Healthcare
HuaWang
RanZhang
ToddWhite
SimonWu
Businessand
EconomicAnalysis
SectorOverview
Agenda
Recommenda<on
FinancialAnalysis
Valua<onAnalysis
1
Sector Overview
Numbers & Charts
Pie Chart of S&P 500
Telecommunica<on
Services,2.37%
Sector Size:
•  MarketCap：$4.42T
Materials,2.87%
Informa<onTechnology,
20.37%
(10/13/2015)
Weighting Market:
ConsumerDiscre<onary,
13.16%
ConsumerStaples,9.90%
Energy,7.09%
Industrials,9.99%
•  14.43%(10/09/2015)
•  3rdlargestweight
U<li<es,3.10%
Financials,16.28%
Healthcare , 14.43%
1
Sector Overview
Performance
Healthcare Sector Performance
14.46%
Year-to-Date
Data through
10/13/2015,
by Morningstar
7.8%
Quarter-to-Date
Data through
10/13/2015,
by Morningstar
No.1
Best
performing
sector
over the past few years
1
Sector Overview
Industries (in Billion)
HealthCareTechnology,
$58.40,1%
Pharmaceuticals
LifeSciencesTools&Services,
$159.50,4%
HealthCareEquipment&
Supplies,$521.40,12%
Biotechnology
Health Care Providers & Services
Health Care Equipment & Supplies
HealthCareProviders&
Services,$657.80,15%
Health Care Technology
Life Sciences Tools & Services
Biotechnology,$885.30,20%
Pharmaceu<cals,$2,150,48%
1
Sector Overview
Companies
Company
Johnson & Johnson
Market Cap ($B)
$272.04
Novartis AG
$229.52
Pfizer, Inc.
$212.22
Gilead Sciences, Inc.
$150.91
Novo Nordisk A/S
$147.37
Merck & Company, Inc.
$145
Sanofi
$132.52
Amgen Inc.
$115.72
CVS Health Corp.
$115.22
UnitedHealth Group Inc.
$114.41
2
Business Analysis
5 Forces Analysis
Profitability and pricing by reviewing:
Power of Suppliers
Industry
Rivalry
Power of Buyers
Threats of New Entrants
Threats of Substitutes
2
Business Analysis
5ForcesAnalysis:ThreatsofNewEntrants
High Entry Barriers
Hardtoenteraindustry,leadingtolowaDrac@on,butgoodforongoingplayers
Pharma/Biotech:Hugeupfront
investmentisrequired
Highrequirementsonresearch
andnewmedicine
Healthinsurance:largeconsumer
base,brand,network
Hardtoseizemarketshares
fromexis@ngplayers
2
Business Analysis
5ForcesAnalysis:PowerofSuppliers
Low Power of Suppliers
Fragmentedindustry
Manysuppliersoutthere
Rela@velylowswitchingcosts
2
Business Analysis
5ForcesAnalysis:PowerofBuyers
Low Power of Buyers
Pharma/Biotech
Buyers:Pharmacies,Retailers
(Patent,ExampleofTuring
Pharmaceu@cals)
Healthinsurance
Policyholders,through
employers,switchcostislow.
(OSUexample)
2
Business Analysis
5ForcesAnalysis:ThreatsofSubs<tutes
Low Level of Subs
Healthservicesisanecessity
Stableperformancewithnearlylowsubs@tuteswillincreasetheaDrac@on.
Alterna@vetherapiesnotviable
ObamaCare
2
Business Analysis
High Competition
5ForcesAnalysis:IntensityofRivalry
DecreasingtheaDrac@onoftheindustryandweakeningtheabilitytogainprofits
Especiallyingenericdrugs
(Costleader)
Patenteddrugismonopoly
(Differen@a@on,Highprofit
Margin)
Racefornewdrugs(Significantly
affectthestockprice)
M&Aac@vitymayincrease
though
2
Business Analysis
Summary
•  Health Care can be considered as an attractive industry
•  Especially good for established players
•  Hard for newcomers and smaller companies
•  Competition/Consolidation can impact margins
2
Economic Analysis
Economy Background
Economy Outlook
•
•
•
Healthcaresectorkeyissues
U.S.economy:Mid-cycleexpansion
Ø
Ø
Ø
Ø
Ø
Expecta<onstogrowjobsandhealthcarespending
Strong U.S. Dollar
Lower Interest Rate
Lower Inflation Rate
Lower Unemployment Rate
Addressingcostsofprovidingcare
Transi@oningtovalue-basedcare;
Adap@ngtoarealignedmarket;
Achievingscale;
Managingregulatoryandrisk
2
Economic Analysis
Characteristics
•  Growing populations and consumer wealth , Expanding middle market
in developing countries
•  Aging global population, aging societies and chronic diseases
•  Defensive industry
•  Relatively inelastic demand
•  Consolidation among companies
2
Economic Analysis
•  Patient Protection and
Affordable Care Act
(Obamacare)
External Factors
Morepeopleundercoverage
Slowingpatentexpira@ons（TPP）
•  FDA Regulations
Expandedcoverage
2
Economic Analysis
Regression
•  Raw Beta: 0.988
•  R(Correlation): 0.825
3
Chart & Numbers
Financial Analysis
2011
2012
2013
2014
Current
Gross Margin
34.35%
33.85%
33.90%
33.53%
32.92%
Operating Margin
12.25%
11.74%
10.62%
10.68%
10.29%
Net margin
7.59%
7.60%
8.33%
7.88%
7.31%
ROE
16.36
15.68
17.57
17.28
16.55
-
4.86%
4.89%
4.76%
4.39%
R&D%
2012
Sector
Sales & earnings Growth Rate
Healthcare Sector Financial Performance
2013
2014
Current
2015E
2016E
1.18%
-4.61%
6.91%
2.32%
11.81%
8.09%
8.53%
6.52%
13.53%
36.58%
7.24%
10.90%
Johnson & Johnson
3.4%
21.3%
6.1%
22.2%
4.2%
23%
-5.3%
22.9%
-5.4%
24.7%
3.1%
24.4%
Pfizer
-16.2%
22.3%
-5.9%
23.5%
-4.0%
24.2%
-3.9%
23.5%
-3.6%
27.6%
9.4%
27.8%
Gilead
15.7%
28%
15.5%
28.1%
122.2%
49.1%
67.4%
51.9%
26.7%
56.9%
-2.1%
55.9%
Major Companies:
3
Financial Analysis
Observations
•  Increasing revenues
•  Shrinking margins
•  Lower margin than the market
•  Free cash flow generator
5
Recommendations
Risks
Demandinforeign
markets
HighEvalua<ons:
Overvalued
An<-trustissues
among
consolida<ons
Regula<ons
5
Recommendations
Strengthens
✚  Defensive nature
3
✚  Advantageous regulations
✚  Sound fundamentals
6
2%
4
5
✚  Outstanding performance
1
45 %
✚  Consolidations
5
Recommendations
Valuation Analysis
Healthcare Sector vs. Market
2011
Price/Earnings
S&P 500
Price/Book
S&P 500
EV/Sales
S&P 500
EV/EBITDA
S&P 500
2012
2013
2014
Current
2015E 2016E
12.22 14.76 20.01
22.83
21.91
17.00
15.33
13.45 14.36 17.48
18.24
18.02
17.18
15.65
2.52
2.68
3.50
4.15
3.74
3.56
3.26
2.05
2.14
2.58
2.82
2.73
2.63
2.47
1.22
1.42
1.83
2.0
1.99
1.90
1.77
1.60
1.69
2.02
2.15
2.17
2.17
2.07
7.63
8.84
13.0
13.97
14.26
11.70
10.65
8.78
9.52
10.72
11.59
12.11
10.66
9.92
•  P/Ehasarela<velycontracttrend
•  Otherrela<vevalua<onsremain
constant.
•  Thesectoriscurrentlyoverweight
(>100bps)andwillremainslightly
overvaluedintheshortfuture.
5
Recommendations
Weighting Recommendations
Portfolio
•  In S&P 500, healthcare sector is overvalued.
•  SIM vs. S&P 500: 13.28% vs. 14.87%, SIM is already underweight .
So keep it.
Cau<ouslyunderweight
thesectorinS&P500.
Therefore keep what we
have in SIM.
Questions ?
THANK YOU
Healthcare Sector Analysis