From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. But financial performance has lagged recently as players offloaded surplus COVID inventories in 2023 and 2024, a headwind for overall demand. The result? Over the past six months, the industry’s return was flat while the S&P 500 climbed by 10.5%.

While some businesses have durable competitive advantages that enable them to grow consistently, the odds aren’t great for the ones we’re analyzing today. On that note, here are three healthcare stocks we’re passing on.

Moderna (MRNA)

Market Cap: $9.37 billion

Rising to global prominence during the COVID-19 pandemic with one of the first effective vaccines, Moderna (NASDAQ: MRNA) develops messenger RNA (mRNA) medicines that direct the body's cells to produce proteins with therapeutic or preventive benefits for various diseases.

Why Do We Steer Clear of MRNA?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 46.3% annually over the last two years
2. 242.8 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

Moderna is trading at $24.14 per share, or 4.9x forward price-to-sales. Read our free research report to see why you should think twice about including MRNA in your portfolio.

Avantor (AVTR)

Market Cap: $9.18 billion

With roots dating back to 1904 and embedded in virtually every stage of scientific research and production, Avantor (NYSE: AVTR) provides mission-critical products, materials, and services to customers in biopharma, healthcare, education, and advanced technology industries.

Why Are We Cautious About AVTR?

1. Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
2. Estimated sales for the next 12 months are flat and imply a softer demand environment
3. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 4.5 percentage points

At $13.47 per share, Avantor trades at 12.5x forward P/E. To fully understand why you should be careful with AVTR, check out our full research report (it’s free).

Bristol-Myers Squibb (BMY)

Market Cap: $96.03 billion

With roots dating back to 1887 and a transformative merger in 1989 that gave the company its current name, Bristol-Myers Squibb (NYSE: BMY) discovers, develops, and markets prescription medications for serious diseases including cancer, blood disorders, immunological conditions, and cardiovascular diseases.

Why Do We Think Twice About BMY?

1. Sizable revenue base leads to growth challenges as its 2.7% annual revenue increases over the last two years fell short of other healthcare companies
2. Estimated sales decline of 4.6% for the next 12 months implies a challenging demand environment
3. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned

Bristol-Myers Squibb’s stock price of $47.22 implies a valuation ratio of 7.4x forward P/E. Check out our free in-depth research report to learn more about why BMY doesn’t pass our bar.

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