If you wrote off biotechnology stocks earlier this year, you probably regret it now. The sector is closing out 2025 on an absolute tear, delivering some of the market's most impressive returns after what looked like a pretty grim spring. Tariff worries and political drama had beaten down these stocks, but a wave of dealmaking, regulatory approvals, and clinical trial wins turned everything around. Now everyone wants to know if this momentum can actually carry into 2026, or if we're just watching the tail end of a good run.

The Numbers Tell a Comeback Story

Let's start with the scoreboard. The iShares Biotechnology ETF (IBB) climbed 29.51% year to date through December 29. Not bad, but the State Street SPDR S&P Biotech ETF (XBI) did even better, posting gains around 35.84%. The Nasdaq Biotechnology Index hit 5,766.59, up 34% for the year.

What makes these numbers truly impressive isn't just the magnitude, it's the journey. Back in April, biotech ETFs crashed to their lowest points as pharmaceutical tariff concerns spooked investors. Since then, XBI has rocketed 75% higher from those lows, reaching price levels not seen since 2021. That's not a dead cat bounce. That's real money coming back into the space with conviction.

Late December saw trading volume spike as both institutional money managers and retail investors jumped in. Many smaller biotech companies started the year running on fumes with less than a year of cash in the bank, which made them attractive acquisition targets for larger pharmaceutical companies desperate to fill their pipelines.

Mergers and Acquisitions Dominate the Landscape

If you're looking for what actually drove this rally, follow the deal flow. Six of 2025's ten biggest biopharma acquisitions happened in just the fourth quarter. Johnson & Johnson (JNJ) kicked things off with authority, dropping $14.6 billion on Intra Cellular Therapies Inc. (ITCI). That signaled big pharma was ready to deploy serious capital.

Then things got interesting in the weight loss drug space. Pfizer Inc. (PFE) ended up paying around $10 billion for Metsera in November, more than double the original $4.9 billion asking price after a bidding war erupted. This GLP-1 feeding frenzy represents a meaningful shift away from cancer drugs dominating the M&A landscape.

Novartis AG (NVS) spent $12 billion acquiring Avidity Biosciences Inc. (RNA), while Merck & Co. Inc. (MRK) paid $10 billion for Verona Pharma plc (VRNA). Analysts are predicting 2026 could bring 20 or more billion-dollar deals.

Here's the thing: major pharmaceutical companies are sitting on over $1.5 trillion in acquisition firepower, according to Tema ETFs research. With 190 drug patents expiring by 2030, these giants face a simple choice: buy new products or watch revenues collapse when generic competition floods the market. Most are choosing to buy.

FDA Approvals Keep Rolling

Regulatory wins added fuel to the fire. The FDA approved 44 new therapies in 2025, with 26 of those approvals coming in the second half alone. December delivered some particularly notable wins. Cytokinetics Incorporated (CYTK) got approval for Myqorzo, a heart condition treatment, marking the company's first approval after 27 years in business. Omeros Corporation (OMER) scored approval for Yartemlea, breaking new ground in treating a rare transplant complication.

The FDA has taken a generally supportive stance toward cancer and rare disease treatments, which has helped smooth the approval process. But there's a potential wrinkle: the agency cut staff in April, raising questions about whether review timelines might stretch out in 2026.

Clinical Trial Results Drive Individual Winners

Some individual companies saw explosive stock gains tied directly to trial results. Structure Therapeutics Inc. (GPCR) more than doubled after its obesity drug showed patients losing over 15% of their weight in trials. Ionis Pharmaceuticals Inc. (IONS) jumped 120.5% as its pipeline advanced, while Monopar Therapeutics Inc. (MNPR) soared 185.9% on enthusiasm for its Wilson disease treatment.

The 2026 calendar is loaded with potential catalysts. EyePoint Pharmaceuticals Inc. (EYPT) will report results from two major studies on treating vision loss in mid-2026. Eli Lilly and Company (LLY) is expected to win approval for its oral GLP-1 pill orforglipron, which delivered strong results in Phase III trials for diabetes and obesity.

Valuations Still Look Reasonable

Even after this massive rally, biotech remains relatively cheap compared to the broader market. The MSCI USA Pharmaceuticals, Biotechnology and Life Sciences Index trades at 15.92 times forward earnings compared to 23.25 times for the overall MSCI USA index as of September. That 15% discount suggests there's room for further upside if the fundamentals keep improving.

Portfolio managers see multiple favorable trends converging in 2026. Valuations remain attractive, cancer drug development continues accelerating, and policy winds appear reasonably favorable. Key therapeutic areas getting attention include heart and metabolic diseases, neurological disorders, cancer treatments, and immune system drugs. Oral GLP-1 medications will be a major focus as companies race to develop pills that can replace injections.

Artificial intelligence is also reshaping drug discovery, helping companies predict which treatments will succeed and compressing development timelines. This technology advantage is making acquisitions more strategic and efficient.

The Risks Worth Watching

Of course, not everything points up and to the right. Political uncertainty lingers, especially around drug pricing policies and regulatory changes. While some companies negotiated pricing deals to avoid tariffs, nobody knows whether those arrangements will hold up long term.

Interest rates matter too. The Federal Reserve started cutting rates in September 2025, but expectations for additional cuts have cooled. Smaller biotech firms that burn through cash and need outside funding would benefit from lower rates, though the sector has shown it can perform well regardless of the rate environment.

What It All Means

Biotech's year-end surge isn't built on hype or momentum trading. Real fundamental catalysts are driving these gains: companies are getting acquired at premium prices, drugs are clearing regulatory hurdles, and clinical trials are delivering positive results. As 2026 approaches, the setup looks promising with major trial readouts scheduled, more dealmaking expected, and AI accelerating the drug development process.

The sector bounced 75% from April lows and still trades at a 15% discount to the broader market despite strong growth prospects. Whether this party continues depends on companies executing their clinical programs, acquirers maintaining discipline with their capital deployment, and regulators keeping the approval process moving smoothly.

For investors comfortable with biotech's inherent volatility, the risk-reward equation heading into 2026 looks increasingly attractive. The fundamentals supporting this rally appear solid, the pipeline of catalysts is robust, and valuations haven't gotten ahead of themselves. That's a reasonably compelling setup, assuming you can stomach the inevitable bumps along the way.