers late last year. That's all it took for investors to notice that the beaten-down sector was actually growing just fine.

Talk of tariffs and aggressive drug-pricing regulation faded, giving way to headline-grabbing price deals between the White House and drugmakers that lifted two of the biggest policy overhangs on pharmaceutical stocks.

By year's end, the group managed something that has become increasingly rare during the AI-driven market boom: It beat the broader market. The NYSE Arca Pharmaceutical Index rose 21% last year, compared with 16% for the S&P 500. Even so, a handful of companies facing patent expirations are still trading at reasonable valuations.

It isn't just about policy. Investors also woke up to a simpler reality: Many large pharmaceutical companies are finally delivering on growth promises that had gone unappreciated. After years of crowding into the obesity trade, money rotated toward more traditional names that had been left behind.

Last year marked the first time in a while that neither Eli Lilly nor Novo Nordisk topped the drug industry. Instead, long-forgotten Johnson & Johnson was 2025's top performer among large-cap pharma, with a share-price gain of 43%. Novartis and AstraZeneca were close behind, each up over 40%, while Gilead Sciences also posted solid gains, up 33%. Lilly still delivered an impressive 39% gain, but that performance came partly at Novo Nordisk's expense. Shares of the Danish drugmaker fell nearly 50% last year. (It is up sharply to start 2026 thanks to the launch of its weight-loss pill.)

At Johnson & Johnson, momentum is coming from immunology and oncology, led by treatments such as Tremfya for autoimmune disease and a growing cancer franchise. At Gilead Sciences, the story is centered on HIV and oncology, not weight loss.

The biggest winners share another thing in common: Their businesses look set to keep growing, without an imminent patent cliff. A patent cliff is what happens when one or a few blockbuster drugs lose protection and cheaper copies flood in, knocking a hole in revenue. This year's top performers mostly look clear of that risk, which investors tend to reward. For instance, Novartis recently projected annual sales growth of 5% to 6% over the next five years, driven by blockbuster drugs like Kisqali for breast cancer and Scemblix for leukemia. The company now has eight approved drugs it predicts could generate peak sales of $3 billion to $10 billion a year.

Pharma's need to replenish its revenue prospects has also helped to lift smaller biotech companies, as dealmaking improved sentiment. The SPDR S&P Biotech ETF initially fell on policy uncertainty but surged over 50% in the second half of the year, finishing the year up 35%. The same forces that drove big pharma helped biotech, but the smaller drug developers also benefited from a mergers-and-acquisitions boom. Last year, M&A activity in the sector surpassed $100 billion, which was more than double the amount recorded in 2024, according to RBC Capital Markets.

After the recent rally, the pharma sector looks closer to being fairly priced, fetching about 16 times forward earnings, which is slightly higher than its five-year average. It is still a reasonable valuation compared with the S&P 500, though, which is trading well above its average. And Lilly's outsize weighting within pharma also drives up the multiple significantly. For investors looking for bargains, the question is whether a group facing more immediate risks from patent losses will join the recovery.

Companies such as Merck, Regeneron, Pfizer and Bristol-Myers Squibb face tougher questions about how much of today's business will be replaced in the coming years. Each has a plausible path forward, with any sustained recovery likely to hinge on results from coming clinical trials and the commercial success of new drug launches.

Merck looks like the easiest bet. The company has worked to soften the eventual loss of Keytruda by broadening its pipeline beyond oncology and lining up a steady flow of potential new products across vaccines, cardiovascular disease and other areas. Its stock has rallied in recent months but still looks reasonably valued, trading at roughly 12.5 times forward earnings.

At the cheaper end of the spectrum, Bristol-Myers Squibb is heading into a busy stretch of clinical readouts that could help restore confidence after years marked by patent losses.

Pfizer, meanwhile, remains a perennial disappointment to investors ever since it crashed in the wake of falling Covid-19 revenues. The company is a solid safety play, offering one of the industry's highest dividend yields. Whether it can deliver substantial gains could come down to the strength of clinical data from Metsera, the obesity startup it bought last year.

Investors could keep falling back in love with drug companies in 2026, regardless of what they do for waistlines.

Write to David Wainer at david.wainer@wsj.com

(END) Dow Jones Newswires

January 06, 2026 05:30 ET (10:30 GMT)

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