HEALTHCARE SECTOR PORTFOLIO COMPARISON
SIM Weight
S&P500 Weight
Materials
4%
Telecom Utilities
3%
3%
Consumer
Discretionary
11%
Consumer
Staples
11%
Overview
Energy
12%
Health Care
12%
Business
Analysis
Consumer
Utilities Discretionary
3%
8%
Consumer
Staples
12%
Information
Technology
22%
Industrials
10%
Information
Technology
19%
Industrials
11%
Materials
3%
Telecom
4%
Energy
11%
Health Care
14%
Financials
13%
Financials
14%
Economic
Analysis
Financial
Analysis
Valuation
Conclusion
HEALTHCARE SECTOR
Market Cap
P/E
ROE
Dividend Yield
LT D/E
P/B
Net Profit Margin
P/FCF
% of S&P500
Overview
41874.5
20.92
16.05%
3.72%
70.38%
17.58%
15.85%
-60.23%
12%
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Conclusion
HEALTHCARE SECTOR INDUSTRIES
Biotechnology
Diagnostic Substances
Drug Delivery
Drug Manufacturers - Major
Drug Manufacturers - Other
Drug Related Products
Drugs - Generic
Health Care Plans
Home Health Care
Hospitals
Long-Term Care Facilities
Medical Appliances & Equipment
Medical Instruments & Supplies
87%
Medical Laboratories & Research
Medical Practitioners
Specialized Health Services
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Conclusion
LARGEST COMPANIES IN HEALTHCARE
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Conclusion
HEALTHCARE SECTOR PERFORMANCE
1Yr
6mo
QTD
Returns
12.5%
14.1%
2.7%
Monthly High
Monthly Low
Current
P/E (fwd)
17.9
10.0
12.1
P/E (trailing)
Overview
Business
Analysis
P/B
4.1
2.2
2.6
Margin
(EBITDA)
16.9
16.3
16.5
P/B
Economic
Analysis
Financial
Analysis
Valuation
Conclusion
PORTER’S 5 FORCES
Threat of New
Competition
Threat of
Substitutes
•FDA Approvals pose Barrier to Entry and Early
Visibility of New Competitors.
•Use of Generic medication is rising.
•Numerous patents are expiring.
Bargaining Power
of Customers
•Age Demographics are Growing
•Political Forces are Targeting Heath-care.
Bargaining Power
of Suppliers
•Specialized Ingredients with Few Substitutes
•Often only one use for the raw materials.
Intensity of
Competitive Rivalry
•Numerous companies bloomed in this sector.
•Fierce competition for new medications.
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Conclusion
EXTERNAL FACTORS
•
Average age of Patients are Increasing.
•
Patents
• Patent Rights Uncertainty – Many of the companies in this sector have
large revenue streams from patented medications. To minimize
healthcare costs, early termination of patents has been discussed as a
viable option to reduce healthcare costs.
• Common / Preferred Generics - As soon as a patent expires, a low-cost
provider readily supplies an alternative causing rapid drops in revenue.
•
Regulatory Pressure
• Healthcare is a hot political topic . As the demographics grow the need
for low cost healthcare is fueling market adjustments.
• FDA – New pharmaceuticals must be clinically tested and approved. This
process is becoming more stringent.
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Conclusion
PATENT EXPIRATIONS
Originating Company
Pfizer
GlaxoSmithKline
Eli Lilly
Sepracor
Pfizer
Sepracor
Sankyo
Abbott
GlaxoSmithKline
Merck
Amgen
Johnson & Johnson
Overview
Business
Analysis
Pharmaceutical
Viagra
Cialis
Cymbalta
Lunesta
Detrol
Xopenex
Benicar
Zemplar
Lotronex
Singulair
Enbrel
Cypher
Economic
Analysis
Financial
Analysis
Expiration
3/27/12
11/21/17
6/11/13
2/14/14
3/25/12
3/25/13
4/25/16
4/17/12
1/13/13
2/3/12
10/23/13
11/06/13
Valuation
Conclusion
PHARMACEUTICALS PENDING FDA APPROVAL
• All companies mention significant product development
pipelines.
• Phase 3 or Later
• JNJ – 16 Pending Registration
• Amgen – 10 Pending Registration
• Pfizer – 14 Pending Registration
• Phase 1&2, ~45 per company.
• Annual Reports Show strong investments in R&D with
Promising data
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Conclusion
HEALTHCARE SECTOR LIFECYCLE
Healthcare
Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Conclusion
US POPULATION PROJECTIONS - AGE
200,000
180,000
160,000
140,000
120,000
.100 years and over
.85 years and over
100,000
.65 years and over
.45 to 64 years
80,000
60,000
Data from
US Census
Bureau
40,000
20,000
0
2010
Overview
2015
2020
Business
Analysis
2025
2030
Economic
Analysis
2035
2040
Financial
Analysis
2045
2050
Valuation
Conclusion
REAL GDP AND HEALTHCARE SECTOR
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Conclusion
CONSUMER FOOD SPEND AND HEALTHCARE
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Conclusion
EARNINGS OUTLOOK
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Conclusion
HEALTHCARE SECTOR P/E + PROJECTION
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Conclusion
MARGINS
&
CASH
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Conclusion
SECTOR LEADERS & FINANCES
Industry
Market Cap
PEG
Ratio
P/B
Profit
Margin
Operating
Margin
Johnson & Johnson (JNJ)
DM - Major
176.23B
2.15
2.88
14.87%
24.84%
Novartis AG (NVS)
DM - Major
134.51B
2.48
2.06
15.35%
21.49%
Pfizer (PFE)
DM - Major
161.81B
3.27
1.81
14.85%
29.32%
GlaxoSmithKline (GSK)
DM - Major
134.51B
2.48
2.06
15.35%
21.49%
Merck & Company (MRK)
DM - Major
115.55B
2.77
2.11
13.05%
20.77%
Sanofi – Aventis (SNY)
DM - Major
99.94B
6.56
1.44
14.49%
20.89%
Abbott Laboratories (ABT)
DM - Major
85.85B
1.30
3.50
12.17%
20.40%
AstraZeneca (AZN)
DM - Major
60.93B
4.35
2.64
29.72%
38.78%
Novo Nordisk (NVO)
DM - Other
75.00B
1.71
11.28
25.77%
33.72%
Biotechnology
52.62B
1.26
2.8
23.64%
33.96%
Amgen (AMGN)
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Conclusion
HEALTHCARE SECTOR VALUATION
Absolute Basis
High
Low
Median
Current
P/Trailing E
P/Forward E
P/B
P/S
P/CF
28.4
25.6
7.5
3.1
22.2
9.9
10.0
2.2
1.0
7.6
18.2
17.2
3.8
1.8
13.4
12.4
12.0
2.6
1.2
9.2
High
Low
Median
Current
1.2
1.2
2.4
2.1
1.7
0.68
0.69
1.1
0.9
0.9
1.0
1.0
1.4
1.2
1.3
0.94
0.92
1.20
1.00
1.00
Relative to
SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Median Current
5.8
5.2
1.2
0.6
4.2
Median Current
0.06
0.08
0.20
0.20
0.30
Overall, Healthcare looks cheap compared to historical values.
We believe this is due to . . . Uncertainty surrounding regulations and increasing
demands for low-cost healthcare from a growing demographic.
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Conclusion
INDUSTRY VARIATION
Industry variation is low
with exception of the
Diagnostic Substances and
Medical Laboratories &
Research industries.
Recall Pharmaceuticals
Dominates the Sector, its
P/E is at the Mean.
Industry
Medical Practitioners
Hospitals
Diagnostic Substances
Medical Laboratories & Research
Overview
Business
Analysis
Market Cap
P/E
ROE %
3.31B
7.6
319.8B
11.94B
131.43B
10.0
179.6
202.8
Economic
Analysis
P/B
45.04
Margin
5.6
P/FCF
12.7
D/E
5.92
144.0
2.5
1.5
76.39
36.47
75.61
-2.49
4.99
-9.45
4.3
2.7
0.8
489.9
134.7
-40.6
Financial
Analysis
Valuation
4.3
Conclusion
• Healthcare saw massive growth after
the surge of the pharmaceutical
industry.
TECHNICAL ANALYSIS:
HEALTHCARE SECTOR
• Currently the industry is more mature,
has reached a sustained growth rate.
• We foresee consolidation through
mergers and acquisitions in the future.
• In the long term, other industries within
the Healthcare Sector will grow,
displacing Pharmaceuticals as they do.
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Conclusion
HEALTHCARE SECTOR RECOMMENDATION
Recommendation – Reduce Healthcare Sector by 200 BP to S&P Weighting.
Current Weights: S&P -12%, SIM-14%
Positives
Risks
• Big Problems Left
• Cancer
• Alzheimer's
• Life Expectancy and Age
Demographics are Growing
• Legislation
• Patents / Generics
• Medicaid / Medicare
• Don’t Expect Large Sector Growth
Industries to Overweight
• Generics
• Hospitals
• Medical Practitioners
Overview
Business
Analysis
Industries to Underweight
•Diagnostic Substances
•Medical Laboratories & Research
Economic
Analysis
Financial
Analysis
Valuation
Conclusion