SIM’s
Healthcare Sector Remedies
Yajing Wang
Andrew Weiner
Chang Xu
Chunwei Xu
Agenda
Healthcare Sector Recap
Recommendation
Company Recommendations
Gilead Sciences
Teva
Wellpoint
Pfizer
Summary
Current S&P Holdings
Energy, 11%
Financials, 15%
Health Care,
11%
Industrials, 11%
Cons Staples;
11%
Information
Technology,
20%
Cons
Discr; 11%
Utilities, 3%
Telecomm 3%
Materials, 4%
Current SIM Holdings
Industrials, 8%
Health Care, 14%
Information
Technology, 22%
Materials, 4%
Telecom; 1%
Financials, 15%
Utilities, 3%
Energy, 11%
Consumer
Discretionary, 11%
Consumer Staples,
11%
Our Recommendation: Reduce SIM’s Portfolio holding
to the same level as the S&P 500; reduce by 200 basis points.
Healthcare Sector Holding
and Recommendation
MRK
ESRX
BMY
TEVA
WLP
GILD
PFE
Market Value
--
--
--
407,308
$424,048
$462,978
$377,850
% of SIM
--
--
--
3.30%
3.51%
3.75%
3.06%
$37.44
$52.04
$32.77
$38.90
$67.53
$49.94
$22.54
--
--
--
(101,104)
$21,103
$50,445
$78,061
Target Price
$41.37
$62.58
$34.39
$54.72
$75.22
$58.96
$25.99
Upside
12.31%
19.85%
4.75%
40.7%
15.6%
18.1%
18.3%
Recommendation
NONE
NONE
NONE
SELL
HOLD
HOLD
HOLD
N/A
N/A
N/A
-130
0
-75
0
0
0
0
2.00%
3.51%
3.00%
2.80%
Current Price
Unrealized G/(L)
BP Change
Ending Allocation
Gilead Sciences, INC - Overview
Incorporated in 1987, Gilead Sciences Inc found their niche
in the discovering, production, and commercialization of
HIV, Hepatitis, respiratory, cardiovascular, and metabolic
issues, cancers, and inflammation medications.
Currently 14 marketed products, half of which have expiring
patents in 2018, and over 30 products in different testing
stages.
Main focus on HIV/AIDS and Hepatitis C.
Largest success: consolidation of multi-dose and multi-pill
medications into once-a-day medications to decrease hassle
and cost.
Biggest revenue creators are Atripla, Truvada, Viread,
AmBisome, Letairis, and Ranexa
Gilead: Key Business Drivers
Drivers:
Research
Huge costs, can’t afford to be wrong
Consolidation
Research is expensive
Regulation
Obamacare: increased demand
Demographics
Less healthy overall, aging and increased life expectancy
Intellectual Property protection
Threats:
Regulation
Obamacare, FDA requirements
Highly competitive
Increasing costs
Decreasing margins, to be lowered by Obamacare despite increases in demand
Generic Medicines and Patent Threats
20 year lives to be reduced by Obamacare
Gilead: Performance (5-year)
source: Yahoo! Finance
Gilead: Financial Analysis
Current Price
49.94
One Year Target Estimate
59.92
DCF Price Target
58.96
52 Week Range
34.45 – 56.50
Volume (3-month average)
7,903,897
Market Cap
$37.82B
Enterprise Value
$45.793B
Trailing P/E (10-year)
12.8
Forward P/E (10-year)
12.7
Return On Assets
21%
52-Week Change
$8.96
Shares Outstanding (millions) 753.11
PEG Ratio
.90
Beta
0.5
Additional info:
• No Dividends – ever
• Virtually same management team since
1996
• Historic Growth Rates: 23% (5-years),
9% (one year), 5% (one quarter)
• Last Earnings represented a surprise:
• Below expectation attributable to
large write-offs, pensions, satisfying
liabilities, and severance packages
of Pharmasett
• Decreased expectations for
2012: EPS holds at $3.88
• Decreased expectations for
Q2: EPS holds at $0.96
• Over 50% of sales are in US: large
opportunity for international growth
source: Yahoo! Finance and Thomas Reuters Baseline
Gilead: Return on Equity
source: Thomas Reuters Baseline
Gilead: Valuation Analysis
Absolute
High
Low
Median
Current
Target
Multiple
Target/S
hare
Target
Price
P/E Forward
94.4
8.9
25.7
13.3
17
3.95
65.45
P/S
32.2
3.8
12.2
4.6
10
8.79
70.32
P/B
23.6
4.2
11.2
5.7
9
9
63
P/EBITDA
131.07
7.17
20.51
8.92
17
5.76
74.88
P/CF
135.4
8.3
30.1
12.0
19
4.28
72.68
S&P 500
P/E Forward
High
13.9
Low
.65
Median
1.8
Current
.98
P/E Trailing
5.1
.8
1.6
1.1
P/S
8.0
2.0
4.1
2.6
P/B
23.7
3.1
9.1
3.7
P/CF
12.7
.9
2.8
1.3
source: Thomas Reuters Baseline
Year
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
8,385,385
9,099,776
9,899,360
10,493,322
11,385,254
12,353,001
13,341,241
14,008,303
14,708,718
15,370,611
15,908,582
8.5%
9.0%
6.0%
8.5%
8.5%
8.0%
5.0%
5.0%
4.5%
3.5%
3,789,841
4,175,165
4,416,589
4,721,995
5,123,364
5,558,850
5,870,146
5,883,487
6,324,749
6,609,363
6,681,604
45.2%
45.9%
44.6%
45.0%
45.0%
45.0%
44.0%
42.0%
43.0%
43.0%
42.0%
66,581
76,568
88,053
104,933
113,853
123,530
133,412
140,083
147,087
153,706
159,086
0.8%
0.8%
0.9%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
Taxes
861,945
1,006,060
1,063,052
1,154,265
1,252,378
1,358,830
1,434,183
1,435,851
1,544,415
1,613,914
1,630,630
Tax Rate
23.6%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
2,803,637
3,023,612
3,194,897
3,462,796
3,757,134
4,076,490
4,302,550
4,307,553
4,633,246
4,841,742
4,891,889
7.8%
5.7%
8.4%
8.5%
8.5%
5.5%
0.1%
7.6%
4.5%
1.0%
392,232
227,494
247,484
262,333
284,631
370,590
440,261
462,274
485,388
507,230
477,257
4.7%
2.5%
2.5%
2.5%
2.5%
3.0%
3.3%
3.3%
3.3%
3.3%
3.0%
(112,348)
(640,334)
(243,873)
(262,333)
(113,853)
(123,530)
(133,412)
(126,075)
(147,087)
(153,706)
(159,086)
Revenue
% Growth
Operating Income
Operating Margin
Interest and Other
Interest % of Sales
Net Income
% Growth
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
-1.3%
-7.0%
-2.5%
-2.5%
-1.0%
-1.0%
-1.0%
-0.9%
-1.0%
-1.0%
-1.0%
131,904
181,996
202,937
262,333
284,631
370,590
433,590
462,274
485,388
507,230
477,257
1.6%
2.0%
2.1%
2.5%
2.5%
3.0%
3.3%
3.3%
3.3%
3.3%
3.0%
2,951,527
2,429,140
2,995,692
3,200,623
3,643,351
3,953,036
4,175,886
4,181,555
4,486,249
4,688,130
4,732,900
-17.7%
23.3%
6.8%
13.8%
8.5%
5.6%
0.1%
7.3%
4.5%
1.0%
Terminal
Value
65,314,023
Free Cash
Yield
7.25%
Terminal P/E
13.4
Terminal
EV/EBITDA
9.1
% Growth
NPV of Cash Flows
21,398,919
48%
NPV of terminal value
Projected Equity Value
23,002,585
44,401,505
52%
100%
Free Cash Flow Yield
7.85%
Current P/E
Projected P/E
13.4
15.8
12.4
14.7
11.8
13.9
Current EV/EBITDA
Projected EV/EBITDA
9.0
10.6
8.5
10.1
8.1
9.5
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
753,106
$49.94
$58.96
18.1%
Gilead: Sensitivity Analysis
10.25
10.5
10.75
11
11.25
11.5
11.75
2.7
61.66
59.58
57.63
55.80
54.08
52.45
50.92
2.9
62.60
60.44
58.43
56.53
54.75
53.08
51.50
3.1
63.60
61.35
59.26
57.30
55.46
53.73
52.10
3.3
64.65
62.31
60.14
58.11
56.20
54.41
52.73
3.5
65.76
63.33
61.07
58.96
56.98
55.13
53.40
3.7
66.94
64.41
62.05
59.86
57.81
55.89
54.09
3.9
68.20
65.55
63.09
60.80
58.67
56.69
54.83
4.1
69.53
66.76
64.19
61.81
59.59
57.53
55.60
4.3
70.96
68.05
65.36
62.87
60.56
58.41
56.41
Gilead: Valuation Analysis – William %R
source: Yahoo! Finance
Gilead: Valuation Analysis – William %R
source: Yahoo! Finance
Gilead Alternative: BMY
Bristol-Myers Squibb is a biopharmaceutical company
that emphasizes the discovery, commercialization, and
distribution of drugs.
Specialize in drugs that address cancer, HIV/AIDS,
cardiovascular disease, diabetes, Hepatitis, arthritis,
and psychiatric issues.
Biggest upcoming problems: patent expiration of
Plavix, Avapro, and Abilify in 2012
BMY: Price Action
Bristol-Myers Squibb
Current Price
32.71
Additional info:
• Small but consistent dividends
52 Week Range
25.69– 35.44
• Under huge patent attack by generics
Volume (3-month average)
7,925,791
• Growth rates are falling dramatically
• Estimated cash flow for the quarter is down
Market Cap
$55.25B
59%, 19% for year
Enterprise Value
$55B
• Estimated revenue decreasing by 17% in the
Trailing P/E (10-year)
14
current quarter, 16% on the year
• Long-term future growth rate is 0%
Forward P/E (10-year)
18.4
• Historic growth rate of 12%
Return On Assets
18%
• 65% of sales in USA
52-Week Change
$4.51
• ROE is 24.4%
• EPS is projected to decline well into 2013,
Shares Outstanding (millions) 168
pick back up in 2014
PEG Ratio
4.47
• Decreasing dividend yield to 4.16%
Beta
0.48
One Year Target Estimate
34.12
Gilead Alternative: ESRX
Primary objective is to provide healthcare management and
administration services through their two product lines, Pharmacy
Benefit Management (claim processing, delivery services, benefit
consultations, drug review, and drug management) and Emerging
Markets (distribution of fertility drugs, drugs requiring specialized
packaging and care, distribution of sample units, and distributions
to clinics)
Pharmacy Benefit Management sector represents 97% of their
revenue, a 2% increase from the previous year
Governmental support: largest client is the Defense Department
Goal is to design a product in which they predict who will stop
taking their meds and help them before they do
“Consumerology” Board
Over 56,000 pharmacies within their network
Walgreens dropped out in 2011
ESRX: Price Action
ESRX S&P 500 Comparison
ESRX: Gilead Comparison
ESRX: ROE
ESRX: Financial Analysis
Current Price
51.81
One Year Target Estimate
62.58
52 Week Range
25.69– 35.44
Volume (3-month average)
9,272,850
Market Cap
$40.72B
Enterprise Value
$26.7B
Trailing P/E (10-year)
16.7
Forward P/E (10-year)
13.5
Return On Assets
12.8%
52-Week Change
(7.77)
Shares Outstanding (millions) 805.5
PEG Ratio
.86
Beta
1.07
Additional info:
• Estimated revenue up 134% for the quarter,
101% for the year
• Estimated cash flow is up 73% for the
current quarter, 28% on the year
• Beta, in regards to the S&P 500, is .91
• EPS growth rate of 24%
• No Dividends
• ROE is 72.3%
Summary and
Recommendation
BMY is unreliable and a purely defensive stock; not a lot of
growth prospects, and not something we should be invested
in
ESRX represents potential opportunities for long-term
growth
More people will need benefit consultation as the healthcare
market becomes more confusing
“Consumerology” Board
Huge distribution network
Lots of opportunity for expansion through alternative
segments
However…
Summary and
Recommendation
Gilead trumps.
Large swings with good news for upcoming medication
Tons of potential for upcoming good news:
GS-7977  12 more weeks remaining in Phase III trial
First to market advantage
97% cure rate
Truvada  Awaiting FDA approval in Phase III trial
Consolidation of HIV meds into fixed-dose regimen
Same as Quad drug (also in Phase III)
Approval will permit use as HIV prevention, not just treatment
Partners with two other Phase III drugs: Elvitegravir and Cobicistat
Perhaps not a long-term solution, but an ideal short-term; lots of
excitement within the pipeline for the next quarter.
TEVA: Overview
Teva Pharmaceutical Industries Ltd., (TEVA) is a global pharmaceutical
company. The company develops, manufactures, and markets generic and
branded human pharmaceuticals as well as active pharmaceutical ingredients.
Business Segments (2011):
Generic
Branded
Other
55.7%
35.4%
8.9%
Geographic Area (2009):
North America
Europe
Israel
International
62%
23%
11%
4%
Major Competitors:
Watson Pharmaceuticals (WPI)
Ranbaxy Laboratories
Sandoz International GmbH
TEVA: Key Stats
Industry : Pharmaceutical
Market Cap: 36.7 Billion
Current Price: $38.9
52-Week Price Range: $35-51.15
Bata: 0.45
Div & Yield: 26.3 cents (2.7%)
Target Price: $55.55
•
Data from Thomson Reuters Baseline as of May 20, 2012
TEVA: 1-year Performance
TEVA: 5-year Performance
TEVA: 1-year Performance
Compared with SP500
TEVA: 5-year Performance
Compared with SP500
TEVA: Opportunities & Risks
Opportunities:
Good start 2012
Demographic: longer life expectancy and more medication demands
Potential stock buy back
High dividend yield compared to others in the same industry
Risks:
Changing CEO increases uncertainty
FDA regulation change
Healthcare Reform increases unpredictability
Euro chaos and Israel reaction
Currency exchange rate
Poor stock performance recently
TEVA: Valuation - DCF
TEVA: DCF Sensitivity Analysis
TEVA: Valuation - Ratios
TEVA: Valuation - Ratios
• Price Target from Ratio Valuation: $53.88
• Price Target from DCF Valuation: $55.55
• Final Price Target = $54.72
TEVA: Recommendation
Buy long term
Sell 130 bps in SIM portfolio
WellPoint Inc
WellPoint: Overview
WellPoint Inc., is one of the nation`s largest health benefits companies, with 34 million members in its
affiliated health plans and more than 65 million individuals served through its subsidiaries.
It has a unique combination of national and regional scale.
National scale--WellPoint's 34 million medical members--is critical for leveraging administrative costs.
WellPoint is only now beginning to take full advantage of its national scale by consolidating its IT
systems.
Regional scale--WellPoint's concentration in 14 Blue Cross and Blue Shield markets--is essential for
gaining bargaining leverage over health-care providers.
Business Segments
Commercial Business (81.79%)
Consumer Business (17.95%)
Other (0.26%)
Main Competitors
UnitedHealth Group, Inc
Express Scripts Holding Company
Aetna Inc
Humana Inc.
Top Healthcare plans Companies by Market Cap
Company
Market Cap P/E
Unitedhealth Group Inc
58.21B
Express Scripts Holding Company 42.12B
WellPoint Inc
22.3B
Aetna lnc
14.18B
Humama Inc
14.62B
Cigna Corp
12.72B
11.61
21.04
9.24
7.92
9.52
9.51
WellPoint: Key Statistics
Industry : Healthcare Plan
Market Cap: 22.28Billion
Current Price: $67.53
52-Week Price Range: $56.61-80.90
Beta: 0.62
Div & Yield: 1.15
Target Price: $ 75.22
WellPoint: 1-yr Performance
WellPoint : Pros & Risks
Risks
Health Reform
--Nationalized Healthcare Plan
The health reform law required plans,
starting in 2011, to spend at least 80% of
premiums on medical cost for small-group
and individual business and 85% for largegroup business
--Medicare Advantage Business
It lost $50 million in the quarter and
$150 million in 2011 (Northern California
Plan)
~Obamacare
Pros
WellPoint: 1-yr Performance
WellPoint : Pros & Risks
Risks
Health Reform
--Nationalized Healthcare Plan
The health reform law required plans,
starting in 2011, to spend at least 80% of
premiums on medical cost for small-group
and individual business and 85% for largegroup business
--Medicare Advantage Business
It lost $50 million in the quarter and
$150 million in 2011
~Obamacare
Membership decline and increased benefit
expense
Pros
Company Position within
Industry
--Various Product Offerings
--Technique in service
Demographics
--Growing need for
Healthcare
Share repurchase program
WellPoint: Valuation-DCF
WellPoint.Inc
Terminal Discount Rate =
Terminal FCF Growth =
Year
Revenue
% Growth
2012E
2018E
2019E
2020E
2021E
2022E
$ 61,192.43 $ 62,577.87 $ 64,414.36 66346.8 68370.4 70489.9 72710.3
2.26%
2.93% 3.00% 3.05% 3.10% 3.15%
75037.0
3.20%
77475.7 80032.4
3.25% 3.30%
82713.5
3.35%
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
Current Price
Implied equity value/share
Upside/(Downside) to DCF
$
$
2015E
2016E
2017E
56%
44%
Terminal Value
37905.80
27854.50
9.80%
100%
Free Cash Yield
8.37%
Terminal P/E
11.40
Terminal EV/EBITDA
7.23
365.06
Shares Outstanding
2014E
15649.85
12204.65
9.87
11.15
6.68
7.41
Current P/E
2013E
12.0%
3.35%
67.53
76.30
13%
9.31
10.52
6.36
7.05
7.74
8.75
5.39
5.97
WellPoint: Valuation-Ratios
Industry: Healthcare Plans
Relative to SP500
High
Low
Median
Current
P/Trailing E
1.3
0.45
0.83
0.78
P/Forward E
1.3
0.47
0.80
0.78
P/B
1.5
0.6
0.9
0.7
P/S
0.9
0.3
0.5
0.4
P/CF
1.7
0.6
1.0
1.0
Relative to SP500
High
Low
Median
Current
P/Trailing E
1.2
0.43
0.79
0.75
P/Forward E
1.2
0.51
0.76
0.70
P/B
1.4
0.4
0.6
0.5
P/S
1.1
0.3
0.5
0.3
P/CF
1.8
0.6
1.1
0.9
WellPoint Inc.,
WellPoint: Valuation-Ratios
Absolute
Valuation
High
A.
Low
B.
Median
Current
D.
E.
C.
#Your Target *Your Target
Multiple
E, S, B,
etc/Share
F.
Your Target
Price
(F x G)
G.
H.
P/Forward E
18.1
6.0
12.8
9.1
11
7.46
85.49
P/S
1.7
0.3
0.6
0.4
0.5
167.43
83.72
P/B
3.6
0.8
1.9
1.0
1.1
65.08
71.58
P/EBITDA
18.14
2.77
7.53
5.20
8.0
7.93
63.44
P/CF
19.5
5.1
12.2
8.0
10
6.62
66.20
Average
Target
Price:
$74.14
WellPoint: Summary
Pfizer Overview
Incorporated in 1942
Researched-based, global biopharmaceutical company
Five Segments
Primary Care: products prescribed by primary-care physicians
Specialty Care and Oncology: products prescribed by
physicians who are specialists
Established Products and Emerging Markets: products that
have lost patent protection or marketing rights and those sold
in emerging markets
Animal Health and Consumer Healthcare: products and
services to address disease in livestock and companion
animals and non-prescription products
Nutrition (Sold to Nestle): presented as a discontinued
operation in 2nd quarter of 2012; will be excluded from the
full year 2012
Key Statistics
Income Statement Highlight
Earning Strength: EPS increased from $2.17 to an estimated $2.22 over
the past 5 quarters, indicating an improving growth rate
1st quarter reported better than expected results
Industry Specific Challenges
Healthcare Legislation
An increase, from 15.1% to 23.1%, in the minimum rebate on branded
prescription drugs sold to Medicaid beneficiaries (effective January 1, 2010)
Extension of Medicaid prescription drug rebates (effective March 23, 2010)
Discounts on branded prescription drug sales to Medicare Part D participants
who are in the Medicare “coverage gap” (effective January 1, 2011)
A fee payable to the federal government, which is not deductible for U.S.
income tax purposes (effective January 1, 2011, with the total fee to be paid
each year by the pharmaceutical industry increasing annually through 2018)
The benefits bring by the substantial increase in the number of Americans
with health insurance beginning in 2014 will be offset by the mandatory
rebates Pfizer has to pay
FDA
FDA will allow biosimilar applicants to use a non-U.S. licensed comparator
in certain studies to support a demonstration of biosimilarity to a U.Slicensed reference product
Industry Specific Challenges
The Loss or Expiration of Intellectual Property Rights
Lipitor: 2011/11; Aricept: 2013/07; Spiriva: 2012-2016
(country by country); Enbrel: 2013/10; Rebif: 2013 or 2015
Effect: increased generic competition, decreased revenue
Pricing and Access Pressures
The industry has experienced significant pricing pressures in
certain European and emerging market countries
The Global Economic Environment
As Pfizer operates in multiple foreign currencies, including
the euro, the U.K. pound, the Japanese yen, the Canadian
dollar and approximately 100 other currencies, changes in
those currencies relative to the U.S. dollar will impact our
revenues and expenses.
Impact of Foreign Exchange
Key Late Stage Assets
Xalkori: a breakthrough in lung cancer treatment and is the first
new drug approved by the FDA for lung cancer in six years
Tofa: Controversial but promising results
Emerging Market Potential
Return to Investors
Return $3.3 billion to investors through share
repurchases and dividends in the first quarter
Continue to expect to repurchase $5.0 billion of shares
in 2012
Pose questions on growth
DCF
Pfizer Inc (PFE)
Analyst: Chang Xu
Date: 4/15/2012
Year
2012E
Terminal Discount Rate =
Terminal FCF Growth =
2013E
2014E
2015E
2016E
11.0%
2.3%
2017E
2018E
2019E
2020E
2021E
2022E
Revenue
% Growth
60,329
59,076 58,343 58,634 59,338 60,169 61,131 62,152 63,414 64,777
-2.1%
-1.2%
0.5%
1.2%
1.4%
1.6%
1.7%
2.0%
2.2%
66,267
2.3%
Operating Income
Operating Margin
24,110 23,959 24,670 26,385 27,355 28,460 29,465 30,641 31,263 31,935
40.0% 40.6% 42.3% 45.0% 46.1% 47.3% 48.2% 49.3% 49.3% 49.3%
32,670
49.3%
Interest and Other
Interest % of Sales
(30)
-0.1%
(30)
-0.1%
(23)
0.0%
(23)
0.0%
(24)
0.0%
(24)
0.0%
(24)
0.0%
(25)
0.0%
(25)
0.0%
(26)
0.0%
(27)
0.0%
Taxes
Tax Rate
7,465
31.0%
7,418
31.0%
7,641
31.0%
8,172
31.0%
8,473
31.0%
8,815
31.0%
9,127
31.0%
9,491
31.0%
9,684
31.0%
9,892
31.0%
10,119
31.0%
16,511 17,006 18,190 18,858 19,621 20,314 21,125 21,554 22,017
-0.6%
3.0%
7.0%
3.7%
4.0%
3.5%
4.0%
2.0%
2.2%
22,524
2.3%
Net Income
% Growth
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
% Growth
16,615
5,611
9.3%
2,248
3.7%
1,514
2.5%
21,645
5,612
9.5%
(124)
-0.2%
1,506
2.6%
5,426
9.3%
(19)
0.0%
1,406
2.4%
4,925
8.4%
(64)
-0.1%
2,111
3.6%
4,272
7.2%
(157)
-0.3%
2,943
5.0%
3,971
6.6%
(185)
-0.3%
4,164
6.9%
4,035
6.6%
(215)
-0.4%
4,230
6.9%
4,102
6.6%
(228)
-0.4%
4,301
6.9%
4,185
6.6%
(283)
-0.4%
4,388
6.9%
4,275
6.6%
(306)
-0.5%
4,483
6.9%
4,374
6.6%
(335)
-0.5%
4,586
6.9%
19,668 20,179 20,370 19,788 19,321 19,989 20,786 21,169 21,610
-9.1%
2.6%
0.9%
-2.9%
-2.4%
3.5%
4.0%
1.8%
2.1%
22,090
2.2%
Price Target
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
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
Debt
Cash
Cash/share
Total Assets
Debt/Assets
Working Capital % of Growth
113,092
91,479
204,571
12.51%
10.4
12.3
6.2
7.3
7,870
$ 21.98
$ 25.99
18.3%
38,949
26,758
3.40
188,002
20.7%
22%
55%
45%
100%
Terminal Value 259,746
Free Cash Yield
10.5
12.4
6.3
7.3
10.2
12.0
6.2
7.2
8.50%
Terminal P/E
11.5
Terminal EV/EBITDA
7.3
Sensitivity Analysis
Discount Rate
Terminal Growth Rate
0.0%
0.3%
0.5%
0.8%
1.0%
1.3%
1.5%
1.8%
2.0%
2.3%
2.5%
2.8%
3.0%
3.3%
3.5%
3.8%
4.0%
4.3%
4.5%
4.8%
5.0%
5.3%
5.5%
6.5%
$40.33
$41.31
$42.37
$43.53
$44.78
$46.16
$47.68
$49.36
$51.22
$53.30
$55.64
$58.30
$61.33
$64.83
$68.91
$73.74
$79.53
$86.61
$95.45
$106.83
$122.00
$143.23
$175.08
7.0%
$37.34
$38.14
$39.01
$39.95
$40.97
$42.08
$43.29
$44.61
$46.06
$47.67
$49.45
$51.45
$53.69
$56.24
$59.15
$62.50
$66.42
$71.04
$76.60
$83.38
$91.86
$102.77
$117.31
7.5%
$34.75
$35.42
$36.15
$36.92
$37.75
$38.65
$39.63
$40.69
$41.85
$43.12
$44.51
$46.05
$47.76
$49.68
$51.83
$54.27
$57.06
$60.28
$64.03
$68.47
$73.79
$80.30
$88.43
8.0%
$32.50
$33.06
$33.67
$34.31
$35.00
$35.75
$36.55
$37.41
$38.35
$39.36
$40.47
$41.69
$43.03
$44.50
$46.15
$47.98
$50.05
$52.39
$55.06
$58.15
$61.75
$66.00
$71.11
8.5%
$30.51
$30.99
$31.50
$32.04
$32.62
$33.24
$33.91
$34.62
$35.39
$36.22
$37.11
$38.09
$39.15
$40.32
$41.60
$43.02
$44.60
$46.36
$48.34
$50.58
$53.15
$56.11
$59.56
9.0%
$28.75
$29.16
$29.60
$30.06
$30.55
$31.07
$31.62
$32.22
$32.86
$33.54
$34.28
$35.07
$35.93
$36.87
$37.89
$39.01
$40.24
$41.60
$43.11
$44.80
$46.70
$48.86
$51.32
9.5%
$27.18
$27.54
$27.91
$28.30
$28.72
$29.16
$29.63
$30.13
$30.67
$31.24
$31.85
$32.50
$33.21
$33.97
$34.80
$35.70
$36.68
$37.75
$38.93
$40.24
$41.69
$43.31
$45.13
10.0%
$25.78
$26.08
$26.40
$26.74
$27.10
$27.48
$27.88
$28.30
$28.75
$29.23
$29.74
$30.29
$30.88
$31.51
$32.19
$32.92
$33.71
$34.58
$35.52
$36.55
$37.68
$38.93
$40.33
10.5%
$24.51
$24.77
$25.05
$25.34
$25.65
$25.98
$26.32
$26.68
$27.07
$27.48
$27.91
$28.37
$28.86
$29.39
$29.95
$30.55
$31.21
$31.91
$32.67
$33.50
$34.40
$35.39
$36.48
11.0%
$23.36
$23.59
$23.83
$24.09
$24.35
$24.64
$24.93
$25.24
$25.57
$25.92
$26.29
$26.68
$27.10
$27.54
$28.01
$28.52
$29.06
$29.64
$30.26
$30.94
$31.67
$32.46
$33.33
11.5%
$22.31
$22.51
$22.73
$22.95
$23.18
$23.43
$23.68
$23.95
$24.24
$24.54
$24.85
$25.19
$25.54
$25.92
$26.32
$26.74
$27.20
$27.68
$28.20
$28.76
$29.36
$30.01
$30.71
12.0%
$21.35
$21.53
$21.72
$21.91
$22.12
$22.33
$22.56
$22.79
$23.04
$23.30
$23.57
$23.86
$24.16
$24.48
$24.82
$25.18
$25.57
$25.98
$26.41
$26.88
$27.38
$27.91
$28.49
12.5%
$20.47
$20.63
$20.80
$20.97
$21.15
$21.34
$21.53
$21.74
$21.95
$22.18
$22.42
$22.67
$22.93
$23.21
$23.50
$23.81
$24.13
$24.48
$24.85
$25.24
$25.66
$26.11
$26.58
13.0%
$19.66
$19.80
$19.95
$20.10
$20.26
$20.43
$20.60
$20.78
$20.97
$21.17
$21.37
$21.59
$21.82
$22.06
$22.31
$22.58
$22.86
$23.15
$23.47
$23.80
$24.15
$24.53
$24.93
Main Drivers
Implied equity value/share
$80.00
Discount Rate
Growth Rate
$60.00
Operating Margin
CapEx
$40.00
Depreciation
Revenue Growth
$20.00
1.0% 25.5% 50.0% 74.5% 99.0%
Percentiles of the variables
Working Capital % of
Growth
Earning Strength
Operating Earnings Yield
Operating Earning Yield: 9.8% -- ranks above 80% of
the other companies in healthcare industry, indicating
Pfizer is undervalued
Stock Valuation
Relative to
Industry
High
Low
Median
Current
P/Trailing E
.86
.57
.72
.86
P/Forward E
.88
.62
.74
.88
P/B
.8
.5
.6
.8
P/S
1.1
.9
1.0
1.0
P/CF
.9
.6
.7
.8
Relative to S&P
500
High
Low
Median
Current
P/Trailing E
.76
.41
.56
.72
P/Forward E
.83
.46
.59
.74
P/B
1.2
.6
.8
.9
P/S
2.9
1.7
2.2
2.0
P/CF
.9
.5
.7
.7
Price Target
Absolute
Valuation
High
A.
Low
B.
Median
C.
Current
D.
#Your
Target
Multiple
E.
*Your
Target
E, S, B,
etc/Shar
e
F.
G.
Your
Target
Price
(F x G)
H.
P/Forward E
13.3
5.9
8.2
10.0
11.6
2.22
25.75
P/S
4.1
1.7
2.5
2.5
3.1
8.25
25.58
P/B
2.7
1.3
1.8
2.1
2.4
10.64
25.54
P/EBITDA
10.93
4.54
7.84
4.69
4.3
6.0
26.04
P/CF
9.8
3.9
6.0
6.4
7.0
3.56
24.92
Price Movement
• Pfizer’s stock price is up 10% in the last 12 months, up 7.6% in the past
quarter, up 3.2% in April
Recommendation
Hold, slightly reduce 26 basis points
From 3.06% to 2.8%
Merck
•
Global healthcare company
•
Market directly and through its JV
•
Segments:
•
•
•
•
Pharmaceutical
Animal Health
Consumer Care
Alliances
Future Growth Potential
Key Statistics
Return to Investors
Pfizer: 3.9% vs. Merck: robust 4.5%
Net Income and EPS
Comparison
Pfizer
Merck
Comparison
Comparison
Merck will offer a little more price and dividend
stability over the next five years
Pfizer has more potential for growth in the latter half
of that period
Final Recommendation
TEVA
WLP
GILD
PFE
407,308
$424,048
$462,978
$377,850
% of SIM
3.30%
3.51%
3.75%
3.06%
Current Price
$38.90
$67.53
$49.94
$22.54
(101,104)
$21,103
$50,445
$78,061
Target Price
$54.72
$75.22
$58.96
$25.99
Upside
40.7%
15.6%
18.1%
18.3%
Recommendation
SELL
HOLD
HOLD
HOLD
BP Change
-130
0
-75
26
2.00%
3.51%
3.00%
2.80%
Market Value
Unrealized G/(L)
Ending Allocation