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CONTRIBUTORS

Evan McCulloch

Portfolio Manager
Franklin Equity

Akiva Felt, CFA

Portfolio Manager
Franklin Equity

Key takeaways

  • A more stable policy backdrop is enabling investors to focus on biotechnology’s fundamentals. Innovation, scientific progress and expansion into areas of unmet medical need underpin the sector’s long-term growth potential.
  • Capital discipline and structural pressures are driving increased dispersion across the sector, increasingly rewarding companies with strong balance sheets, well-defined development strategies and clear paths to commercialization.
  • We believe this environment favors a selective, active approach, focused on identifying the companies that can translate innovation into durable value.

The biotechnology sector is gaining positive momentum as we enter 2026. Market attention is now shifting back toward underlying fundamentals after a prolonged period of elevated uncertainty.

By late 2025, several headwinds had eased: Certain proposed pharmaceutical‑related tariffs were delayed or narrowed, “most‑favored‑nation” (MFN) pricing proposals were effectively confined to targeted Medicaid reforms, and investors gained better visibility into trade and reimbursement policy paths. In light of this, the backdrop entering 2026 is more stable, allowing investors to refocus on biotechnology’s fundamentals, scientific progress and long‑term growth drivers.

Biotechnology is now on a firmer footing following an extended period of market uncertainty. While macroeconomic, pricing and regulatory risks remain, greater clarity around policy and capital-market conditions is allowing investors to refocus on fundamentals and long-term value creation.

Scientific innovation continues to underpin the sector’s growth potential, with meaningful advances across therapeutic modalities and disease areas. However, capital discipline and structural pressures are driving increased dispersion, elevating the importance of execution, balance-sheet strength and clinical differentiation.

In this environment, biotechnology’s role as a driver of medical progress and long-term growth remains intact, but outcomes are likely to be increasingly uneven. For investors, we believe this supports a highly selective, active approach, focused on identifying companies best positioned to translate innovation into durable value.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Equity securities are subject to price fluctuation and possible loss of principal.

Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.

Investment strategies which incorporate the identification of thematic investment opportunities, and their performance, may be negatively impacted if the investment manager does not correctly identify such opportunities or if the theme develops in an unexpected manner. Focusing investments in the health care and biotechnology sectors carries much greater risks of adverse developments and price movements in such industries than a strategy that invests in a wider variety of industries.

Active management does not ensure gains or protect against market declines.

Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

WF: 8746158

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