• AI jitters and a rotation into defensives benefited the healthcare sector; large-cap pharma performed particularly well.
• M&A activity in the sector slowed somewhat; biotech funding remained healthy.
• The earnings season has so far exceeded expectations – most small and mid-cap companies are yet to report.

It’s harder to make monkeys than memory

The healthcare sector benefited from a rotation out of tech and into defensive sectors during October. A lukewarm reception of reports from the larger tech companies, together with concerns about the financing of the AI buildout, was the primary cause.

Large-cap pharma (DRG Index) had its best month since April 2020 and now trades in line with the S&P 500 on a P/E basis, despite starting the year at a 27 percent discount. Since 2000, the DRG has on average traded at a 1 percent premium. In the last week of the month alone, the DRG gained 7 percentage points on large-cap tech, illustrating the strength of the rotation.

Hardly anyone following the stock market has missed that memory stocks have been the trade of the year, as the AI buildout has created an acute shortage of DRAM and NAND memory. During the month, research firm Citrini published a report with a parallel thesis for drug development, best summed up in the punchy quote “It’s harder to make monkeys than memory”. Their thesis is that AI will lead to more drug studies and thus to increased demand for monkeys for animal testing. Among others, Charles River, the world’s largest supplier of animal models, was highlighted as a result.

The healthcare sector in October

The pharmaceutical sector performed strongly, mainly thanks to defensive rotation and solid quarterly reports. Europe’s largest cancer conference, ESMO, took place, with positive data releases from AstraZeneca, Roche and Genmab, among others.

Strong reports from both health insurers and life science tools companies lifted the healthcare services sub-sector. Hospitals, on the other hand, reported a relatively weak payer mix with a higher share of uninsured patients due to the expiration of the enhanced subsidies (eAPTC).

Medtech performed relatively well. Reports from the large companies can so far be summed up as better than feared. The sub-sector trades near record-low valuations after tariffs, weak consumer confidence, a lack of product cycles and reduced insurance coverage have weighed on medtech this year. Stable utilisation levels and constructive outlooks were enough to give the sub-sector a boost in October. Medtronic in particular led the advance, thanks to an FDA approval and strong clinical data in its cardiac ablation business.

Biotech declined as a lack of M&A activity and reduced risk appetite weighed on the sub-sector. Investor appetite for financing biotech companies nonetheless remained healthy, with several successful IPOs and even stronger interest in the private markets. In the first nine months of the year, biotech companies raised more than USD 90 billion in total financing, almost double the amount raised in the same period last year^[1].

Reflections

The US midterm elections, held on November 3, handed the Democrats control over the House of Representatives and the Senate. Their ability to force a reversal of the cuts to publicly funded health insurance programmes now increase. The House Minority Leader has singled out these healthcare issues as priorities in the upcoming debt ceiling negotiations, which bodes well for the sector. Although one must remember that the President still has veto power.

The reporting season has so far gone well, and we are encouraged by strong sales growth for key products, good innovation and solid clinical data results across many of our portfolio companies. Excluding loss-making companies from a broad healthcare index, the earnings outlook for 2027 looks unusually strong – with annual earnings growth of 29 percent^[2]. That is exactly the same earnings outlook for next year as the tech-heavy Nasdaq 100 index has at the time of writing.

So far, it has been the larger healthcare companies that have driven the market’s advance, and we hope to see this broaden out to small and mid-cap companies, whose quarterly reports are due in November.

At the same time, we should bear in mind that geopolitical developments could deteriorate if Trump feels he has nothing to lose. This could have implications for the inflation and interest rate outlook, and it is the small-caps in the sector that are the most sensitive to interest rates.

^[1] BioWorld, data per end of October 2026

^[2] Bloomberg, data per end of October 2026