Re-rating Opportunities in Health Care Amid Sector Rotation and Regulatory Risk

The healthcare sector in 2025 is navigating a pivotal inflection point, marked by sector rotation dynamics, regulatory uncertainty, and the re-rating potential of undervalued biotech ETFs. As macroeconomic normalization and improved funding conditions take hold, investors are increasingly turning to biotechnology as a defensive yet growth-oriented asset class. This analysis explores strategic entry points into undervalued biotech ETFs and long-term positioning in resilient subsectors, balancing the risks of regulatory headwinds with the sector’s innovation-driven upside.

Undervalued Biotech ETFs: A Re-rating Catalyst

Biotech ETFs have emerged as compelling vehicles for capturing the sector’s re-rating potential. As of Q4 2024, the median enterprise value to revenue (EV/Revenue) multiple for biotech and genomics companies stood at 6.2x, a sharp decline from the 12.5x peak during the 2021 pandemic-driven vaccine boom [4]. This valuation discount reflects a combination of post-pandemic profit-taking, regulatory delays, and constrained capital access for small-cap innovators. However, it also creates a compelling entry point for investors seeking exposure to companies with strong fundamentals and high-growth pipelines.

Key ETFs to consider include the Virtus LifeSci Biotech Products ETF (BBP), which has delivered a 12.95% year-to-date (YTD) return in 2025 with a minimal expense ratio of 0.01% [1], and the VanEck Biotech ETF (BBH), which has posted a 12.32% YTD return while managing $365.9 million in assets under management (AUM) [1]. The iShares Biotechnology ETF (IBB), with $5.8 billion in AUM, offers broad exposure to the sector and a 5.32% YTD return, underscoring its role as a barometer of investor sentiment [1]. These metrics highlight a sector where low valuations, relative to large-cap peers, are beginning to align with improving fundamentals such as clinical trial progress and M&A activity.

Sector Rotation and Regulatory Risks: Navigating the Landscape

The healthcare sector’s outperformance in 2025—up 3.47% in Q3—reflects a broader market rotation away from high-growth tech stocks and toward defensive assets [2]. This shift has been amplified by falling interest rates, which reduce the discount rate for long-duration biotech cash flows, and a quieter regulatory environment as the U.S. election cycle approaches. However, regulatory risks remain a critical overhang. The FDA’s 25% staffing reduction has delayed clinical trial reviews, increasing costs and timelines for drug approvals [3]. Additionally, proposed policies such as the Trump administration’s “most favored nation” (MFN) Medicare drug pricing cap threaten to erode profit margins for biopharma firms [1].

Geopolitical tensions further complicate the outlook. U.S. tariffs on Chinese goods and supply chain disruptions have added volatility to biotech valuations, with ETFs like BBP and BBH experiencing sharp corrections in early 2025 [5]. Investors must weigh these risks against the sector’s long-term drivers, including AI-driven drug discovery, precision medicine, and an aging global population.

Resilient Subsectors: Healthcare Tech and AI-Driven Innovation

Amid these challenges, certain healthcare subsectors are demonstrating resilience. Healthcare technology and AI-driven solutions are reshaping the industry, with 77% of health executives ranking AI as a top investment priority in 2025 [1]. Innovations such as Vertex/CRISPR Therapeutics’ FDA-approved gene-editing therapy Casgevy and Abeona Therapeutics’ Zevaskyn for rare diseases highlight the sector’s capacity for breakthroughs [3]. These advancements are supported by a surge in venture capital funding and M&A activity, including Novo Holdings’ $16.5 billion acquisition of Catalent and Johnson & Johnson’s $14.6 billion purchase of Intra-Cellular Therapies [3].

For investors, thematic ETFs focused on these subsectors offer targeted exposure. The iShares Biotechnology ETF (IBB) and Fidelity Disruptive Medicine ETF (FMED) provide broad access to biotech and medtech innovators, while the Global X Robotics & Artificial Intelligence ETF (BOTZ) includes holdings like Intuitive Surgical’s robotic surgical systems [1]. These funds align with long-term trends such as AI integration in diagnostics, automation in drug manufacturing, and personalized medicine.

Strategic Entry and Long-Term Positioning

To capitalize on re-rating opportunities, investors should adopt a dual strategy:
1. Undervalued ETFs as Short-to-Midterm Bets: ETFs like BBP and BBH, trading at low EV/Revenue multiples, offer exposure to small-cap biotechs poised for re-rating through clinical milestones or M&A.
2. Resilient Subsectors for Long-Term Growth: ETFs focused on healthcare technology and AI infrastructure, such as BOTZ and FMED, align with secular trends in innovation and efficiency.

Regulatory risks, while significant, are not insurmountable. The sector’s history of navigating policy shifts—such as the 2021 Medicare drug pricing reforms—demonstrates its adaptability. Moreover, the normalization of macroeconomic conditions and the Fed’s rate-cutting cycle are likely to further support biotech valuations.

Conclusion

The healthcare sector in 2025 presents a unique confluence of undervaluation, innovation, and strategic repositioning. While regulatory and geopolitical risks persist, the sector’s long-term fundamentals—driven by AI, gene editing, and demographic trends—remain robust. By strategically allocating to undervalued biotech ETFs and resilient subsectors, investors can position themselves to benefit from both near-term re-rating catalysts and the sector’s enduring growth trajectory.

Source:
[1] Biotech Investment Opportunities 2025: Strategic Insights [https://ironwoodinvestmentmanagement.com/biotech-investment-opportunities-2025/]
[2] Healthcare stocks shine in a dimming economy [https://www.janushenderson.com/en-us/investor/article/healthcare-stocks-shine-in-a-dimming-economy/]
[3] Top Biotechnology and Health Tech Trends in 2025 [https://ts2.tech/en/top-biotechnology-and-health-tech-trends-in-2025-mid-year-update-and-forecast/]
[4] BioTech & Genomics: 2025 Valuation Multiples [https://finerva.com/report/biotech-genomics-2025-valuation-multiples/]
[5] Healthcare Market Overview [https://www.stifel.com/Newsletters/InvestmentBanking/BAL/Marketing/Healthcare/Biopharma_TimOpler/2025/BiopharmaMarketUpdate_TO_040725.html]