Trends may be shifting in favor of biotech stocks in 2025 after several years of poor performance, but it would still be wise to place your bets carefully on some of the most innovative names. “We’re still optimistic on the outlook for biotech,” said Stacey Sears, senior vice president and portfolio manager at Emerald Advisors, in an interview with CNBC. “I think the underperformance [makes them] attractive.” The SPDR S & P Biotech ETF (XBI) has risen more than 2% year to date, but is down 9% just since the election as investors question what changes the Trump administration will bring. Investors will gain clarity on the regulatory and policy environment in the months to come, Sears said, but the meantime the current uncertainty is creating an opportunity, especially among the small- and mid-cap stocks she monitors. Waiting for M & A to pick up In recent years, biotech stocks have been held back by a dearth of merger and acquisition activity and high interest rates, which raised companies’ cost of capital and remained volatile even after the Federal Reserve began cutting earlier this year. But innovation has been humming along and the new year is likely to bring a fresh round of drug approvals and launches that could push stocks higher, analysts say. If yields cooperate, “and then we finally start to get a more meaningful uptick in M & A activity, along with continued advancement from a clinical perspective, I think that will bring eyes back to the group,” said Sears. XBI 5Y mountain SPDR S & P Biotech ETF over the past five years Many industry watchers point to a looming “patent cliff” as a driver for future dealmaking. Large pharmaceutical companies will need to replace more than $300 billion in revenue between now and 2028, and they will look to innovative biotechs to fill in the gaps, according to Yuri Khodjamirian, chief investment officer at Tema Funds. “The cliff really picked up this year, but it’s going to get strong over ’25 and ’26,” he said. Terry Smith, Emerald’s director of life sciences research, expects neurology, immunology and inflammation, oncology and metabolic will be the most attractive clinical areas for Big Pharma to target, but doesn’t anticipate a frenzy of speculative stock buying to broadly lift the sector when M & A activity does resume. “That’s why we think an active strategy is really important because you have to pick those out,” Smith said. “You can’t just own the whole index.” Emerald declined to provide specific stock picks for the coming year. Goldman Sachs analysts see AbbVie , Biogen , Johnson & Johnson , Merck and Roche as the most likely acquirers. Merck is best-positioned with “capital, need and positioning,” and a record of recent dealmaking success, while Johnson & Johnson may be able to “pursue a sizeable target,” after a string of smaller deals, the said. Insmed: A pivotal year ahead Insmed is a buy-rated stock on Goldman’s conviction list and the firm’s analysis suggests it could be an attractive acquisition target. Shares are up nearly 125% in 2024, and all of the analysts who cover the rare disease researcher rate it a buy or overweight, according to FactSet. On average, analysts see more than 28% upside from Friday’s close. Next year “is poised to be another year of value creation for INSM via both commercial execution and clinical data catalysts,” Goldman analyst Andrea Newkirk wrote in a research note earlier this month. INSM YTD mountain Insmed shares year to date She explained that the firm’s $5.9 billion peak global sales estimate for brensocatib “likely significantly” underestimates the drug’s true potential. She anticipates it will be approved to treat a chronic lung condition known as bronchiectasis in the middle of next year, but further upside could come from its expanded use for other illnesses. Insmed also has other respiratory assets in its portfolio, which could boost annual peak sales to $8.2 billion, she said. Barclays analyst Leon Wang also likes Insmed, but his focus is on clinical data expected in the second half of next year for treprostinil palmitil inhalation powder, or TPIP , in pulmonary arterial hypertension , or high blood pressure in the lungs. “We are positively biased on this readout and look for superior efficacy compared to standard of care Tyvaso,” Wang wrote in a note to clients in mid-December. “… In all, 2H25 could transform INSM into a multiple commercial product company who is launching pivotal studies in two large indications.” Legend Biotech: Poised for a rebound In the oncology space, several Wall Street analysts are optimistic about the outlook for Legend Biotech . Shares of the CAR-T specialist have fallen 46% year to date, but the average price target, as collected by FactSet, anticipates the stock could soar 147% from Thursday’s close. LEGN YTD mountain Legend Biotech shares year to date “LEGN stock got over punished on what we view as an unfair comparison of clinical data vs. [ Arcellx’ s] anito-cel , as well as lingering concerns on China risk, especially given the new administration to be on board in Jan. 2025, ” Barclays analyst Gena Wang wrote, referring to clinical data that rival Arcellx presented at the American Society of Hematology conference on Dec. 9. “We believe facts speak for themselves, and we expect [Legend’s] Carvykti launch uptick in 2025 with possible ~100% y/y growth for both 2025 and 2026, driven by on-track execution of manufacturing capacity expansion, label expansion to earlier line of multiple myeloma with likely positive CARTITUDE-5 data in 2025, as well as continued outstanding clinical profile with more mature data to set as the industry leader,” Wang said. Piper Sandler has named Legend one of its biotech focus stocks. The investment bank said demand is so great that there is room in the market for both Legend and its partner Johnson & Johnson, and Arcellx, working with its partner Gilead Sciences , to all succeed. ‘Stick to what you can measure’ Legend was also among the names that Morgan Stanley biotech analysts highlighted in their 2025 outlook. “We expect stocks that have a product with an existing market position combined with a label expansion to perform the best in 2025,” the team wrote on Dec. 16. Legend fits this description as well as companies such as Argenx , Beigene , Sarepta Therapeutics and Rhythm Pharmaceuticals , among others. According to Morgan Stanley, their key 2025 theme is to “stick to what you can measure.” Legend is in the easiest bucket of what is measurable, since it has an existing product that has a chance to grow sales. The firm’s next bucket includes stocks such as Insmed and Jazz Pharmaceuticals that have either a recent drug approval or an imminent product launch as a key driver. The final group they compiled was a list of companies that have “material catalysts” that could lead to commercialization beyond next year. This more speculative group includes Rocket Pharmaceuticals , a company developing a treatment for Danon disease, a rare, inherited disorder that usually leads to fatal heart problems. Rocket shares are down nearly 61% year to date, and consensus price targets suggest nearly 285% upside from Friday’s close, per FactSet. Morgan Stanley expects a catalyst for the stock in late 2025 when phase 2 trial data is expected for Rocket’s RP-A501 gene therapy. These are just a sample of the innovations biotech analysts are watching, and why they are hopeful performance in the sector will pick up. “You can only have so many bad years, right?” Tema’s Khodjamirian said. “At some point the valuations start to look very attractive. If you look at the health-care sector in general, it’s trading at about a 23% discount to the S & P 500, which is one of the lowest discounts we’ve seen, certainly in the last 20 years.”