So far in 2024, healthcare stocks continue to run slightly behind the broader market: The Morningstar US Healthcare Index has returned about 8.55% this year, versus 9.72% for the broad-based Morningstar US Market Index as of Aug. 7. However, healthcare stocks have significantly outperformed the market during the past month on investor fears about a recession. Healthcare stocks are considered defensive, which suggests they could hold up better than some other sectors during an economic slowdown.
Morningstar director Damien Conover finds solidity in the healthcare sector. “Despite other sectors having more dependency on stable or growing economies, the healthcare sector tends to perform well independently of the market cycles, providing more consistent sales and earnings growth,” he explains. “In the past global recession in 2009, the global biopharma group largely posted steady sales and earnings growth.”
Is Healthcare a Good Sector to Invest in Now?
Most larger healthcare firms maintain economic moats; demand for health-related products and services continues to rise as populations age; and healthcare companies tend to have high research and development spending, which can generate major improvements in treatment options.
The 10 Best Undervalued Healthcare Stocks to Buy Now
The healthcare stocks below all earn Morningstar Economic Moat Ratings of narrow or wide, and they are trading below our fair value estimates as of Aug. 7, 2024.
- Bayer BAYRY
- Royalty Pharma RPRX
- Baxter International BAX
- Fresenius Medical Care FMS
- Illumina ILMN
- Zimmer Biomet Holdings ZBH
- CVS Health CVS
- AMN Healthcare Services AMN
- Biogen BIIB
- Ionis Pharmaceuticals IONS
Bayer
- Morningstar Price/Fair Value: 0.38
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: Narrow
- Forward Dividend Yield: 0.42%
- Industry: Drug Manufacturers—General
German healthcare and agriculture conglomerate Bayer tops our list of the best healthcare stocks to buy now. Despite the heavy debt added by the Monsanto acquisition, we believe Bayer holds a sound balance sheet with low levels of risk. Shares are trading at a 62% discount relative to our $18.50 fair value estimate.
Largely on the basis of the strong competitive advantages of the healthcare group and to a lesser extent the crop science business, we believe Bayer has created a narrow economic moat. Bayer is evaluating the divestitures of the crop science and consumer healthcare businesses, which appear to hold few synergies with the prescription drug business.
In the healthcare division, Bayer’s strong lineup of recently launched drugs and solid exposure to biologics should support steady long-term cash flows. Bayer’s hemophilia franchise and key ophthalmology drug Eylea are biologics. While competition is increasing in hemophilia and in eyecare, the manufacturing complexity of these drugs helps to deter generic pressure. Also, new formulations of Eylea and hemophilia drugs hold the potential to keep competition at bay. Further, strong demand for cardiovascular drug Xarelto should continue to drive growth, but the drug’s key 2026 patent loss will likely create growth headwinds.
Bayer's healthcare segment also includes a consumer healthcare business with leading brands Aspirin and Aleve. Brand recognition is key in this unit, as evidenced by the company's iconic Aspirin, which continues to post strong sales even after decades of generic competition.
In addition to healthcare, Bayer runs a leading crop science segment, which includes crop protection products (pesticides, herbicides, fungicides) and the fast-growing plant and seed biotechnology business. Similar to the drug business, this segment is research and development intensive, and Bayer has developed a strong portfolio of products. The downside to this business is that demand is heavily dictated by weather and commodity prices, which will determine how much farmers can afford to spend on crop treatment. The acquisition of Monsanto has significantly expanded Bayer’s competitive position in this industry. On the negative side, the acquisition increased Bayer’s exposure to litigation around potential side effects from glyphosate use. While many studies have shown glyphosate use to be safe, some reports of linkage to cancer drove large class-action legal cases against Bayer and led to a legal settlement of over $15 billion.
Read more about Bayer stock.
Royalty Pharma
- Morningstar Price/Fair Value: 0.52
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Narrow
- Forward Dividend Yield: 2.97%
- Industry: Biotechnology
Royalty Pharma is the first biotechnology firm on our list of affordable healthcare stocks. It earns a narrow moat rating thanks to its high-quality investment portfolio that consists of royalties on approved biopharma products across different therapeutic areas. This affordable healthcare stock trades at a 48% discount to our fair value estimate of $52.00.
Royalty Pharma is the largest buyer of biopharmaceutical royalties and a leading funder of innovation across the biopharmaceutical industry. The company makes lump-sum payments in exchange for future cash flows linked to those products’ sales revenue, which differentiates it from other biotech companies that are exposed to high R&D and/or manufacturing costs. Its uniqueness also lies in the diversity of royalties across different therapeutic areas. This stands in contrast to a typical biotech firm’s focus on developing specialized therapies targeting certain diseases.
Royalties play an important role in the commercialization process of cutting-edge therapies. Royalties are usually created as a form of payment when a large biopharma company takes over research insights from smaller biotech firms or research institutions for further marketing and development through licensing agreements. In this process, royalty recipients often face the issue where multiple small future royalty streams cannot fulfill ongoing large lump-sum R&D funding needs. The mismatch is where Royalty Pharma captures its market opportunity.
The increasing demand for capital across the global biopharma industry has been propelling Royalty Pharma’s growth in recent years. The total dollar value of all royalty transactions in 2022 was 10 times the volume in 2015. Royalty financing shows its advantage as a nondilutive funding method that satisfies instant funding needs despite the conditions of debt and equity markets. As a leading royalty acquirer, we think Royalty Pharma is in a great position to capture market tailwinds.
With the average development cost for a newly approved drug surpassing $1.4 billion in 2022, we find Royalty Pharma’s capability of executing large deals appealing. Royalty Pharma has a dominant market position for transactions sized over $500 million. The company’s extensive experience in structuring flexible deals with installment and milestone payments makes it a preferred choice for many royalty sellers.
Read more about Royalty Pharma stock.
Baxter International
- Morningstar Price/Fair Value: 0.55
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: Narrow
- Forward Dividend Yield: 3.21%
- Industry: Medical Instruments & Supplies
Our analyst sees possibilities ahead for Baxter International as it explores emerging markets and renews existing contracts. Given improving top-line prospects and easing input cost pressures, we suspect margins can expand from recent lows. This affordable healthcare stock trades at a 45% discount to our fair value estimate of $67.00.
Although the 2015 Baxalta spinoff was successful, Baxter’s financial results fell substantially in 2022-23 on external pressures, such as inflation and weak medical utilization trends. We see these external pressures easing. Also, we suspect Baxter’s financial prospects will improve, especially in 2025 and beyond, as hospitals renegotiate their reimbursem*nt deals with third-party payers, and as Baxter renegotiates significant contracts, a key group purchasing organization among them.
From a business strategy perspective, Baxter is currently focused on spinning off its kidney care division and improving the profit growth of its other businesses. In kidney care, Baxter’s renal and acute care technology supports patients with failing kidneys. Baxter generates most of its kidney care revenue from at-home patients using its peritoneal dialysis tools, but it also sells hemodialysis products to dialysis clinics and continuous renal replacement therapy and other organ support equipment to intensive care units. Concerns about long-term demand for dialysis, given the halting of a related obesity drug trial, have created uncertainty around the kidney care segment’s expected spinoff by mid-2024. However, we suspect the intermediate-term outlook for dialysis demand has not changed much given the potential benefits of those drugs on surviving renal patients.
The balance of Baxter’s business is focused on providing basic medical supplies and equipment to caregivers such as hospitals, which have been under pressure in recent years owing to a mismatch in labor cost hikes and reimbursem*nt rates with third-party payers that are in the process of being renegotiated. Through the 2021 Hillrom acquisition, Baxter provides beds, patient-monitoring devices, and other digital tools. These Hillrom tools, along with Baxter’s own infusion pumps, have been negatively affected by inflationary pressures on input costs that have severely depressed margins, which remain a key area for Baxter to improve. Baxter also sells many injectable therapies, such as IV solutions, generic pharmaceuticals, and surgical tools to control bleeding.
Read more about Baxter International stock.
Fresenius Medical Care
- Morningstar Price/Fair Value: 0.58
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: Narrow
- Forward Dividend Yield: 3.15%
- Industry: Medical Care Facilities
Next on our list of best healthcare stocks to buy now, Fresenius Medical Care is 42% undervalued relative to our $32.00 fair value estimate. As the world’s largest dialysis company, this cheap healthcare stock earns a narrow moat rating based on its intangible assets and scale-related cost advantages primarily from its services business.
Fresenius Medical Care treats end-stage renal disease patients through its dialysis clinic network, medical technology, and care coordination activities. Its strengths in these related areas help Fresenius maintain the leading global position in this market. Even with the threat of obesity drug expansion in the long run, we expect the company to benefit from decent demand in developed markets, such as the US, and even faster expansion in emerging markets, such as China, in the long run. With global ESRD patient growth expected to remain in the low- to mid-single digits in the long run, we expect top-line growth for Fresenius to grow at a similar pace during the next five years.
The company's position as the top dialysis service provider and equipment maker in the world remains symbiotic and unique. Fresenius' experience operating roughly 3,750 dialysis clinics around the globe, which is higher than nearest competitor DaVita because of Fresenius' more expansive global network, gives it insights into caregiver and patient needs to inform service offerings and product innovation. Fresenius uses clinical observations to develop and then manufacture even better technology to treat ESRD patients. It outfits all its clinics with its own brand of equipment and consumables, which has margin implications related to system costs and operating efficiency for staff. However, other dialysis clinics appreciate Fresenius' technology as well, and Fresenius claims about 35% market share in dialysis equipment/consumables while serving only about 8% of ESRD patients through its global clinics. Especially telling, main rival DaVita remains one of Fresenius' top product customers.
With growing clinical and payer support for at-home treatments, Fresenius is taking aim at those ESRD therapies with significant investments, too. It acquired NxStage Medical in 2019 for home hemodialysis, which appears differentiated in the industry for its ease of use and physical size. The company also aims to improve on its peritoneal dialysis offering where Baxter has traditionally excelled.
Read more about Fresenius Medical Care stock.
Illumina
- Morningstar Price/Fair Value: 0.62
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: Narrow
- Forward Dividend Yield: NA
- Industry: Diagnostics & Research
Diagnostics firm Illumina provides tools and services to analyze genetic material. We think the firm’s differentiated technology, ongoing innovation, and large installed system base create significant entry barriers for its competitors. Shares of this stock look 38% undervalued compared with our $188.00 fair value estimate.
Illumina aims to transform human health practices through its leadership of genomic sequencing and related applications. The firm provides a broad range of instruments and related consumables to help researchers and clinicians identify and understand genetic variations. The scale of these projects can be wide, such as population genomic initiatives being pursued in many countries, or narrow, such as noninvasive prenatal screening. We believe Illumina will continue to benefit from the rapidly expanding applications of genomic sequencing tools through its own innovation and select acquisitions.
During the past decade or so, technological advancements in the sequencing industry have largely been led by Illumina and brought down the cost of assembling one genome from nearly $3 billion in the 13-year Human Genome Project completed in 2003 to $1,000 after Illumina introduced HiSeq X in early 2014. Further innovation, like the NovaSeq, continued to push down these costs, and Illumina expects its new NovaSeq X Series to enable the $100 genome, which could greatly increase the accessibility of genomic sequencing. At a lower cost, genomic sequencing could even have wide appeal in clinical applications beyond current strongholds in oncology and reproductive health.
Threats from disruptive technologies may never fully disappear, though. For example, cheaper sequencing tools may eventually displace Illumina’s stronghold in genomic sequencing. Currently, we remain unconvinced that emerging systems will fully dethrone Illumina’s sequencing technologies, though, given the switching costs associated with its large installed system base and its own new commercialization efforts. However, new entrants may include Roche in clinical diagnostics in the intermediate term, which creates a more substantial threat than even some of the more emerging companies that have targeted this business in recent years.
Read more about Illumina stock.
Zimmer Biomet Holdings
- Morningstar Price/Fair Value: 0.63
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Wide
- Forward Dividend Yield: 0.88%
- Industry: Medical Devices
Zimmer Biomet Holdings is the only medical device company on our list of the best cheap healthcare stocks to buy. The company’s wide moat stems from two major sources: the substantial switching costs for orthopedic surgeons, and its intangible assets, including intellectual property that protects the product portfolio. Zimmer currently looks 37% undervalued relative to our $175.00 fair value estimate.
Zimmer Biomet is the undisputed king of large joint reconstruction, and we expect aging baby boomers and improving technology suitable for younger patients to fuel solid demand for large-joint replacement that should offset price declines. However, Zimmer stumbled into a series of pitfalls in 2016-17, including integration issues, supply and inventory challenges, and quality concerns. The firm’s efforts to turn around the firm have been admirable, though the pandemic slowed down progress. Now the firm is seeking to capitalize on the normalization of procedure volume and placements of its Rosa robot.
Zimmer’s strategy is two-pronged. First, it is focused on cultivating close relationships with orthopedic surgeons who make the brand choice. High switching costs and high-touch service keep the surgeons closely tied to their primary vendor. This close relationship and vendor loyalty also help explain why market share shifts in orthopedic implants are glacial, at best. As long as Zimmer can launch comparable technology within a few years of its rivals, it can remain in a strong competitive position. Nevertheless, we think surgeon influence will inevitably erode, as the practice of medicine changes in response to healthcare reform. Over the long term, it will be more difficult for surgeons to run private practices profitably, and more of them will be open to employment at hospitals.
Second, the firm aims to accelerate growth through innovative products and improved execution. The latter is critical, in our view, to realizing the firm’s potential. Despite a range of structural competitive advantages, Zimmer Biomet in 2016-18 failed to shine in operations, which dragged down returns. Former CEO Bryan Hanson delivered substantial signs of progress. Now new CEO Ivan Tornos must continue progress on Rosa robot placements, related consumable product pull-through, and expansion of the firm’s digital portfolio. Additionally, we anticipate the firm will flex its advantage in key areas, including extremities, trauma, and collaborations that involve sensor and digital technologies to improve surgical workflow.
Read more about Zimmer Biomet stock.
CVS Health
- Morningstar Price/Fair Value: 0.63
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Narrow
- Forward Dividend Yield: 4.56%
- Industry: Healthcare Plans
CVS is the only company from the healthcare plans industry on our list of affordable healthcare stocks. As a top-tier medical insurer, pharmacy benefit manager, and pharmacy retailer, we believe CVS possesses enough scale-related cost advantages to generate economic profits for the long run. CVS currently looks 37% undervalued relative to our $93.00 fair value estimate.
CVS aims to be the most customer-centric health company in the US and has spent over a decade positioning itself as a managed care leader, with the acquisitions of pharmacy benefit manager Caremark (2007), insurance provider Aetna (2018), and healthcare service provider Oak Street (2023) defining its strategic direction. CVS’ top-tier retail pharmacy, health insurer, and PBM franchises create the potential to improve health outcomes and even bend the healthcare cost curve for its clients, especially if it can align incentives by owning healthcare service providers, as well.
CVS appears uniquely positioned to improve health outcomes, and we appreciate management's focus on better leveraging its assets through digital and other means to bring a more consumer-centric approach to healthcare, which could provide many benefits. For example, a recent observational study showed when members use both CVS medical and pharmacy benefits, their medical costs decline 3%-6% over a three-year period through factors like fewer hospitalizations and emergency room visits. Driving savings like that could be attractive to many potential clients, such as self-funded employers, and CVS' own at-risk operations, like its Medicare Advantage plans, by reducing medical costs. Also, CVS continues to dive further into healthcare services especially through recent acquisitions of primary-care assets. We think the relatively high-margin healthcare services business could eventually accelerate CVS' profit growth directly or by reducing long-term costs in its medical and pharmacy benefit businesses.
With its integrated strategy, management aims to accelerate bottom-line growth to the mid to high single digits in the long run, which we think is achievable after a tough 2024.
Read more about CVS Health stock.
AMN Healthcare Services
- Morningstar Price/Fair Value: 0.65
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: Narrow
- Forward Dividend Yield: NA
- Industry: Medical Care Facilities
AMN Healthcare Services currently trades 35% below our fair value estimate of $95.00. AMN is one of America’s largest healthcare staffing companies, offering a wide array of premium job postings, which in turn attracts hospitals seeking a robust well of quality workers. The healthcare industry is one of the fastest growing in the US, and the demand for workers will likely remain robust as a result, providing AMN with a strong operational foundation.
Healthcare utilization is expected to increase at a solid clip over the coming decades, and the pipeline of healthcare professionals is not expected to keep pace, especially in light of the coronavirus pandemic. This combination of factors should serve as a strong foundation for AMN Healthcare through our explicit forecast period. While the firm continues to navigate near-term demand declines as providers return to normalized nonpandemic utilization, we believe long-term demand will remain robust for the firm’s core service—providing temporary and permanent labor for healthcare providers—as projected utilization continues to outpace the net number of nurses the US produces.
AMN is one of the world’s largest providers of healthcare workers, with the core of its business in the travel nurse market niche. The firm has a large nationwide client base, which has attracted a quality supply of job-seekers. We expect AMN’s sizable pool of workers should help the firm to drive top- and bottom-line growth over an economic cycle.
AMN's ability to provide almost any type of medical worker is also highly attractive to its customers, as they can use one vendor for most of their placement needs. These managed services relationships have been a major focus for AMN Healthcare, and the firm has become one of the premier HR managed services providers as a result.
A managed services arrangement entails AMN Healthcare taking over the entire staffing and employee measurement process for a provider system. We believe this strategy will serve to reinforce its narrow economic moat. This service creates higher customer switching costs, allows AMN to gain the first shot at meeting a customer’s entire staffing needs, and gives the firm the opportunity to see real-time leading metrics in the healthcare industry.
Having said that, AMN is exposed to fluctuations in the larger labor markets and any hiccups in the growth of healthcare workers. Healthcare staffing firms have historically been hard-hit after economic downturns, and we expect this to hold true in the future.
Read more about AMN Healthcare stock.
Biogen
- Morningstar Price/Fair Value: 0.66
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: Narrow
- Forward Dividend Yield: NA
- Industry: Drug Manufacturers—General
Drug manufacturer Biogen has achieved strong profitability based on its diversified multiple sclerosis portfolio and a long-standing Roche collaboration for CD20-based drugs in MS and oncology. Its neurology portfolio outside of MS should help diversify revenue and boost sales growth. Biogen stock is priced at a 34% discount to our fair value estimate of $303.00.
We think Biogen’s neurology, immunology, and focus on rare diseases support a narrow moat. Biogen’s strategy has its roots in the 2003 merger of Biogen (multiple sclerosis drug Avonex) and Idec (cancer drug Rituxan). The firm expanded its neurology portfolio beyond MS, including the blockbuster rare neuromuscular disease drug Spinraza. We see Biogen as a firm in transition, as MS revenue fades and launches of several new drugs for Alzheimer’s, depression, and rare diseases begin to ramp up.
Biogen generated nearly $6 billion in MS revenue in 2023, although we see these sales declining nearly 10% annually as the firm faces branded competition, generic pressure on Tecfidera, and biosimilar Tysabri launches. While pricing power and demand for Biogen's injectable MS portfolio are eroding in the face of new competition, Biogen receives substantial royalties on Roche's popular drug Ocrevus, which helps offset pressure on older MS drugs.
Outside of MS, we think Biogen’s growth potential looks solid, although Alzheimer’s market evolution is highly uncertain. We think sales of spinal muscular atrophy drug Spinraza (partnered with Ionis) will remain around the $2 billion level, although competition from Novartis (gene therapy Zolgensma) and Roche (oral drug Evrysdi) has cut into growth. While Biogen’s first amyloid antibody for Alzheimer’s, Aduhelm, was a commercial failure, Biogen and Eisai’s Leqembi had definitive, positive data in September 2022, and the drug received US Food and Drug Administration approval in January 2023, with full approval and Medicare reimbursem*nt in July 2023, and we expect peak sales around $7 billion. That said, the launch has been off to a slow start and we expect global sales will reach only about $250 million in 2024 as diagnosis and treatment pathways become more standardized. New drugs like postpartum depression drug Zurzuvae and Friedreich’s Ataxia drug Skyclarys further support Biogen’s portfolio. We also think the market underestimates Biogen’s pipeline, which includes a continuing partnership with Ionis (including tau-targeting Alzheimer’s drug BIIB080) and drug candidates to treat conditions including Parkinson’s disease and lupus.
Read more about Biogen stock.
Ionis Pharmaceuticals
- Morningstar Price/Fair Value: 0.68
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: Narrow
- Forward Dividend Yield: NA
- Industry: Biotechnology
Our list of the best healthcare stocks to buy now closes with Ionis Pharmaceuticals. Ionis has attracted big-name partners like Biogen and Roche, and it has one of the broadest pipelines in the biotech sector. This cheap healthcare stock trades 32% below our fair value estimate of $69.00.
Ionis is a leader in RNA-based therapies, and its spinal muscular atrophy drug Spinraza, marketed by partner Biogen, is the first RNA-based therapy to achieve blockbuster status. The firm’s antisense oligonucleotide, or ASO, technology faces strong competition from RNA interference technology emerging from Alnylam, Arrowhead, and Novo Nordisk (Dicerna), as well as gene editing and gene therapy pipelines at multiple firms. However, Ionis has built a massive pipeline of promising new drugs that are rapidly moving toward the market, securing a narrow moat.
Ionis' therapies alter production of a given protein in the body, typically reducing production of a toxic, mutant version. Therefore, Ionis can tackle diseases that are difficult to treat effectively with other methods, as its therapies are targeted (avoiding safety issues with off-target effects of small-molecule drugs), can act inside the cell (unlike antibody therapies), and are reversible (unlike gene therapy). Ionis has a broad pipeline and strong collaboration partners to help usher to market drugs for large indications, requiring large clinical trials and salesforces. Ionis spun out cardiovascular-focused Akcea in 2017 but reacquired full ownership again in 2020, given the advancement and increasing attractiveness of Akcea's late-stage cardiology pipeline.
While first-generation ASOs had side effects that limited their commercial potential, we're more enthusiastic about next-generation ASOs, which require much smaller doses and are easier to administer. AstraZeneca-partnered Wainua is launching in 2024 in amyloidosis patients with polyneuropathy and potentially in 2026 in cardiomyopathy, with peak sales potential north of $3 billion. Ionis has full rights to high triglyceride drug olezarsen, which is poised to launch in a rare disorder in 2025 and a broader population in 2026, and holds US rights to hereditary angioedema drug donidalorsen, which could launch in 2025. Partnered programs in neurology (Biogen), cardiology (Novartis), and the complement pathway (Roche) are also in late-stage development, putting Ionis in a position to see multiple data readouts through 2025.
Read more about Ionis Pharmaceuticals stock.
How to Find More of the Best Healthcare Stocks to Buy
Investors who’d like to extend their search for healthcare stocks to invest in can do the following:
- Review Morningstar’s comprehensive list of healthcare stocks to investigate further.
- Use the Morningstar Investor screener to build a shortlist of healthcare companies to research and watch.
- Read the latest news about notable healthcare companies from Morningstar’s Damien Conover and Karen Andersen.
- Stay up to date on the healthcare sector’s performance, key earnings reports, and more with our Healthcare Sector page.
The author or authors do not own shares in any securities mentioned in this article.Find out about Morningstar’s editorial policies.
