GLP-1 spillover, AI empowerment... Will biopharmaceuticals be the "alternative" to tech stocks in 2026?

Due to attractive valuations, the recovery of business development (BD) and IPO activities, and a series of key catalysts, the biopharmaceutical sector is showing strong growth potential in 2026. Although the industry’s overall revenue and earnings growth expectations are slightly below market average, its low-risk profile and strong pipeline option value make it an ideal alternative for investors to balance their tech stock allocations.

According to Trading Desk News, Citi analyst Jarwei Fang’s team released a research report on the 6th, stating that the US biopharmaceutical sector performed well in 2025, successfully breaking a two-year downturn. The Nasdaq Biotechnology Index (NBI) rose 32%, and the S&P Pharmaceuticals Index (DRG) rose 20%, both outperforming the S&P 500's 17% gain. As policy uncertainty gradually faded in the second half of 2025, market sentiment shifted from defensive to aggressive.

Currently, large-cap pharmaceutical stocks still trade at lower forecast P/E ratios than the S&P 500 Index, showing room for valuation recovery. Citi expects the Fed may further cut rates in 2026, providing macro support for the biopharma sector. Especially high-growth leaders like Lilly, Gilead, and Vertex are expected to continue outperforming the market through strong commercial execution.

The growth logic of the biopharmaceutical industry is undergoing fundamental changes. The market penetration of GLP-1 drugs is spilling over from diabetes and obesity into cardiovascular and neurological areas; artificial intelligence applications in drug research and clinical trial design are entering the harvest period; along with the re-shaping of distribution channels through the DTP (Direct-To-Patient) model, the industry’s overall profitability and innovation conversion efficiency are significantly improving.

Bidding Farewell to Policy Headwinds, Welcoming the Return of Fundamentals

For the biopharmaceutical industry, 2025 was a year of “fire and ice.” In the first half, issues like Inflation Reduction Act (IRA) drug price negotiations, Most Favored Nation (MFN) pricing threats, and tariff worries led to capital flowing en masse into the tech sector, putting pressure on pharmaceutical stocks. The turning point came in September, as Pfizer took the lead in signing pricing agreements with the Trump administration, followed by other pharmaceutical companies including Amgen, Gilead, and Merck, eliminating most of the sector’s policy uncertainty.

Entering 2026, Citi believes the regulatory environment will become more benign. Although the IRA-mandated price cuts for the first 10 drugs were effective January 1, and pricing negotiations for drugs like Novo Nordisk’s Ozempic in 2027 are on the horizon, the market has largely priced in these expectations. More importantly, the FDA’s approval efficiency has surged—a strong rebound in new drug approvals in 2025—paving the way for innovative drugs to come to market.

Against this backdrop, Citi is optimistic about using biopharma as an “alternative trade” to tech stocks. Currently, large pharmaceutical companies’ P/E ratios still trade at a discount to the S&P 500 Index, and as interest rates fall, financing costs for small/mid-cap biotech firms are reduced, opening up more room for sector valuation recovery.

GLP-1 Market: From “Weight Loss” to “Panacean” Spillover

If 2025 is the year when GLP-1 drugs established their reputation as “miracle weight loss drugs,” then 2026 will be the year where their application boundaries expand sharply. Citi’s report emphasizes that GLP-1 receptor agonists are experiencing two profound market shifts:

First is extensive indication expansion. In addition to consolidating their dominance in diabetes and obesity, GLP-1 is rapidly penetrating cardiovascular diseases, kidney diseases, and even neuropsychiatric and neurodegenerative disorders. Although Novo Nordisk’s oral semaglutide failed to meet its primary endpoint in Alzheimer’s Disease (AD) trials, positive biomarker data indicates that this mechanism still shows promise in neurological conditions.

Second is major breakthroughs on the payment side. As early as April 2026, Medicare Part D is expected to formally expand coverage for GLP-1 drugs, granting more than 20 million new beneficiaries insurance coverage. Although this requires price concessions, exchanging price for volume will significantly drive sales peaks for giants like Lilly and Novo Nordisk.

The most notable upcoming catalyst is the potential approval and launch of Lilly’s oral GLP-1 drug orforglipron (expected Q2 2026). As a daily oral drug, orforglipron may break the compliance barriers associated with injectable drugs, and challenge competing brands from Novo Nordisk with its advantage of no dietary restrictions. Citi predicts first-year sales could reach $1.8 billion, even surpassing Wall Street’s consensus expectations.

AI Empowerment: From Proof of Concept to Real Value

In biopharma, artificial intelligence (AI) is no longer just a buzzword to attract investors but is now delivering real efficiency and returns. In 2025, the industry’s AI applications moved beyond early “testing” to generating measurable benefits.

Citi’s report cites multiple cases illustrating AI’s value: Bristol Myers Squibb used AI to shorten clinical trial times by almost three years and saved about $250 million in supply chain costs; Novartis optimized biologics production with AI, saving each plant $10–15 million annually; Novo Nordisk’s generative AI platform “NovoScribe” cut the time required for writing clinical trial reports by around 90%.

Looking ahead to 2026, AI will delve further into the core segments of drug R&D. Lilly’s partnership with Nvidia to build an “AI factory” with over $1 billion invested signals the industry’s move into the age of “autonomous labs.” These systems can design and execute experiments independently, promising to greatly accelerate new drug discovery.

2026 Trading Strategy: Embracing Growth and Catalysts

Citi’s recommendations for large-cap stocks remain focused on growth companies. At the individual stock level, Lilly is seen as a top pick, mainly driven by ongoing GLP-1 penetration and orforglipron’s launch; Vertex is highly favored for its solid cystic fibrosis pipeline and breakthroughs in kidney programs; Gilead is expected to grow from the expansion of its HIV drug Yeztugo and its oncology pipeline.

In small and mid-cap biotech, Citi’s attention is on companies with significant de-risking events, including Apogee (52-week data for APG777 in atopic dermatitis), Arcellx (regulatory submission for anito-cel), and NewAmsterdam (Phase III data for obicetrapib in cardiovascular indications).

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The above highlights are from Trading Desk.

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