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Morningstar | Life Science and Diagnostics Industry Offers Attractive Growth and Moats, but Be Wary of Valuations

We think there's plenty to like about the life science and diagnostics industry, including attractive growth opportunities and several competitive advantages that lead to economic moats. The industry tends to have a predictable and attractive growth outlook, especially in areas such as bioprocessing, analytical instrumentation, and genomics, in addition to being somewhat insulated from broader macroeconomic cycles. Nearly every company under our life science and diagnostic manufacturer coverage also earns an economic moat thanks to intangibles often paired with high switching costs. Valuations already reflect the optimism, however, with multiples across the industry looking expensive, in our view. Currently, we think Waters, Agilent, Danaher, and Becton Dickinson reflect the best value, and all trade close to 3-star territory. We view Mettler, BioMerieux, and Qiagen as significantly overvalued.

Moats are common in life science tools thanks to intangibles and switching costs. We generally award moats to life science and diagnostic firms that have records of consistent innovation, have a large installed base of equipment, and have a dedicated pull through of consumables on its instruments. We think the niche gas and liquid chromatography and mass spectrometry markets led by Waters and Agilent create one of the few wide-moat segments, which benefits from low disruptive risk, high barriers to entry in a comfortable oligopoly, a razor-and-blade business model, and high customer switching costs.

The outlook for the life science and diagnostic market remains stable with attractive pockets of growth. We estimate the market exceeds roughly $150 billion, growing at nearly 4% to 6% annually depending on the market segment. Population growth, increases in drug research and volume, workflow improvements, a rise in manufacturing quality standards, and emerging fields in genetic research and testing are all key industry growth drivers.

For a complete overview of our life sciences moat analysis, please see our report "Life Science and Diagnostics Industry Offers Attractive Growth and Economic Moats, but Be Wary of Valuations," which discusses our growth outlook and economic moats in the life sciences industry.