HEALTH CARE
SECTOR REPORT
Jiajun Wang
Yuhao Wu
Nick LiBassi
AGENDA
 Overview
 Business Analysis
 Economic Analysis
 Financial Analysis
 Valuation Analysis
 Recommendation
OVERVIEW
THE SIZE OF HEALTH CARE SECTOR
 $ 74228.5B
 13.1% of S&P 500
COMPONENTS
Biotechnology
18%
Pharmaceutical
s
45%
Health Care
Distribution
4%
Health Care
Equipment
16%
Managed Health
Care
8%
Health Care Facilities
0%
Health Care
Health Care
Supplies
Services
0%
4%
Life sciences
Tools & Services Health Care
4%
Technology
1%
LEADING COMPANIES IN THE SECTOR
Pharmaceutical
Managed Health
Care
Pfizer
190.1B
UnitedHeal
th
63.30B
Teva
34.7B
WellPoint
26.5B
Biotechnology
Health Care
Equipment
Gilead
97.76B
Medtronic
54.9B
Amgen
83.5B
Abbott Lab
52.5B
SECTOR VS. S&P 500
09/01/2013
04/01/2013
11/01/2012
06/01/2012
01/01/2012
08/01/2011
03/01/2011
10/01/2010
05/01/2010
12/01/2009
07/01/2009
02/01/2009
09/01/2008
04/01/2008
11/01/2007
06/01/2007
01/01/2007
08/01/2006
03/01/2006
10/01/2005
05/01/2005
12/01/2004
07/01/2004
02/01/2004
09/01/2003
AMONG INDUSTRIES
3,000
2,500
2,000
1,500
Biotechnology
Managed Health Care
1,000
Pharmaceutical
500
0
BUSINESS
ANALYSIS
Porter’s Five Forces and Current
Trends
PORTER’S FIVE FORCES
• Patterns for
manufacturing side
• M&A in service
side
• Research &
Knowledge
• Actual Science
Years
Males
Females
1900-1902
47.9
50.7
1909-1911
49.9
53.2
1919-1921
55.5
57.4
1929-1931
57.7
60.9
1939-1941
61.6
65.9
1949-1951
65.5
71
 Increasing life expectancy will stop in next century
1959-1961
66.8
73.2
 Obamacare
1969-1971
67
74.6
1979-1981
70.1
77.6
1989-1991
2002
2003
2005
2025
2050
2075
71.8
74.5
74.8
74.8
77
79.4
81.3
78.8
79.9
80.1
79.6
81.2
83.2
84.9
CURRENT TRENDS
 Mergers & Acquisitions ($50B in Q2 2013)
 The trend of integrating with technology
 Higher demand in the next 30 years with Baby
Boomer aging
PewResearch, 2008
ECONOMIC
ANALYSIS
POPULATION
AGE AND EXPENDITURE
HEALTH EXPENDITURE PER CAPITA
HEALTH SPENDING GROWTH BY
COMPONENTS
OBAMACARE
Positive Factors
- More people involved
Negative Factors
- Cost control
FINANCIAL
ANALYSIS
NET PROFIT MARGIN
ROE
REVENUE PER SHARE, CF PER SHARE,EPS
VALUATION
ANALYSIS
VALUATION RATIOS
Health Care Sector Absolute - 10 Year
High
Low
Median Current
P/Trailing E
22.0
9.9
15.4
16.8
P/Forward E
20.1
10.0
14.5
16.1
P/B
5.5
2.2
3.3
3.3
P/S
2.4
1.0
1.5
1.6
P/CF
16.0
7.6
11.1
12.0
Health Care Sector Absolute - 5 Year
High
Low
Median Current
P/Trailing E
16.8
9.9
12.2
16.8
P/Forward E
16.3
10.0
12.0
16.2
P/B
3.4
2.2
2.8
3.3
P/S
1.6
1.0
1.2
1.6
P/CF
12.1
7.6
9.0
12.1
Healthcare Sector Relative to S&P 500 - 10 Year
High
Low
Median Current
P/Trailing E
1.2
0.7
1.0
1.1
P/Forward E
1.2
0.7
1.0
1.1
P/B
1.8
1.1
1.3
1.4
P/S
1.5
0.9
1.2
1.1
P/CF
1.5
0.9
1.1
1.1
Healthcare Sector Relative to S&P 500 - 5 Year
High
Low
Median Current
P/Trailing E
1.1
0.68
0.91
1.1
P/Forward E
1.1
0.69
0.9
1.1
P/B
1.6
1.1
1.3
1.4
P/S
1.5
0.9
1.0
1.1
P/CF
1.3
0.9
1.0
1.2
 Sector is priced inline with 10-year historical values
 Currently trading at a 5-year high (since 2008-2009 financial crisis)
SECTOR-INDUSTRY-FIRM COMPARISON
Industry and Firm Valuation Variance within Health Care Sector - Current
Sector
Industry
Firm
Health
Health Medical
Care Biotech Pharma Plans Equipment ISRG GILD WLP AET TEVA AGN
P/ Trailing E
16.8
26.4
15.8
12.5
16.4
23.4 32.3 10.2 11.9 8.9 20.5
P/ Forward E
16.1
23.4
15.4
12.2
12.2
23.8 27.3 11.5 10.8 7.7 17.5
P/B
3.3
6.9
3.4
1.9
2.8
3.8 9.5 1.1 2.1 1.5 4.2
P/S
1.6
8.0
3.4
0.6
2.8
6.4 9.4 0.4 0.6 1.9 4.5
P/CF
12.0
22.2
11.1
9.7
11.1
20.0 29.3 7.8 9.7 6.5 17.0
 High degree of variance from the sector to the industry and firm levels
 Large variances in valuation between industries
 Firm level degree of variance between firms can depend on industry
 Health Plans: WLP-AET similar; Pharmaceuticals: TEVA-AGN high variance
GROWTH VERSUS THE S&P 500
YTD
3 Year
5 Year
 Predictable and dependable earnings growth
 Strong performance during late (declining) stage and
recession stage of the business cycle
Technical Analysis
 Relative Strength remains on an uptrend
 Support/Resistance levels keep climbing
 Opinion: Bullish
Technical Analysis
RECOMMENDATION
CURRENT HOLDINGS
 Current health care sector holdings: TEVA, WLP, GILD
 11.90% Weight in the SIM Portfolio
 Overweight the SIM Portfolio by 190 basis points
 12.97% Weight in the S&P 500
 SIM is underweight the S&P 500 by 107 basis points
POSITIVE FACTORS
 Valuations are reasonable, earnings growth is dependable, relative
strength is increasing moderately, opinion on sector is bullish
 Health Care has outperformed the S&P 500 since the financial crisis
 High growth in aging population as well as healthcare expenditure
 Business analysis shows revenue growth will continue with the
expansion of the market
 Financial analysis shows anticipation of continued growth in revenue,
EPS, and cash flows
 Industry concentration caused by increasing volume of mergers and
acquisitions
 Percentage of uninsured population to decrease due to new availability
of insurance from the Affordable Care Act
NEGATIVE FACTORS
 Sector valuation is currently at or above 10-year median values
 Uncertainty with the Affordable Care Act and Healthcare Reform
 FDA regulations and clinical trials
 Political Uncertainty- government debt, congressional actions
 Profitability can be hurt by government efforts to decrease healthcare
costs
 Uncertainty with the sustainability of Medicare and Medicaid
RECOMMENDATION
 Market weight Health Care stocks with the S&P 500
 Increase healthcare holdings by 107 basis points
 Downside: It would further overweight Health Care in the SIM Portfolio
Based on expected growth, current valuations, and economic factors:
 Overweight: Medical Equipment, Biotechnology
 Underweight: Health Plans, Life Sciences
 Market weight: Pharmaceuticals
QUESTIONS?