21 Best Healthcare Companies to Invest In | Morningstar

These companies largely earn their competitive advantage from intangible assets, and their stocks are great choices for an investor’s watchlist.

The strongest long-term opportunities for healthcare companies primarily fall in three industries: drug manufacturing, medical devices, and diagnostics and research.

And all 21 of the best healthcare companies to invest in have intangible assets that provide a wide moat against competitors. This intangible-asset advantage is often derived from either patents or proprietary technology.

Patents are temporary government licenses that exclude competition from copying an invention. For example, in pharmaceutical companies, patents are necessary owing to the ease with which some drugs can be replicated. Similarly, patents are vital in the medical-device industry to protect companies’ product designs.

Proprietary technology encompasses more complex processes and tools than a company’s patents might cover—many companies keep their intellectual property as a trade secret rather than provide a public description in a patent application. In general, the more sophisticated and customized a product or service becomes, the more that proprietary technology plays a role in driving competitive advantage. In healthcare, this is seen in biopharma, medical devices, and contract research organizations.

Here, we highlight the 21 healthcare companies that made our list of the Best Companies to Own in 2024. These companies earned their spot on the list by carving out wide moats and making smart capital decisions.

Because this list is built for the long term, rather than to identify presently undervalued companies, it may not be the right time to buy all these names. Rather, we believe these healthcare companies are strong choices for an investor’s watchlist.

You should consider buying only when they’re trading below our price/fair value estimate, which assesses whether a stock’s price is high or low compared with its fundamental value.

All the drug manufacturers on the best companies list, both general and specialty, gain an edge from their intangible assets.

Pfizer PFE is a prominent member of the group. “Pfizer’s patent-protected drugs carry strong pricing power that enables the firm to generate returns on invested capital in excess of its cost of capital,” writes Karen Andersen, Morningstar director of equity research for healthcare. “The patents give the company time to develop the next generation of drugs before generic competition arises.”

Johnson & Johnson JNJ, the world’s largest and most diverse healthcare firm with a market cap of $394 billion as of Oct. 15, 2024, also thrives in this area. Andersen notes that Johnson & Johnson’s wide moat is “supported by intellectual property in the drug group and intellectual property and switching costs in the device segment ... Seve… of J&J’s key next-generation pipeline drugs are specialty drugs that tend to carry strong pricing power as well as lower regulatory hurdles for approval.”

Eleven of the 21 companies with a moat driven by intangible assets have an additional moat source, either a cost advantage or a high switching cost.

There are six qualifying companies in the diagnostic and research or medical-devices industries; all have an advantage from intangible assets and also benefit further from switching costs.

With a market cap of $230 billion as of Oct. 15, 2024, Thermo Fisher Scientific TMO is the largest of the diagnostics and research companies on the list. Thermo Fisher sells scientific instruments and laboratory equipment, diagnostics consumables, and life science reagents.

Like key competitors Agilent A and Waters WAT, Thermo Fisher’s analytical instrument business benefits from intangible assets and switching costs, says Morningstar’s Director of European Equity Research Alex Morozov. “The intangible asset is the firm’s differentiated technology and its leadership positions within tools such as mass spectrometry, chromatography, microscopy, and others. … The business is also rather sticky, particularly within the biopharma end market, where the regulatory process assures high switching costs. Production methods have to stay uniform throughout the lifecycle of a drug, which often extends beyond the lifecycle of a typical mass spectrometer.”

Medical devices, for their part, have high switching costs because surgeons develop expertise in using a differentiated set of tools and device systems have component parts that are designed to work together.

“The highest switching costs in medical devices is in orthopedics, where all the device makers have their own differentiated implants and the tools to install the implants,” says Morningstar Senior Analyst Debbie Wang.

“It takes years for the orthopedic surgeons to become practiced enough on one vendor’s tools and implants to deliver optimal patient outcomes, and after they have mastered them, they are reluctant to switch to another vendor where they’d have to relearn some of it,” Wang explains. “For this reason, the switching costs are the highest for companies like Zimmer Biomet ZBH and Stryker SYK.”

The medical instruments and supplies subindustry has among the fewest representatives on our list: just Coloplast CLPBY and West Pharmaceutical Services WST.

Coloplast is the market leader in ostomy and continence care, holding 40% of the global market share. “Though ostomy products do benefit from some protection of intellectual property, we think the moat is also rooted in sticky end-user relationships,” Morningstar’s Wang notes.

West Pharmaceutical Services, for its part, is the global market leader in primary packaging and delivery components for injectable therapeutics. The company has two moat sources: intangible assets and switching costs. As for the latter, Morningstar Senior Equity Analyst Jay Lee notes: “Primary packaging has direct contact with the drug product and must be written into the drug application with the US Food and Drug Administration and remain on file for the life of the product. This means West often remains the primary elastomer packaging provider for the entire time a drug remains on the market.”

Find the full list of companies and read about our selection methodology.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.