No biotech bubble – but can the sector’s rally persist through 2026?

What It Covers

RBC Capital Markets analyst Brian Abrams assesses biotech's 80% rally from April 2025 lows, evaluating whether sector momentum can persist through 2026 amid rising valuations, regulatory uncertainty, M&A activity, and emerging innovation in obesity, psychedelics, and protein degraders.

Key Questions Answered

• •Rally positioning: Biotech is approximately in the "sixth inning" of its current rally, with the XBI still down 17% over five years versus the S&P 500 up 80%, meaning valuations are elevated but not bubble territory — investors should expect harder work finding alpha in 2026.
• •M&A pipeline durability: Big pharma faces $400 billion in revenue losses from patent cliffs over the next decade, and completed deals don't cover those gaps, signaling continued acquisition demand. M&A activity historically accelerates post-midterm elections, providing a structural tailwind for small and mid-cap biotech targets.
• •Emerging innovation bets: Protein degraders, in vivo CAR-T, and psychedelic-based therapies represent the highest-conviction breakthrough areas. Several psychedelic companies report Phase 3 data in H1 2026, potentially triggering a sharp re-rating of mental health treatment paradigms after single-administration remission results emerge.
• •SMID-cap leverage shift: Smaller biotechs have demonstrated successful independent drug launches, fundamentally changing negotiation dynamics in acquisition talks. Investors should reassess the traditional discount applied to pre-acquisition SMID-caps, as commercial self-sufficiency now generates standalone value without requiring big pharma partnership.