Biotech stocks: could this be the next big market wave after AI?
The Strategic Newb Editorial Team
Translated from the original; figures and sources have been preserved. Read the original →
The next major application of artificial intelligence could well emerge from a laboratory.
There, the central question has enormous medical and economic implications: can we discover more quickly which medicines actually work?
Biotech brings these worlds together. New treatments, genetic information and AI could change how medicines are developed. Patients gain hope for better treatments. Investors face a more difficult question: which companies turn scientific progress into sustainable revenue?
That makes biotech stocks interesting, but also risky. A medical breakthrough, a successful company and a good investment are three different things.
Why biotech is attracting attention again
Clinical results, new research technology and partnerships make biotech worth following carefully. Its economic opportunities reflect several developments.
To understand that interest, it helps to distinguish three potential sources of value:
- New treatments that demonstrably help patients.
- Technology that makes research better or more efficient.
- Partnerships and acquisitions that give larger companies access to promising medicines.
These developments can reinforce one another. Better research results can attract funding. More funding can enable further research. And convincing results can make a company more attractive to a pharmaceutical partner.
Yet the most important step remains the same: demonstrating that a treatment is sufficiently safe and effective.
Personalised cancer therapy shows what is changing
One concrete example comes from Moderna and Merck, known as MSD outside the United States and Canada.
On 22 October 2026, the companies reported positive results from a phase 3 trial of intismeran autogene, an experimental personalised mRNA treatment. Combined with Keytruda, it reduced the risk of disease recurrence or death by 42% compared with Keytruda alone in the studied patients whose melanoma had been completely removed surgically. Median follow-up was 24.6 months.
That 42% is a relative risk measure. It does not mean a reduction of 42 percentage points, nor that cancer is prevented in every patient.
Nor is this a general preventive cancer vaccine. The treatment is tailored to characteristics of an individual patient's tumour. Overall survival data were not yet mature enough for a definitive conclusion when the results were announced.
The example shows why biotech can attract so much attention: treatments increasingly target the biological characteristics of a disease more specifically.
But it also shows why investors must read carefully. A positive study result does not answer every question about approval, manufacturing, reimbursement and commercial use.
What could AI mean for new medicines?
AI can help analyse large volumes of research data and select promising hypotheses. The potential economic value is clear: identifying worthwhile research directions earlier could reduce wasted time and capital.
Regulators' involvement shows that this goes beyond marketing. The US FDA and Europe's EMA have jointly developed principles for responsible use of AI in medicine development.
Reliability remains essential. In January 2025, the FDA published draft guidance on assessing AI models that provide information for decisions about the safety, effectiveness or quality of medicines.
A convincing prediction from an AI model is not proof that a medicine works in people.
Medicine development involves laboratory research, preclinical research, clinical trials and regulatory review. AI changes the tools within that process; evidence of safety and effectiveness remains necessary.
For investors, the key question is therefore: what measurable improvement does AI deliver?
More partnerships or impressive demonstrations are interesting. Stronger evidence consists of better research results, more efficient use of capital and, ultimately, products customers pay for.
Who can earn money from biotech's development?
The best-known biotech stories concern a company with one promising medicine. The economic opportunities are broader.
| Type of company | Potential revenue source | Key consideration |
|---|---|---|
| Drug developer | Sales, licences and milestone payments | Does the treatment work and reach the market? |
| Large pharmaceutical company | Existing medicines and new products | Can the pipeline support future revenue? |
| Research technology supplier | Equipment, software and consumables | Does additional research generate paying customers? |
| Research service provider | Conducting and supporting studies | How are orders and margins developing? |
A supplier does not have to develop the eventual successful medicine itself. This can reduce dependence on a single research outcome.
However, suppliers remain dependent on their customers' investment. A promising market becomes financially attractive only when demand translates into revenue, healthy margins and cash flow.
The comparison with AI infrastructure is natural: companies enabling research may also be interesting in biotech. But that comparison is a research hypothesis, not an automatic reason to buy.
Why acquisitions do not guarantee returns
A large pharmaceutical company may find it attractive to acquire or license a promising treatment. This buys access to research it would otherwise have to develop internally.
Investors may therefore be tempted to view small biotech companies mainly as potential takeover targets.
That is a fragile strategy.
A partnership may involve a modest upfront payment and larger amounts payable only when certain goals are achieved. An impressive total in a press release is therefore not necessarily cash that becomes immediately available.
Anyone assessing an agreement should examine its terms: how much is paid now, which results are still required, and who bears future development costs?
The biggest risks of biotech stocks
Risk starts with the science, but does not end there.
Research risk. A treatment may prove insufficiently effective or have unacceptable side effects.
Financing risk. A company without sufficient revenue must keep funding its research. New shares can dilute existing shareholders' ownership.
Commercial risk. Even an approved medicine must reach patients, obtain reimbursement and compete with other treatments.
Valuation risk. A promising company can be an unattractive investment when its share price already assumes exceptional success.
The last point is easily underestimated. Investors earn from the difference between expectations and outcomes. Good news may not be enough when the market had priced in even better news.
Biotech ETF or individual stocks?
A sector fund can reduce dependence on one company. It does not eliminate the risk of the biotech sector as a whole.
Funds also differ. The iShares Biotechnology ETF, ticker IBB, tracks an index of US-listed biotech stocks. The State Street SPDR S&P Biotech ETF, ticker XBI, tracks a modified equal-weighted index of large, medium-sized and small companies.
Composition and weighting therefore help determine which risks an investor actually takes on. Comparing only the word 'biotech' in a fund's name is not enough.
These US funds are examples used to explain fund structures. Availability through a broker in your country and current product documentation must be checked separately.
Will biotech be the next big market wave?
Biotech has a compelling economic story: better treatments can create substantial social value, and technology can help develop those treatments.
But a compelling sector story does not predict returns.
The decisive questions remain concrete. Does the product work? Is funding sufficient? Can the company make money? And how much of that potential success is already priced in?
Ultimately, the most interesting biotech companies are those that can turn medical promise into demonstrable results and a sustainable business model.
Frequently asked questions about biotech stocks
What are biotech stocks?
They are shares in companies using biological processes or technology to develop medicines, diagnostics or research products, for example. The difference between an early-stage developer and a profitable company can be substantial.
Does AI make biotech less risky?
AI can support certain research tasks. It does not remove uncertainty about effectiveness, safety, funding or commercial use.
Why does positive drug research not guarantee share-price gains?
Share prices reflect expectations. Positive results can fall short of what investors had hoped for. Costs, competition and future revenue also remain important.
Is a biotech ETF risk-free?
No. Diversification can limit the impact of one failed treatment, but a sector fund remains sensitive to developments affecting the entire biotech sector.
This article provides general information and is not personal investment advice.
Sources
- Merck/Moderna: phase 3 study
- FDA: AI in drug development
- FDA: draft guidance on AI
- FDA: drug development
- iShares IBB: prospectus
- State Street: XBI