Healthcare: Eleven A-Grades and Three Falling Giants

The Sector Split No One's Talking About

Healthcare just delivered 11 A-grades out of 18 companies. That's a 61% success rate, better than tech's distribution when you adjust for the higher margin threshold. The median FCF margin sits at 15.5%, right at the sector's A-grade cutoff. This should be a clean story about pharmaceutical cash machines and medical device dominance.

Except six companies graded F. And three of them are household names with market caps in the hundreds of billions.

The sector isn't struggling. It's bifurcated. One half prints money. The other half is structurally broken.

The Cash Printers

Gilead leads with a 35.8% FCF margin and a stable grade. That margin is double the sector median. The company converted pandemic-era revenue into durable cash flow, and the balance sheet shows it: Gilead sits on net cash with minimal debt pressure. The stable trend means this isn't a fluke quarter. This is the baseline.

Regeneron follows at 26.3%, though the declining trend is worth watching. The margin still clears the A-grade threshold by 11 percentage points, so there's room for slippage before it matters. But declining trends in high-margin businesses usually mean pricing pressure or pipeline gaps. The grade holds for now. The direction doesn't.

Zoetis and Intuitive Surgical both sit just under 25%. Zoetis is stable, which makes sense for an animal health business with subscription-like revenue. Intuitive is improving, and that's the more interesting story. Surgical robotics requires massive upfront R&D, but once the installed base grows, the razor-and-blades model kicks in. An improving trend at a 24.7% margin suggests the model is working.

Johnson & Johnson rounds out the top five at 20.3% with an improving trend. This is what diversification looks like when it actually works. Pharma, devices, consumer health (now spun off), all generating cash at different cycle points. The improving trend tells you the post-spin structure is cleaner.

These five companies share two traits: high margins and manageable debt. The sector average debt-to-FCF ratio is 4.5x. These names sit well below that. When your margin is 20%+ and your debt load is light, you survive pricing pressure, patent cliffs, and regulatory changes. You have options.

The F-Grade Problem

Now look at the bottom.

Moderna posted a -126.8% FCF margin. The improving trend means it's getting less catastrophic, but you don't celebrate a company that's burning $1.27 for every dollar of revenue just because it used to burn more. This is what happens when a one-product COVID story tries to build a platform business. The cash consumption is structural until the pipeline delivers. The grade reflects reality.

Vertex sits at -8.9% with a declining trend. This one's messier. Vertex has real products, real revenue, and a strong position in cystic fibrosis treatment. But the company is investing heavily in cell and gene therapy acquisitions while facing pricing pressure on existing products. Negative cash flow with a worsening trend means the investments aren't paying off yet. The market prices in the pipeline. The Aureus grade prices in the cash. Right now, there isn't any.

Then there are the insurers.

Elevance Health: 1.6% FCF margin, declining trend, F grade. CVS: 1.7%, improving trend, still F. Humana: 2.0%, declining trend, F. UnitedHealth, the largest health insurer in the country, sits at 5.2% with a declining trend and an F grade.

These are not biotech startups burning cash to fund research. These are mature, established businesses with hundreds of billions in revenue. And they can't convert it to cash.

The problem is structural. Health insurers operate on thin underwriting margins, rely on medical cost trends staying predictable, and face constant regulatory pressure on rate increases. When medical costs spike or utilization rises, margins collapse. Free cash flow is what's left after you pay all the bills. For insurers, there's not much left.

CVS gets an improving trend because it's slightly less bad than last year. That's not a bullish signal. That's damage control.

What the Trends Tell You

Six companies show improving trends. Three are stable. Nine are declining.

That breakdown matters more than the grade distribution. The sector has 11 A-grades today, but nine companies are moving in the wrong direction. Some of those are high-margin names like Regeneron and Biogen that can afford to slip. Others are low-margin names like UnitedHealth and Humana that can't.

The improving names skew toward medical devices and diagnostics: Intuitive Surgical, DexCom, Boston Scientific. These businesses benefit from aging demographics and growing procedure volumes. The cash flow follows the trend.

The declining names split between pharma giants facing patent cliffs (Biogen, Pfizer) and insurers facing margin compression (UnitedHealth, Humana, Elevance). Different problems, same result: deteriorating cash generation.

Debt Isn't the Story Here

The sector average debt-to-FCF ratio of 4.5x sounds high, but it's skewed by the F-grade names. When your FCF is near zero or negative, even modest debt loads create ugly ratios. The A-grade companies mostly sit below 3x. The outliers are the insurers and the biotech burners.

This isn't a sector with a systemic debt problem. It's a sector where half the companies generate real cash and the other half doesn't. Debt stress follows from that split, not the other way around.

What This Means

Healthcare looks healthy at the top and broken at the bottom. The 11 A-grades aren't inflated. These are real businesses with real margins and real cash flow. Gilead at 35.8% isn't a temporary spike. It's a durable model.

But the sector narrative that healthcare is a safe, defensive, cash-generative industry only works if you ignore half the sector. The insurers are structurally weak. The biotech burners are speculative. The pharma giants are facing pipeline and patent pressures.

The grade distribution tells you where to look. The trend breakdown tells you where the momentum is. And right now, momentum is split. If you're buying healthcare for cash flow, you're buying the top half of this list. The bottom half is a different bet entirely.