Executive Summary

Global health care equities approach the back half of 2026 arguably in the unusual position of policy risk that investors feared for the past three years now being known and largely priced into the group, and the sector’s valuation discount to the broader market reaching one of widest levels in over a decade. The forward P/ E of the S& P 500 Health Care sector currently stands at approximately 17-18x earnings versus the S& P 500’s ~20-20.5x, a discount that has narrowed intermittently since 2023 but has remained in place since 2023 and reached multi-decade highs earlier in the cycle. The primary overhang of Medicare drug price negotiation and Most Favored Nation (MFN) pricing has shifted from open-ended risk to a defined framework that covers 26 manufacturers and approximately 89% of branded market share, removing tail risk but capping upside on legacy blockbusters. We are bullish on health care on a 12-month view and preferentially like GLP-1 leaders, diversified large-cap pharma names with MFN deals already agreed to, and select medtech companies. We remain cautious on companies with the most exposure to the 2026-2030 patent cliff. This environment favors patient, valuation-disciplined investors as opposed to momentum players.

Macro Backdrop

Two permanent tailwinds, however, remain intact. Healthcare demand is structurally insulated. Older populations in the US, Europe, and parts of Asia will continue driving chronic disease prevalence upward for decades to come, while durable growth rates in diagnostics, specialty pharma, and medtech have weathered this cycle as utilization trends have proven resilient: healthcare spending may be sensitive to higher interest rates, but it is not discretionary. One drug category has become a shock to demand itself: global sales of GLP-1 receptor agonists are expected to reach approximately $110 billion in 2024, and consensus estimates are now roughly $100-$150 billion by 2030. That is one of the steepest ramps in drug-category history by a considerable margin, and investors should expect it to continue redefining capital allocation decisions for pharmas across the board.

Pricing policy is the other major theme. The main development over the last year has been expansion of the US Most Favored Nation, or MFN, program. 26 pharma companies—including big-cap firms Pfizer, Eli Lilly, Novo Nordisk, Merck, AbbVie, and Johnson & Johnson as well as nine mid-cap additions such as Teva, UCB, and CSL—have signed voluntary MFN agreements as of August 31, 2026, which synchronize US list prices more closely to net prices paid in six other developed countries. The White House estimates that spending reduction from these deals alone will amount to $64.3 billion over the next decade through Medicaid, and up to $529 billion through all payer channels when the broader prospective MFN framework is accounted for. Novo Nordisk agreed to slash its US list price for Ozempic and Wegovy from $1,000/month and $1,350/month to $350/month under TrumpRx, while Lilly will offer Zepbound at discounts bringing its starting price down to approximately $299/month and will launch its new drug Foundayo at $149/month. In return for lower prices, signatories are relieved from certain tariffs on US drug imports, since pharmaceutical tariffs announced by the Biden administration are set at 100% for drugs without an MFN agreement versus 0% for compliant firms with US onshoring commitments. To date, TrumpRx accounts for the majority of these deals.

Elsewhere, IRA price negotiation continues to build on MFN. CMS's negotiated Part D prices for the inaugural group of selected drugs are now live, while future negotiation batches are proceeding on time for a prolonged period of margin compression on single-source branded drugs in positive reimbursement territories sold to US government payers.

Lastly, patent cliffs create a wild card. The industry will lose patents on drugs with over $500 billion in forecasted annual sales over the next several years, the highest cliff in memory. This includes numerous blockbuster immunology, oncology, and diabetes drugs, and helps explain why large-cap pharma trades with such depressed multiples despite fairly healthy near-term earnings prospects. On the reimbursement side, adverse pressure is not limited to Medicare: Part D redesign will continue transferring more spending risk onto pharmaceutical companies in the catastrophic phase of coverage, commercial insurers are becoming more aggressive with specialty pharmacy and GLP-1 utilization management, and state Medicaid programs are now eligible to receive MFN pricing on all 26 firms' drugs.

Key Drivers

GLP-1 and obesity drug pricing expansion (bullish) Revenue/cost share will continue to normalize after IRA rollout hurdles are cleared. Volume growth is outpacing price concessions. Despite MFN-induced discounts of 60-75% on top-selling obesity medications, unit volume growth has been rapid enough for J.P. Morgan to forecast ~25 million patients on GLP-1 therapy in the US by 2030 (totaling ~10 million in 2025) and TD Cowen to forecast 59 million global patients at the decade’s end. This trade hinges on volume growth strong enough to offset headline sell-offs from the two biggest players.

MFN and IRA normalized pricing (mixed, net mildly bullish for large caps) As contractual agreements have been signed with 26 companies as of mid-Oct-23 and tariff exemption amounts are clarified, the unknown policy risk that weighed on multiples through 2024 and into 2025 is being supplanted by known, discountable pricing declines. Put differently, uncertainty resolves poorly in markets even when the fundamental development is positive (IRA pricing guidance), so the large-cap stabilization we’re seeing despite pricing headwinds is somewhat encouraging on that front alone.

20 26 – 20 30 patent cliff (bearish for large-cap pharma exposed, bullish for generic and biosimilar players) Over half-a-trillion dollars of annual branded revenues are set to lose exclusivity during this timeframe. Businesses that generate most of their revenue from a single franchise heading into cliff exposure will see their revenues meaningfully decline as generic and biosimilar competitors take volume within a year or two of patent expiry, while generic companies and biosimilar developers should benefit from multiple years of new revenue streams.

NHS & non-US reimbursement pressure (mildly bearish for ex-US prospects, but likely collides with US price normalization) UK medicine spending as a percent of GDP is doubling from 0.3% to 0.6% by 2036, and the cost-effectiveness threshold NICE uses to determine whether a drug represents good value for money will increase by 17-25%. However, this prescription comes with the NHS having to reallocate between 13 and 45 billion pounds from spending on other care by 2036 unless allocated additional funding, and NHS England’s mandatory Pharmaceutical Price Regulation Scheme (PPRS) Vice Chancellor Minster Adviser Group (VPAG) rebate that manufacturers pay is getting cut from 22.9% to 14.5%. These budget reallocations slightly improve launch medicine economics for the UK but imply European payers are still operating under significant fiscal constraints.

Mid-record M&A and new product pipeline (bullish) Large-cap pharma balance sheets are being leveraged to buy innovation as we approach the patent cliff, boding well for biotech. From JP Morgan Asset Management, “Strategic acquirers spent approximately $318 billion on health care M&A over the past three years.”

Regional Lens

The US remains the primary driver given that pricing policy there determines marginal drug development economics for the world and given that the MFN framework employs tariff linkage so non-compliant manufacturers operate at a genuine cost disadvantage relative to compliant manufacturers. The UK stands out among its developed market peers given that it is raising, rather than slashing spending on medicines as a percentage of GDP as a result of the US-UK pharmaceutical pricing agreement signed in 2026, however spending will not be centrally funded and will pressure other lines of NHS spending. Canada's single-payer PharmaCare model has officially reached nationwide implementation of biosimilar switching policy, whereby originator biologic manufacturers no longer have guaranteed volume after the launch of a biosimilar competitor, a secular margin headwind for originators and tailwind for biosimilar players. Finally, the GCC states are the most institutionally under-covered region despite Saudi Arabia and the UAE both actively looking to privatize public hospital operations and mandate private health insurance as part of Vision 2030-style economic diversification plans as well as continuing to invest in medical tourism hubs.

Valuation and Positioning

Valuation signals in health care are unusually black and white. Forward-looking metrics like the S&P 500 Health Care sector’s price-to-forward earnings ratio paint a stark picture: 17-18x against the S&P 500’s 20-20.5x. This is, according to JPMorgan Asset Management, around a 30-year low for the sector’s valuation relative to the market. Other sources show the discount wider still on a trailing basis, with one headline calling healthcare 30% cheaper than its historical average relative to the market after reaching a peak discount of 38% in 20twenty-five. YTD performance tells a similar story of investor pessimism: while the S&P 500 is up about 9%, the MSCI Healthcare Index has returned only about 2%, a performance gap that hasn’t closed despite four of six healthcare industries reporting earnings growth. The disconnect between healthcare’s fundamentals and its price is health care’s main valuation thesis.

Big Pharma continues to churn out large amounts of free cash flow, and we’ve still got relatively high dividend yields (typically above the S&P 500 average) across large-cap pharma that support share buybacks, even as companies allocate capital to the $318 billion dollar tsunami of mergers and acquisitions activity focused on repopulating pipelines in advance of the patent cliff. Put simply, the market is pricing health care as if LVFX and patent exposure will permanently depress growth rates, but MFN eliminated the worst case scenario of unrestricted price controls and GLP-1 sales are generating real, incremental earnings growth. On net, the sector trades cheap relative to its own history and to the broader market, and the valuation discount is wider than fundamentals currently justify.

Companies and Sub-Sectors to Watch

Eli Lilly. On track to be the world’s largest pharmaceutical company by Rx sales in 2030 ($113B driven by Mounjaro, Zepbound, and newly launched Foundayo) and already has an MFN agreement in place granting tariff certainty.

Novo Nordisk. Discount pressure from Lilly in the obesity market is real but should be modestly offset by the larger addressable US patient population gained from having Ozempic/Wegovy priced at MFN ($350/mo.) through TrumpRx as per-unit pricing declines.

Large-cap diversified pharma with executed MFN deals (Pfizer, Merck, AbbVie, J&J). These companies have already priced in the hit to guidance and received tariff relief, removing a major source of estimate risk relative to peers still negotiating.

Biosimilar and generics manufacturers. Canadaannounced full national rollout of biosimilar switching policy last week, and with over $500B of at-risk branded sales facing patent expiry in the US, biosimilar developers stand to benefit from multi-year volume growth as exclusivity waivers.

Medical technology and diagnostics. Positive utilization trends in imaging, robotics-assisted surgery, and diagnostics remain intact and are less directly impacted by drug pricing policy, allowing for a less correlated way to play the aging-population theme we highlighted in JPMorgan’s 2026 healthcare growth theme forecast.

Key Risks

Accelerated generic/biosimilar entry on the >$500B of branded sales at-risk for patent cliffs could hit large-cap pharma earnings before new launches can fully offset.

GLP-1 pricing may deteriorate faster than expected/volume can compensate, especially if more Medicaid states negotiate below the $350 TrumpRx cash price or if global peak sales estimates ($150B down to closer to $95B-$105B by several banks) are revised lower still.

US political risk notwithstanding positive signs from bipartisan support, the MFN program is voluntary (could be opened up to more companies), modified (tightened), or sued over by a future administration. Even the underlying 100% tariff on non-MFN compliant patented imports could be renegotiated or raised.

Funding gaps for reimbursement remain an issue in the UK/Europe. The BMJestimated £45B NHS funding shortfall from 2026-2036 could force NICE to tighten reimbursement thresholds or slow adoption of new drugs if not funded by the UK Treasury.

Bottom Line

Health care trades at an historically rare valuation discount to the rest of the market. The policy risk driving that discount (Most Favored Nation and IRA pricing reform) has become a known, signed framework instead of a looming unknown. Drivers of volume growth remain in GLP-1s, M&A should remain a resilient tailwind, and we are now seeing biosimilar adoption in single-payer markets like Canada. These factors give us multiple paths for earnings growth despite the largest patent cliff in decades hitting legacy franchises. We believe price has become disconnected from fundamentals in health care and are recommending investors build positions in MFN compliant large-cap pharma, GLP-1 leaders, and biosimilar exposed names while continuing to monitor timing of these patent cliffs.