During this year, the healthcare sector has lagged behind other sectors in the S&P 500, due to negative investor expectations of possible U.S. government measures, such as budget cuts and tariff measures towards this sector. Despite this, companies have continued to report good results overall and are stable in terms of solvency.

Large pharmaceuticals such as Merck and Pfizer are trading at just 8-9 times forward P/E, while the Healthcare index as a whole trades at a discount of close to 30% to the S&P500. This undervaluation is not due to demand fundamentals, but to cyclical pressures.. Historically, these phases of multiple compression have anticipated significant rebounds. As regulatory uncertainties clear and investment in innovation normalizes, the sector could revalue towards multiples more in line with its expected growth. This makes healthcare a clear defensive value play opportunity with medium-term catalysts, at a time when U.S. market valuations are highly challenged.

This uncertainty and negative sentiment in the sector should be dissipating after an important announcement this week. Pfizer's agreement with the U.S. government under the MFN program, which limited drug price adjustments to Medicaid and new drug launches only, reducing the impact on the companies' current revenues.The agreement also reduced the impact on the companies' current revenues. In addition, it granted a 3-year grace period with no import tariffs in exchange for increased investment in local manufacturing. This framework is interpreted as manageable and replicable for the rest of the industry, reducing the political risk that was pressuring sector valuations..

Beyond the current economic situation, the demand for health services and products continues to be supported by very solid structural factors.. The global aging of the population is increasing the incidence of chronic diseases such as diabetes, cancer, Alzheimer's and cardiovascular diseases, ensuring a steady growth in demand. In addition, scientific advances open up space for targeted therapies, personalized medicine and new high-value treatments. In this context, the sector combines defensive resilience with a pipeline of sustained structural growth.

In addition, we believe that the changes being promoted at the FDA (Food and Drug Administration) should be positive for innovation in the sector, with a focus on streamlining pharmaceutical patent processes. With this, the FDA will go from being perceived as an obstacle to becoming a catalyst for innovation and value for large pharmaceutical companies.

The healthcare sector is going through a transformational wave driven by technological and scientific innovation. The application of AI accelerates diagnostics, molecule discovery and clinical trial design, reducing R&D time and costs. In biotechnology, gene therapies, immuno-oncology and GLP-1s for obesity and diabetes are setting a new therapeutic paradigm. Areas such as longevity and gene editing are emerging on the horizon. This set of innovations, coupled with the venture capital that continues to flow (USD ~8 mm in healthtech in H1 2025 alone), make the sector a disruptive hub with high potential returns in the long term.

DISCLAIMER

Tomas Fernandez
Discretionary Portfolio Analyst