December 11, 2023

Healthcare Global

Splash Healthcare Global All Over

10 Undervalued Quality Healthcare Stocks

While it’s been a down year for the stock market as a whole, it’s been a good year for healthcare stocks as these often defensive plays live up to their reputation during the bear market.

Despite the strong showing of healthcare stocks, Morningstar equity analysts still see plenty of attractive opportunities for long-term investors.

The Morningstar US Healthcare Index, which measures the performance of stocks in the healthcare sector, lost 2.8% for the year through Dec. 13, while the broader market fell 15.8% during the same period, as measured by the Morningstar US Market Index. Still, of the 96 healthcare companies reviewed by Morningstar equity analysts, 58.8% are currently undervalued.

Line chart showing performance of healthcare stocks vs. the market

What Kinds of Companies Are Healthcare Stocks?

A wide range of companies fall under the umbrella of healthcare stocks.

The Morningstar US Healthcare Index comprises seven industries including biotechnology, drug manufacturers, healthcare plans, healthcare providers and services, medical devices and instruments, medical diagnostics and research, and medical distribution.

There are companies engaged in the research, discovery, development, and production of innovative drugs and technologies, and companies that offer a wide variety of managed health products and services, like health maintenance organizations and preferred provider organizations. Some of the largest healthcare stocks include UnitedHealth Group (UNH), Johnson & Johnson (JNJ), and Eli Lilly (LLY).

Healthcare stocks fall under Morningstar’s defensive Super Sector, meaning they tend to do well even when the overall market is down.

For this screen, we looked for the 10 most undervalued stocks in the Morningstar US Healthcare Index all carrying a Morningstar Rating of 4 or 5 stars. Then we looked for healthcare stocks that have earned a Morningstar Economic Moat rating of wide, to screen for companies with durable competitive advantages.

10 Undervalued Healthcare Stocks to Buy Now

These were the 10 most undervalued healthcare stocks in the Morningstar Healthcare Index as of Dec. 1:

  • GSK (GSK)
  • Zimmer Biomet Holdings (ZBH)
  • Medtronic (MDT)
  • Roche Holding (RHHBY)
  • Bayer (BAYRY)
  • Veeva Systems (VEEV)
  • Sanofi (SNY)
  • West Pharmaceutical Services (WST)
  • AstraZeneca (AZN)
  • Zoetis (ZTS)

The most undervalued healthcare stocks are GSK and Zimmer Biomet Holdings, both trading at a 30% discount to their Morningstar fair value estimate. The least undervalued on the list is AstraZeneca, trading at an 8% discount. Morningstar analysts believe all 10 of these stocks are high quality and continue to be undervalued in the market.

table of  Undervalued Wide-Moat Healthcare Stocks


  • Fair Value Estimate: $50
  • Economic Moat Rating: Wide

“The shares have largely recuperated the over $30 billion in market capitalization lost when significant investor concern over Zantac litigation emerged in August. Even with the rebound, we continue to view the stocks as undervalued, with the market not fully appreciating the growth potential of the firms and their wide moats.”

“Patents, economies of scale, and a powerful distribution network support GSK’s wide moat. GSK’s patent-protected drugs carry strong pricing power, which enables the firm to generate returns on invested capital in excess of its cost of capital. Further, the patents give the company time to develop the next generation of drugs before generic competition arises. While GSK holds a diversified product portfolio, there is some product concentration with its largest drug, Triumeq (for HIV), representing close to 10% of total sales, but we expect new products will mitigate the generic competition that likely won’t emerge until 2027 or later.

“Also, GSK’s operating structure allows for cost-cutting following patent losses to reduce the margin pressure from lost high-margin drug sales. Overall, GSK’s established product line creates the enormous cash flows needed to fund the average $800 million in development costs per new drug. A powerful distribution network sets up the company as a strong partner for smaller drug companies that lack GSK’s resources. GSK’s entrenched vaccines platform creates an added layer of competitive advantage stemming from cost advantages in creating vaccines.”

“As one of the largest pharmaceutical and vaccine companies, GSK has used its vast resources to create the next generation of healthcare treatments. The company’s innovative new product lineup and expansive list of patent-protected drugs create a wide economic moat.”

— Damien Conover, director of healthcare equity research

Zimmer Biomet Holdings

  • Fair Value Estimate: $175
  • Economic Moat Rating: Wide

“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, and the surgeons bring in enough profitable procedures to keep hospital administrators at bay.”

“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.”

“Zimmer’s wide economic moat stems from two major sources. First, there are substantial switching costs for orthopedic surgeons. The extensive instrumentation, or tool sets, used to prepare bones and install implants are specific to each company. The learning curve to become proficient in using one company’s instrumentation is significant.”

“Zimmer’s moat also involves intangible assets, including intellectual property that protects the product portfolio, which is characterized by evolutionary changes to technology, because new generations of products rely on intellectual property established by earlier iterations of those devices.”

“We’re holding steady on our fair value estimate at $175 per share, which reflects our expectation that more normal procedure volume will be able to flow through after 2022 thanks to widespread vaccinations and some level of COVID-19 immunity acquired by extensive infection by previous variants.”

— Debbie S. Wang, senior equity analyst


  • Fair Value Estimate: $112
  • Economic Moat Rating: Wide

“Medtronic’s standing as the largest pure-play medical device maker remains a force to be reckoned with in the med-tech landscape. Pairing Medtronic’s diversified product portfolio aimed at a wide range of chronic diseases with its expansive selection of products for acute care in hospitals has bolstered Medtronic’s position as a key partner for its hospital customers.

“Medtronic has historically focused on innovation, designing and manufacturing devices to address cardiac care, neurological and spinal conditions, and diabetes. All along, the firm has remained focused on its fundamental strategy of innovation. It is often first to market with new products and has invested heavily in internal research and development efforts as well as acquiring emerging technologies.”

“Medtronic’s wide moat is rooted in its dominant presence in highly engineered medical devices to treat chronic diseases, including those beyond its historical stronghold in heart disease. Medtronic’s strongest moat source is intangible assets and to a lesser extent switching costs that are associated with specific products.”

“Medtronic’s wide moat is bolstered by several intangibles, including intellectual property and carefully nurtured relationships with physicians. Thanks to its persistent ability to innovate, Medtronic is often first to market with new products in various therapeutic areas.”

“Overall, we now include the following in our assumptions for Medtronic: A more gradual resumption of prepandemic procedure volume in fiscal 2023 and 2024, hospital labor constraints that will prevent significant expansion of capacity through the midterm, and the anticipated launch of renal denervation by early 2024. We project 3% average annual top-line growth through fiscal 2027, as procedure volume returns and stabilizes closer to prepandemic levels over the next 18 months.”

— Debbie S. Wang, senior equity analyst

Roche Holding

  • Fair Value Estimate: $57
  • Economic Moat Rating: Wide

“We think Roche’s drug portfolio and industry-leading diagnostics conspire to create maintainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global health care into a safer, more personalized, and more cost-effective endeavor. Strong information sharing continues between Genentech and Roche researchers, boosting research and development productivity and personalized medicine offerings that take advantage of Roche’s diagnostic arm.”

“Roche’s wide moat arises from its status as the leader in oncology therapeutics and in vitro diagnostics, and the firm has a promising strategy of combining its expertise in both areas to generate a growing personalized medicine pipeline, making use of companion diagnostics.”

“Much of Roche’s moat in pharmaceuticals is derived from its long relationship with Genentech.”

“Roughly 80% of Roche’s pharmaceutical sales are from biologics, which has insulated the firm, to some extent, from rapid erosion of its blockbusters. Biosimilars (follow-on versions of branded biologics) are associated with significantly higher costs of manufacturing, clinical trials, and marketing than traditional small-molecule generics, and therefore have not had as dramatic an impact on branded drug sales at launch.”

“We think Roche’s pharmaceutical division will see a 5% top-line compound annual growth rate through 2026, with diagnostics division sales remaining flat over this period due to a strong COVID-19-related 2021 performance.”

“We’ve slightly adjusted our fair value estimates for Roche shares to CHF 428/$57 from CHF 33/$55, which also incorporates recent foreign exchange volatility, and we think Roche shares remain significantly undervalued.”

— Karen Andersen, healthcare sector strategist


  • Fair Value Estimate: $20
  • Economic Moat Rating: Wide

“Bayer reported strong third-quarter results ahead of our expectations, but we don’t expect any major changes to our fair value estimate. Strong crop science prices partly supported the outperformance, but we expect increased competition in 2023, which will likely reverse some of Bayer’s recent gains. However, the crop science business remains well positioned for growth over the long term, led by innovative new products (such as short-stature corn and next-generation trait protection) that help reinforce the firm’s wide moat.

“We continue to view Bayer as undervalued with the market not fully appreciating the innovation at the company and overly concerned about past glyphosate litigation pressures. Beyond the innovation in crop science, Bayer recently introduced drugs (Nubeqa for cancer and Kerendia for kidney disease) that are starting to contribute meaningfully to the top line (representing close to EUR 200 million collectively in the quarter).”

“Similar to other large pharmaceutical companies, Bayer’s drug unit supports a wide economic moat. The company has a diverse portfolio of patent-protected drugs and a growing number of biologic drugs. The company also has a strong global salesforce that can attract smaller drug firms to partner with Bayer for commercialization efforts, which augment Bayer’s internal drug-development efforts. The company’s consumer health business benefits from a narrow economic moat, largely because of its strong brand power. Consumers continue to pay a premium for Aspirin and Aleve even though strong generic competition has existed for many years.”

“Overall, Bayer looks poised for steady sales and earnings growth over the next five years, and we project a 3% five-year compound annual growth rate (CAGR) for sales and a 4% five-year CAGR for earnings.”

— Damien Conover, director of healthcare equity research

Veeva Systems

  • Fair Value Estimate: $265
  • Economic Moat Rating: Wide

“Veeva is the leading provider of cloud-based software solutions tailored to the life sciences industry. It provides an ecosystem of products to address the operating challenges and regulatory requirements that companies in the space face. Instead of focusing on a general, one-size-fits-all system, Veeva has created platforms that are purely designed to serve one industry.’’

“We assign Veeva a wide moat rating because we believe the firm’s high retention rate and its customers’ unlikeliness to move to a different product (switching costs) should continue to support economic profits for at least the next 20 years.”

“The company operates in two categories: Commercial solutions and R&D solutions.”

“In the near term, management expects the number of life sciences sales representatives to drop roughly 10% by the end of fiscal year 2024 as the industry adopts more digital solutions (a trend that we view as likely). We expect this rep reduction to create some headwinds for both commercial and R&D businesses. The lowered user base will directly impact Veeva CRM as each contract with customers are priced by the number of end users. But we think Veeva will more than offset this by continuing to gain market share and its other businesses within the segment, such as its presence in commercial content management and data and analytics, propelling top line growth. Veeva continues to win new customers in its CRM or Vault commercial solutions and further penetrates its existing userbase, shown by the consistently increasing number of average commercial products per user.

“We expect the commercial business to grow at a modest to high single-digit over the next five years. For R&D solutions, we expect revenue growth to soften but we still expect a very strong growth for this healthcare stock over the next five years with a revenue CAGR of 22%.”

— Keonhee Kim, healthcare equity analyst


  • Fair Value Estimate: $57
  • Economic Moat Rating: Wide

“Sanofi’s wide lineup of branded drugs and vaccines and robust pipeline create strong cash flows and a wide economic moat. Growth of existing products and new product launches should help offset upcoming patent losses.

“Sanofi’s existing product line boasts several top-tier drugs, including immunology drug Dupixent. Dupixent looks well positioned to reach peak sales over EUR 14 billion, with an initial focus on the moderate to severe atopic dermatitis market. We expect additional indications in areas such as the more recently added severe asthma indication will help the drug serve additional patients.”

“While Sanofi shares profits on the drug with Regeneron, the very high sales expected for the drug should provide a strong tailwind to overall growth for the company. Additionally, Sanofi holds a strong position with several vaccines and rare disease drugs that should hold up well as pricing pressures and competition tend to be less severe in these areas.”

“Sanofi is making mixed progress, but with limited near-term patent losses (besides the 2023 exclusivity loss on multiple sclerosis drug Aubagio), the firm has time to develop its next-generation drugs.”

“Overall, we project a five-year average annual revenue growth rate of close to 5%, largely driven by steady Dupixent gains along with gains in consumer products and vaccines … as well as new product launches offsetting patent losses and deteriorating pricing for Lantus. Following a sharp patent cliff in 2013, Sanofi faces relatively mild patent losses, and diverse operations in vaccines, consumer products, and emerging markets should lead to steady growth over the long term. Also, we expect the streamlining of operations, cost-cutting and gains in high margin specialty drugs to offset falling Lantus pricing in the U.S., resulting in operating margin expansion over the next three years. Furthermore, we estimate the company’s weighted average cost of capital at 7%, which is in line with the company’s peer group.”

— Damien Conover, director of healthcare equity research

West Pharmaceutical Services

  • Fair Value Estimate: $280
  • Economic Moat Rating: Wide

“West Pharmaceutical Services is the global market leader in primary packaging and delivery components for injectable therapeutics. Primary packaging is the material that first envelops a drug product, and safe production of drug-delivery packaging is critical for the successful delivery of pharmaceutical products. Packaging must ensure drugs don’t leak into the surrounding material and vice versa. Because of the mission-critical nature of these components, it’s important for customers to trust the quality of manufacturing and design.”

“West is primarily chosen as a vendor for its quality reputation and supply chain expertise. The firm’s massive scale, at more than 40 billion components per year, limits the chance of component shortages, as many components can be made in a different facility if any one plant faces difficulties.”

“West has carved out a wide economic moat in the field of complex injectable device packaging from a proven level of expertise in the space and the durability of profits supported by packaging-specific regulatory approvals.”

“West’s dominant market position, which has proved to be durable over the past several decades, is evidence of strong intangible assets. West participated as a vendor in at least 90% of biologic drugs brought to market in 2019 in the U.S. and Europe.”

“We are maintaining our fair value estimate on West Pharma of $280. We think West’s growth is likely to be fairly resilient once COVID-19 sales begin to roll off the top line.”

— Karen Andersen, healthcare sector strategist


  • Fair Value Estimate: $74
  • Economic Moat Rating: Wide

“AstraZeneca has built its leading presence in the pharma and biotech industry on patent-protected drugs and a developing pipeline that add up to a wide moat. The replenishment of new drugs is setting up industry-leading growth.

“AstraZeneca’s pipeline is emerging as one of the strongest in the drug group, and we think the company is developing several key products that hold blockbuster potential. In particular, the company’s recently launched cancer drugs Tagrisso and Imfinzi are well-positioned based on leading efficacy in hard-to-treat cancers.”

“As Astra’s next generation of drugs launch, we expect operating margins to improve based on the strong pricing power of the new drugs and the operating leverage the firm should attain as the new drugs reach critical mass.”

“Astra is making solid strides with its pipeline, setting up the potential for steady long-term growth. We are most bullish on the recently announced positive clinical data in breast cancer for two key drugs (camizestrant and capivasertib), which seem less appreciated by the market potentially due to other drugs with similar mechanisms of action that failed.”

“We continue to view this healthcare stock as undervalued with the market not fully appreciating the strong growth outlook and the innovative pipeline that also supports the firm’s wide moat.”

— Damien Conover, director of healthcare equity research


  • Fair Value Estimate: $170
  • Economic Moat Rating: Wide

“Zoetis reported third-quarter results that were characterized by a number of growing pains that we categorize as short-term turbulence, but we’ve moderately trimmed our fair value estimate of this healthcare stock to $170 per share, down from $186 after adjusting our estimate for 2022-23 to reflect ongoing unfavorable foreign exchange, drag from near-term materials shortages, and the delay in U.S. regulatory approval of Librela.

“Nonetheless, shares remain undervalued from our perspective. Despite these near-term constraints, we see little to alter our confidence in Zoetis’ wide economic moat, including its intangible assets and cost structure.”

“Zoetis continues to enjoy robust growth in its companion animal segment with quarterly operational revenue up 10%, but the livestock segment remains soft with a quarterly decline of 3% thanks to pressure from generics and increased competition across cattle, swine, and fowl.”

“Zoetis is the undisputed leader in the global animal health industry, and we believe it possesses the widest moat of all the competitors. Zoetis has set itself apart based on its impressive innovation that shows up across its product portfolio, including a number of drugs for specific pet ailments such as separation anxiety.”

“We expect Zoetis to grow faster than the industry and maintain above-average margins due to its scale and its shift toward the faster-growing companion animal segment. Zoetis’ investments in dermatology, parasiticide, and monoclonal antibody innovation have been paying off handsomely here.”

“Zoetis enjoys a wide economic moat thanks to its intangible assets and cost advantages. Although patents are not essential for maintaining a product in the animal health industry, at least 20% of the firm’s revenue comes from products protected by patents that allow Zoetis to charge a premium price and insulate it from competition. The firm’s strong brand name is another advantage over competitors.”

“Considering the firm’s strong grip on expense control, we expect Zoetis to largely maintain the operating margin gains made in the past two years. We now project adjusted operating margin to reach 38% by 2026—an increase of roughly 220 basis points of growth compared with high-water mark in 2021.”

— Debbie S. Wang, senior equity analyst