Health Care innovation at an inflection point

The Health Care sector is showing renewed momentum after several years of relative underperformance.¹ The strong market response to the recently released Phase 3 clinical trial results for Moderna and Merck’s personalized mRNA-based cancer therapy provides one example of the sector’s innovation potential along with investors’ willingness to reward meaningful clinical advances.

While the sector’s recent outperformance during market volatility may look characteristically defensive, its longer-term opportunity is increasingly being tied to innovation. From GLP-1s and AI-enabled drug development to precision oncology, cell and gene therapies, and surgical robotics, the next wave of Health Care innovation could broaden growth opportunities, improve patient outcomes, and expand addressable markets—strengthening the sector’s long-term growth profile and the role it can play in equity portfolios.

Against this backdrop, we interviewed Shalabh Gupta and Stephen Kao from State Street’s Equity Research team to discuss the innovation trends they see as most important for today’s Health Care investors, and how these advancements are reshaping the sector’s typical defensive profile through innovation-led growth opportunities.

GLP-1s are becoming a metabolic platform

GLP-1 medicines began as diabetes treatments back in 2005,² and have subsequently matured into their current commercialization for weight loss. The next phase is likely to extend GLP-1s’ reach further to obesity-linked conditions like cardiovascular disease, sleep apnea, kidney disease, joint problems, and progression to type 2 diabetes. Its application path is likely to influence several large healthcare markets at once, but the opportunity is developing along two distinct tracks: a consumer-driven obesity market and a medical market tied to specific obesity-related diseases.

The commercial forecasts are therefore substantial, with global GLP-1 sales projected to reach $190 billion by 2035, more than double the $79 billion in total sales recorded in 2025.³ Penetration rates are also expected to rise, with US adoption increasing from roughly 6% of the obese or diabetic population in 2025 to 30% by 2035, and international adoption rising from roughly 2% to 10%.⁴ Oral products, broader reimbursement, and lower-cost international access will be central to the expansion.

The medical case is also moving beyond weight loss alone. GLP-1-based therapies have already expanded into cardiovascular risk reduction, obstructive sleep apnea, and chronic kidney disease, while ongoing studies in neurological, inflammatory, and other obesity-linked conditions could turn the category into a broader cardiometabolic platform rather than a single-indication market.⁵ Combination approaches may also become important as companies test GLP-1s alongside existing therapies to improve outcomes across a broader range of diseases.

From an investment perspective, large-cap and mega-cap leaders with injectable and oral formulations, manufacturing capacity, broad pipelines, and balance sheets to fund large outcome trials are well placed to defend their positions. But smaller biotechnology companies can still create value through differentiated molecules, improved tolerability, muscle preservation, or combination therapies that larger companies may license or acquire.

For medical device investors, the likely outcome is disruption by degree rather than destruction. Better weight control may delay but not eliminate the need for bariatric surgery, joint replacement, sleep apnea treatment, or some cardiovascular procedures. At the same time, ageing demographics and continued innovation in minimally invasive care are likely to continue to support long-term procedure volumes.

AI’s biggest prize across the health-care value chain

Artificial intelligence (AI) has already been applied in healthcare to perform tasks such as administrative automation which can reduce repetitive work, while AI-assisted imaging can help read scans faster and more accurately highlight abnormalities. Based on a McKinsey study, AI agents could enhance or automate tasks across roughly three-quarters of pharmaceutical and medtech workflows, freeing significant organizational capacity. Over the next three to five years, this could contribute several percentage points of additional revenue growth and EBITDA margin expansion across both industries.⁶

But the bigger prize may be in research & development (R&D), where even modest productivity gains may have an outsized financial impact. Drug development across the sector is currently costly, lengthy, and often failure prone—adding to the development runway and cost.

AI-related tools can support many of the processes from screening compounds and identifying biological targets, to matching patients to trials, and deprioritizing weaker programs sooner. For companies, that can translate into direct financial benefits including lower development costs, improved capital efficiency, better patient screening, and a higher probability of technical and regulatory success, while bringing a medicine to market sooner can also extend its commercial life before patent expiry.

Early evidence suggests that these AI-related benefits are becoming more tangible. For example, IQVIA’s 2026 analysis found a 75% Phase I success rate for AI-enabled programs at emerging biopharmaceutical companies in the latest three-year window versus roughly 40-50% for all Phase I trials.⁷ Other large providers have reported similar results, with Merck indicating that its generative-AI platform reduced the human review time for clinical study reports from 180 to 80 hours and cut documented errors by 50%,⁸ while Pfizer reported a 40% reduction in first-draft time and a 15% reduction in the overall manuscript submission timeline.⁹

The benefits, however, are likely to be uneven across the healthcare value chain, and AI’s growth may even create risks for some companies. For example, early-stage laboratory tools may face some substitution risk as more research moves into computer-based testing or modelling rather than physical laboratory experiments. At the same time, contract research organizations (CROs) could lose selected tasks to insourcing. That said, a larger number of viable drug candidates could also create more clinical trial demand, which could partly offset these pressures by creating additional demand for research tools and outsourced services.

In contrast, downstream activities such as bioprocessing, quality control, drug filling and packaging, and outsourced manufacturing are likely to feel less AI-related impact because medicines will continue needing physical production, testing, and packaging, regardless of whether AI helped design the molecule faster and more efficiently.

Precision oncology is expanding cancer therapies

Precision oncology is transforming cancer care by replacing broad-based treatments with therapies designed around the unique biology of a patient's tumor. Two of the most promising advances are personalized mRNA cancer vaccines and antibody-drug conjugates (ADCs). Personalized mRNA therapies, such as Moderna’s melanoma mRNA vaccine, leverage the genetic profile of an individual's cancer to train the immune system to target residual cancer cells, while ADCs combine the precision of antibodies with the potency of chemotherapy by delivering cancer-killing drugs directly to tumor cells. Together, these technologies illustrate how innovation is making cancer treatment more targeted and improving efficacy while reducing damage to healthy tissue.

Although further clinical and regulatory work will be required, commercial opportunities are emerging for personalized mRNA cancer therapies. Moderna and Merck's positive Phase 3 melanoma results provide one recent example of progress in the field. The approach also is being studied across lung, bladder, and kidney cancers.¹⁰ Success in additional tumor types could broaden the commercial opportunity by allowing the same treatment design and manufacturing platform to support multiple oncology programs, often alongside established immunotherapies.

Meanwhile, ADCs have moved beyond proof of concept to become an established therapeutic class, supporting expanding pipelines, streamlined approvals, and deal activity. Pipeline value rose 40% in 2025 and has compounded at 22% annually over the previous five years,¹¹ while sales are forecast to exceed $57 billion by 2032.¹² Large pharmaceutical interest remains strong, highlighted most recently by Gilead’s 2026 acquisition of ADC developer Tubulis in a transaction valued at ~$5 billion.¹³

Moreover, the ADC opportunity extends beyond any single therapy. ADCs are being studied across tumor types, both on their own and in combination with existing treatments. But with many companies now developing ADCs, efficacy and the quality of clinical data will determine which platforms stand out.

Most of the economic value is likely to accrue to companies that own successful therapies. Diagnostics and screening are important because precision medicine success relies on identifying the right patient. But the larger profit pool is likely to remain with biopharmaceutical companies developing the actual drugs—keeping successful therapies at the center of the precision oncology opportunity.

Cell and gene therapies move closer to cures—but economics must catch up

Cell and gene therapies offer one of healthcare’s clearest paths from chronic disease management toward potential cure. Near-term commercial progress is most credible in diseases caused predominantly by a single genetic defect and where the biological gene target is clear. Hemophilia and spinal muscular atrophy are leading examples. In contrast, treating diseases driven by multiple genes, including many cancers, cardiovascular conditions, and metabolic disorders remains a longer-term ambition.

While the opportunity is significant, commercial adoption will hinge on whether companies can make these therapies scalable, reliable, and economically viable. Cell therapies are especially complex because a personalized treatment may require a patient's cells to be collected, modified, tested, and returned through a tightly controlled “vein-to-vein” process. Automation can reduce labor, improve consistency, increase production success rates, and shorten turnaround times, but the model will remain more expensive than mass-produced medicines.

That manufacturing complexity ultimately drives the economic debate. But high headline prices do not automatically imply poor economic outcomes. A one-time therapy costing more than $1 million can be rational if it replaces costly years of hospitalization, procedures, and long-term medicine therapies. The harder questions include whether the therapy delivers lasting disease control without retreatment, if the right patients can be identified, manufacturing reliability, and who bears the upfront costs.

For investors, the key is distinguishing scientific promise from commercial viability. The strongest investments are therefore likely to combine clear biology, validated clinical benefit, and a credible route to production and reimbursement.

Surgical robotics has a long runway and an ecosystem moat

Surgical robotics is more established than many advanced therapies, but adoption remains early enough to support a long growth runway. The global surgical robot market is estimated to grow from $23 billion in 2025 to $52 billion by 2030, implying a nearly 18% annual growth rate.¹⁴ Robotic procedures account for only ~8% of global surgical volumes today,¹⁵ highlighting meaningful geographic and procedural white space as systems become more affordable, capable, and easier to integrate into hospital workflows.

Cost remains the first adoption barrier. Hospitals must consider the upfront system price, recurring charges for instruments and consumables, training, and operating room requirements. But leasing, usage-based agreements, trade-in programs, and longer lasting instruments can lower the initial hurdle and reduce the cost per procedure, which can serve to expand access to smaller hospitals, ambulatory surgery centers, and international markets.

Price alone, however, is unlikely to determine leadership. Surgeons and hospitals value reliability, instrument quality, imaging, ergonomics, ease of use, and patient outcomes. Switching platforms also means retraining surgeons and adjusting operating room workflows, making clinical performance and ecosystem support as important as cost. The category leader controls over 50% of the market,¹⁶ supported by sustained R&D and close relationships with surgeons and hospitals. New competitors can broaden adoption through more compact systems and lower costs, but they must at minimum match the incumbent's capabilities in order to displace an installed platform.

The next growth phase is likely to come from both penetration and innovation: better imaging, force feedback, more flexible instruments, single-incision systems, less invasive surgical approaches, and expansion into new procedures. For investors, the most attractive platforms are likely to be those with an established and large installed base, recurring instrument use, strong clinical evidence, and deep surgeon familiarity. These advantages are difficult to replicate quickly and should help established leaders continue to benefit as robotic surgery penetration rises.

Health Care: Pairing a defensive sector with growth potential

The last period of sustained Health Care leadership came during 2011 to 2015, when the sector was the best performer in the S&P 500®.¹⁷ That cycle was driven by a powerful biopharmaceutical innovation wave, including breakthrough treatments for hepatitis C, cancer and immune disorders, alongside insurance expansion under the Affordable Care Act that supported health care providers.

But the sector’s next chapter is being redefined by innovation-led growth. The transformation is happening across multiple vectors including GLP-1s, AI, precision oncology, cell and gene therapies, and surgical robotics—helping to expand addressable markets, improve productivity, and reshape treatment pathways. While these opportunities are at different stages of maturity, together they point to a broader trend and innovation cycle happening across the Health Care sector.

The next growth cycle is unlikely to mirror the previous one, but Health Care remains one of the few sectors capable of combining defensive characteristics with innovation-led growth, making it a valuable source of diversification within equity portfolios—and one with a growing innovation tilt that may offer the potential for a more competitive performance profile.

Contributors:

Shalabh Gupta, Vice President
State Street Equity Research

Stephen Kao, Vice President
State Street Equity Research