Healthcare Stocks
The Stock Market – SIM, Professor West
Yiping Yang, Lu Yu
1
Agenda
•
•
•
•
Sector/SIM Overview
Recommendation Summary
Stock Analysis of Recommendations
Vote
2
Sector Overview
3
Healthcare Sector
•  Slightly overweight
•  King v Burwell resolved (favorable for
managed care companies)
•  Strong fundamentals, good momentum,
continued upside
4
SIM Weighting
•  SIM Weight (16.16%) vs.
S&P Weight (15.42%)
•  Currently healthcare +0.74%
•  Overweight – keep the same
S&P 500 Weight 3.13% 2.27% 2.82% 2.88% 3.00% SIM Weight Health Care 2.25% 15.42% 16.16% Consumer Discre>onary Consumer Staples 19.63% 12.80% 10.09% 9.43% 16.63% 7.78% Energy 20.79% 12.61% 8.39% 9.41% Financials Industrials Informa>on Technology 17.76% 7.37% Materials Telecommunica>on Services 5
Asset Weight in SIM
•  Aetna – 4.3%
•  Gilead Sciences – 4.26%
•  McKesson Corp – 3.52%
•  Teva – 4.08%
6
Summary
Current Price Target Price
Upside /
Downside
Action
AET
111.55
134.25
+20.4%
BUY
GILD
117.78
136.65
+16.0%
BUY
MCK
232.49
275.46
+18.5%
BUY
TEVA
63.35
58.21
-8.1%
SELL
7
Summary
Current Weight
Target Weight
BPS
AET
4.3%
4.8%
+50 BPS
GILD
4.26%
4.76%
+50 BPS
MCK
3.52%
4.6%
+108 BPS
TEVA
4.08%
2.00%
-208 BPS
8
Company Overview
•
•
•
•
Founded 1853
Diversified health care benefits company
Serves 46 Million people
Among the largest U.S. insurance
providers
9
Stock Performance
140
120
2014 Sales: $58.00B
Return YTD: 44.05%
Dividend Yield: 0.75%
Market Cap: $44.51B
52-week Range: 71.81-134.40
100
80
60
40
20
7/22/2010
7/22/2011
7/22/2012
7/22/2013
7/22/2014
10
Drivers/Opportunities
•  Merger with Humana (1st to consolidate)
•
$37B Deal; Medicare Advantage/National Presence
•  Economies of Scale
•
Synergies from 2013 acquisition of Coventry Health
•  Health Technology Investments
•
•
Consumer-centric retail model
Market Share, Pricing Power, Revenue
•  Public Health Exchanges, Dual Eligibles
•  Accountable Care Solutions
•
Value-based payment models, ACOs
11
Risks
•  The Affordable Care Act (ACA) fees,
costs, and regulations
•  Synergies/Economies of Scale not
realized
•  Merger with Humana falls through
•
•
Anti-trust, associated fees
Overpay, no synergy, higher claims costs
12
Key Ratios - Historical
AET
2010
2011
2012
2013
2014
TTM
P/E
7.3
9.0
9.6
13.9
14.8
18.7
P/S
0.4
0.5
0.4
0.5
0.6
0.7
P/B
1.2
1.4
1.5
1.8
2.1
2.6
P/CF
9.1
6.4
8.8
11.0
8.7
11.7
ROE
18.22
19.85
16.15
15.67
14.32
14.67
13
Key Ratios - Competitors
TTM
AET
UNH
HUM
ANTM
CI
Industry
P/E
18.7
20.4
24.0
16.4
19.3
22.6
P/S
0.7
0.9
0.6
0.6
1.1
0.7
P/B
2.6
3.7
2.8
1.7
3.6
3.0
P/CF
11.7
13.6
27.5
12.3
18.8
-
ROE
14.67
18.42
12.2
11.2
19.6
13.4
14
DCF
15
Sensitivity Analysis
10.00% 10.25% 10.50% 10.75% 11.00% 3.00% 138.64 133.86 129.39 125.21 121.29 3.25% 141.45 136.42 131.74 127.36 123.27 3.50% 144.48 139.18 134.25 129.66 125.37 3.75% 147.76 142.15 136.95 132.13 127.63 4.00% 151.30 145.36 139.86 134.77 130.04 16
Recommendation
Buy!
AET
Current
Price
Target
Price
Upside
Action
BPS
111.55
134.25
+20.4%
BUY
50 BPS
17
Company Overview
•
•
•
•
Founded 1987
Researched-Based Biopharmaceuticals
Focus: Life-threatening disease
Liver Disease and Infectious Disease
•
HIV/AIDS, Hepatitis, Cardiovascular, Respiratory
•  Disrupt compounds to form a more
comprehensive therapy
•  Single-tablet regimens
18
Stock Performance
120
100
2014 Sales: $24.89B
Return YTD: 24.67%
Dividend Yield: 0.37%
Market Cap: $172.06B
52-week Range: 85.95-123.37
80
60
40
20
7/22/2010
7/22/2011
7/22/2012
7/22/2013
7/22/2014
19
Key Products
•  HIV Franchise
•
Viread, Truvada, Complera, Stribild
•  Hepatitis C Franchise
•
Sovaldi, Harvoni ($12.4 B – 2014 Sales)
•  Influenza
•
Tamiflu
•  Oncology
•
Zydelig – treats certain leukemias & lymphomas
20
Pipeline
Phase 1 Phase 2
Phase 3
Submitted
Total
HIV/AIDS
1
1
1
2
5
Liver Disease
1
5
2
-
8
Hematology/
Oncology
4
4
3
-
11
Cardiovascular
-
4
2
-
6
Inflammation/
Respiratory
3
5
-
-
8
21
Key Ratios - Historical
GILD
2010
2011
2012
2013
2014
TTM
P/E
10.9
11.9
22.4
41.3
16.8
13.5
P/S
4.0
4.0
6.0
11.8
7.6
7.0
P/B
5.0
5.0
6.0
10.6
10.4
10.1
P/CF
11.2
9.8
18.2
40.8
15.0
11.3
ROE
47.44
44.49
32.30
29.74
90.32
92.96
22
Key Ratios - Competitors
TTM
GILD
BIIB
AMGN
CELG
Industry
P/E
13.5
29.2
22.0
46.0
46.1
P/S
7.0
9.5
6.1
14.0
10.5
P/B
10.1
8.2
4.7
15.8
9.4
P/CF
11.3
26.8
14.4
36.1
-
ROE
92.96
31.5
23.18
43.36
22.6
23
Drivers/Opportunities
•  HIV Franchise
•  Maintain HIV dominance; single-tablet regimens –
convenience/affordability
•  Hepatitis C Franchise
•  Patent through 2029; High efficacy/low resistance –
help to maintain market share in long run
•  Rest of the world sales?
•  Japan sign-on for Hep C (Sovaldi & Harvoni) – adds
to EPS growth
•  $14.5B cash – Potential Acquisitions?
•  Pipeline Potential – Oncology, etc.
•  Strategy/Expertise
24
Risks
•  ~61% of total revenue from HCV
(hepatitis C)
•
Revenue growth may peak soon
•  Expiring Patents (beginning 2018)
•  Pricing Pressures (Payors)
•
Lower pricing but more volume
•  Pipeline Success
•  Maintaining superior efficacy/safety status
25
DCF
26
Sensitivity Analysis
10.00% 10.25% 10.50% 10.75% 11.00% 4.00% 141.02 135.73 130.84 126.31 122.10 4.25% 144.44 138.81 133.63 128.84 124.40 4.50% 148.17 142.16 136.65 131.57 126.88 4.75% 152.25 145.81 139.93 134.53 129.55 5.00% 156.75 149.82 143.51 137.75 132.45 27
Recommendation
Buy!
GILD
Current
Price
Target
Price
Upside
Action
BPS
117.78
136.65
+16.0%
BUY
50 BPS
28
Company Overview
•  Founded 1833
•  One of the largest and oldest
pharmaceutical distributer
•  Largest non-weapon contractor of U.S.
government
•  Two segments:
•
•
Distribution Solution (98% sales)
Technology Solution (2% sales)
29
Stock Performance
250
230
210
190
2014 Sales: $179.05B
Return YTD: 8.53%
Dividend Yield: 0.43%
Market Cap: $52.06B
52-week Range: 178.28-243.61
170
150
130
110
90
70
50
7/22/2010
7/22/2011
7/22/2012
7/22/2013
7/22/2014
30
Key Ratios - Historical
2010
2011
2012
2013
2014
TTM
P/E
17.8
17.2
14.7
27.2
34.6
31.1
P/S
0.2
0.2
0.2
0.3
0.3
0.3
P/B
2.5
2.7
3.0
4.6
5.4
6.8
P/CF
9.7
6.8
15.5
13.4
19.6
17.7
ROE
4.73
4.07
4.39
3.94
2.92
2.79
31
Key Ratios - Competitors
MCK
CAH
ABC
P/E
31.1
25.3
N/A
P/S
0.3
0.3
0.2
P/B
6.8
4.5
13.2
P/CF
17.7
12.2
8.7
ROE
2.79
4.39
-32.42
32
Drivers/Opportunities
•  Good industry prospect
•  Leading position in industry
•
Acquisition of the largest European drug
distributer
•  Strong revenue growth
•
Double digit growth in recent years
33
Risks
•  High multiples
•  Low margins
•
•
Gross margin 6.37%
Operating margin 1.66%
34
DCF
McKesson Corp. (MCK)
Analyst: Lu Yu
7/21/2015
Terminal Discount Rate =
Terminal FCF Growth =
Year
2016E
Revenue
% Growth
12,146
9.50%
4.0%
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
2026E
13,152
8.3%
14,506
10.3%
15,957
10.0%
17,553
10.0%
19,308
10.0%
21,239
10.0%
23,363
10.0%
25,699
10.0%
28,269
10.0%
31,096
10.0%
Operating Income
Operating Margin
3,511
28.9%
4,085
31.1%
4,941
34.1%
4,787
30.0%
5,266
30.0%
5,792
30.0%
6,372
30.0%
7,009
30.0%
7,710
30.0%
8,481
30.0%
9,329
30.0%
Taxes
Tax Rate
1,053
30.0%
1,226
30.0%
1,482
30.0%
1,436
30.0%
1,580
30.0%
1,738
30.0%
1,911
30.0%
2,103
30.0%
2,313
30.0%
2,544
30.0%
2,799
30.0%
Net Income
% Growth
2,458
2,860
16.4%
3,458
20.9%
3,351
-3.1%
3,686
10.0%
4,055
10.0%
4,460
10.0%
4,906
10.0%
5,397
10.0%
5,936
10.0%
6,530
10.0%
1,032
8.5%
(3,826)
-31.5%
577
4.8%
1,118
8.5%
(503)
-3.8%
592
4.5%
1,233
8.5%
(677)
-4.7%
617
4.3%
1,277
8.0%
(638)
-4.0%
654
4.1%
1,316
7.5%
(702)
-4.0%
702
4.0%
1,352
7.0%
(772)
-4.0%
772
4.0%
1,381
6.5%
(850)
-4.0%
850
4.0%
1,402
6.0%
(935)
-4.0%
935
4.0%
1,413
5.5%
(1,028)
-4.0%
1,028
4.0%
1,413
5.0%
(1,131)
-4.0%
1,131
4.0%
1,244
4.0%
(1,244)
-4.0%
1,244
4.0%
(913)
2,883
-415.8%
3,398
17.9%
3,335
-1.9%
3,598
7.9%
3,862
7.3%
4,142
7.3%
4,439
7.2%
4,754
7.1%
5,088
7.0%
5,286
3.9%
24,398
40,335
64,733
-1.67%
38%
62%
100%
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
% Growth
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
22.2
26.3
12.0
14.2
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
Terminal Value
Free Cash Yield
19.1
22.6
10.5
12.4
15.8
18.7
8.8
10.5
99,959
5.29%
Terminal P/E
15.3
Terminal EV/EBITDA
9.5
235
$
$
232.49
275.46
18.5%
35
Sensitivity Analysis
9.25% 9.50% 9.75% 3.50% 272.3 260.4 249.5 3.75% 280.3 267.6 256.0 4.00% 289.1 275.5 263.1 4.25% 298.7 284.1 270.8 4.50% 309.4 293.5 279.2 36
Recommendation
Buy!
MCK
Current
Price
Target
Price
Upside
Action
BPS
232.49
275.46
+18.5%
BUY
108 BPS
37
Company Overview
•  Founded 1901
•  Largest generic drugs manufacturer in
the world
•  Two segments:
•
•
Generic drugs (48% sales)
Specialty drugs (42% sales)
•  Active M&A
Teva
Perrigo
Mylon
38
Stock Performance
70
65
60
2014 Sales: $20.27B
Return YTD: 3.95%
Dividend Yield: 2.14%
Market Cap: $50.11B
52-week Range: 47.36-68.75
55
50
45
40
35
30
7/22/2010
7/22/2011
7/22/2012
7/22/2013
7/22/2014
39
Key Ratios - Historical
2010
2011
2012
2013
2014
TTM
P/E
14.4
12.0
16.6
28.3
17.9
19.8
P/S
3.0
2.1
1.6
1.7
2.4
2.7
P/B
2.1
1.6
1.4
1.7
2.1
2.4
P/CF
11.6
9.6
7.1
8.6
11.7
9.8
ROE
16.18
12.50
8.73
5.60
13.32
12.09
40
Key Ratios - Competitors
TEVA
MYL
PRGO
AGN
P/E
19.8
31.5
126.1
N/A
P/S
2.7
3.5
6.1
5.4
P/B
2.4
3.6
2.9
1.9
P/CF
9.8
27.1
24.9
33.8
ROE
12.09
4.64
2.24
-5.95
41
Drivers/Opportunities
•  Cash Cow: Copaxone
•
•
Prevalent drug for multiple sclerosis
21% of total revenue
•  Shift to patent drugs
•
Gross margin (87.1%) almost doubled than
generics (43.3%)
•  Merger success
•  New blockbuster drug
42
Risks
•  Merger failure
•
Resistance from Mylan, antitrust concerns
•  Copaxone patent expire
•
September 2015, extension unlikely
•  FX exposure
•
Substantial European presence
43
DCF
Teva Pharmaceutical (TEVA)
Analyst: Lu Yu
7/21/2015
Terminal Discount Rate =
Terminal FCF Growth =
Year
2015E
Revenue
% Growth
19,461
10.00%
3.0%
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
19,072
-2.0%
19,263
1.0%
19,455
1.0%
19,747
1.5%
20,043
1.5%
20,444
2.0%
20,853
2.0%
21,374
2.5%
21,909
2.5%
22,566
3.0%
Operating Income
Operating Margin
3,814
19.6%
4,024
21.1%
4,064
21.1%
4,086
21.0%
4,147
21.0%
4,410
22.0%
4,498
22.0%
4,796
23.0%
4,916
23.0%
5,258
24.0%
5,416
24.0%
Interest Income
Interest % of Sales
292
1.5%
286
1.5%
289
1.5%
292
1.5%
296
1.5%
301
1.5%
307
1.5%
313
1.5%
321
1.5%
329
1.5%
338
1.5%
Taxes
Tax Rate
282
8.0%
299
8.0%
302
8.0%
304
8.0%
308
8.0%
329
8.0%
335
8.0%
359
8.0%
368
8.0%
394
8.0%
406
8.0%
Net Income
% Growth
3,251
3,439
5.8%
3,473
1.0%
3,490
0.5%
3,543
1.5%
3,780
6.7%
3,856
2.0%
4,125
7.0%
4,228
2.5%
4,535
7.3%
4,671
3.0%
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
1,362
7.0%
186
1.0%
778
4.0%
1,240
6.5%
33
0.2%
668
3.5%
1,156
6.0%
(160)
-0.8%
578
3.0%
1,070
5.5%
(162)
-0.8%
584
3.0%
987
5.0%
(164)
-0.8%
592
3.0%
902
4.5%
(167)
-0.8%
601
3.0%
818
4.0%
(170)
-0.8%
613
3.0%
730
3.5%
(173)
-0.8%
626
3.0%
641
3.0%
(178)
-0.8%
641
3.0%
657
3.0%
(182)
-0.8%
657
3.0%
677
3.0%
(188)
-0.8%
677
3.0%
Free Cash Flow
% Growth
4,020
4,044
0.6%
3,891
-3.8%
3,815
-2.0%
3,773
-1.1%
3,914
3.7%
3,890
-0.6%
4,056
4.3%
4,050
-0.1%
4,353
7.5%
4,483
3.0%
24,507
25,435
49,942
7.40%
49%
51%
100%
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
16.7
15.4
10.5
9.6
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
Terminal Value
Free Cash Yield
15.8
14.5
10.3
9.5
15.6
14.4
10.4
9.6
65,971
6.80%
Terminal P/E
14.1
Terminal EV/EBITDA
10.8
858
$
$
63.35
58.21
-8.1%
44
Sensitivity Analysis
9.75% 10.00% 10.25% 2.50% 58.0 56.1 54.3 2.75% 59.1 57.1 55.2 3.00% 60.3 58.2 56.2 3.25% 61.6 59.4 57.3 3.50% 63.0 60.6 58.5 45
Recommendation
Sell!
TEVA
Current
Price
Target
Price
Upside
Action
BPS
63.35
58.21
-8.1%
SELL
208 BPS
46
Summary
Current
Price
Target
Price
Upside /
Downside
Action
BPS
AET
111.55
134.25
+20.4%
BUY
50 BPS
GILD
117.78
136.65
+16.0%
BUY
50 BPS
MCK
232.49
275.46
+18.5%
BUY
108 BPS
TEVA
63.35
58.21
-8.1%
SELL
208 BPS
47
Questions?
48
Thank You!
49