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A bullish turning point for this industry may be at hand

Why this might be a key entry point for unloved biotech stocks.

Key takeaways

  • Dramatic advances in science have been accelerating the pace of discovery and development of important new drug therapies.
  • Low valuations and promising trends in clinical trials could be setting the stage for a resurgence among small-cap biotech stocks.
  • Owing to the complexity of the science and the large gulf between winners and losers in the biotech world, it can make sense to let the pros pick the stocks.
  • Fidelity analysts and fund managers have found potential opportunity among firms developing gene therapies, auto-immune treatments, and more.

The stock market has been in flux so far in 2025. Market segments that were previously leading, like the Magnificent 7, have begun to lag. And segments that were languishing, like European stocks and certain defensive sectors, have suddenly sprung to life.

The market is always searching for new themes. One of these in 2025 could be the health care sector, which until this year's shake-up had been distinctly out of favor. “Some of the money coming out of artificial intelligence (AI) stocks recently could look at health care,” says Rajiv Kaul, manager of Fidelity® Select Biotechnology Portfolio (

).

Specifically, due to a confluence of factors, the stars may be aligning for the volatile small-cap biotech sector. “Innovation has been progressing at a fast pace and valuations have been reasonable,” says Kaul, who thinks the industry may be in the early innings of a 3- to 5-year virtuous cycle of innovation. “This could prove to be an excellent time to invest in biotech.”

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Cheap valuations and strong clinical trial trends

Historically, the biotech industry has tended to pass through boom-and-bust cycles. After the miraculously rapid development of COVID-19 vaccines in 2020, money poured into biotech ventures. However, valuations started plummeting in 2022 as interest rates rose—sharply increasing the cost of capital for these research- and cash-intensive businesses—and the industry fell out of favor.

“It’s been a historically cheap valuation trough for the industry,” says Kaul, who has managed the biotech fund for 20 years.

Importantly, the attractive valuations have coincided with improving biotech product pipelines. Eirene Kontopoulos, a Fidelity biotech analyst and portfolio manager, says that historically, periods of positive clinical trial data have presaged subsequent industry investment returns. “Positive or negative clinical trial events have often set the tone for the entire biotech industry," says Kontopoulos.

One way to measure the trends in clinical trial results is to look at the bounce (or dip) in biotech firms’ stock prices and market values that occurred on days trial results were released. On these metrics 2024 appeared to mark a clear turning point for the industry—in the first 3 quarters of the year alone, small-cap biotech stocks gained nearly $30 billion in market value on trial results.1

A possible catalyst from acquisitions?

Large pharmaceutical companies often acquire small-cap biotech firms to help fill the holes in their product lineups that are created when their blockbuster drugs go off patent.

“Acquisitions can allow big pharma companies that are not as nimble to acquire drugs at the later stages of development,” says Kontopoulos.

This symbiotic relationship also benefits the acquisition targets, since the cost of shepherding promising new biotech treatments through the latter stages of clinical trials and bringing them to market is onerous and capital intensive. The acquirer gains a new portfolio of products in development—with the hopes that one or more will become blockbusters. The acquisition target gains resources and support.

Kontopoulos notes that a number of the largest pharmaceutical and biotech companies are facing significant patent cliffs in the next few years and have been accumulating large cash piles on their balance sheets. There’s also a sense in the industry, she notes, that the new administration might erect fewer barriers to mergers and acquisitions than the previous one.

This could create both incentive and opportunity for these companies to go shopping for acquisition targets among small-cap biotech firms—which could also provide a catalyst for valuations in the industry to come back to life.

The importance of stock picking

At a macro level, the biotech setup—a combination of huge innovation, dramatic progress in science, and a vast global addressable market for efficacious therapies—is exciting. “We’ve really made great strides to address the major health issues of our time, such as cancer, heart, autoimmune, and genetic disease,” says Kaul. Moreover, rising health care costs are a knotty problem both in the US and abroad; innovative new drugs are seen as a strategy to keep sick people out of the hospital and to help contain medical costs.

The greater challenge is at the micro, or company, level because of some unusual characteristics of small biotech companies oriented toward research and development. Most small biotech companies—even those listed on exchanges—lose money. While the potential gains can be enormous, they tend to flow to a relatively few successful laboratories.

That’s why biotech has long been an industry suited for stock pickers who understand the science. Investors may need the resources and ability to conduct intensive bottom-up research to identify promising therapies in trial that could prove successful.

Fund top holdings2

Top-10 holdings of the Fidelity® Select Biotechnology Portfolio (

) as of February 28, 2025:

  • 15.0% – AbbVie Inc. (
    )
  • 9.5% – Amgen Inc. (
    )
  • 7.9% – Krystal Biotech Inc. (
    )
  • 4.6% – Vertex Pharmaceuticals Inc. (
    )
  • 4.4% – Gilead Sciences Inc. (
    )
  • 4.0% – Alnylam Pharmaceuticals Inc. (
    )
  • 2.5% – Regeneron Pharmaceuticals (
    )
  • 2.5% – Argenx SE (
    )
  • 2.4% – Ascendis Pharma AS (
    )
  • 2.4% – UCB SA

(See the most recent fund information.)

Kontopoulos and Kaul say that Fidelity’s biotech research team has been uncovering potential opportunities in several therapeutic segments. For instance, Kontopoulos says there’s been a shortage of therapies to treat diseases of the central nervous system. Xenon Pharmaceuticals (

)3 is an example of a biotech outfit with a potent new therapy for epilepsy and other neurological disorders that’s in Phase 3 clinical trials. In a recent example of a breakthrough neurological drug being acquired by a major pharmaceutical firm, Kaul points to Karuna Therapeutics, which was acquired by Bristol Myers Squibb (
)4 for $14 billion in 2024 after it announced positive Phase 3 trial results for a transformative schizophrenia drug.

Treatments for genetic disorders, including use of gene editing, have been another area experiencing exciting advances in science. Some of these treatments can now identify genetic errors at the subcellular level and treat them by replacing or correcting proteins. Vertex Pharmaceuticals (

), as an illustration, developed a powerful therapy for cystic fibrosis that works by correcting genetic errors. Alnylam (
) has been credited with pioneering RNA interference therapeutics that treat genetic diseases by, in effect, silencing the genes that cause or contribute to the ailments.

Cancer and autoimmune diseases have been another important category for innovative biotech solutions. Netherlands-based Argenx SE (

) mushroomed into a large-cap company largely on the strength of its pioneering treatments for autoimmune diseases.

AbbVie (

), an industry giant, acquired the rights to Skyrizi® several years ago from Boehringer Ingelheim, the private German company that developed the drug. Skyrizi has been approved as a treatment for several autoimmune diseases—including arthritis, Crohn’s disease, and ulcerative colitis—which together pose a large end market that could set it up as a blockbuster medication, says Kaul.

Finally, Kontopoulos highlights Vaxcyte (

)5 as an example of the type of company that could make an attractive acquisition target. The company has developed a best-in-class pneumonia vaccine that protects against emerging strains of the acute disease and antibiotic resistance.

Risks to keep in mind

Of course, there’s no guarantee that biotech will come back into favor or that recent trends in clinical trials will translate into further stock gains. Many small-cap biotech companies are not profitable, which can contribute to the industry’s volatility. For every successful new therapy, there may be many more that fail during clinical trials.

That’s why it’s important for investors to keep their broader investing strategy and risk tolerance in mind if considering increasing their allocation to biotech, and to consider the size of any allocation in relation to their other investments.

Using screeners to find investing candidates

Investors interested in doing their own research into individual biotech stocks can use Fidelity’s Stock ScreenerLog In Required .

In addition to individual stocks and active mutual funds, another option for exposure could be to consider an ETF, which investors can research with Fidelity’s ETF ScreenerLog In Required . Below are the results of a screen for ETFs with at least 70% of assets invested in the biotech industry, and with a minimum of $100 million in net assets (these are not recommendations of Fidelity):

  • iShares Biotechnology ETF (
    )
  • SPDR® S&P Biotech ETF (
    )
  • First Trust NYSE Arca Biotechnology Index Fund (
    )
  • VanEck Biotech ETF (
    )
  • Invesco Biotechnology & Genome ETF (
    )
  • ALPS Medical Breakthroughs ETF (
    )

The Fidelity screeners are research tools provided to help self-directed investors evaluate these types of securities. The criteria and inputs entered are at the sole discretion of the user, and all screens or strategies with preselected criteria (including expert ones) are solely for the convenience of the user. Expert screeners are provided by independent companies not affiliated with Fidelity. Information supplied or obtained from these screeners is for informational purposes only and should not be considered investment advice or guidance, an offer of or a solicitation of an offer to buy or sell securities, or a recommendation or endorsement by Fidelity of any security or investment strategy. Fidelity does not endorse or adopt any particular investment strategy or approach to screening or evaluating stocks, preferred securities, exchange-traded products, or closed-end funds. Fidelity makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from its use. Determine which securities are right for you based on your investment objectives, risk tolerance, financial situation, and other individual factors, and reevaluate them on a periodic basis.

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1. Market value created reflects the cumulative market value created or destroyed each month on clinical trial releases, calculated as the change in market cap on the day of the release of clinical trial results for each respective firm that released clinical results in each month. Data based on the Russell 2000® Biotech Index.
2. Any holdings, asset allocation, diversification breakdowns or other composition data shown are as of the date indicated and are subject to change at any time. They may not be representative of the fund's current or future investments. The Top Ten holdings do not include money market instruments or futures contracts, if any. Depository receipts are normally combined with the underlying security. Some breakdowns may be intentionally limited to a particular asset class or other subset of the fund's entire portfolio, particularly in multi-asset class funds where the attributes of the equity and fixed income portions are different. Under the asset allocation section, international (or foreign) assets may be reported differently depending on how an investment option reports its holdings. Some do not report international (or foreign) holdings here, but instead report them in a "Regional Diversification" section. Some report them in this section in addition to the equity, bond and other allocation shown. Others report international (or foreign) holding as a subset of the equity and bond allocations shown. If the allocation without the foreign component equals (or rounds to) 100%, then international (or foreign) is a subset of the equity and bond percentage shown.
3. Fidelity® Select Biotechnology Portfolio (FBIOX) held a position of 0.502% in this stock as of January 31, 2025.
4. Fidelity® Select Biotechnology Portfolio (FBIOX) held no position in this stock as of January 31, 2025.
5. Fidelity® Select Biotechnology Portfolio (FBIOX) held a position of 1.631% in this stock as of January 31, 2025.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.
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Past performance is no guarantee of future results.

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Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.
Because of its narrow focus, sector investing tends to be more volatile than investments that diversify across many sectors and companies. Sector investing is also subject to the additional risks associated with its particular industry.

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