Healthcare: Policy Headwinds Continue to Weigh on the Sector, but Valuations Remain Attractive

Over the first half of 2025, the Morningstar Healthcare Index has underperformed the Morningstar US Index, losing 4.67% over the trailing 12 months versus the US Index’s 15.09% return. After a brief rebound early this year, the sector lost momentum in the second quarter due to rising uncertainty around the potential effects of US policy on growth rates for biopharma, healthcare plans, and medical technology firms. Broader concerns around elevated care utilization and regulatory headwinds for US-centric firms further weighed on sentiment. We see the potential for healthcare to close the performance gap in the coming months, driven by its defensive profile and improving clarity on policy risks.

Healthcare Lagged the Broader US Market in the Year to Date

The sector looks relatively undervalued overall, with a median price roughly 10% below our fair value estimate. Medical distribution stands out as the only overvalued industry, while healthcare plans and biopharma appear to be the most undervalued.

Apart from Distribution, Most Healthcare Industries Look Undervalued

Volatility has increased following the election of Donald Trump as president and Robert F. Kennedy Jr.’s appointment to lead the Department of Health and Human Services. While we have not made significant valuation changes across the healthcare industries, we see high uncertainty surrounding many stocks, particularly in biopharma and healthcare plans. Within the obesity market, Novo Nordisk trades at a discount to its fair value estimate, as we still see strong competitive advantages despite Eli Lilly’s growing market share.

Medical Insurance Concentration, Sorted by Employer Plan Concentration

Two major policy developments are in focus this quarter. First, Congress is looking to reduce federal healthcare spending, primarily through cuts to Medicaid and subsidies on the individual exchanges. Such changes could pressure Medicaid and individual plan enrollment, and Centene appears most exposed. Second, the CDC’s restructuring of its vaccine advisory panel has raised questions about the future of public health guidance. We still expect moderate vaccine growth, supported by demand across core immunization categories.

Global Vaccine Sales Outlook Through 2034 ($M)

Top Healthcare Sector Picks

Baxter International

• Fair Value Estimate: $55.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

Demand is improving in most of Baxter’s BAX medical supply businesses because of rising medical utilization and new product introductions like the Novum IQ pump platform. We think investors have been overly focused on near-term risks for Baxter, such as recent leadership changes and tariff uncertainty, while overlooking the company’s improving fundamentals. With inflation-related pressures easing and favorable GPO contracts set to support pricing in 2025, we see a clear path to margin expansion. We expect near-term profit growth to be strong, stabilizing to high-single to low-double-digit rates in the long term.

Moderna

• Fair Value Estimate: $85.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

We think Moderna MRNA investors were overly enthusiastic about the potential of the company’s mRNA technology during the pandemic, but that they have subsequently been too bearish on its post-pandemic growth. While we have modest expectations for sales of the firm’s covid-19 vaccine following massive pandemic-fueled demand in 2021 and 2022, we think Moderna’s pipeline of mRNA-based vaccines and treatments is advancing rapidly across multiple therapeutic areas. We’re confident in the long-term sales trajectory of the firm’s diversified pipeline, despite a competitive RSV vaccine market and policy headwinds clouding near-term prospects.

IQVIA Holdings

• Fair Value Estimate: $268.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

IQVIA’s IQV shares have been negatively affected by macroeconomic concerns and slowing biotech funding levels. However, we view these issues as near-term headwinds, and IQVIA remains a global leader in providing clinical trial services and healthcare analytics. The firm’s backlog has continued to expand despite macroeconomic pressures, demonstrating its strength and resilience in booking new business. Further, the company’s extensive and proprietary data analytics capabilities, along with its continued reinvestment in new technology (including artificial intelligence) should support durable long-term growth.