What's driving biotech's latest rally?

What's been driving biotech's rally in the first half of 2026?

Brian Abrahams: It's really been a remarkable run. The XBI is up 80% in the past year, and a lot of that gain has come since early June, which is what makes the move so striking.

When you look at what's driving the rally, you have to start with M&A. Cumulative deal value reached approximately $78 billion by mid-year, nearly double the entirety of 2025. A sustained run of sizeable transactions has helped lift the entire sector as investors start pricing acquisition premiums more broadly.

The regulatory backdrop has also improved meaningfully. Concerns around FDA leadership instability and inconsistent communication have eased, while investors have seen encouraging signals around greater regulatory flexibility. Strong clinical data, easing policy concerns and renewed investor flows into healthcare have further supported sentiment across the sector.

"When you look at what's driving the rally, you have to start with M&A... a sustained run of sizeable transactions has helped lift the entire sector "

Brian Abrahams, Head, Global Healthcare Research, RBC Capital Markets

Has biotech become less risky?

Abrahams: What we've seen is a powerful shift in sentiment more than a resolution of the underlying risks biotech companies still face. Valuations have moved up substantially, reducing the cushion that existed when much of the sector appeared deeply discounted relative to its commercial potential.

Expectations are now more demanding, which means the reward-to-risk on individual names has to be evaluated with a more critical eye.

Over the past 10 years, there have only been three other occasions where the XBI outperformed the S&P by 15% or more over a very short window, and forward returns that followed were generally more mixed.

This episode does have some distinct features, particularly that it's been driven by a sector-specific re-rating rather than a broad risk-on tape. But history suggests we shouldn't simply extrapolate from the first half's performance.

We remain constructive on the sector overall, but we do think the second half is going to reward selectivity more than breadth.

"We remain constructive on the sector overall, but we do think the second half of this year is going to reward selectivity more than it rewards breadth."

Brian Abrahams, Head, Global Healthcare Research, RBC Capital Markets

What is RBC's latest biotech investor survey telling us?

Lisa Walter: Sentiment remains constructive, but positioning has become a bit more neutral following the rally.

A majority, 58%, still expect biotech to outperform the S&P 500 in the second half of the year, and only a record low 8% expect underperformance.

But more investors now plan to maintain their current exposure, 64%, up from 56% at our last survey, while only 30% say they plan to increase exposure, down from 40%.

The view is still optimistic, but investors are staying the course rather than pressing further into the group.

After the XBI jumped 20% since June and 30% year to date, 55% of investors now see biotech as fairly valued. We also saw a large jump in those calling the sector overvalued, while only 22% still see biotech as undervalued.

Higher valuations may mean clinical binaries are looked at with a more critical eye in the second half.

Has investor confidence in M&A changed?

Walter: From the investor perspective, they are still really bullish on M&A. M&A remains the number one tailwind, with 70% of our respondents citing M&A as the biggest positive driver.

Increasingly, investors picked a large $20 billion acquisition as the second most likely catalyst to happen in the second half of 2026.

How are launches shaping the sector's recovery?

Leonid Timashev: As we exited last year, many commercial-stage biotech companies were performing well, supported by strong expectations for launches across several high-profile therapeutic areas. Enthusiasm around some of those launches cooled in the first half of the year as expectations proved difficult to meet, and a number of commercial names fell out of favor.

As we move into the second half, investors may increasingly return to fundamentals, focusing on companies that are generating meaningful revenues while still offering significant growth potential. A new wave of opportunities across emerging therapeutic areas could also help renew interest in commercial-stage biotech and support a re-rating of the group.

At the same time, more companies are launching new products, creating greater competition for investment dollars and reinforcing the importance of selectivity when evaluating launch opportunities.

How is innovation being rewarded across biotech?

Timashev: Innovation remains the lifeblood of the sector.

When people invest in biotech, what they want is a company that's developing a novel drug, opening up a novel therapeutic area or creating a technology platform that can generate multi-billion-dollar opportunities.

We're seeing new targets, new modalities and new treatment settings. Areas we're particularly excited about include degraders, the RAS space, trispecific antibodies and in vivo CAR-T.

Innovation gets rewarded both in the market and through M&A. Companies that are doing something truly different can benefit across multiple stages of development.

The challenge is that once a company does something innovative, everyone wants to copy it, which is another reason investors need to be selective in which companies you’re pursuing. But overall, we believe innovation remains strong, and biotech companies that are first movers or pursuing truly differentiated approaches are likely to be the biggest beneficiaries.

"Innovation remains the lifeblood of the sector."

Leonid Timashev, Biotechnology Analyst, RBC Capital Markets

How is China's role in biotech evolving?

Timashev: China has been a subject of extensive debate among biotech investors.

The two most important dynamics we're seeing are China's ability to move quickly on the chemistry side of biotech, develop drugs, move them into trials and generate proof-of-concept data.

The second dynamic is that we're seeing more M&A and business development activity turn toward China because companies can access competitive assets at a lower cost.

However the major market remains the U.S. and so to really tap into that market, you're going to have to fulfil all the regulatory requirements here.

I also think China as a market in itself may grow in importance and is becoming one of the largest markets for some of the large pharma’s.

What could determine whether biotech extends the rally?

Abrahams: The setup for the second half remains relatively constructive, but it is a more selective environment than the first half.

The key variables are: whether M&A can remain active enough to support SMID-cap and mid-cap biotech; whether major clinical data readouts can deliver results that justify the higher expectations now embedded in the sector; whether drug launches can sustain the commercial confidence that has helped build biotech's credibility over the past year; and whether the FDA follows through on its more constructive recent posture when the hard decisions arrive at upcoming PDUFAs.

If those factors break favorably, we could see momentum continue.

If any of them disappoint, particularly if M&A cools and clinical setbacks emerge at the same time, we think the focus will return quickly to individual company fundamentals and therapeutic area dynamics, which could be a more demanding lens in a higher-valuation environment.