The health-care sector faces mixed prospects in 2025 with opportunities in distributors and labs amid broader challenges in managed care, health-care technology and animal health, Morgan Stanley said Tuesday in a report.

Managed care stocks "significantly" underperformed in 2024, pressured by policy uncertainty, Medicaid mismatches and "utilization headwinds", Morgan Stanley said. "Medicare Advantage should improve, offering some level of visibility on already low expectations across the group," the report said.

Morgan Stanley downgraded Elevance Health (ELV) to equal weight from overweight "on limited visibility" across government segments, while favoring UnitedHealth (UNH) with an overweight rating.

Distributors including McKesson (MCK) and Cardinal Health (CAH) remain "safe havens" with "strong" and "greater" policy clarity, Morgan Stanley said. The firm upgraded the health-care services and distribution industry to attractive.

Clinical labs are poised for strong growth in 2025, driven by pricing visibility, regulatory insulation and favorable utilization trends, Morgan Stanley said, upgrading Labcorp (LH) and Quest Diagnostics (DGX) to overweight from equal weight.

Morgan Stanley recommended selectivity in health-care tech and providers amid "mixed demand and policy uncertainties."

"Near-term utilization trends are positive for hospitals with the bigger question on sustainability," the report said. Morgan Stanley named LifeStance Health Group (LFST) and Hims (HIMS) as top picks while expressing caution on Veeva Systems (VEEV) on risks of share loss in customer relationship management "and lingering headwinds to life sciences spending."

In animal health, Morgan Stanley said it lacks visibility on when vet visits will return. The firm named IDEXX Laboratories (IDXX) as top pick in animal health with an overweight rating and a $559 price target.

Morgan Stanley boosted its price targets on McKesson, Cardinal Health, Labcorp, Quest Diagnostics and Veeva Systems and cut the target on Elevance Health.

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