Healthcare investment strategies reshaped by inflation, interest rates and M&A in 2025

From potential changes in government healthcare policies to persistent inflationary pressures and evolving investment strategies, the US healthcare sector is facing a convergence of economic, regulatory, and political forces that could reshape the industry’s trajectory for years to come.

As the industry emerges from the lingering effects of the COVID-19 pandemic, healthcare companies must adapt to new cost structures, shifting reimbursement models, and an increasingly competitive landscape.

Analysts at UBS have assessed the state of the healthcare market across key subsectors, outlining the factors that could drive—or hinder—growth.

A major concern for investors is the potential impact of regulatory shifts under the Trump administration, particularly regarding the Food and Drug Administration (FDA) and Medicare. Discussions around Medicaid funding, site-neutral payments, and pharmaceutical pricing reforms remain central to the policy debate, while proposed tariffs on pharmaceuticals and medical supplies add another layer of complexity to the investment outlook.

At the same time, innovation remains a core theme across the industry. Advances in biotechnology, medical devices, and diagnostic tools continue to unlock new treatment possibilities, providing opportunities for companies positioned at the forefront of research and development. However, macroeconomic headwinds, such as inflation and rising interest rates, have led to a more cautious approach to capital allocation, with mergers and acquisitions (M&A) playing a crucial role in shaping the competitive landscape.

UBS analysts highlight several investment themes across the healthcare ecosystem, including the resilience of medical technology companies, the evolving dynamics of the biopharmaceutical industry, and the pressures facing managed care organizations. With an uncertain economic backdrop and increasing scrutiny on healthcare expenditures, understanding these sector-specific trends is critical for investors navigating the space.

Biotechnology: regulatory changes and M&A prospects

UBS analysts note that the biotechnology sector is primarily focused on potential changes at the Food and Drug Administration (FDA) under the Trump administration, with particular scrutiny on areas like vaccines.

"Another theme continues to be the potential for M&A, which is of particular focus for small and mid cap (SMID) biotech companies with late-stage or clinically derisked programs,” analysts wrote.

Despite a macroeconomic environment that has tempered investor risk appetite in biopharma, analysts still see an interest in near-term clinical and regulatory catalysts.

Healthcare facilities & managed care: policy uncertainty and cost pressures

The sector is grappling with heightened policy uncertainty, especially concerning Medicaid funding as a source for tax cut extensions. UBS analysts point out that discussions are centered around work requirements, provider taxes, and site-neutral payments, with impacts on Managed Care Organizations (MCOs) and hospitals hinging on implementation specifics.

Analysts caution that the expiration of enhanced subsidies could lead to a significant loss of enrollees in exchanges. Additionally, elevated cost trends post-pandemic has pressured margins, prompting plans to adjust benefits and reconsider geographic presence to maintain financial stability.

Healthcare technology and distribution: tariff implications and legislative risks

Proposed tariffs on pharmaceuticals, set to commence on April 2, have become a focal point for the healthcare technology and distribution sector.

UBS analysts highlighted investor concerns regarding customer churn, changes in generic drug reimbursement under Medicaid, consolidation in the specialty space—particularly oncology—and legislative risks surrounding opioids. They note that while some legislative proposals may have marginal impacts, the broader implications of tariffs and policy shifts warrant close monitoring.

Life sciences & diagnostic tools: research funding and market outlook

Trends in academic research spending, influenced by actions from the new administration, are causing concern within the life sciences and diagnostic tools sector.

UBS analysts see a subdued outlook for pharmaceutical research from global pharma and SMID biotech companies. However, they are optimistic about production-oriented segments, such as drug manufacturing, supported by positive performance in drug packaging and bioproduction. The demand in China remains subdued, with several companies adopting a cautious view of the market's long-term growth prospects.

Medical supplies and devices: resilience amid political volatility

Despite political volatility introducing uncertainty in the healthcare space, UBS analysts view the medical technology (MedTech) sector as relatively insulated compared to other subsectors.

While there are lingering concerns, especially regarding the impact of coverage loss on procedure volumes due to government layoffs, investor focus has shifted toward market growth driven by innovation, and pricing power into 2025 and beyond. Analysts favor companies with exposure to high-growth end markets, considering this dynamic essential for establishing strong fundamentals to support long-term, sustainable top-line growth momentum.

Pharmaceuticals major: navigating macroeconomic and policy uncertainties

UBS analysts perceive an uncertain backdrop for biopharma recovery in 2025, citing less visibility into the macro landscape, including factors like inflation, interest rates, and tariffs. They note that broader macro conditions are influencing large pharma sentiment, with investors seeking more defensive positions.

The impact of leadership changes at the Department of Health and Human Services (HHS) remains a source of uncertainty, as policy changes and healthcare reforms unfold. Upcoming stages of the Inflation Reduction Act (IRA), particularly reforms to Medicare Part D, are identified as key trends for 2025.

Pharmaceuticals specialty & SMID biotechnology: market reactions and regulatory outlook

Several stocks in the specialty and SMID biotechnology sector have experienced significant selloffs following fourth-quarter 2024 updates, as full-year 2025 guidance fell below expectations.

UBS analysts noted investor uncertainty regarding FDA regulatory actions for biotech drugs, as the new administration alters the agency's operations. Key debates in the biotech sector revolve around clinical data outcomes, particularly in oncology, where investors compare results to approved therapies or emerging competitor programs.

Discussions also focus on nuances within datasets, such as the number of evaluable patients, specific mutations and subtypes, and notable safety or tolerability issues.

Commercial adoption considerations, influenced by factors like ease of use—favoring oral therapies over more complex cell therapies—also play a significant role in investor deliberations.

UBS’s picks

• Sarepta Therapeutics Inc (NASDAQ:SRPT): analysts believe that the Duchenne Muscular Dystrophy (DMD) opportunity is underappreciated. They estimate approximately $20 billion in cumulative Elevidys sales through 2030, compared to SRPT's current market capitalization of around $10 billion.
• Cigna Group (NYSE:CI): a favorite due to its minimal exposure to government businesses and associated volatility. Analysts expect a 100 basis points margin improvement by the end of 2026 and anticipate continued share buybacks using proceeds from its Medicare Advantage sale.
• Cardinal Health Inc (NYSE:CAH): analysts cited high visibility into above-average earnings growth through fiscal year 2026, a relatively modest macro risk to drastic policy changes and tariffs, and a healthy balance sheet supporting stock performance.
• Danaher Corporation (NYSE:DHR): analysts believe that the company can deliver outsized growth through bioprocessing demand recovery and diagnostics share gains. They expect 2025 to be another year of recovery, with a credible path to accelerate sales growth to approximately 7% in 2026.
• Boston Scientific Corp (NYSE:BSX, ETR:BSX): analysts highlighted the company’s strong fundamentals and increasing revenue diversification. They expect BSX to benefit from product launches and continued expansion in high-growth markets, supporting double-digit earnings growth through 2026.

Proactive’s picks:

• Lisata Therapeutics Inc (NASDAQ:LSTA): A clinical-stage biotechnology company focused on developing regenerative and targeted therapies for cardiovascular and oncological diseases. Its innovative pipeline, including novel cell therapy candidates, positions it for potential breakthroughs in high-value markets.
• Candel Therapeutics Inc (NASDAQ:CADL): A biotech firm developing viral immunotherapies to treat solid tumors by stimulating immune responses against cancer. With a differentiated approach in oncology and a growing immunotherapy market, the company could attract strategic partnerships or acquisition interest.
• NanoViricides (NYSE-A:NNVC): A company specializing in nanomedicine-based antiviral therapies designed to target and destroy viruses. Its proprietary nanotechnology platform has the potential to revolutionize antiviral treatment, making it a strong candidate for future licensing deals.
• Protalix Biotherapeutics Inc (NYSE-A:PLX): A biopharmaceutical company developing plant cell-based protein therapies for rare genetic diseases. Its FDA-approved enzyme replacement therapy and innovative production platform offer a competitive edge in the high-margin orphan drug market.
• Immunic Inc (NASDAQ:IMUX): A clinical-stage biotech company advancing small molecule therapies for chronic inflammatory and autoimmune diseases. With multiple candidates in late-stage trials and a focus on high-demand therapeutic areas, Immunic presents a compelling growth opportunity.
• Tiziana Life Sciences Ltd (NASDAQ:TLSA): A biotechnology firm developing innovative treatments for autoimmune diseases and central nervous system disorders. Its novel intranasal and oral formulations offer potential advantages over traditional therapies, enhancing its marketability.
• Cardiol Therapeutics (TSX:CRDL, NASDAQ:CRDL): A clinical-stage company focused on developing anti-inflammatory therapies for heart disease and heart failure. Its lead candidate, CardiolRx, targets a large unmet medical need, with potential for regulatory acceleration and significant commercial impact.
• atai Life Sciences (NASDAQ:ATAI, ETR:9VC): A biopharmaceutical company specializing in developing psychedelic and non-psychedelic therapies for mental health disorders. With growing investor interest in psychedelic medicine and strategic investments in multiple drug candidates, atai could be well-positioned for long-term value creation.
• Sona Nanotech Inc (CSE:SONA, OTCQB:SNANF): A nanotechnology company developing gold nanorod-based solutions for diagnostic and medical applications. Its proprietary nanotechnology platform could disrupt the rapid diagnostics market, particularly in infectious disease testing.
• Zero Candida Ltd (TSX-V:ZCT, OTCQB:ZCTFF): A biotech company developing treatments targeting fungal infections, particularly drug-resistant Candida species. With rising antifungal resistance and limited treatment options, its pipeline addresses a critical healthcare need, making it a high-potential investment.
• Zynex Inc (NASDAQ:ZYXI): A medical device company focused on non-invasive pain management and rehabilitation solutions. Strong revenue growth, expanding insurance coverage, and increasing demand for opioid-free pain management solutions make it an attractive investment.
• Voyageur Pharmaceuticals Ltd (TSX-V:VM, OTC:VYYRF): A pharmaceutical company developing barium and iodine-based contrast agents for medical imaging applications. Its vertically integrated business model, controlling both raw material supply and production, could provide cost advantages and market stability.
• OKYO Pharma Ltd (NASDAQ:OKYO): A biotech company working on novel treatments for inflammatory eye diseases and dry eye syndrome. The growing prevalence of dry eye disease and its innovative drug candidates position OKYO for potential licensing deals or acquisition.
• Medicus Pharma (NASDAQ:MDCX): A pharmaceutical company engaged in developing and commercializing therapies for unmet medical needs. With a focus on high-value, niche therapeutic areas, Medicus Pharma has the potential for strong regulatory and commercial upside.