HEALTHCARE SECTOR:
STOCK RECOMMENDATIONS
•
Biotechnology - Gilead Sciences, Inc.
•
Pharmaceutical - Teva Pharmaceuticals
•
Managed Health Care - Aetna Inc.
Agenda
• Recap Health Care Sector Presentation
• Recommendation Overview
• Company Recommendations
• Gilead Sciences, Inc.
• Intuitive Surgical
• Teva Pharmaceuticals
• Aetna Inc.
• Summary
Sector Recommendation Recap
• Healthcare Sector is 13.1% of S&P 500
• SIM Health Care holdings equal 11.81%
• Recommend market weight with S&P 500
• Increase Health Care holdings by 129 basis points
Stock Recommendations
GILD
ISRG
TEVA
AGN
AET
WLP
% of SIM Portfolio 4.49%
-
2.92%
-
-
4.40%
Cost Basis
$26.50
-
$50.25
-
-
$64.52
Current Price
$69.82
$375.87
$36.47
$91.70
$63.59
$87.34
Unrealized Gain
(Loss)
$309,724
-
($122,765)
-
-
$127,777
Target Price
$84.96
$428.21
$73.20
$107.38
$83.84
$85.18
Upside/Downside
22.1%
14.1%
99%
17.1%
31.9%
-1.9%
Recommendation
HOLD
-
BUY
-
BUY
SELL
BP change
-
-
+341
-
+300
-220
Ending Allocation
4.49%
-
3.41%
-
3.00%
2.20%
Gilead Sciences, Inc. Overview
• Biopharmaceutical company focused in the discovery,
production, and commercialization of therapeutics for the
treatment of HIV/AIDS, respiratory disease,
cardiovascular disease, and Hepatitis C
• Best-known and highest revenue producing products
include HIV therapeutics Stribild, Atripla, Complera,
Truvada, Viread
Gilead Sciences Key Business Drivers
Catalysts:
• Imminent release of new Hepatitis C drug sofosbuvir
• Extremely successful clinical trials
• 15-0 unanimous support from FDA advisory committee
• Final approval expected by December 2013
• Expansion and proliferation of existing and new drugs into
underdeveloped markets
• Current reach is 4.2 million people out of 26 million person market,
based on WHO guidelines
• South America, Middle East
• Strong research and development as well as strategic
acquisitions ability
• Pharmasset- $11B
• Consistent sales growth on existing products
Gilead Sciences Risks
• Increasing competition in the biotech space
• Hepatitis C- AbbVie
• Cardiovascular- Pfizer, Actelion, GSK
• HIV- ViiV Healthcare, Merck
• Significant patent expirations in the near future
• Generic availability of drug components
• Consistent regulatory risk from the FDA
• Growth and entry of new products requires approval
• All it takes is one bad drug recall ie. Vioxx and Merck
Gilead Sciences Financial Summary
Current Price
$69.82
1yr Target Estimate
$78.42
52 Week Range
$32.07 - $73.20
Average Daily Volume
7.579 M
Market Cap
$106.28 B
Enterprise Value
$112.36 B
Trailing P/E
38.34
Forward P/E
22.8
Return on Assets
12.72%
Return on Equity
30.38%
Shares Outstanding
1.53 B
Beta
0.92
Gilead Sciences Return on Equity
Gilead Sciences, Inc. (GILD)
Analyst: Nick LiBassi
9/24/2013
Terminal Discount Rate =
Terminal FCF Growth =
Year
2013E
Revenue
11,048,022
% Grow th
14,830,645
34.2%
Operating Income
4,706,982
Operating Margin
Interest
Interest % of Sales
Taxes
% of Sales
20,690,384
45,105,037
9.0%
22,552,518
48,713,440
8.0%
24,356,720
52,123,381
7.0%
26,061,690
54,729,550
5.0%
27,364,775
(377,157)
(397,901)
(423,764)
(653,381)
(907,473)
(1,088,968)
(1,241,423)
(1,353,151)
(1,461,403)
(1,563,701)
(1,641,886)
-3.4%
-2.7%
-2.2%
-2.7%
-3.0%
-3.0%
-3.0%
-3.0%
-3.0%
-3.0%
-3.0%
1,786,737
26.0%
5,025,328
400,427
2,603,842
26.0%
7,350,934
46.3%
480,144
3,101,864
26.0%
8,828,381
20.1%
629,181
3,932,383
26.0%
11,192,167
26.8%
846,975
4,435,728
26.0%
12,624,764
12.8%
1,016,370
5,056,730
26.0%
14,392,231
14.0%
1,241,423
5,511,836
26.0%
15,687,532
9.0%
1,353,151
5,952,782
26.0%
16,942,534
8.0%
1,461,403
6,369,477
26.0%
18,128,512
7.0%
1,563,701
6,687,951
26.0%
19,034,937
5.0%
1,641,886
3.0%
2.7%
2.5%
2.6%
2.8%
2.8%
3.0%
3.0%
3.0%
3.0%
3.0%
(261,534)
(832,177)
(962,529)
(967,971)
(1,058,718)
(1,161,565)
(1,241,423)
(1,262,941)
(1,266,549)
(1,250,961)
(1,313,509)
-5.6%
741,532
5.0%
3,852,046
31.6%
55,818,037
74,175,733
129,993,769
2.75%
33.4
40.8
22.2
26.8
1,530,000
$
$
14.0%
50.0%
2,926,936
Shares Outstanding
18,149,460
41,380,768
50.0%
% Grow th
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
20.0%
2023E
50.0%
3.0%
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
16,032,023
36,298,919
2022E
50.0%
-2.4%
Free Cash Flow
25.0%
2021E
50.0%
331,441
Capex % of sales
12,583,625
30,249,099
2020E
50.0%
331,441
Subtract Cap Ex
26.0%
2019E
53.0%
57.6%
Plus/(minus) Changes WC
10,378,541
24,199,279
2018E
52.0%
3,188,470
% of Sales
29.5%
2017E
54.0%
% Grow th
Add Depreciation/Amort
19,205,777
2016E
48.6%
26.0%
Net Income
7,209,966
2015E
42.6%
1,141,354
Tax Rate
Current Price
Implied equity value/share
Upside/(Downside) to DCF
2014E
12.0%
4.00%
69.59
84.96
22.1%
-5.0%
1,344,404
7.0%
5,524,145
43.4%
43%
57%
100%
-4.0%
1,451,957
6.0%
7,037,634
27.4%
-3.5%
1,512,455
5.0%
9,467,968
34.5%
-3.2%
1,814,946
5.0%
10,664,622
12.6%
-3.0%
1,655,231
4.0%
12,737,000
19.4%
-2.8%
1,804,201
4.0%
13,973,540
9.7%
-2.6%
1,461,403
3.0%
15,675,985
12.2%
-2.4%
1,563,701
3.0%
16,877,551
7.7%
3.0%
17,721,428
5.0%
Terminal Value 230,378,566
Free Cash Yield
21.2
25.9
14.7
17.8
-2.4%
1,641,886
14.5
17.7
10.3
12.5
7.69%
Terminal P/E
12.1
Terminal EV/EBITDA
8.1
Gilead Sciences Sensitivity Analysis
Terminal Growth Rate
Discount Rate
10.5
11.0
11.5
12.0
12.5
13.0
3.0
$98.12
$90.98
$84.71
$79.16
$74.22
$69.79
3.5
$102.61
$94.76
$87.91
$81.89
$76.56
$71.81
4.0
$107.79
$99.07
$91.53
$84.96
$79.19
$74.07
4.5
$113.84
$104.04
$95.67
$88.44
$82.14
$76.59
5.0
$120.98
$109.85
$100.45
$92.42
$85.48
$79.42
Gilead Recommendation
• HOLD
• Though there is significant upside, SIM already holds 4.5% in
Gilead
• Want to keep diversification amongst the healthcare sector
• Purchased at low cost basis, price is too high to purchase now
• Better value for the money in other healthcare stocks
• Strong earnings history with very positive growth outlook
• Highest return in the SIM portfolio, 162%
Intuitive Surgical, Inc. Overview
• Designs, manufactures, and markets the da Vinci surgical
system as well as related instruments and accessories
• da Vinci is a robotic laparoscopic surgery device that translates
direct surgeon inputs
• Endowrist product line comprising forceps, electrocautery,
scalpels, and other surgical tools
Intuitive Surgical Key Business Drivers
• MIS (minimally invasive surgery) is growing in popularity
and practice as more doctors become trained
• da Vinci machines have annual maintenance plans
costing approximately $150,000/year creating additional
servicing revenue
• Surgical instruments have to be purchased for each
surgery
• Use of technology within hospitals is projected to keep
rising
Intuitive Surgical Risks
• Many outstanding lawsuits, deaths during surgery
• Questions about the efficacy of the robot versus normal
open surgeries
• Costs more than traditional surgery though it was
designed to reduce costs in the long-run
• High barrier to entry, $2,000,000 purchase price
• Prevents widespread implementation among hospitals
• Poor performance lately, missing earnings estimates
• Reliance on one main product
Intuitive Surgical Financial Summary
Current Price
$375.36
1yr Target Estimate
$425.43
52 Week Range
$357.02 - $585.67
Average Daily Volume 496,317
Market Cap
$14.33 B
Enterprise Value
$12.95 B
Trailing P/E
22.69
Forward P/E
22.3
Return on Assets
15.01%
Return on Equity
20.73%
Shares Outstanding
38.06 M
Beta
0.64
Intuitive Surgical Valuation Analysis
• Stock is near 52-week low
• DCF shows that stock is undervalued
• 14.1% upside using 12% discount rate, 3% terminal growth
• Ratios analysis shows that the stock is inline with
historical median, however, medians are anticipated to
grow within the sector
• No action, better values discovered within sector
TEVA: Overview
• Teva Pharmaceutical Industries Limited develops,
manufactures, markets, and distributes pharmaceutical
products worldwide. It offers generic pharmaceutical
products; and basic chemicals, as well as specialized
product families.
• Segments:
• Generic products
• Central Nervous System (CNS)
• Women’s Health
• Respiratory
• Active Pharmaceutical Ingredients (APIs)
TEVA:Key Statistics
• Industry : Pharmaceutical
• Market Cap: 30.92 Billion
• Current Price: $36.59
• Trailing P/E: 25.97
• Forward P/E: 7.1
• Beta: 0.96
• 52-Week Price Range: $36.52- $42.83
TEVA: 10-year Performance vs. SP500
TEVA: 10-year EPS and Expectation
TEVA: Catalysts & Risks
• Catalysts:
1.
2.
3.
4.
•
Huge discount according to DCF model.
Teva has acquired many smaller drug companies and
should start to see the synergies from these acquisitions.
Dividend increase and repurchase plan
Baby boomers will show strong demand in the long run.
Risks:
1. Slow growth rate
2. Loss of patents
3. Political pressure both in American and in emerging
markets
TEVA: DCF
Year
2013E
Revenue
20,622
% Grow th
20,828
1.0%
Operating Income
4,226
Operating Margin
Interest
Interest % of Sales
Taxes
Tax Rate
Net Income
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
5,622
22,489
4.0%
5,847
23,614
5.0%
6,022
24,558
4.0%
6,140
2020E
25,295
3.0%
6,324
2021E
25,928
2.5%
6,482
2022E
26,576
2.5%
6,644
2023E
27,240
2.5%
6,810
25.5%
25.0%
25.0%
25.0%
25.0%
25.0%
(227)
(208)
(168)
(173)
(180)
(189)
(196)
(202)
(207)
(213)
(218)
-1.1%
-1.0%
-0.8%
-0.8%
-0.8%
-0.8%
-0.8%
-0.8%
-0.8%
-0.8%
-0.8%
280
322
353
381
397
408
416
429
439
450
461
7.0%
7.0%
7.0%
7.0%
7.0%
7.0%
7.0%
7.0%
7.0%
7.0%
7.0%
4,281
4,686
5,068
5,271
5,424
5,527
5,693
5,835
5,981
6,131
15.1%
9.5%
8.1%
4.0%
2.9%
1.9%
3.0%
2.5%
2.5%
2.5%
1,361
1,375
1,386
1,427
1,484
1,559
1,621
1,669
1,711
1,754
1,798
6.6%
6.6%
6.6%
6.6%
6.6%
6.6%
6.6%
6.6%
6.6%
6.6%
6.6%
-35
-119
-84
-108
-112
-118
-123
-126
-130
-133
-136
-0.2%
-0.6%
-0.4%
-0.5%
-0.5%
-0.5%
-0.5%
-0.5%
-0.5%
-0.5%
-0.5%
1,072
1,125
1,218
1,297
1,349
1,417
1,474
1,568
1,608
1,754
1,798
5.2%
5.4%
5.8%
6.0%
6.0%
6.0%
6.0%
6.2%
6.2%
6.6%
6.6%
3,973
4,412
4,770
5,090
5,293
5,448
5,552
5,668
5,809
5,848
5,994
11.1%
8.1%
6.7%
4.0%
2.9%
1.9%
2.1%
2.5%
0.7%
2.5%
873.0
$
$
3.0%
2019E
26.0%
9.5
17.2
6.4
11.6
Shares Outstanding
5,207
21,624
2018E
26.0%
32,319
31,585
63,904
11.27%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
0.8%
2017E
24.8%
% Grow th
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
20,995
2016E
23.1%
3,719
Add Depreciation/Amort
4,811
2015E
20.5%
% Grow th
Current Price
Implied equity value/share
Upside/(Downside) to DCF
2014E
40.36
73.20
81.4%
51%
49%
100%
Terminal Value
Free Cash Yield
8.2
14.9
5.8
10.4
7.5
13.6
5.4
9.8
81,924
7.32%
Terminal P/E
13.4
Terminal EV/EBITDA
9.6
TEVA: Sensitivity Analysis
$
73.20
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
5.50%
9.00%
73.05
75.38
78.01
81.02
84.49
88.55
93.34
99.09
106.11
114.89
126.19
9.25%
70.87
73.02
75.44
78.19
81.36
85.03
89.34
94.47
100.68
108.35
118.06
9.50%
68.81
70.80
73.03
75.56
78.44
81.78
85.67
90.27
95.78
102.52
110.95
9.75%
66.87
68.70
70.76
73.09
75.73
78.77
82.29
86.43
91.35
97.31
104.67
10.00%
65.03
66.73
68.63
70.77
73.20
75.97
79.17
82.91
87.32
92.61
99.09
10.25%
63.28
64.86
66.62
68.60
70.83
73.37
76.29
79.67
83.64
88.36
94.08
10.50%
61.62
63.09
64.73
66.56
68.61
70.94
73.60
76.68
80.26
84.50
89.58
10.75%
60.05
61.42
62.94
64.63
66.52
68.67
71.10
73.90
77.15
80.96
85.50
11.00%
58.55
59.82
61.24
62.81
64.56
66.53
68.77
71.33
74.28
77.72
81.79
TEVA: Ratio Valuation
TEVA: Recommendation
• Ratio Valuation: $80
• DCF Valuation: $73
• Current Price: $36.59
Recommendation: BUY
Target Price: $83.84
Current Price: $63.59 (As of 11/4/2013)
Potential: +31.9%
Company Overview
• A health care benefit company
• Market Cap: Top 4 in the Industry
• UnitedHealth: 70.6B
• Express Scripts: 50.16B
• WellPoint: 25.65B
• Aetna: 23.37B
• Lines of Businesses
• Health Care: 90.72%
• Group Insurance: 8.36%
• Large Case Pensions: 0.92%
Performance vs. S&P 500
Performance vs. Industry
AET: Business Analysis
• Characteristics
• Major focus on mid-size, and small employers
• Solid Operations
• Business Drivers:
• Regulations
• Economy - Unemployment Rate
Historical Unemployment Rate
AET: Financial Analysis
In Millions, except Per Share data,
Revenue:
Total revenue
Net income
Profit Margin
2015E
2014E
2013E
$ 63,992.19 $ 55,878.26 $
$ 2,468.57 $ 2,126.55 $
3.858%
3.806%
2012
2011
2010
2009
2008
46,940.64 $ 36,595.90 $ 33,779.80 $ 34,246.00 $ 34,764.10 $ 30,950.70
2,008.36 $ 1,657.90 $ 1,985.70 $ 1,766.80 $ 1,276.50 $ 1,384.10
4.279%
4.530%
5.878%
5.159%
3.672%
4.472%
AET: Valuation
• DCF
9/22/2013
Terminal FCF Growth =
Year
2013E
Revenue
2014E
2015E
2016E
2017E
4.75%
2018E
2019E
2020E
2021E
2022E
2023E
46,941
55,878
63,992
70,391
77,431
83,625
88,642
93,518
98,661
103,348
108,257
2,008
2,127
2,469
2,330
2,311
2,224
2,358
2,104
2,220
1,989
2,084
2,892
2,311
2,669
2,551
2,554
2,392
2,535
2,291
2,368
2,041
2,138
Net Income
Free Cash Flow
Current Price
$
63.59
Implied equity value/share
$
83.84
Upside/(Downside) to DCF
31.9%
• Ratios
Absolute
Valuation
High
Low
Median
Current
P/Forward E
P/S
P/B
P/EBITDA
P/CF
18.6
1.5
3.2
12.65
22.5
5.5
0.3
1.1
3.35
4.6
10.7
0.6
1.6
6.28
9.7
10.7
0.6
2.0
6.16
9.6
#Your
Target
Multiple
10.7
0.6
1.6
6.28
9.7
*Target
E, S per
Share
5.89
144.81
Target
Price
63.023
86.886
50.848
64.798
64.222
AET: Recommendation
• BUY
• Sell half of WLP stock (220 bps) to purchase AET stock
• WLP has 1.95 downside
• Buy 300 bps of AET
• 220 bps from the sale of half of the WellPoint shares
• 80 bps to market weight healthcare with the S&P 500
Summary
GILD
ISRG
TEVA
AGN
AET
WLP
% of SIM Portfolio 4.49%
-
2.92%
-
-
4.40%
Cost Basis
$26.50
-
$50.25
-
-
$64.52
Current Price
$69.82
$375.87
$36.47
$91.70
$63.59
$87.34
Unrealized Gain
(Loss)
$309,724
-
($122,765)
-
-
$127,777
Target Price
$84.96
$428.21
$73.20
$107.38
$83.84
$85.18
Upside/Downside
22.1%
14.1%
99%
17.1%
31.9%
-1.9%
Recommendation
HOLD
-
BUY
-
BUY
SELL
BP change
-
-
+341
-
+300
-220
Ending Allocation
4.49%
-
3.41%
-
3.00%
2.20%