Biotech stocks are surging. How investors can play the new drug innovation boom

Moderna gave investors a scare as its stock plunged on Thursday. But it’s still one of the hottest biotechs this year. And it’s hardly alone – the sector is on a roll and looks poised for more gains.

The iShares Biotechnology ETF (IBB) is up 24% through October 23, building on a 28% gain in 2025. Two dozen of the ETF’s 233 holdings have more than doubled year-to-date. Moderna leads the pack with a 587% surge — even after an 18% decline following a leak of clinical data for its cancer vaccine (which was actually positive).

Analysts say a new biotech cycle is underway, fueled by clinical trial results, M&A activity, and promising technologies such as genomics, mRNA — and AI.

“We’re in the midst of a powerful innovation cycle,” said John Hall, portfolio manager of the T. Rowe Price Biotechnology ETF. “What’s super exciting is we’re seeing newer modalities start to make it to market.” Companies “understand the disease biology better,” he adds, and that could ultimately lead to more novel drugs making it to market.

Investors are excited about technologies like mRNA and genomics, along with a steady stream of new drug approvals. The FDA approved about a dozen novel biologic drugs in 2025, out of 46 approvals in total. Roughly 66 novel drugs are in the pipeline for FDA approval, including potential blockbusters like Moderna and Merck‘s cancer drug for melanoma, and a next-generation obesity drug from Eli Lilly.

Analysts say AI could also lead to more approvals as companies deploy the software to speed up drug development.

“Biotech is a phenomenal application for artificial intelligence and machine learning,” says Piper Sandler analyst Ted Tenthoff. “You can set up exciting predictive models that, frankly, can do things that we’ve never been able to do in the space in terms of novel drug discovery.”

Granted, the industry is recovering from a fallow period. The sector’s last strong performance was during the Covid era when ultra-low interest rates encouraged investment in early-stage drug developers, and mRNA vaccines fueled a revenue surge for companies like Moderna, Pfizer and Biontech.

The sector then went cold as many early-stage companies fizzled. Demand for Covid vaccines evaporated, and surging interest rates put a chill in IPOs and M&A.

The risks haven’t evaporated – this is still a sector whose products take years to develop, resulting in far more failures than successes. But analysts say the outlook is healthier now. While that’s reflected in strong performance and richer valuations, there’s still good reason to invest.

Recent clinical trial results are stoking excitement that novel drugs in the works could tackle some of the toughest problems in medicine.

Moderna and Merck’s melanoma drug, for instance, uses mRNA to trigger an immune response in patients, targeting tumors that have been surgically removed and genetically analyzed. It’s not a preventive vaccine, but it uses a similar immunology mechanism and showed a 42% reduction in cancer recurrence or death (used in conjunction with Merck’s cancer drug Keytruda).

While the Phase 3 results disappointed Wall Street, oncologists say the outcomes were still highly positive. And they see the technology as a potential game changer, ushering in an era of personalized treatments for cancers. Moderna and Merck have said they aim to submit the drug for FDA approval and get it launched in 2027.

Inflammation treatment is another promising area. AstraZeneca and Amgen recently released positive Phase 3 results for another use for their drug Tezspire, an injectable approved for nasal polyps and asthma. In clinical trials, it showed that it successfully relieved swallowing symptoms and healed microscopic and visual tissue damage in patients with severe throat inflammation.

Roche, meanwhile, notched a win after the FDA approved its drug Enspryng, a therapy to treat rare inflammatory and autoimmune diseases. It became the first and only at-home injection for adults with thyroid eye disease.

Obesity drugs are also advancing beyond the first generation of GLP-1s. Eli Lilly’s retatrutide, a “triple agonist” targeting three different hormone receptors, cleared two more clinical trials over the summer. The drug produced 28%-30% weight loss at the highest doses in the study, Lilly said. The company plans to submit the drug for FDA approval in the first quarter of 2027.

Much of the innovation isn’t just happening in drug-making – it’s also in areas like gene sequencing, mRNA, and high-tech instruments.

Illumina has more than doubled this year. The DNA and gene sequencing company is seeing accelerating demand for its NovaSeq X high-end sequencing platform. Pharmaceutical companies including Bristol-Myers Squibb, Merck and Kura are working with Illumina to develop precision oncology solutions.

Another big winner is 10x Genomics, up more than 300%. The biotech firm offers its lab instruments to help scientists research cancer, immunology and neuroscience. The company’s Atera platform is helping produce data sets to train AI models, a process that helps accelerate personalized therapies.

On the AI front, companies are using the technology for more efficient drug discovery, says ShreefÄl Mehta, president of Guidant BioTherapeutics. Using AI, “you can now bring a drug to clinical trials with less capital. More investment is also going into companies that are demonstrating that,” he said.

Global AI in drug discovery will grow from a $20 billion market in 2025 to more than $160 billion by 2035, according to forecasts by Towards Health, a research and consulting firm.

One other catalyst for the sector could be M&A. Dealmaking for biopharma hit $134 billion in the first half of 2026, up from $112 billion for all of 2025, notes Jeet Mukherjee, biotech analyst at BTIG. That’s a positive signal, indicating more drugs in development are showing clinical promise.

It also helps that Big Pharma has a “patent cliff” ahead. Products representing $180 billion of revenue will lose exclusivity by 2030, according to research firm RTW Institute. Companies with looming expiries “are looking for novel products and innovative products to put into their pipeline,” Mehta says.

GLP-1 blockbusters have also left some companies flush with cash for acquisitions. Eli Lilly alone has completed 10 acquisition deals in 2026 worth $25 billion.

Where to invest in biotech now

ETFs can capture the investing theme, though they aren’t all alike. The iShares Biotech ETF is one of the lower cost funds. It tracks a market-cap weighted index of biotech stocks, led by companies like Gilead Sciences, Amgen, Vertex Pharmaceuticals, and Moderna.

The State Street SPDR S&P Biotech ETF holds stocks in equal weight, offering more exposure to small- and mid-cap names. Its top holdings are Moderna, Natera, Twist Bioscience and Halozyme Therapeutics.

Piper Sandler calls Illumina and 10x Genomics the “primary infrastructure plays” in the life science arena, saying their technologies are “driving the next generation of precision medicine.”

Piper analyst David Westenberg has a buy rating and $305 target on Illumina, implying 14% gains from recent prices around $267. He has a hold rating on 10X with an $80 target, above recent prices around $70.

Twist Bioscience is another name to consider. The company makes customized synthetic DNA and sells DNA sequencing tools. Twist has partnered with Eli Lilly’s AI and machine-learning platform and linked up with Anthropic in August to start testing its AI model, Claude, for protein development.

Twist isn’t expected to turn an EPS profit until 2029, according to consensus forecasts. But revenue is expected to go from $572 million in 2027 to $833 million in 2029. Analysts have an average target of $168 on the stock, implying 21% returns from recent prices around $138.

In the small-cap space, Piper Sandler’s Tenthoff likes Monte Rosa Therapeutics, a pioneer in protein degradation that selectively destroys disease-causing proteins.

The firm has partnered with Novartis to develop a drug for inflammatory conditions and autoimmune diseases. The companies announced a Phase 2 clinical study in September for an autoimmune disease treatment, which has been “triggering milestones to Monte Rosa,” Tenthoff said.

Tenthoff has a buy rating and $37 target on the stock, which recently traded around $10.70.

Also in the small-cap arena, BTIG’s Mukherjee recommends Faeth Therapeutics.

The biotech is developing a novel two-drug regimen to treat breast cancer and other tumors. The regimen “has the potential to address safety and dosing limitations of another recently approved drug for breast cancer,” he says. And it could become “a mainstay of the future breast cancer treatment paradigm and other cancers.”

Faeth is a clinical-stage company that has yet to bring a drug to market. Yet the stock is up 93% year-to-date on positive clinical trial results, trading around $18. Mukherjee has a $55 target on it.

Kymera Therapeutics is worth considering too. The company is developing an oral version of the blockbuster drug Dupixent (made and co-developed by Regeneron Pharmaceuticals and Sanofi). Dupixent is an injectable, however, and oral agents “are frequently preferred by patients,” Mukherjee says. “The drug has the potential to not only take share from patients taking Dupixent for numerous immunological diseases but also expanding the market to those not taking systemic biologic drugs,” he tells CNBC.

Kymera has said it doesn’t expect a patent fight over Dupixent because its drug is distinct, not a biosimilar or biologic copy.

T. Rowe’s Hall also likes Kymera for its potential “to unlock disease targets that have been classically considered un-druggable.” The stock is the second largest holding in T. Rowe’s Biotech ETF, accounting for 4.2% of the portfolio.