Biotech stocks surge on drug innovation and AI adoption

The iShares Biotechnology ETF (IBB) rose 24% through October 23, extending a 28% gain recorded in 2025. Two dozen of the fund's 233 holdings have more than doubled year-to-date, with Moderna leading the group at a 587% surge despite a recent 18% decline following a leak of positive clinical data for its cancer vaccine. Analysts attribute the sector's momentum to a new innovation cycle driven by clinical trial results, mergers and acquisitions, and advancements in genomics, mRNA, and artificial intelligence.

John Hall, portfolio manager of the T. Rowe Price Biotechnology ETF, stated that the industry is in the midst of a powerful innovation cycle where newer modalities are reaching the market. He noted that companies understand disease biology better, which may lead to more novel drugs. The FDA approved about a dozen novel biologic drugs in 2025 out of 46 total approvals. Approximately 66 novel drugs are currently in the pipeline for FDA approval, including a melanoma cancer drug from Moderna and Merck and a next-generation obesity drug from Eli Lilly.

Ted Tenthoff, an analyst at Piper Sandler, described biotech as a phenomenal application for artificial intelligence and machine learning, citing predictive models that enable novel drug discovery. The sector is recovering from a previous downturn caused by evaporating demand for Covid vaccines and rising interest rates that chilled initial public offerings and M&A activity. Although the industry still faces high failure rates due to long development times, analysts view the current outlook as healthier.

Recent clinical data has fueled investor interest in specific therapeutic areas. Moderna and Merck's melanoma drug uses mRNA to trigger an immune response against surgically removed tumors. In conjunction with Merck's Keytruda, it showed a 42% reduction in cancer recurrence or death. The companies aim to submit the drug for FDA approval and launch it in 2027. AstraZeneca and Amgen reported positive Phase 3 results for Tezspire, an injectable approved for nasal polyps and asthma, which successfully relieved swallowing symptoms in patients with severe throat inflammation. Roche received FDA approval for Enspryng, the first at-home injection for adults with thyroid eye disease.

Eli Lilly's retatrutide, a triple agonist targeting three hormone receptors, cleared two clinical trials over the summer. The drug produced 28%-30% weight loss at the highest doses. Lilly plans to submit it for FDA approval in the first quarter of 2027. Innovation is also expanding into infrastructure companies. Illumina, which has more than doubled this year, is seeing accelerating demand for its NovaSeq X sequencing platform from pharmaceutical partners including Bristol-Myers Squibb and Merck. 10x Genomics, up more than 300%, provides lab instruments for cancer and immunology research and uses its Atera platform to generate data for AI models.

Shreefāl Mehta, president of Guidant BioTherapeutics, stated that AI allows companies to bring drugs to clinical trials with less capital. Forecasts by Towards Health project the global AI in drug discovery market will grow from $20 billion in 2025 to more than $160 billion by 2035. M&A activity also supports the sector; biopharma dealmaking reached $134 billion in the first half of 2026, up from $112 billion in all of 2025, according to BTIG analyst Jeet Mukherjee. This activity is partly driven by a patent cliff, with products representing $180 billion of revenue set to lose exclusivity by 2030.

Investors can access these themes through ETFs such as the iShares Biotechnology ETF or the State Street SPDR S&P Biotech ETF. Individual stocks like Twist Bioscience, which partners with Eli Lilly and Anthropic on AI models, are also drawing attention. Piper Sandler maintains buy ratings on Illumina and Monte Rosa Therapeutics, while BTIG recommends Faeth Therapeutics and Kymera Therapeutics.