The biotech sector is entering 2026 with a positive outlook, characterized by reasonable valuations, robust oncology momentum and supportive policy tailwinds. This combination is setting the stage for a continued recovery, driven in part by the integration of artificial intelligence (AI).
However, this sectoral resurgence must navigate a tug-of-war between supportive stimulus and structural risks, which have the potential to challenge the pace of recovery.
Biotech’s rebound drivers
According to Song, biotech has rebounded since April 2025 lows. Valuations are trading at a 15 percent discount to broader markets on forward P/E, with secular demand intact for oncology, obesity and chronic diseases.
In Song’s view, biotech’s rebound stems from reduced policy uncertainty under the administration of US President Donald Trump.
Song added that valuations across healthcare are reasonable, noting rotational flows from cooling AI hype. “I can’t deny that there have been some rotational effects that not just biotech has benefited (from), but healthcare in general.
“While AI is an important driver in healthcare, to our view, it certainly is not priced in to the largest extent in many pockets of healthcare.”
Key sector catalysts
Song sees healthcare’s recovery extending into 2026, with oncology remaining the primary growth engine.
He characterizes this sectoral resurgence as a durable structural shift, fueled by key developments that present tangible investment opportunities, including anticipated positive clinical trial outcomes, such as those for Revolution Medicines (NASDAQ: RVMD) pancreatic cancer drug.
“They have a lead drug that blocks an important pathway called RAS…and they could have a potential breakthrough in pancreatic cancer. They’re running a Phase III trial to demonstrate a potential survival benefit. There could be meaningful progress there,” Song explained.
Outside of oncology, Song flagged high-profile biotech catalysts that could broaden the sector’s 2026 rally.
“Non-peptide oral GLP-1s … are clearly going to be an important data set read out and launch that could occur next year,” he explained, citing Eli Lilly’s (NYSE:LLY) orforglipron, a daily pill that hit Phase III success for type 2 diabetes and obesity in 2025.
Approval is expected in 2026, which could be a potential game-changer in obesity and chronic disease treatments, an area dominated by biotech innovators.
These readouts will test whether platforms deliver best-in-class therapies, offering a margin of safety for investors focused on clinical proof over unvalidated hype.
A dual-track recovery
While macro analysts see a broad cyclical recovery, Song predicts the 2026 market will be defined by a dual-track recovery: a diagnostics-led initial public offering (IPO) surge and a biopharma M&A environment focused on companies with the clinical validation required to alter the standard of care.
Renaissance Capital predicts a faster pace for biotech IPOs, with a strong pipeline of companies such as Aktis Oncology, a radiopharma diagnostics firm targeting solid tumors, ready to list for US$100 million.
Additionally, AlphaSense forecasts steady M&A flow as companies rebuild their pipelines in the new year, a trend that Song sees as a structural necessity rather than a simple trend. “It’s an important pillar where Big Pharma needs to replenish their pipelines, and they can’t all do it internally,” he explained.
Consequently, he believes the primary “hunting ground” for these deals is mid-cap territory, where acquiring one or two proven drugs can effectively move the needle for a large pharmaceutical giant.
Investor takeaway
Song maintains that, while AI has not reached full valuation in the sector, its role is expected to grow, with significant future productivity gains predicted in biopharma, drug discovery, clinical development and healthcare delivery.
“We’ve done some preliminary work that that that suggests there could be…productivity gains in areas like biopharmaceuticals and drug discovery and clinical development,” Song explained, adding that these are long-term projections. He sees a more immediate economic impact in how care is managed.
“Since healthcare is a large part of the US and global economy, and growing quickly in terms of healthcare costs, there are also opportunities for efficiency gains, which could lead to margin and consumer gains,” he noted. This revolution in delivery is already a key focus for his firm’s Tema Oncology ETF (NASDAQ:CANC).
However, life science market analyst Anastasia Bystritskaya warns that valuation and productivity are not synonymous, as high-performing models do not automatically become revenue-producing products. For investors, the real inflection point is operational integration rather than operating as a standalone prototype.
Drive for efficiency is expected to take a practical form in 2026 through what Sergey Jakimov, managing partner at longevity and biotech VC firm LongeVC, describes as the “doctor in your hand.”
This AI companion manages routine, low-complexity tasks between clinic visits.
LongeVC anticipates that this shift to a regulated digital workflow will allow AI to identify meaningful clinical signals continuously without overburdening primary care teams.
This democratization of discovery creates a new competitive landscape for the hunting ground Song described; if AI-enabled teams can dissect complex pathways without a billion-dollar balance sheet, the traditional R&D model of Big Pharma faces a permanent disruption. In this new era, the innovation gap could be filled by agile players who use technology to act with the scale of a giant but the speed of a startup.
Headwinds and strategic reprioritization
Despite sector momentum, headwinds remain, particularly regarding the stability of clinical research funding.
A November report in JAMA Internal Medicine reveals that 383 clinical trials recently had their grants terminated, disrupting progress for over 74,000 participants. Dr. Gary K. Zammit, founder of Clinilabs, warned that these reductions in NIH funding risk slowing the future commercial development of innovative therapies.
Macroeconomic headwinds, including rising tariffs and early labor-market weakness, also present a material challenge.
Ultimately, the 2026 outlook balances promising catalysts with the need for strategic capital deployment and a focus on clinically validated platform technologies, ensuring a durable expansion for the sector.
Securities Disclosure: I, Meagen Seatter, hold no direct investment interest in any company mentioned in this article.