Biotech stocks have been quietly building a strong rally over the past year, outpacing technology companies.

Two key benchmarks—the NYSE Arca Biotechnology Index and Nasdaq Biotechnology Index—returned more than 56% in the last 12 months (as of July 7), topping the Nasdaq 100's 29% upswing in that period.

Buoyed by biotech innovation, the surging obesity market, and a spike in dealmaking, the industry is in a good position to keep the rally going, say Asad Haider and Salveen Richter of Goldman Sachs Research.

"Many large-cap biopharma companies have handily outperformed leading tech names this year," says Haider, head of US healthcare and pharmaceuticals. "One thing I think investors should appreciate is the product cycle momentum in healthcare. Innovation is going to get rewarded."

Richter, head of US healthcare and biotechnology, says key data in areas such as cardiovascular disease, cancer, and Alzheimer's disease are set to be released from the second half of the year onward. "The fundamentals of biotech are extremely strong," says Richter.

Industry executives unpacked those fundamentals at Goldman Sachs' 47^th Annual Global Healthcare Conference, which took place in Miami in June. While the tone at last year's gathering was guarded as attendees took in US trade policy adjustments, this time around the mood was quite bullish, say Richter and Haider.

What is the outlook for M&A in healthcare stocks?

"There is an appetite for M&A, and the large-cap biopharma companies leaned into this notion of wanting to do more deals," Haider says. "That's a show of confidence."

Richter says small- and mid-cap biotechnology stocks stand to benefit from increased dealmaking. "Large biopharma firms are constantly searching for innovation to fill their pipelines," she says. "And they also have to address losses of exclusivity playing out in their portfolio."

Across healthcare, promising areas for potential M&A include oncology, immunology, neuroscience, and cardiometabolic health given the focus on obesity, says Richter.

What is the forecast for sales of obesity drugs?

This year, a new generation of oral obesity drugs is poised to accelerate one of the fastest-growing businesses in healthcare. Up until now, obesity medications have been largely administered by injection.

Rather than cannibalizing injectable offerings, weight loss pills will expand the marketplace, says Haider. Goldman Sachs Research recently increased its 2030 forecast for global sales of obesity drugs by 15%, to $114 billion, with oral medications expected to comprise 40% of the worldwide market.

What's striking about the evolution of the obesity marketplace is that it's driven by consumers as well as medical patients, the analysts say. "It is behaving like no other pharmaceutical market we have ever seen," says Haider.

At one end of the spectrum, there are severely obese patients who need bariatric surgery and regular injections of medical weight loss drugs. Those medications tend to be the most expensive.

At the other end, there are consumers who may desire 5% weight loss or even a microdosing regimen. Those uses are well-suited for obesity pills, which are not only easier to administer, but also tend to be more affordable.

"Patients are going to opt for what appeals to them most in this consumer market," Richter says. "That means patients will take a weekly oral or even go the monthly to quarterly injectable route in the context of actual weight loss and tolerability dynamics."

Serving all these segments of the marketplace will be an opportunity for a number of drugmakers, she adds.

More sources of demand are also coming online, according to Goldman Sachs Research. As of July 1, patients eligible for Medicare, the US federal health insurance program, have been able to apply for coverage of obesity drugs in both oral and injectable forms. While adoption is likely to be gradual as patients undergo authorization protocols, Medicare coverage is expected to unlock more growth, says Haider.

So, too, is the take-up of obesity drugs outside the US. Goldman Sachs Research recently increased its estimate for overseas sales by 4 percentage points to 42% of the global market. "We believe the size of the weight-loss market outside the US has been underestimated," says Haider.

How China and AI are changing the pharmaceutical sector

Another top theme with healthcare investors is how China is structurally transforming the healthcare industry to operate at lower cost and with higher productivity. China has become an important source of innovation and a sought-after venue for clinical trials. The Chinese biopharma industry, for instance, is an emerging producer of leading cancer therapies.

Likewise, Haider and Richter say AI promises to cause fundamental changes to healthcare. They say one CEO at the conference shared how AI applications are already enabling significant cost reductions and contributing to earnings performance.

Stepping back and sizing up all this activity, the analysts say the outlook is quite positive, especially given the prevalence of macroeconomic and policy challenges at last year's conference.

"This year, we asked all our companies, 'Are there any banana peels in the external environment that you are keeping your eyes out for and that investors should be aware of?'"

Haider says. "Their answers were constructive. And there is a tremendous amount of M&A balance sheet capacity out there among the large-cap biopharma companies."

"M&A needs to happen in this space, and it will happen in this space," Richter adds.

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