Healthcare Sector
The Stock Market – SIM, Professor West
Yiping Yang, Lu Yu
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Agenda
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Sector Overview
Business and Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
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Sector Overview
Sector Size: $4.97 T Market Cap
Weighting of Market:
•  15.1%
•  3rd largest weight
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Sector Overview
Industries within Healthcare Sector
•  Pharmaceuticals
•  Biotechnology
•  Health Care Providers & Services
•  Health Care Equipment & Supplies
•  Health Care Technology
•  Life Sciences Tools & Services
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Sector Overview
Largest by Market Cap in Healthcare Sector
Company
Market Cap ($B)
1) Johnson & Johnson
276.92
2) Novartis AG
240.32
3) Pfizer, Inc.
210.47
4) Gilead Sciences
176.06
5) Merck & Company, Inc.
163.98
6) Novo Nordisk A/S
145.70
7) Sanofi
129.48
8) Amgen, Inc.
122.20
9) CVS Health Corporation
119.01
10) Allergan plc.
118.66
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Sector Overview
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Sector Overview
Healthcare Sector Performance
•  Year-to-Date: 11.39% returns
•  Quarter-to-Date: 2.75% returns
•  Best performing sector over the past few
years
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Sector Overview
Citation: http://www.yardeni.com/pub/peacockperf.pdf
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Business & Economic Analysis
Economy Outlook
•  U.S. economy: mid-cycle expansion
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expectations to grow, jobs, healthcare spend
•  Strong U.S. Dollar
•
exposure to FX risk
•  Low inflation
•  Plunge in oil prices
•
lower raw material and distribution cost
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Business & Economic Analysis
Business Analysis
•  Defensive industry
•  Relatively inelastic demand
•  Consolidation among companies
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Business & Economic Analysis
5 Forces Analysis: Barriers to Entry
•  High
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Pharma/Biotech: huge upfront investment, high
requirement on research
Health insurance: large consumer base, brand,
network
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Business & Economic Analysis
5 Forces Analysis: Power of Suppliers
•  Low
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•
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Fragmented industry
Low switching costs
Many suppliers
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Business & Economic Analysis
5 Forces Analysis: Power of Buyers
•  Low
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Pharma/Biotech: pharmacies, retailers
Health insurance: policyholders, through employers
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Business & Economic Analysis
5 Forces Analysis: Intensity of Rivalry
•  High
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Especially in generic drugs
Patented drug is monopoly
Race for new drugs
M&A activity may increase though
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Business & Economic Analysis
5 Forces Analysis: Substitutes
•  Low
•
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Health services is a necessity
Alternative therapies not viable
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Business & Economic Analysis
5 Forces Analysis: Summary
•  Attractive Industry
•  Good for established players
•  Hard for newcomers and smaller
companies
•  Competition/Consolidation/ACA may
impact margins
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Business & Economic Analysis
External Factors
•  Patient Protection and Affordable Care
Act (Obamacare)
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•
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Members/Coverage, Exchanges
King v. Burwell
Regulations
•  FDA regulations
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Slowing patent expirations
Expanded coverage
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Business & Economic Analysis
Users and Geography
•  Aging global population
•  Expanding middle market in developing
countries
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Financial Analysis
Key Observations
•  Increasing revenues
•  Free cash flow generator
•  Shrinking margins
•  Lower margin than the market
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Valuation Analysis
Healthcare CY 2009
Sector
CY 2010
CY 2011
CY 2012
CY 2013
CY 2014
P/E
P/B
P/S
P/CF
12.99
2.44
1.25
9.59
11.99
2.37
1.16
11.17
12.22
2.52
1.18
12.22
14.76
2.68
1.34
14.76
20.01
3.50
1.74
19.83
22.35
4.22
1.88
21.96
Gross
Margin
33.91
34.34
34.35
33.85
33.90
33.16
Operating
Margin
12.48
12.10
12.25
11.74
10.62
10.81
Profit
Margin
9.60
7.28
7.59
7.60
8.33
7.98
ROE
22.00
15.39
16.36
15.68
17.56
17.85
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Valuation Analysis
Current ratios
P/E
P/B
P/S
P/CF
S&P 500
Healthcare
18.67
22.53
2.82
4.45
1.81
1.96
11.99
17.77
IT
Financials
20.04
15.26
3.86
1.41
3.27
2.37
13.75
11.40
Materials
Telecom
Utilities
Cons. Discret.
20.18
14.59
16.12
22.11
3.51
3.48
1.63
5.10
1.61
1.43
1.54
1.55
11.49
5.90
6.53
13.76
Cons. Staples
19.80
5.39
1.35
14.76
Industrials
17.31
3.82
1.60
11.87
Energy
16.17
1.75
1.21
7.62
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Valuation Analysis
Fastest Expanding Industry
•  In terms of multiples
•  Horizontally and vertically
•  Due to economy recovery and regulations
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Recommendation
Strengths
•  Outstanding performance
•  Sound fundamentals
•  Defensive nature
•  Advantageous regulations
•  Consolidations
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Recommendation
Risks
•  High valuation
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overvalue/bubbles
•  Demand in foreign markets
•  Uncertainty on ACA/regulations
•  Anti-trust issues among consolidations
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Recommendation
Weighting Recommendation
•  Portfolio:
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Cautiously Overweight Healthcare Sector
•  Overweight industry:
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Healthcare Provider & Services
•  Underweight industry:
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Healthcare Equipment & Supplies
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Questions?
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Thank You!
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