Global Healthcare Investment Impact of the Middle East Conflict

• The Pre-Conflict Backdrop — A Sector in Recovery

Before the conflict escalated, global healthcare investing was on an improving trajectory. Biotech had begun to emerge from a two-year slump in April 2025, entering a near-historic run. Drug launches were strong, investor sentiment was favorable, capital inflows were spiking, and falling interest rates were particularly supportive for unprofitable smaller-cap biotechs.

Healthcare private equity deal activity, which had shown an uneven rebound through 2025, was expected to become more consistent in 2026, as lower interest rates, abundant dry powder, and LP demand for liquidity began to unlock a backlog of delayed transactions from the 2018–22 cycle.

The conflict has now become a serious headwind to that recovering momentum:

1.Cost Inflation Squeezing Healthcare Margins Globally

Global medical health benefit costs were already projected to increase by 10.3% in 2026, following rises of 10% in 2025 and 9.5% in 2024. In the Middle East specifically, healthcare costs are expected to rise by 11.3%, and the conflict is now amplifying these pressures further.

Hospitals are facing rising labor costs, changes to reimbursement rates, Medicaid budget cuts, and growing inflation and supply chain costs — all of which compound with the conflict-driven energy and logistics shock. Operating expense inflation ran at 11% in 2025, and the 2.5% Medicare boost planned for 2026 is largely neutralized by sequestration and other cuts.

2. Private Equity: Healthcare Insulated but Transaction Machinery Strained

At the portfolio company level, healthcare is largely insulated from direct conflict damage. However, the transaction machinery that monetizes assets faces serious stress — as rates and volatility rise, M&A multiples compress, and risk appetite shrinks. The base case of +12% PE returns in 2026 flips to -12% in the downside scenario, as exit windows close, hold periods extend, and marks come under pressure, creating real J-curve stress for investors managing liquidity commitments.

Despite the constructive pre-conflict macro backdrop, persistent valuation dislocation from the 2020/21 cycle and policy uncertainty around drug pricing, reimbursement, and digital health regulation may further constrain mid-market deal flow.

3. Biotech and Pharma Services: Disrupted But Not Derailed

Healthcare IT remains active, and pharma services were expected to rebound as clinical trial activity picked up. MedTech continues to be a strong area, and biotech funding was described as "alive again" — though the conflict now introduces a meaningful new risk layer to that narrative.

High interest rates, inflation, global economic slowdown, and ongoing international conflicts had already contributed to a more than 50% decrease in early-stage medical device investment over two decades, and a significant drop in small to mid-cap VC funds in recent years. The Middle East conflict compounds these structural pressures.

The clinical trials disruption is particularly significant for biotech valuations globally: all 10 of the largest global drug firms have clinical trial operations in the region, with some having as many as 500 sites. With more than 4,300 active trials exposed — including many Phase III studies that underpin regulatory submissions — there is real risk that disruption will delay data readouts and approvals beyond the region, affecting global drug timelines and investor return horizons.

4. AI and Digital Health: The Bright Spot

Despite the turbulence, AI-driven healthcare investment remains a powerful countercurrent.

AI startups continue to see disproportionate VC investment globally, with growing demand for agentic AI platforms and AI agents that address real-world problems, reduce physician burnout, and deliver measurable ROI. Pragmatism is beginning to outweigh pure FOMO — investors now want evidence of genuine clinical and operational value.

AI is playing a crucial role across diagnostics, revenue cycle management, pharma services, and MedTech — compressing labor costs, changing how workflows scale, and eroding moats built on manual processes. For investors, the question is no longer who "uses" AI, but whose model becomes more effective and more defensible when AI is embedded at scale.

5. Supply Chain Reshoring: Accelerating Long-Term Investment Shift

The uncertainty is accelerating discussions around reshoring and nearshoring pharmaceutical manufacturing. In the US, renewed investments in domestic production capacity and incentives to diversify supply sources have gained urgency — a structural capital reallocation that will reshape where life sciences investment flows over the coming years