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Quarter-End Insights

Our Outlook for Health-Care Stocks

Health-care companies are relatively unscathed by the market meltdown.

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With recent market turbulence ratcheted up to hair-raising levels, the health-care sector has been buffeted on the margins. Fortunately, however, health-care companies remain relatively insulated from the ripples making their way through the economy. This is partially due to the low levels of financial leverage in many health-care firms. Many of our established drug, equipment, and services companies can generate enough cash to finance their business growth and do not need to rely on debt. This immediately lowers their exposure to some of the liquidity issues that have infected other industries. Additionally, most of the smaller biotechnology or development-stage companies typically tap equity financing because banks are unlikely to lend to such risky ventures in the first place. With the credit market seizing up, we see the low leverage of health-care companies as a silver lining in a dark cloud hanging over the markets currently. Finally, the larger factors that drive health care tend to be unrelated to macroeconomic market conditions--people still get sick whether assets are rising in value or falling.

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Debbie Wang has a position in the following securities mentioned above: BIIB. Find out about Morningstar’s editorial policies.