Yajing Wang
Andrew Weiner
Chang Xu
Chunwei Xu
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Agenda
Overview
Business Analysis
Financial Analysis
Economic Analysis
Valuation Analysis
Risk Analysis
Recommendation
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Healthcare Sector Weight
Telecommunication
3%
S&P 500 Weight
Materials
3%
Information
Technology
20%
Utilities
4%
Consumer
Discretionary Consumer
11%
Staples
11%
Utilities
4%
Energy
11%
SIM Weight
Telecom
1%
Materials
4%
Health
Care
11%
Financials
15%
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Industrials
11%
Consumer
Discretionary
10%
Information
Technology
23%
Industrials
8%
Consumer
Staples
11%
Energy
11%
Health
Care
14%
Financials
14%
Sector Performance
Recently, healthcare sector stocks have been paying large dividends and
acting relatively defensive based on what the sector represents.
12.8
P/E Forward
12.4
Dividend Yield
2.1%
EPS 5-Year Historical Growth Rate
9%
Historic One Year Growth Revenue Rate
8%
Estimated Revenue Growth Rate for 2013
4%
Price to Book Ratio
2.7
Price to Cash Flow
9.4
Price to Sales
1.26
Beta
.70
Return on Equity (Margin)
21.5%
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P/E Trailing
Top Players
$178.7 billion
$172.6 billion
$151.5 billion
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$119.4 billion
$116.6 billion
$102.4 billion
SIM holdings: Gilead Sciences, Inc., Pfizer, Wellpoint Inc., and Teva
Pharmaceutical Industries LTD
Industry Breakdown
“A category of stocks relating to medical and healthcare goods or services.”
--Investopedia
3%
3%
9%
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81%
2%
Biotechnology - 9%
Diagnostic Substances
Drug Delivery - 2%
Drug Manufacturers - Major - 81%
Drug Manufacturers - Other
Drug Related Products
Drugs - Generic - 3%
Health Care Plans
Home Health Care
Hospitals
Long-Term Care Facilities
Medical Applicances and Equipment - 3%
Medical Instruments and Supplies
Medical Laboratories and Research
Medical Practicioners
Specialized Health Services
Industry Breakdown
Industry
10-year
growth
Biotechnology
106%
Distributors
34%
Equipment
42%
Facility
-23%
Managed Care 132%
Services
249%
Supplies
107%
Life Science
226%
Pharma
-7%
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Industry Performance: 10 years
Sector Performance: QTD
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Sector Performance: YTD
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Sector Performance: 10 years
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Sector Performance: 10 years
Agenda
Overview
Business Analysis
Financial Analysis
Economic Analysis
Valuation Analysis
Risk Analysis
Recommendation
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Business Cycle
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Porter’s Five Forces
• Threat of Entry: Low
1) There are high barriers to entry due to FDA strict
regulation;
2) Brand equity is costly to build;
3) New company needs to put a lot of capital into
R&D lengthy approval process, marketing, and start
up costs before it is able to receive any returns
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Porter’s Five Forces
• Bargaining Power of Suppliers: Low.
Suppliers generally have little room for negotiation
Not many other places to direct their products
• Bargaining Power of Buyers: Low - Medium.
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Most medication is prescribed by the doctors, and
consumers will have to buy the drug at any given price if
they need it.
Exception: generic medication after patents run out (still
within the healthcare sector)
Porter’s Five Forces
• Industry Competition: High.
 1) Some mergers and acquisitions are going on, but also require
inter-industry joint partnerships due to heavy input costs and
need for more resources;
 2) Industry benefits from strong demand from consumers;
 3) Threats may come from other global drug manufacturers.
• Threat of Substitutes: Moderate - High.
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 Customers can find substitute medicine if the original product
has an expired patent. However, customers generally have no
alternative choice if it is a new product.
 When a patent runs out, generic medication is cheaper and will
effect pricing structure in the market.
 Medication and healthcare products are inelastic goods that
have no substitutes outside of the sector.
Demographic catalyst
• Demographic catalyst:
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 As the baby boomers are
getting old, healthcare
products are needed by an
increasing number of
people. Company revenue
will increase as
consumption for drugs
surges. The stock price may
increase when company
publishes a nice-looking
income statement from
increased demand
 Demand from international
market for advanced U.S.
medication.
Claim Frequency
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Claim Severity
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Agenda
Overview
Business Analysis
Financial Analysis
Economic Analysis
Valuation Analysis
Risk Analysis
Recommendation
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Net Profit Margin
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EBIDA Margin
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ROE
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Cash Flow Per Share
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Revenues Per Share
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Agenda
Overview
Business Analysis
Financial Analysis
Economic Analysis
Valuation Analysis
Risk Analysis
Recommendation
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Real GDP
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Future Federal Spending on
Medicare, Medicaid, and Social
• Percentage of GDP
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CPI
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Employment Rate
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S&P500
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Gov’t Defense Purchase
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Trend in the Future
• Opportunities for Innovative
• Low Cost /High Value
• Increasing Technology-enabled Delivery and
Financing Solutions
• Significant Integration and Consolidation
• Increase Global Market Share and Offshore
Operation
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Agenda
Overview
Business Analysis
Financial Analysis
Economic Analysis
Valuation Analysis
Risk Analysis
Recommendation
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Sector Vitals
Absolute
High
Low
Median
Current
P/Trailing E
27.5
9.9
18
12.6
P/Forward E
24.6
10
16.8
12.2
P/B
7.5
2.2
3.8
2.6
P/S
3.0
1.0
1.8
1.3
P/CF
20.1
7.6
13.3
9.4
High
Low
Median
Current
P/Trailing E
1.2
.68
1.0
.94
P/Forward E
1.2
.69
1.0
.91
P/B
2.4
1.1
1.4
1.2
P/S
1.9
.9
1.2
1.0
P/CF
1.7
.9
1.2
1.0
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Absolute
Dividend Yield
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Pharma Industry Performance
to S&P 500 Performance
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Pharma Industry Performance
to S&P 500 Performance
Biotech Industry Performance
to S&P 500 Performance
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Biotech Industry Performance to
S&P 500 Performance
Services Industry Performance
to S&P 500
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Services Industry Performance
to S&P 500
Agenda
Overview
Business Analysis
Financial Analysis
Economic Analysis
Valuation Analysis
Risk Analysis
Recommendation
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Healthcare Reform
• Healthcare Reform and Act
– In theory, Accountable Care Organizations (ACOs) provide financial
incentives for health care organizations to reduce costs and improve
quality. In reality, given the complexity of the existing system, health care
providers are facing more challenges than ever before.
– Patient Protection and Affordable Care Act (PPACA) leads to a shift in the
health care delivery and reimbursement marketplace.
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– Part of the Affordable Care Act is intended to limit the influence of drug
and medical equipment manufacturers and supplies on physician or
hospitals practices.
– Lower Margin but Lower Credit Risk
– May Incur New Taxes
FDA Regulatory Changes
• Stricter Rules
• Longer Approval Process
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Increasing Competition
• Mergers and Acquisitions
• Insurance Program Alignment
• Demand of Technology Upgrades
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Economic Slowdown
• Rising Capital Costs
• Reduced Level of Reimbursement
• Loss of Income
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Uninsured Population
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Potential Staff Shortages
• Baby Boomers Retirement
• Failure to Attract or Retain Top Talent
• Declining Healthcare Quality
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Global Economic Uncertainty
• European Crisis
• China’s economic slowdown
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Agenda
Overview
Business Analysis
Financial Analysis
Economic Analysis
Valuation Analysis
Risk Analysis
Recommendation
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Weigh the Pros and Cons
Negatives
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Regulation, changes to Medicare/Medicaid prompts too many questions
Revenue and margin growth outlook is decreasing
Historically underperforms the S&P 500
Increase in competition – particularly from generic substitutes and important patents
expiring
Federal Debt
European Debt Crisis – companies generally require heavy amounts of funding and
cash due to nature of R&D expenses
Approaching median value in sector vitals
Pharmaceutical industry weight
Positives
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Revenue growth
Regulation may increase amount of insured patients
Inelastic good: people need health care sector products to survive
Low external threats: most threats (except for the government)
are internal to the sector, thus providing potential for a competitive advantage
– Possible that sector vitals will climb to median
– Increased buying power of emerging, developing markets
– Demographic trends
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Recommendation
• Decrease the holding to the S&P 500 level
– Decrease by 222 basis points
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Questions?
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