SIM Por(olio Recommenda2ons: Health Care Sector Seton Staley Agenda •  Overview •  Discussion of Stocks •
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•
•
Business Analysis Financial Analysis Valua9on Recommenda9ons Overview SIM Por(olio Alloca2ons 6/30/2014 Sector Consumer Discre9onary Consumer Staples Energy Financials S&P Index 11.78% 9.63% 10.86% 16.07% SIM 11.61% 9.92% 9.68% 14.54% +/-­‐ -­‐0.17% 0.29% -­‐1.18% -­‐1.53% Health Care 13.24% 14.63% 1.39% Industrials Informa9on Technology Materials Telecommunica9ons U9li9es Cash/Dividends Rec. Other Total 10.70% 18.73% 3.51% 2.41% 3.07% 0.00% 0.00% 100.00% 7.23% 22.09% 2.89% 0.00% 3.42% 1.47% 2.52% 100.00% -­‐3.47% 3.36% -­‐0.62% -­‐2.41% 0.35% 1.47% 2.52% 0.00% •  Recommenda2on: Market weight Health Care sector in SIM por(olio. SIM Health Care Holdings Security Ticker Industry Providers & Services Aetna AET Gilead Sciences GILD McKesson MCK Teva TEVA Pharmaceu9cals Total Biotechnology Providers & Services % of Shrs Held Mkt Price Mkt Value Por(olio 5,600 $81.08 $454,048 3.48% 7,150 $82.91 $592,807 4.54% 2,500 $186.21 $465,525 3.57% 7,500 $393,150 3.01% $1,905,530 14.60% $52.42 •  GILD is currently the 3rd highest holding in the por(olio behind TAP and APPL. SIM Recommenda2ons Security Aetna Ticker AET Industry Providers & Services Mkt % of Price* Por(olio Price Target Recommenda2on $81.08 3.48% $86.78 HOLD 4.54% $90.90 SELL (140 bps) McKesson MCK Biotechnology $82.91 Providers & Services $186.21 3.57% $207.31 HOLD Teva TEVA Pharmaceu9cals $52.42 3.01% $57.50 HOLD Gilead Sciences GILD Total 14.60% *Mkt price is as of 6/30/2014 (7/14/14 Closing Prices: AET $82.16, GILD $89.66, MCK $190.41, TEVA $54.64) **AET and MCK are Bloomberg consensus price targets. Discussion of Stocks Teva Pharmaceu2cals •  Current Price as of 6/30/2014: $52.42 •  Price target: $57.50 •  Recommenda9on: HOLD Teva Pharmaceu2cals •  Israeli based developer, manufacturer, and marketer of generic and proprietary pharmaceu9cals and ac9ve pharmaceu9cal ingredients. •  Largest generic drug manufacturer in world. Por`olio includes more than 1,400 products and it has presence in 60 countries. •  In addi9on to generics business, also has several noted branded drugs including Copaxone, the #1 prescribed treatment for Mul9ple Sclerosis. •  Due to underperformance over the past several years, new CEO turnaround specialist Erez Vigodman was brought in this year with the goal of improving company gross margins by 600 bps. Teva Pharmaceu2cals Year Total Year Total 2011 Y/Y Year Total 2012 Y/Y Year Total
$ million
Group total
10-Act
11-Act
growth
12-Act
growth*
13-Act
Y/Y
growth
16,121
18,312
14%
20,317
11%
20,314
0%
9,907
10,196
3%
10,385
2%
9,902
-5%
641
747
17%
796
7%
727
-9%
Branded Products
4,855
6,493
34%
8,150
26%
8,388
3%
CNS
3,202
4,412
38%
5,464
24%
5,545
1%
Copaxone
2,958
3,570
21%
3,996
12%
4,328
8%
Provigil*
1,126
1,159
3%
417
-64%
91
-78%
Azilect
244
290
19%
330
14%
371
12%
Nuvigil*
186
266
43%
347
30%
320
-8%
Respiratory
747
878
18%
856
-3%
964
13%
ProAir
396
436
10%
406
-7%
429
6%
Qvar
250
305
22%
297
-3%
328
10%
374
438
17%
448
2%
510
14%
74
268
262%
860
221%
1,005
17%
393
505
28%
608
20%
709
17%
458
497
9%
522
5%
364
-30%
1,359
1,623
19%
1,782
10%
2,024
14%
OTC
496
765
54%
936
22%
1,165
24%
Distr. / other
863
858
-1%
846
-1%
859
2%
Generics total (incl. API)
of which API
Women's Health
Oncology
Treanda*
Other Branded
All Others
Teva Pharmaceu2cals Teva Pharmaceu2cals •  Business Outlook Posi9ves •  CEO Vigodman’s goal is to regain focus on generics, assessing individual products and termina9ng unprofitable ones with target of 600 bps of gross margin improvement by 2017 (modelled accordingly, more conserva9ve than Bloomberg consensus es9mates). •  Launched 21 generic versions of branded products in 2013 amoun9ng to a total U.S. market of $10 billion (modelled assuming Teva captures 50% of market share in 10 years). •  As of 12/31/13, 8 generic brands that have received “tenta9ve approval” by the FDA with aggregate US market of $480 million (modelled assuming Teva captures 25% of this market with growth of 10% per year). •  According to Argus research report, Teva submiged applica9ons for 155 generic drugs, including 21 ANDA’s in US bringing total US pipeline to 133 pending ANDA’s, rep. $81 billion in brand value. Teva believes 51 of those ANDA’s are first-­‐to-­‐file opportuni9es, poten9al rep. $40 billion in brand value. (not modelled as reliable informa9on on this could not be obtained, could raise target price prospects). Teva Pharmaceu2cals •  Business Outlook Risks •  Big one -­‐ Copaxone patent expiry and generic compe99on •  Copaxone patent expired May, 2014 •  Biogen launched and Mylan won favorable court ruling in patent challenge against Teva. •  However, Teva introduced 3-­‐day per week Copaxone brand (modelled 25%, 33%, 50% reduc9on in Copaxone sales vs. 75% standard, leveling off to $270 million by 2018). •  Execu9on risk in streamlining & dives9ng opera9ons – generics in every market, specialty pharma (MS, cancer, Parkinson’s, respiratory) •  Generics patent cliff – number of branded drugs with expiring patents flagens out in 2015. •  General risk that products in development will fail to progress for technical and/or commercial reasons and are subject to regulatory approval. Teva Pharmaceu2cals Teva Pharmaceu2cals Teva Pharmaceu2cals P/E
P/B
P/FCF
Teva
32.46
1.96
24.16
Activis
Perrigo
Mylan
Sun
Avg. (excl. Teva)
74.44
43.70
26.11
46.84
47.77
3.93
2.33
5.91
8.00
5.04
28.47
37.94
20.36
55.02
35.45
Teva:
EPS
BV per Sh
FCF per Sh
Estimated Sh. Price
$ 1.64
$ 26.70
$ 78.35
$ 134.63
$ 2.60
$ 92.16
Avg.
$ 101.72
•  Teva is trading at a discount compared to its peers. Teva Pharmaceu2cals Teva Pharmaceuticals (TEVA)
(000,000s)
Year
2013 Actual
Revenue
2014E
20,314
Terminal Discount Rate =
Terminal FCF Growth =
2015E
20,271
2016E
20,162
2017E
20,056
1,649
3,324
8.1%
Operating Margin
Interest Exp
Interest % of Sales
Taxes
Net Income
29,661
3,778
4,276
4,671
5,137
5,477
5,792
6,245
6,513
18.8%
20.3%
20.7%
21.1%
21.2%
21.2%
22.0%
22.0%
3,778
4,276
4,671
5,137
5,477
5,792
6,245
6,513
445
0.9%
1.0%
1.1%
1.2%
1.3%
1.4%
1.5%
1.5%
181
210
248
292
336
382
427
445
1,098
1,194
1,308
1,388
1,461
1,571
1,638
743
861
964
24.6%
26.6%
26.8%
27.0%
27.0%
27.0%
27.0%
27.0%
27.0%
27.0%
964
1,098
1,194
1,308
1,388
1,461
1,571
1,638
24
38
38
37
42
45
49
52
55
57
59
0.1%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
1,269
2,239
2,339
$
2,239
1,564
4.5%
$
2,339
1,326
37
39
42
45
48
51
53
55
2,596
2,926
3,184
3,488
3,701
3,895
4,191
4,370
11.0%
$
2,596
1,218
12.7%
$
2,929
1,262
8.8%
$
3,187
1,286
9.5%
$
3,491
1,340
6.1%
$
3,704
1,423
5.2%
$
3,898
1,446
7.6%
$
4,195
1,507
4.3%
$
4,374
1,483
8.1%
7.7%
6.6%
6.1%
6.0%
5.7%
5.5%
5.5%
5.3%
5.3%
5.0%
624
(995)
43
42
(105)
(113)
(122)
(129)
(136)
(142)
(148)
20,097
28,887
48,985
5.61%
35.2
38.6
16.9
18.2
852
$
$
28,437
1.5%
2,504
Shares Outstanding
27,275
1.5%
-4.9%
1,047
5.2%
1,760
-29.7%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
25,866
2.0%
2,504
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
24,368
427
% Grow th
Free Cash Flow (Discounted for TVM)
22,559
382
5.1%
Free Cash Flow
21,028
336
1,031
Capex % of sales
4.3%
20,056
292
3.1%
% of Sales
Subtract Cap Ex
29,661
4.3%
248
1,642
Plus/(minus) Changes WC
28,437
5.4%
210
76.4%
% of Sales
27,275
6.1%
2023E
181
% Grow th
Add Depreciation/Amort
25,866
8.0%
2022E
302
1,269
$
24,368
7.3%
2021E
304
-3.4%
Sh. In Losses of Assoc. Co.'s/Net Loss Attr. Non-Cntrl Int.
17.6%
2020E
399
(43)
Tax Rate
3,540
16.4%
2019E
22,559
4.8%
Operating Income
Current Price
Implied equity value/share
Upside/(Downside) to DCF
2018E
21,028
% Grow th
9.75%
3.50%
52.42
57.49
9.7%
1,680
0.2%
1,042
5.2%
2,667
51.5%
2,319
41%
59%
100%
0.2%
1,036
5.2%
2,820
5.8%
2,235
-0.5%
1,087
5.2%
2,996
6.2%
2,163
-0.5%
1,166
5.2%
3,191
6.5%
2,100
-0.5%
1,243
5.1%
3,464
8.5%
2,076
-0.5%
1,319
5.1%
3,675
6.1%
2,007
-0.5%
1,391
5.1%
3,813
3.8%
1,898
-0.5%
1,422
5.0%
4,134
8.4%
19.1
20.9
11.4
12.3
per 1st qtr. press release
5.0%
4,222
2.1%
1,875
1,744
Terminal Value
69,912
Free Cash Yield
19.9
21.9
11.4
12.3
-0.5%
1,483
6.04%
Terminal P/E
16.0
Terminal EV/EBITDA
10.1
Teva Pharmaceu2cals Terminal
FCF Growth
Sensi2vity Analysis 2.50%
3.00%
3.50%
4.00%
4.50%
$
$
$
$
$
9.00%
58.86
61.91
65.52
69.85
75.14
$
$
$
$
$
Terminal Discount Rate
9.50%
9.75% 10.00% 10.50%
54.49 $ 52.53 $ 50.71 $ 47.41
57.01 $ 54.83 $ 52.81 $ 49.18
59.94 $ 57.49 $ 55.23 $ 51.20
63.42 $ 60.62 $ 58.06 $ 53.53
67.58 $ 64.34 $ 61.40 $ 56.25
$
$
$
$
$
11.00%
44.50
46.00
47.70
49.65
51.89
Gilead Sciences •  Current Price as of 6/30/2014: $82.91 (7/14/14 Closing Price: $89.66) •  Price target: $90.90 •  Recommenda9on: SELL 140 bps Gilead Sciences •  California based biopharmaceu9cal company with fourteen commercially available products. •  Tradi9onal focus on an9viral drugs to treat HIV, hepa99s, and influenza. Atripala &Truvada (HIV drugs) 2013 combined sales of $6.7 billion out of total $9.3 billion an9viral sales. •  In 2006, Gilead acquired Myogen and Corus Pharma that were developing drugs for cardio and pulmonary disease (hypertension, angina, cys9c fibrosis). •  Strong growth in revenues and earnings (5 yr. CAGR of 16.0% and 12.9% respec9vely) and fat margins (gross margins of 75%-­‐77%, opera9ng margins of 40%-­‐50%, net margins of 27%-­‐38%). •  Solvaldi, new hepa99s C drug, rolled out in North America & Europe Q4 2013, with Q1 2014 sales of $2.3 billion. Gilead Sciences Gilead Sciences •  Business Outlook Posi9ves •  Approximately 4 million people infected with hepa99s C worldwide and Solvaldi has been proven highly effec9ve. •  FDA’s upcoming September, 2014 decision on Idelalisib (treatment for indolent non-­‐Hodgkin’s lymphoma). Could reach market by Q4 2014. Na9onal Cancer Ins9tute es9mates 70 thousand will be diagnosed with iNHL this year. Gilead Sciences •  Business Outlook Risks •  Big One -­‐ Solvaldi costs $84 thousand per typical 12 week treatment -­‐ pushback from insurers (UnitedHealth), pharmacy benefit managers (CVS Caremark, Express Scripts), and government payers. •  Although Gilead has diversified product por`olio, s9ll heavily concentrated on HIV and Hepa99s treatments -­‐ $9.3 billion in an9viral sales out of $11.2 billion total revenue. •  General risk that products in development will fail to progress for technical and/or commercial reasons and are subject to regulatory approval. Gilead Sciences Gilead Sciences Gilead Sciences P/E
P/B
P/FCF
Gilead
31.34
9.97
36.23
Vertex
Regeneron
Alexion
Celegene
Biogen
Amgen
Avg. (excl. G ilead)
N.A.
87.93
89.09
36.32
39.32
17.15
53.96
18.24
N.A.
11.67
15.31
8.25
3.99
11.49
N.A
N.A
82.31
30.95
37.55
15.93
41.69
Gilead:
EPS
BV per Sh
FCF per Sh
Estimated Sh. Price
$ 2.99
$ 7.41
$ 161.35
$ 85.16
$ 1.91
$ 79.62
Avg.
$ 108.71
•  Gilead is trading at a discount compared to its peers. Gilead Sciences Gilead Sciences
Terminal Discount Rate =
Terminal FCF Growth =
(000s)
Year
2013 Actual
Revenue
11,202
% Grow th
2014E
21,619
93.0%
Operating Income
4,524
Operating Margin
40.4%
Interest/Non-Operating/Min Int
333
Interest % of Sales
3.0%
Taxes
1,151
Tax Rate
27.3%
Net Income
3,040
% Grow th
14,107
65.3%
1,297
6.0%
3,591
25.9%
9,219
203.3%
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
2015E
25,349
17.3%
16,667
65.8%
368
1.5%
4,281
25.6%
12,018
2016E
27,453
8.3%
18,791
68.5%
1,194
4.4%
4,525
25.9%
13,072
2017E
29,621
7.9%
19,846
67.0%
1,096
3.7%
4,847
25.9%
13,903
12.00%
5.50%
2018E
31,843
7.5%
20,698
65.0%
1,178
3.7%
5,046
25.9%
14,474
2019E
34,104
7.1%
21,315
62.5%
1,262
3.7%
5,184
25.9%
14,869
2020E
36,389
6.7%
21,833
60.0%
1,346
3.7%
5,296
25.9%
15,191
2021E
38,681
2022E
40,963
6.3%
22,242
5.9%
22,530
57.5%
1,431
55.0%
1,516
3.7%
5,380
3.7%
5,432
25.9%
15,431
25.9%
15,582
2023E
43,216
5.5%
22,689
52.5%
1,599
3.7%
5,452
25.9%
15,638
30.4%
8.8%
6.4%
4.1%
2.7%
2.2%
1.6%
1.0%
0.4%
432
345
400
456
522
563
605
512
546
580
410
3.1%
1.9%
1.8%
1.9%
1.9%
1.9%
1.5%
1.5%
1.5%
1.0%
1.0%
(707)
(3,716)
(1,141)
(644)
(695)
(747)
(800)
(853)
(907)
(961)
(1,014)
-6.3%
-17.2%
-4.5%
-2.3%
-2.3%
-2.3%
-2.3%
-2.3%
-2.3%
-2.3%
-2.3%
Subtract Cap Ex
191
216
253
275
296
318
341
364
387
410
432
Capex % of sales
1.7%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
Free Cash Flow
2,487
% Grow th
Free Cash Flow (Discounted for TVM)
2,487
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
73,187
80,881
154,067
1.64%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
50.0
50.7
30.6
31.0
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
5,687
128.7%
1,695
$
$
89.66
90.91
1.4%
5,373
11,080
94.8%
9,348
48%
52%
100%
12,675
14.4%
9,548
13,475
6.3%
9,063
14,014
4.0%
8,415
14,240
1.6%
7,635
14,520
2.0%
6,951
14,717
14,621
1.4%
6,291
-0.7%
12.6
12.8
8.7
8.8
0.0%
5,580
4,983
Terminal Value
237,365
Free Cash Yield
16.5
16.7
10.3
10.4
14,624
6.16%
Terminal P/E
15.2
Terminal EV/EBITDA
10.1
Gilead Sciences Terminal FCF
Growth
Analysis Sensi2vity 3.00%
4.00%
4.50%
5.00%
5.50%
6.00%
6.50%
7.00%
$
$
$
$
$
$
$
$
10.00%
98.35
107.49
113.30
120.28
128.81
139.47
153.18
171.46
$
$
$
$
$
$
$
$
11.00%
86.26
92.60
96.51
101.07
106.45
112.91
120.81
130.68
$
$
$
$
$
$
$
$
Terminal Discount Rate
11.50%
12.00%
12.50%
81.27 $ 76.84 $ 72.87
86.64 $ 81.41 $ 76.79
89.90 $ 84.16 $ 79.12
93.66 $ 87.29 $ 81.77
98.04 $ 90.91 $ 84.79
103.23 $ 95.13 $ 88.27
109.45 $ 100.12 $ 92.34
117.05 $ 106.11 $ 97.14
13.00%
$ 69.29
$ 72.68
$ 74.68
$ 76.92
$ 79.47
$ 82.37
$ 85.73
$ 89.65
14.00%
$ 63.10
$ 65.68
$ 67.17
$ 68.82
$ 70.68
$ 72.76
$ 75.12
$ 77.82
Aetna •  Current Price as of 6/30/2014: $81.08 •  Bloomberg Consensus Price target: $86.78 •  Recommenda9on: HOLD Aetna •  One of na9on’s largest providers of health insurance and related benefits serving 16 million members. •  Three business segments: •  Healthcare segment – medical and dental benefit plans. •  Group Insurance segment – employer sponsored life, disability and long term care insurance. •  Large Case Pensions segment – manages re9rement, pension and annuity products for defined contribu9on and defined benefit plans. Aetna Aetna Aetna McKesson •  Current Price as of 6/30/2014: $186.21 •  Bloomberg Consensus Price target: $207.31 •  Recommenda9on: HOLD McKesson •  Largest pharmaceu9cal distributor in North America. •  Two repor9ng segments: •  Distribu9on Solu9ons – U.S. and Canadian pharmaceu9cal distribu9on businesses; European retail and distribu9on through the acquisi9on of Celesio; Medical-­‐surgical supplies distribu9on business. •  Technology Solu9ons – technology services, sorware and systems, and hardware. McKesson McKesson McKesson •
SIM Health Care Sector Alloca2on Recommenda2ons Market weight, do not significantly overweight healthcare in the SIM por`olio – health care stocks have enjoyed a nice run the last five years and are currently trading at premium to the S&P 500. •  Pay agen9on to valua9ons. Premiums at which the sector is trading may be jus9fied as secular outlook for health care is generally posi9ve. •  Generally avoid biotechs and health care technology as these industries have had major run ups over the past five years. •  Trim the SIM’s exposure to Gilead Sciences •  Focus in reasonably valued stocks in the health care providers & services, pharmaceu9cals, and health care equipment & supplies industries. SIM Recommenda2ons Recap Security Aetna Ticker AET Industry Providers & Services Mkt % of Price* Por(olio Price Target Recommenda2on $81.08 3.48% $86.78 HOLD 4.54% $86.00 SELL (140 bps) McKesson MCK Biotechnology $82.91 Providers & Services $186.21 3.57% $207.31 HOLD Teva TEVA Pharmaceu9cals $52.42 3.01% $57.50 HOLD Gilead Sciences GILD Total 14.60% *Mkt price is as of 6/30/2014 (7/14/14 Closing Prices: AET $82.16, GILD $89.66, MCK $190.41, TEVA $54.64) **AET and MCK are Bloomberg consensus price targets.