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<ul><li>After a long period of underperformance for healthcare, Citi Research sees 2026 as a year marked by greater optimism.</li><li>Among factors acting as headwinds for healthcare in 2025 were tariffs, China policy considerations, politics, interest rates and inflation.</li><li>Healthcare industry trends will be a focus of our annual Global Healthcare Conference, to be held in Miami Dec. 2-4.&nbsp;</li></ul>

In a new Super-Sector Analysis from Citi Research, Joanne Wuensch and a team of analysts discuss the reasons they’re optimistic about the healthcare sector heading into 2026 despite headwinds that have long weighed on earnings and stock-price performance. While healthcare subsectors have seen divergent performance, the analysts believe momentum will continue to build, and that Citi’s annual Global Healthcare Conference, held in Miami on Dec. 2-4, will provide an opportunity to dig into trends.The S&amp;P 500 has been relatively volatile in 2025, with sectors impacted by artificial intelligence driving most of the returns since early April’s Liberation Day unveiling of U.S. tariffs. While the S&amp;P had risen 13% year to date at publication time, the healthcare sector had returned just 3%. That figure masks sub-sector variability, however: The Biotech index was up 16% year to date, Pharma up 4%, Healthcare Equipment up 4%, Life Science Tools down 4%, Healthcare Supplies down 21%, and Managed Care down 25%.&nbsp;It's also worth noting that the overall sector has performed better since late September, when greater clarity about pharma tariffs arrived and the impacts of Most Favored Nation (MFN) drug-pricing policies proved relatively benign. This autumn rebound has helped Healthcare move from S&amp;P 500 laggard to near the middle of the pack in terms of year-to-date performance, though that performance is far behind standouts such as Communications Services and Information Technology. Furthermore, the healthcare sector’s weighting in the S&amp;P 500 now stands at just ~9.1%, its lowest level since 1994; just two and a half years ago its weighting was ~16%.<h2>Noteworthy subsector trends&nbsp;</h2><h3>U.S. Pharmaceuticals and Biotech</h3>As the third quarter came to a close, the Street saw healthcare policy overhangs diminish, with pharma tariff threats largely mitigated and newfound clarity about MFN policies. That was a welcome change after a year marked by persistent headlines on healthcare policy, which combined with technology’s continued momentum to keep investors at bay. But looking forward, we see optimism on a return to fundamentals.On the policy side, we see investor concerns about pharma tariffs as mostly resolved, with most large Biopharma names having made commitments to large-scale manufacturing and R&amp;D investments in the U.S., exempting them from targeted levies. Our recent investor conversations highlight renewed interest in the sector.Mergers and acquisitions have also helped fuel a sense of optimism. Total M&amp;A value in the second half of 2025 already exceeds what we saw in the second half of 2024, with activity focused on Biopharma’s increasing need to fill the clinical pipeline. Oncology and Immunology &amp; Inflation remain spaces with significant growth potential, with growing total addressable markets. The shift in M&amp;A toward cardiometabolic and central nervous system names is an acknowledgment of arguably even faster growth spaces, with massive addressable populations and potential for innovation.<h3>U.S. SMID Cap Biotech</h3>FDA Commissioner Martin Makary is advancing a new approval pathway to increase efficiencies for rare disease drugs, which we think will lower hurdles and compress timelines to market. We think these new regulations could spur companies to shift greater attention to rare diseases and/or intensify efforts to identify relevant biomarkers.&nbsp; More generally, we think additional wide-ranging commentary emerging from the new FDA should help convince both the industry and investors that collaboration and common purpose will make positive outcomes more likely and reduce regulatory friction.&nbsp;<h3>U.S. MedTech</h3>Despite solid fundamentals, the persistent theme for 2025 in MedTech has been “tariffs.” But trends turned at the end of August. Throughout it all, the trade association AdvaMed pushed the White House to exempt devices from tariffs, while several large-caps emphasized their commitment to increasing manufacturing in the U.S. to reduce tariff impacts. Then September came, raising questions about the fate of Section 232 tariffs. Looking ahead, we are encouraged by the improving clarity and continue to appreciate companies that are transparent in their tariff/Section 232 communications and expectations.&nbsp;Among other trends, we note that concerns regarding access to healthcare continue to build, including coverage for Medicaid patients, something that’s already shaping healthcare delivery. AI is making inroads in MedTech; while there has been some industry pushback about how to best incorporate guardrails, MedTech seems broadly in sync with AI advancement. Medical-device companies are increasingly integrated AI into their products, with the FDA’s AI-Enabled Medical Devices list documenting more than 1,200 such devices. We see AI as transformational, a technological boon to the industry and an ongoing catalyst as we head into 2026.<h3>U.S. Life Sciences Tools &amp; Diagnostics</h3>“Uncertainty” has been the primary word referenced by most Life Sciences management teams since impacts from the new administration began to weigh on the Healthcare/Life Sciences sectors, with veteran researchers noting this as the most challenging funding backdrop they’ve experienced given that uncertainty as well as volatility.&nbsp;As we move toward year-end 2025 and fiscal 2026, the biggest message we heard from management teams about what will improve demand and sentiment is initial views on the recent positive MFN developments, focus on the fiscal 2026 National Institutes of Health (NIH) budget changes, and global tariff rates. Besides the back and forth on the NIH budget, another factor to consider is the method of funds dispersal, as the Trump administration seems to want to shift toward multiyear grants rather than a single lump sum. As we move into year’s end and more clarity is gained, we believe research customers will remain cautious and capital-conservative into fiscal 2026 in order to extend the longevity of funding.Finishing on a positive note, exiting the third quarter the White House announced an agreement that will follow MFN pricing initiatives, lifting a significant overhang from Tools. Expectations are that the new pricing strategy will have a small percentage impact to the topline, coming in far better than investors have feared.<h3>U.S. Healthcare Technology and Distribution</h3>Our Healthcare Tech and Distribution coverage tends to be well insulated from political vagaries, but it isn’t immune from the headline risk inherent in the Trump administration’s policy prescriptions. This tends to manifest in two key areas: drug pricing policies (namely MFN and TrumpRx) and cuts to Medicaid/exchange subsidies.&nbsp;The Trump administration has sought to lower branded drug prices most recently via MFN/TrumpRx. While implementation of these policies is uncertain, anything that pressures list prices would generally be a negative for distributors. Ultimately, we expect distributors to work with manufacturers to be fairly compensated on core distribution regardless of list prices, and to work with the government/payors to make sure their recently acquired community-provider assets aren’t unfairly harmed by a reduction in reimbursement based on average sales price. The impact of TrumpRx is wholly dependent on if the website partners and/or integrates with existing discount programs or creates a competing channel.&nbsp;The Congressional Budget Office estimates that Medicaid cuts and the potential exchange subsidy expiration will reduce Medicaid enrollment by ~7 million (a 9% reduction) and exchange enrollment by ~8 million (about a 36% reduction) by 2034. Such reductions stand as a slight headwind to our coverage.<h3>China Healthcare</h3>We’re constructive on the long-term trend of China’s rise as a global hub for biotech innovation. From 2020 through August 2025, for outlicensed molecules originating from China, total transaction consideration as a percentage of global jumped from 1% to 52% and the deal number increased from 4% of global deals to 19%. We see the most promising opportunities in innovative Chinese pharma and biotech companies that possess strong pipelines and are prime candidates for outlicensing deals with global multinational corporations.&nbsp;Despite stock-price volatility caused by geopolitics, we expect the impact of tariffs and other potential U.S. policies to be minimal for China’s pharma and biotech sectors, for several reasons. Outlicensing innovative Chinese molecules to U.S. companies isn’t physical goods and so has no impact from tariffs. Upcoming patent cliffs and pricing pressure make it imperative for global drug makers to enrich their pipelines, with China assets becoming an important source. And finally, U.S. non-pharma companies could license early-stage assets to potentially outcompete restricted U.S. firms.The speedy expansion of overseas businesses has been a key growth engine for domestic Medtech leaders. Given an established sales network and good-enough product quality, leading China Medtech players have continued to capture market share overseas.

Our new report, Global Healthcare: The Times They Are A-Changin’, offers our detailed analysis of themes across all subsectors. It’s available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/48KmK">here</a>.

Healthcare has underperformed for some time, weighed down by tariffs, considerations related to China, politics, and interest rates and inflation. Yet we see green shoots and look to 2026 as a year of more optimism and industry proactiveness. We look forward to exploring what’s ahead for the industry at our annual Global Healthcare Conference, to be held in Miami Dec. 2-4.

Global Healthcare: The Times They Are A-Changin'

Transcript

<ul><li>While AI is a major focus in healthcare, its true impact on drug development is not expected to be fully realized until the 2028-2030 timeframe</li><li>The outlook for the biopharma sector is improving, with a diminished risk of tariffs, a strong drug pipeline and expectations for continued M&amp;A activity creating a positive environment for 2026 and 2027</li><li>The next major innovation in weight loss will be oral GLP-1 drugs, like Lilly's Orforglipron expected in early 2026, which could become a "game changer" by creating a large, consumer-focused cash-pay market</li></ul>

Anne Malone, Head of North America Equity Research, and Global Head of Healthcare Geoff Meacham discuss where Healthcare stands after the third-quarter reporting period. Conversation topics include the promise of AI, innovations in the drug pipeline and the next phase of GLP-1s.This podcast contains thematic content and is not intended to be investment research. Nor does it constitute financial, economic, legal, tax or accounting advice. This podcast is provided for information purposes only and does not constitute an offer or solicitation to purchase or sell any financial instruments. The contents of this podcast are not based on your individual circumstances and should not be relied upon as an assessment of suitability for you of a particular product, security, or transaction. The information in this podcast is based on generally available information and, although obtained from sources believed by Citi to be reliable, its accuracy and completeness are not guaranteed. Past performance is not a guarantee or indication of future results. This podcast may not be copied or distributed, in whole or in part, without the express written consent of Citi. © 2025 Citigroup Global Markets Inc. Member SIPC. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.

Anne Malone was named Head of North America and Latin America Equity Research 2022; promoted from Deputy Director, a role she held since 2018. Anne started at the firm in 1996 as an Analyst covering Medical Technology stocks. She has held several positions since then, in both Equity Research and Citi Asset Management, taking on roles that utilized her analytical, product, and people skills. Prior to joining Citi she was a Medical Device Analyst at Bear Stearns. Anne graduated from the St Leo College with a degree in Finance and a minor in Economics. She is a CFA Charterholder.

Anne Malone, Head of North America and Latin America Equity, Citi Research

Geoff Meacham, Ph.D. is a Managing Director at Citi Research, covering both the US Pharmaceuticals and Biotechnology sectors. Prior to joining Citi in September 2024, Geoff covered the Pharma / Biotechnology sectors for 20+ years at Bank of America and Barclays, as well as JP Morgan Chase and UBS. Prior to joining Wall Street, Geoff conducted R&amp;D at Solvay Pharmaceuticals. He is based in Atlanta.

Geoff Meacham, Global Head of Healthcare, Citi Research

Anne Malone, Head of North America Equity Research, and Global Head of Healthcare Geoff Meacham discuss where Healthcare stands after the third-quarter reporting period. Conversation topics include the promise of AI, innovations in the drug pipeline and the next phase of GLP-1s.

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E56: Thankful for Health: AI Vaccines and Weight Loss

<ul><li>Citi's top strategists are debating the AI-driven equity market, contrasting views of a valuation bubble against a fundamentally sound technology 'boom' with significant long-term growth potential and strong earnings.</li><li>The debate highlights a crucial strategic crossroads for investors: either hedge against a potential market overshoot or embrace a structural bull case for equities driven by generational AI-powered productivity gains.</li><li>The outlook hinges on a massive, underestimated AI capex cycle and the early stages of broad AI adoption. The key is monitoring the return on investment and how AI's use expands beyond tech enablers.</li></ul>

Dirk Willer, Global Head of Macro Strategy and Asset Allocation, and Scott Chronert, U.S. Head Equity Strategy, sit down with Heath Terry, Global Head for Technology and Communications Research, to debate whether AI is a boom or a bubble and what the endgame may be for companies and markets.This podcast contains thematic content and is not intended to be investment research. Nor does it constitute financial, economic, legal, tax or accounting advice. This podcast is provided for information purposes only and does not constitute an offer or solicitation to purchase or sell any financial instruments. The contents of this podcast are not based on your individual circumstances and should not be relied upon as an assessment of suitability for you of a particular product, security, or transaction. The information in this podcast is based on generally available information and, although obtained from sources believed by Citi to be reliable, its accuracy and completeness are not guaranteed. Past performance is not a guarantee or indication of future results. This podcast may not be copied or distributed, in whole or in part, without the express written consent of Citi. © 2025 Citigroup Global Markets Inc. Member SIPC. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.

Dirk Willer is a Managing Director and Global Head of Macro Strategy and Asset Allocation. In this role, Dirk develops broad macro themes, related asset allocation views as well as trade ideas across a wide range of asset classes and geographies. Dirk also directs the Quant Macro Team. Prior to that, Dirk was the Global Head of Emerging Market Fixed Income and FX Strategy. He joined the firm in 2005 as the head of LatAm Local Market Strategy. Previously, Dirk worked at Omega Advisors and RHG Capital as their global macro strategist and portfolio manager. Dirk and his team have been ranked as the first team in the Institutional Investor survey for LatAm local strategy and the first or second team for LatAm sovereign credit strategy since 2017, as well as first in CEEMEA and Asia local strategy in 2019. Dirk is the lead author of “Trading Fixed Income and FX in Emerging Markets”, published by Wiley in 2020. Dirk holds a PhD and MSc in Economics from the London School of Economics. He did his undergraduate work at the University of St. Gallen in Switzerland.

Dirk Willer, Global Head of Macro Strategy and Asset Allocation, Citi

Scott Chronert is a Managing Director at Citi Research serving several roles, including US Equity Strategist, Global Head of ETF Strategy &amp; Analysis, and US Small/Mid Cap strategy. Scott assumed the US Equity Strategy role at Citi in October 2021. He brings a fundamental approach to assess the US equity landscape. Regarding ETFs, Scott and his team have been at the forefront of sell-side, institutional grade, analysis of the ETF ecosystem since 2012. His product covers all facets of ETFs, including broader industry trends, flow analysis, stock and market impacts, complemented with positioning views covering most asset classes and geographies. His work on US Small/Mid Cap provides a blend of top-down and stock-specific insight. Scott also contributes to Citi’s global equity strategy product. Prior to joining Citi Research in 2010, Scott spent more than 25 years in Institutional Equity Sales and Management roles (mostly at Citi). Citi was named Global ETF Research Provider of the Year 2019 by ETFexpress. Scott is a graduate of Dartmouth College, AB degree 1978 and UCLA Graduate School of Management, MBA degree 1980.

Scott Chronert, U.S. Head Equity Strategy, Citi

Heath Terry is the Global Sector Head for Technology &amp; Communications Research at Citi Research. Prior to joining Citi in May 2025, Heath led the centralized research effort in TMT for Balyasny Asset Management and was a Managing Director at Third Point Ventures, leading its growth stage venture capital practice. Prior to that Heath worked for more than 20 years in equity research, most recently as the head of Goldman Sachs’ Global Investment Research’s Technology, Media and Telecom Group. While at Goldman Sachs Heath led research's working group on Artificial Intelligence and created the firm’s venture capital research practice. He is a Trustee for the Southern Environmental Law Center and Vice Chairman of The University of Alabama President’s Cabinet. Heath earned an MBA from Columbia Business School and a BS in Finance from the University of Alabama.

Heath Terry, Global Head for Technology and Communications Research, Citi

Dirk Willer, Global Head of Macro Strategy and Asset Allocation, and Scott Chronert, U.S. Head Equity Strategy, sit down with Heath Terry, Global Head for Technology and Communications Research, to debate whether AI is a boom or a bubble and what the endgame may be for companies and markets.

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Special Markets Edition: Boom or Bubble? The AI Debate 

In this interview moderated by Joanne Wuensch from Citi Research, which took place at the Citi Healthcare Conference 2025, Alex Azar, Former Secretary of the U.S. Department of Health and Human Services (2018-2021) discusses the transformative era of healthcare innovation. He highlights the impact of the genomic revolution, which, over the past 25 years, has deepened our understanding of disease at a molecular and genetic level, paving the way for highly targeted curative therapies. This shift necessitates a re-evaluation of traditional clinical trial designs, moving from broad efficacy studies to focusing on off-target safety and impact due to the high certainty of success with validated targets.Azar emphasizes the significant challenge of payment models, particularly the "time discontinuity" where the benefits of expensive, life-saving treatments are realized over a lifetime, while payers (employer-sponsored insurance or Medicare) may only cover a short period. He advocates for industry collaboration to solve this microeconomic problem of reinsurance and risk pooling, cautioning against government-imposed solutions.They also discuss the revolutionary potential of Artificial Intelligence (AI) in healthcare. Envisioning AI democratizing access to clinical trials by improving patient identification, enhancing provider productivity and fundamentally changing diagnostics.&nbsp;

<ul><li>Genomic Revolution Driving Curative Therapies: Healthcare is entering an unprecedented phase driven by the genomic revolution, leading to highly effective, targeted curative therapies that redefine disease treatment and prevention.</li><li>Urgent Need for Payment Model Innovation: The current healthcare payment system faces a critical challenge with the advent of high-cost curative therapies, particularly due to the "time discontinuity" between who pays for treatment and who ultimately benefits. </li><li>AI as a Transformative Force in Healthcare Delivery: Artificial Intelligence is poised to revolutionize multiple facets of healthcare, from streamlining clinical trial enrollment and democratizing access for patients in underserved areas to significantly enhancing the efficiency and precision of healthcare providers, especially in diagnostics like radiology, by amplifying human capabilities.</li></ul>

Genomics, Payment Models, and AI Transformation

In this interview at the Citi Healthcare Conference 2025, Alex Azar discusses the transformative era of healthcare innovation. He highlights the impact of the genomic revolution, which, over the past 25 years, has deepened our understanding of disease at a molecular and genetic level, paving the way for highly targeted curative therapies.&nbsp;