Healthcare lagged the S&P by 50%. The picks-and-shovels crowd is back.

The wreckage

Across the two years leading up to the end of 2024, healthcare stocks lagged the S&P 500 by approximately 50 percent, according to Baillie Gifford's research. That is the hole the sector has been climbing out of. m:…7587

The damage had three drivers. Sharp interest-rate increases tightened capital availability and funding for biotech ventures. Uncertainty around regulation, drug pricing reforms and research budgets dented investor sentiment. And post-pandemic dislocations hit the profits of businesses that aided the fight against Covid-19 — vaccine producers, diagnostic test makers and bioprocessing suppliers. m:…7587

Why the toolmakers

Baillie Gifford's answer is the picks-and-shovels trade: own the companies that sell into R&D spending rather than the ones taking scientific risk. Medpace, the research argues, is leveraging the sector's increasing R&D spend without bearing direct scientific risk. Thermo Fisher Scientific, which the company says spends more than $1bn annually on research and development, is the category's anchor tenant. m:…7587

Illumina gets the same treatment: Baillie Gifford calls it a "genomic powerhouse" with a strong competitive edge from its dominant installed base and broad technological capabilities. The backdrop helps: GLP-1 medicines for diabetes and obesity already represent a global market exceeding $50 billion. m:…7587

The ownership filter

A second Baillie Gifford note adds the ownership filter. When business leaders have skin in the game through significant ownership stakes, they are more likely to make decisions with persistence and long-term vision; inside-owned businesses tend to be more innovative, file more patents and spend more on research and development, while family-run firms prioritize resilience, reinvestment and cultural preservation over short-term thinking. m:…2558

The examples are healthcare-adjacent and instructive. The philanthropic Novo Nordisk Foundation is the controlling shareholder of the drugmaker Novo Nordisk; the William Demant Foundation is the majority shareholder of Demant, the hearing-health company. Other examples in the note: Adrian Gore retains a 7 per cent direct holding in Discovery, Technoprobe remains majority-owned by the Crippa family, and Investor AB is the largest shareholder of Atlas Copco. The counter-cyclical playbook comes from outside healthcare: Ryanair chief executive Michael O'Leary — who holds a 4 per cent stake in Ryanair — ordered 75 new Boeing aircraft in December 2020, when 90 out of 96 European airlines made under €1 profit per seat in 2019. m:…2558

This suggests a loop: ownership structures that let managers think in decades produce the R&D budgets the toolmakers feed on. Baillie Gifford practices the doctrine itself — the firm notes it intervened to thwart an attempted takeover of Scout24 in 2019. m:…2558

The rotation arrived

Then the market moved. DBS reports that energy, healthcare, and financials rallied in the third quarter of 2026, as market leadership broadened meaningfully beyond technology. For a sector that lagged the S&P 500 by approximately 50 percent in the two years to the end of 2024, that is the rotation Baillie Gifford's research argued the toolmakers were set up to capture. m:…8979 m:…7587

The honest caveat, from Baillie Gifford's own note: the exact timing of a full sector rebound remains uncertain, and the uncertainty around regulation, drug pricing and research budgets has not gone away. The picks-and-shovels case is a positioning argument, not a prediction — and the risk is the cycle itself, since sharp rate increases already tightened biotech funding once. m:…7587