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Quarter-End Insights

Healthcare: Pick Carefully as Valuations Head Higher

Damien Conover, CFA
  • In aggregate, valuations in the healthcare sector have slightly increased to a price/fair value of 1.04, up from 1.02 at the end of the last quarter and 0.87 at the start of the year, as risks of deflating drug pricing power are abating and new clinical data supports new drugs. Against this higher valuation backdrop, stock selection is important in the healthcare sector, and our top picks are  Allergan (AGN),  Roche (RHHBY), and  Shire (SHPG).
  • In the United States, following the failed attempt to repeal and replace the Affordable Care Act by the Republican-led Congress, tax reform has passed and will lower corporate tax rates. 
  • Further consolidation within the healthcare industries is likely as the larger healthcare companies continue to redeploy strong cash flows and tax reform could accelerate this trend.
  • Pricing pressures from pharmacy benefit managers, pharmacies, and government payers continue to weigh on drug companies, but in the branded pharmaceutical segment, solid clinical data should support the pricing power of new innovative drugs.

Damien Conover, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.