Healthcare: Stocks Had a Great Q3, as Defensive Nature and Steady Innovation Drew Interest

The Morningstar Healthcare Index has significantly outperformed the Morningstar US Index over the past 12 months, driven first by voluntary agreements between large-cap pharma firms and the Trump administration in the fourth quarter of 2025 that took more damaging price policies off the table, and then in the third quarter of 2026 as investors sought defensive opportunities, downstream AI beneficiaries, and noted impressive clinical data for breakthrough cancer therapies. Near-term challenges remain for healthcare plans and some life science names, but in 2026, we expect steady innovation to support biopharma, the sector’s largest industry.

While biopharma names appear more fairly valued, we still see several undervalued opportunities in the US across biopharma (Ionis, BioMarin), medical devices (Boston Scientific, Zimmer Biomet), and healthcare plans (UnitedHealth, Molina).

Volatility has remained elevated since Donald Trump’s reelection and Robert F. Kennedy Jr.’s appointment as secretary of Health and Human Services. We still see high uncertainty around many stocks, particularly in biopharma and healthcare plans, but clarity on drug pricing headwinds is improving, and plans look poised to see a better match between rates and utilization beyond 2026. As the market assigns winners and losers in the age of AI, we think healthcare is well-positioned. Most firms are likely to see incremental operational benefits from incorporating AI. Some industries, like biopharma, could see even broader benefits.

The outlook for patent losses is moderate, except in 2029, which will bring one of the heaviest patent-loss years since the 2012-14 patent cliff. Johnson & Johnson is growing through the industry’s most recent major cliff after Stelara lost protection in 2025.

The oral SERD class has generated mixed data in 2026, including Roche’s giredestrant and AstraZeneca’s Etcamah. Nonetheless, we view this as a promising class with multi-billion-dollar sales potential, largely based on use in earlier-stage patients.

Top Healthcare Sector Picks

GE Healthcare GEHC

• Fair Value Estimate: $88.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

We attribute the recent selloff in GEHC shares to the Middle East conflict and higher oil prices. GEHC’s top line has very little exposure to this region (perhaps a low-single-digit percentage of revenue), but oil prices can pressure its margins due to higher transportation costs. Although there was progress toward a ceasefire deal in June, we think the margin pressure is likely to remain in the near term. We note that GEHC has an excellent track record of responding to supply chain shocks, including during the covid pandemic, and we think shares are already pricing in a bearish scenario.

BioMarin Pharmaceutical BMRN

• Fair Value Estimate: $90.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

We believe narrow-moat BioMarin, a biotechnology company developing therapies for rare genetic diseases, trades at an attractive discount to our $90 fair value estimate. The market underappreciates its enzyme-replacement therapy franchise and long-term growth potential. BioMarin has eight approved therapies across achondroplasia, phenylketonuria, hemophilia, and mucopolysaccharidosis. Its acquisition of Amicus Therapeutics adds Galafold, Pombiliti + Opfolda, and phase 3 asset BMN-820. We see meaningful growth from BioMarin’s scale, global reach, and commercial expertise, supporting long-term expansion of its rare-disease franchise.

Medline MDLN

• Fair Value Estimate: $43.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

Medline shares have fallen 20% in the year to date, amid margin concerns and a US Food and Drug Administration warning letter. On margins, rising input costs from geopolitical issues and expenses related to a fire at one of the firm’s facilities created headwinds and led to a guidance cut, but we see these as largely transitory and continue to believe strong fundamentals remain unchanged. The FDA warning letter appears to be an isolated issue for a niche product, and we think the ensuing stock move (down 7%) was an overreaction. We note that Medline is a market leader and see significant growth upside from new clients, customer penetration, and end-market expansion.