In the first half of 2025, the MorningStar Healthcare Index slowed the performance of the MorningStar US Index, losing 4.67% over 12 months against a return of 15.09% for the US index. After a brief rebound earlier this year, the sector lost momentum in the second quarter due to increased uncertainty regarding the potential impact of US policies on biopharma, healthcare plans and health technology companies' growth rates. Broader concerns about rising headwinds in care use and regulation for US-centric businesses have been further heightened on sentiment. We believe healthcare could potentially close the performance gap in the coming months. It is driven by improving its defensive profile and policy risk clarity.
The sector appears to be relatively undervalued overall, with the median price falling approximately 10% below the fair value estimate. Although medical distribution stands out as the only overrated industry, healthcare planning and biopharma seem to be the most underrated.
Volatility increased after President Donald Trump and Robert F. Kennedy Jr. appointed to lead the Department of Health and Human Services. Although there have not been any major valuation changes across the healthcare industry, there is a high degree of uncertainty surrounding many stocks, particularly in biopharma and healthcare plans. Within the obesity market, Novonordisk trades fair value estimates at discounted prices, as there are still strong competitive advantages despite the increased market share of Elirilyrie.
Two major policy developments will be focused this quarter. First, Congress aims to reduce federal health costs, primarily through Medicaid cuts and individual exchange subsidies. Such changes could put pressure on Medicaid and individual plans registration, making the center appear most exposed. Second, the restructuring of the CDC's vaccine advisory panel raised questions about the future of public health guidance. Medium vaccine growth is expected to be supported by demand across the core vaccination category.
Top Healthcare Sector Picks
Baxter International
With the introduction of medical use and new products like the Novum IQ Pump Platform, demand is improving in most of Baxter's Bax healthcare supply business. Investors believe they are overly focusing on Baxter's short-term risks, including recent leadership changes and tariff uncertainties. The pressures related to inflation have eased and the preferred GPO contracts set up to support pricing in 2025 give us a clear path to margin expansion. We expect strong short-term profit growth and will remain stable in the long term from high single to low double digit rates.
Moderna
I think Moderna MRNA investors were overly enthusiastic about the company's mRNA technology potential during the pandemic, but since then they've become bearish to growth after that post-pandemic. Following the massive demand for pandemic fuels in 2021 and 2022, the company has modest expectations for its Covid-19 vaccine sales, but we believe that the Merna-based vaccine and treatment pipeline is moving rapidly across multiple treatment areas. Despite the close-up headwinds that are clouding the competitive RSV vaccine market and policy, we are confident in the long-term sales trajectory of our company's diversified pipeline.
Iqvia Holdings
IQVIA's IQV stocks have been negatively affected by macroeconomic concerns and lower levels of biotechnology funding. However, we consider these issues to be short-term headwinds and IQVIA continues to be a global leader in providing clinical trial services and healthcare analytics. The company's backlog continues to expand despite macroeconomic pressures, demonstrating its strength and resilience in booking new businesses. Additionally, the company's extensive and unique data analytics capabilities should support durable, long-term growth, along with continuous reinvestment in new technologies (including artificial intelligence).
