Healthcare has historically been one of the most attractive sectors for long-term investment, supported by durable demand, favorable demographic trends, and its non-discretionary nature as an essential service. Since its inception in September 1989 through December 31, 2025, the S&P 500 Health Care Index generated an annualized return of 11.47%, modestly outperforming the S&P 500’s 10.77% annualized return over the same period. Despite this strong long-term track record, the sector has recently fallen out of favor. Investors have increasingly gravitated toward technology and artificial intelligence-related investments, while healthcare companies have navigated a more challenging macroeconomic and policy environment. Through the first half of 2026, the S&P 500 Health Care Index declined 4.09%, compared to gains of 11.55% for the S&P 500 and 26.89% for the S&P 500 Information Technology Index. As the market chases momentum elsewhere, we believe this period of short-term underperformance has led to favorable valuations across the Healthcare Sector. By our research and estimates, several high-quality companies in both domestic and international markets are trading at discounted valuations relative to their long-term growth prospects. Among the areas where we see the greatest opportunity is the Life Science Tools & Diagnostics industry.

The Life Science Tools & Diagnostics industry plays a critical role within the broader healthcare ecosystem, supplying the laboratory instruments, day-to-day supplies (‘consumables’), software, and services that enable biological research, drug discovery, clinical diagnostics, and biopharmaceutical manufacturing. Put simply, the industry provides the foundational tools that enable scientific discovery and development. These tools serve a diverse end market that includes academia, government laboratories, pharmaceutical and biotechnology companies, hospitals, and industrial customers. The industry benefits from entrenched customer relationships, an extensive global service and support network, and recurring revenue streams tied to installed laboratory instruments. For customers, the cost to switch providers can be substantial as workflows are validated around specific instruments and reagents (the chemical substances or test kits used to conduct experiments or analyses). In addition to the upfront equipment cost, which alone can be significant, replacing established laboratory tools and reagents often requires extensive requalification, disrupts ongoing operations, and can result in meaningful incremental costs. As a result, industry leaders often generate strong recurring revenue streams and high margins once equipment is placed in customer laboratories.

The industry experienced an extraordinary period of growth during the COVID-19 pandemic, driven by demand for diagnostic testing, vaccine development, and biopharmaceutical manufacturing solutions. In the years since, growth has moderated as customers normalized inventory levels and research spending faced pressure from a more challenging funding environment, weaker academic and government budgets, and softer demand in China (traditionally a high-growth region for major US and EU tools producers).

Despite these near-term headwinds, we believe the industry’s long-term growth outlook remains attractive. Key secular trends include an aging US population, growing investment in biologic drug development, increasing adoption of individualized precision medicine, and continued advances in genomics and proteomics (the study and analysis of DNA and proteins, respectively). As scientific research continues to become more complex and healthcare increasingly shifts toward targeted therapies and diagnostics, demand for sophisticated analytical instruments, consumables, and services should continue to grow.

Beyond these long-term secular trends, we see several factors that could further support industry growth over the next decade. The adjacent pharmaceutical and biotechnology industry faces an unprecedented wave of patent expirations, with approximately $300 billion of branded drug revenue expected to lose exclusivity by 2030.¹ As companies work to replace these revenues, increased investment in drug discovery and development should drive greater demand for research tools and services. At the same time, early research suggests that advances in artificial intelligence have the potential to meaningfully improve R&D productivity and increase the number of therapies progressing through clinical development. Supporting these trends, laboratories are increasingly investing in automation and workflow optimization to handle more complex research workflows while improving efficiency, testing volume, and reproducibility. Taken together, we believe demand for advanced life science tools and diagnostics will accelerate and increasingly favor companies with differentiated technologies and consistent execution.

While we are broadly constructive on the prospects of the Life Science Tools and Diagnostics industry, we also believe the considerable dispersion in outcomes between more established companies and earlier-stage technological innovators provides fertile ground for diligent active managers to add value. Companies in the former group tend to be better capitalized with diversified revenue streams, while the latter tend to be more narrowly focused and, resultingly, more vulnerable to exogenous factors such as regulatory shifts or downstream biopharma funding. Through our disciplined research process, we aim to identify high-quality companies positioned to reward shareholders over the long-term. Our core criteria include strong competitive moats, durable balance sheets capable of weathering a range of economic environments, consistent free cash flow generation, and management teams with proven track records of disciplined capital allocation and long-term value creation. Most importantly, we invest only when a company is trading at a discount to our estimate of intrinsic value.

Among the industry’s leading participants, we believe Thermo Fisher Scientific (TMO) stands out as one of the most diversified and strategically advantaged platforms. The company operates across life science solutions, analytical instruments, specialty diagnostics, and laboratory products and biopharma services. The result is broad exposure across virtually every stage of the research and development workflow. Thermo Fisher’s scale creates meaningful advantages in procurement, manufacturing, distribution, and service capabilities, while its portfolio breadth allows the company to serve as a strategic partner rather than simply an equipment vendor. The company has also built a highly resilient recurring revenue model through consumables, services, and bioproduction exposure. Management’s acquisition strategy has historically been disciplined and value-creating, further strengthening its competitive positioning in bioprocessing, clinical research, and diagnostics. More recently, the company announced a strategic collaboration with OpenAI aimed at accelerating drug development and improving clinical trial efficiency through the application of advanced AI across its clinical research and pharmaceutical services businesses. As a result, we believe Thermo Fisher is poised to benefit from long-term growth in biologics, cell and gene therapy, and outsourced pharmaceutical development and manufacturing.

Bruker Corporation (BRKR) occupies a differentiated niche within the industry, focusing on high-performance analytical instrumentation and specialized diagnostic solutions. The company holds leading positions in mass spectrometry, nuclear magnetic resonance, microbiology diagnostics, proteomics, and spatial biology, supported by limited direct competition, deep technical expertise, and highly entrenched customer relationships. Bruker’s competitive advantage is underpinned by its leadership in highly specialized analytical technologies and its exposure to several attractive, rapidly evolving areas of scientific research. While outsized exposure to academic and government research customers has weighed on recent performance, we believe underlying demand remains intact and should support a return to more consistent growth over time. In addition, recent acquisitions have increased the company’s exposure to higher-growth biopharmaceutical end markets, while its smaller security detection and superconducting technologies businesses have become increasingly meaningful contributors to growth. Although Bruker’s narrower focus can result in greater earnings volatility relative to larger diversified peers, we believe the company is well positioned to benefit from growing analytical complexity across its end markets. We also appreciate the strong alignment between management and shareholders, as the CEO owns more than 25% of the company’s outstanding shares.

Tecan Group AG (TECN SW), headquartered in Switzerland, is a leading provider of laboratory automation, liquid handling, and OEM instrumentation solutions serving the in-vitro diagnostics, life science research, and medical device markets. The company offers a broad portfolio of instruments, components, consumables, and services, with particular strength in liquid handling, laboratory automation, and workflow integration. These capabilities are becoming increasingly important as laboratories integrate AI-enabled solutions and seek to improve efficiency, testing volumes, and reproducibility while managing increasingly complex research and diagnostic workflows. While macroeconomic headwinds and OEM customer concentration have weighed on recent performance, Tecan remains well positioned to benefit from the ongoing adoption of laboratory automation, an area we believe is one of the industry’s most attractive long-term growth drivers. The company’s large installed base, deep engineering expertise, and longstanding OEM partnerships should provide a strong competitive foundation as laboratories continue to automate increasingly sophisticated workflows. Moreover, management’s recent focus on portfolio optimization and operational efficiency should drive meaningful earnings growth. We believe that the combination of ongoing operational improvements and a net cash balance sheet positions Tecan to successfully navigate near-term industry challenges while continuing to invest for long-term growth.

In summary, the Life Science Tools & Diagnostics industry remains an attractive area for long-term investment, supported by high barriers to entry, recurring revenue streams, and its essential role in enabling healthcare innovation. While short-term demand cycles may create periods of volatility, we believe the industry’s underlying growth drivers enable high-quality companies with durable competitive advantages to compound value over time. Moreover, the combination of durable industry fundamentals and meaningful dispersion creates a compelling backdrop for disciplined security selection. In this environment, we believe our continued emphasis on rigorous research and valuation discipline serves us well in our goal of identifying the companies best equipped to navigate near-term variability while continuing to build long-term value for investors.

Disclosures:

VELA Investment Management, LLC is a registered investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about VELA Investment Management, LLC, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, and/or Form CRS, which is available upon request.

Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

The views expressed are those of VELA Investment Management, LLC as of 06/23/2026 and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Third-party information in this report has been obtained from sources believed to be accurate; however, VELA makes no guarantee as to the accuracy or completeness of the information.

As of the most recent month end period, the following holdings (noted in this piece) were held in one or more VELA Investment Management strategies: TMO, BRKR, TECN. The companies identified above are example holdings and subject to change without notice. The companies above have been selected to help illustrate VELA’s investment process. This information should not be considered a recommendation to purchase or sell any particular security.

The S&P 500 (Standard & Poor’s 500) is a stock market index that tracks the performance of 500 of the largest publicly traded companies in the United States. It covers approximately 80% of the total U.S. equity market value and is widely considered a proxy for the overall health of the American economy.

The S&P 500 Health Care Index is a subset of the S&P 500 that tracks the performance of publicly traded health care and medical companies in the United States. It serves as a benchmark for the sector and includes major players in pharmaceuticals, biotechnology, and medical devices.

Capex (Capital Expenditure) is money a company spends to buy, maintain, or improve its long-term physical assets, like buildings, equipment, technology, or land, to increase future economic benefits, rather than for daily operations.

Free Cash Flow (FCF) is the cash a company generates after covering its operating expenses and capital expenditures (Capex). It represents the discretionary cash available for reinvestment, debt repayment, dividends, or acquisitions without affecting day-to-day operations.

Intrinsic Value represents the true, inherent worth of an asset, investment, or company based on its fundamental, underlying factors—such as cash flows, revenue, or assets—rather than its current, fluctuating market price. It serves as an objective, calculated estimate of long-term value used by investors to identify undervalued or overvalued securities.

¹Pareto Research Partners

Data Source: Factset