Are Pharmaceutical Stocks Ready to Take Off? Here's What I See
After rough years for pharmaceutical stocks, is now a prime time to buy in? Expert James K. Glassman weighs in.
Until very recently, the stocks of America's most-hated industry — prescription drugs, of course — had been having a rough time. While the S&P 500 index was notching a return, including dividends, of well over 200% during the nine years that ended June 30, 2025, the S&P Pharmaceuticals Select Industry index eked out a mid-single-digit showing.
Then pharma stocks surged, rising more than 66% in the past 12 months. Is the recent performance of drug stocks a harbinger or an anomalous blip up on an oscillating EKG chart?
First, understand that pharmaceuticals are not rising with a healthcare tide. The complete sector — which also includes insurers, hospitals, nonprescription medicines, suppliers and medical devices — has lately performed about the same as the market as a whole. Some investors see healthcare as a haven in turbulent times because consumers can't scrimp on treating their illnesses. But something different is going on with pharmaceuticals. And it could be something big.
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How the pharmaceutical industry overcomes obstacles
Pharmaceuticals have a unique supply chain, with a complicated reimbursement system. The chain is exposed to changing government rules at every curve.
Because the best new medicines are expensive, politicians of both parties have responded in ways meant to take a bite out of profits. And like many industries, drug manufacturing, much of which occurs abroad, is being hurt by President Donald Trump's tariffs.
But innovation can trump intervention, and if a drug company can keep developing powerful new medicines, it can still be exceedingly profitable. Governments have not yet curdled the secret sauce of the drug-company business model: The monopoly status that a novel prescription pharmaceutical enjoys.
A dynamic duo of pharma stocks
Investors did not suddenly wake up last year and decide to love drug stocks. Instead, two companies have been the main drivers of the sector's remarkable performance.
In a column two years ago on what I call "faith-based stocks," companies whose stocks have hit a bad patch but have bulletproof brands, I predicted Johnson & Johnson (JNJ) would "get its mojo back — somehow."
It has. J&J has returned 58.8% in the past year, mostly on the strength of its oncology therapies. Seven of them, including Darzalex for multiple myeloma, have been approved, and 23 more are in Phase 3 trials (the last stage before Food and Drug Administration approval). The company in 2023 made a smart spin-off of its consumer products division, which was less profitable than prescription drugs. (Prices, returns and other data are as of July 31, unless otherwise noted.)
Since the start of 2023, the second leader, Eli Lilly (LLY), has more than tripled to become the ninth-largest U.S. stock, with a market capitalization (price times shares outstanding) of $1.1 trillion. Pouring enormous sums into research, Lilly has cultivated nine "blockbusters" (drugs with over $1 billion in annual sales) in the past decade, such as Verzenio for breast cancer.
But Lilly's triumph has been GLP-1 weight-loss drugs. Its Mounjaro and Zepbound medicines soared in popularity last year, and Lilly's edge in mass manufacturing helped make the two drugs best-sellers among all medicines, with combined revenues of $36 billion. Lilly's first oral GLP-1 treatment, Foundayo, launched in April. This drug category also treats Type 2 diabetes and may have other uses — not yet approved by the FDA — in such diverse areas as heart and liver disease, sleep apnea, and even substance-abuse disorders, the Harvard Gazette reports.
Lilly has outdistanced such traditional pharmaceutical leaders as Merck, and the company's future looks bright. Value Line forecasts earnings will rise at a spectacular annual average of 26.5% for the next five years. Based on a consensus of analysts' projected earnings for 2027, Lilly trades at a price-earnings ratio of 27. Not unreasonable.
The two stocks are by far the largest holdings of my top exchange-traded fund recommendation, iShares U.S. Pharmaceuticals (IHE), with an expense ratio of 0.38%. Together, J&J and Lilly represent nearly 43% of assets. Normally, I wouldn't want to own an ETF so top-heavy, but this one is a good way to buy two of America's best stocks.
An alternative is a managed mutual fund such as Fidelity Select Pharmaceuticals (FPHAX), with an expense ratio of 0.67%. It has outperformed the iShares ETF by an average of roughly three percentage points annually for the past 10 years. Among its top 10 holdings are U.K.-based AstraZeneca (AZN), which focuses on cancer and rare diseases and has three of the world's 25 best-selling drugs.
Mergers have helped boost pharmaceutical prices lately. Part of the business model for large drug companies is buying up smaller biotech firms that are developing a few groundbreaking medicines, or even just one. Through June, drug companies have engaged in 33 such deals in 2026, spending $134 billion. That includes larger purchases, such as AbbVie's buyout, at a 50% stock premium, of Apogee Therapeutics, which makes drugs that fight inflammatory diseases like atopic dermatitis and asthma.
The average investor doesn't have the industry knowledge to figure out which biotech is about to get purchased by a drug giant. You're competing with investors and advisers who spend their lives studying these little firms.
It's better to buy bigger firms, invest in the entire sector through an ETF, or purchase a fund such as Franklin Biotechnology Discovery (FBDIX), another managed fund that's an ETF beater—despite an expense ratio of 1.02%. (You can buy the fund with no sales charge at platforms including Fidelity, Schwab and E-Trade.) Evan McCulloch, who has co-managed since 1997, owns smaller companies, some unprofitable but very promising, like Revolution Medicines (RVMD), which recently won approval for its drug that nearly doubled the survival rates of patients with deadly pancreatic cancer.
An edge from AI
Finding new drugs that work is an arduous and expensive process. Clinical trials have a 90% failure rate, and it costs $2.8 billion to bring a successful pharmaceutical to market. Artificial intelligence is perfectly designed to sift through billions of possible molecules before they are tested in the laboratory.
Companies like Lilly and U.K.-based GSK (GSK) are investing heavily in the technology. GSK's blockbusters include Shingrix, a shingles vaccine, and Trelegy Ellipta, an inhaler to combat COPD and asthma. The stock appears undervalued at a P/E of 10 and a 3.5% dividend yield.
Although AI is one catalyst for pharma stocks, another is the possibility that the political picture could change. Pharmaceuticals are undoubtedly a success at saving lives. Statin drugs, which lower cholesterol and now cost only a few dollars a month, have drastically reduced heart attacks and stroke. Targeted drugs have turned cancers that were once quickly fatal into longer-term illnesses. HIV, which invariably led to AIDS and death, can now be treated and prevented with two shots a year.
In the first half of 2026 alone, the FDA approved new medicines for lymphoma, ovarian cancer, hypertension, thyroid eye disease, COVID-19, schizophrenia and many more indications — 29 drugs in all. Over the preceding five years, the FDA approved 238 such small-molecule drugs and dozens of biologics, which are more-complicated medications derived from living organisms.
The field is competitive. Of last year's 10 best-selling drugs, eight are made by different companies. After all those rough years, are pharmaceutical stocks ready to take off? It's a good bet.
James K. Glassman chairs Glassman Advisory, a public-affairs consulting firm. He does not write about his clients. His most recent book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence. He owns none of the stocks listed here. You can reach him at JKGlassman@gmail.com.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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