Healthcare: fear and opportunity

As with any investment, your capital is at risk.

In his 1986 annual letter to Berkshire Hathaway shareholders, Warren Buffett wrote: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Going against the crowd is a lonely endeavour. This is particularly true when stock markets overreact to short-term headline news while underreacting to slower, more consequential trends.

At Baillie Gifford, we are long-term, active, growth investors. We carefully evaluate business fundamentals and consider enduring, structural trends. Our long-term investment horizon lends us the patience and courage to embrace independent thinking and go against the crowd where we see opportunities. This approach is particularly relevant in healthcare today, where short-term fear is obscuring some of the most exciting opportunities we’ve seen in decades.

Fear

The US healthcare sector is experiencing one of its worst downturns in decades. Across the two years leading up to the end of 2024, healthcare stocks lagged the S&P 500 by approximately 50 per cent – the widest gap since 1991. This unprecedented slump is remarkable for a sector often seen as ‘defensive’. What’s going on?

Macroeconomic and structural headwinds have made investors flee this space in fear. Sharp interest rate increases have tightened capital availability and funding for biotech ventures. Post-pandemic dislocations have caused significant profit declines for businesses that aided the fight against Covid-19, such as vaccine producers, diagnostic test makers and bioprocessing suppliers. Meanwhile, the Donald Trump and Robert F. Kennedy Jr. duo has created uncertainty around regulation, drug pricing reforms and research budgets. Uncertainty is the ultimate party killer for investors.

Opportunity

Meanwhile, innovation in life sciences has been accelerating faster than ever, thanks to the convergence of various fields of science and technology that will transform every aspect of healthcare. This has produced a wave of medical breakthroughs, despite the sector’s current challenges.

Novel drug approvals – a crude proxy for biopharma R&D productivity – have been trending up since the 2000s. Industry pipelines are at record highs with compounds targeting big unmet needs such as obesity, Alzheimer's and heart diseases. The new GLP-1 medicines for diabetes and obesity already represent a more than $50bn market globally and are growing fast.

Elsewhere, advances in engineering and materials science have translated into innovative, minimally invasive approaches to treat prevalent diseases such as heart valve abnormalities, sleep apnoea and benign enlarged prostates. Scientific progress marches on despite market downturns.

As long-term investors, we don’t try to predict market moods. Instead, we seek out great businesses with strong fundamentals that can weather cyclical downturns. The life sciences tools and services subsector is among the most depressed, despite often commanding premium valuations in the past due to the presence of high-quality businesses. While others despair over subdued quarters due to ongoing inventory destocking, we see long-term value creation opportunities. These ‘picks and shovels’ businesses provide critical tools, services and platforms that enable the next wave of breakthroughs and are poised to benefit as the sector recovers. Examples of holdings in some of Baillie Gifford’s portfolios in this area include:

• Thermo Fisher Scientific: A one-stop shop provider of life-science products and services for academic labs and pharmaceutical manufacturers, supplying everything from analytical instruments to bioprocessing equipment. It has a wide competitive moat due to its scale, unmatched distribution and deep customer relationships. It spends more than $1bn annually on research and development (R&D) to remain a ‘world leader in serving science’. 
• Medpace: A specialised contract research organisation (CRO) managing clinical trials for biotech and pharmaceutical clients. We observe the secular trend of increased outsourcing, with clients relying on CROs such as Medpace to run studies more efficiently. Medpace has developed expertise in high-growth areas such as oncology, cardiology and metabolic diseases. Its full-service operating model particularly appeals to small and mid-sized drug developers, which are emerging as the main engine of innovation in the industry. Medpace is leveraging the sector’s increasing R&D spend without bearing direct scientific risk, making it a compelling pick as trial activity rebounds.
• Illumina: As the global leader in genomic sequencing technologies, Illumina forms the foundational infrastructure for personalised medicine. The company has faced multiple challenges, from a failed acquisition to a research spending slowdown and increased competition. With a new management team bringing more focus and innovation, we believe Illumina remains a genomic powerhouse with a strong competitive edge thanks to its dominant installed base, robust balance sheet and broad technological capabilities. The strategic importance of genomics is only growing, from guiding cancer therapies to enabling drug discovery. The disconnect between Illumina’s pivotal role in the future of medicine and its beaten-down stock price presents an attractive investment opportunity. 

Staying focused on the long term

The US healthcare sector’s current pain could prove to be the long-term investor’s gain. Few sectors enjoy such a powerful combination of secular demand and transformative innovation. Today’s valuation trough and bouts of pessimism echo past episodes that ultimately gave way to strong recoveries. The timing of a full rebound is uncertain, but we have seen early signs of positive momentum. R&D engines are revving, capital is returning and innovation continues unabated. By focusing on companies aligned with enduring healthcare trends and supported by resilient fundamentals, we position our clients to benefit when the sector’s prognosis inevitably improves.

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The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in August 2025 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

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