Fall 2011
HEALTH CARE
Colin McMahon
Balaji Natarajan
Thomas O’Neill
Abinav Sankar
Agenda
• SIM Portfolio Analysis
• Recommendation for Healthcare
• Individual Stock Analysis
• Amgen
• TEVA
• Pfizer
• Johnson and Johnson
• Summary
Portfolio summary
S&P 500
Telecom Svc
3%
Utilities
4%
Energy
12%
Info Tech
19%
Financials
14%
Health
Care
11%
SIM Portfolio
Materials
Utilities
3%
3%
Materials
4%
Industrials
11%
Info Tech
25%
Cons Staples
21%
Cons Disc
11%
Health Care
12%
Cons Staples
11%
Industrials
3%
Financials
11%
Energy
13%
Consumer
Discrectionary
9%
Recommendation
• Increase the weight in the health care sector by 100 bps
bringing the weight to 12.77%
Stock
Market value
% of the SIM
Portfolio
Recommendation
Amgen
$297,804
2.73%
Buy 50 bps
Johnson and
Johnson
$431,413
3.96%
Hold
Pfizer
275418
2.53%
Hold
Teva
277780
2.55%
Buy 50 bps
AMGEN
Amgen: Increase 50 bps
24% Upside to Target of $68
Company Name:
Ticker:
Price:
Market Cap:
Price Target:
Consensus Target:
Analyst Ratings
Buy
19
Hold
6
Sell
2
Amgen
AMGN
$55
$49 bln
$68
$66
Amgen
• California-based biotechnology company
• 12 approved drugs on the market
• 23 drugs in testing or waiting approval
SIM Portfolio
• Currently 273 bps
• Purchased at $52.80
• Currently trading at $54.70
• Recommending an increase of 50 bps
• Based on company, industry, and sector analysis
Catalysts
• Increasing international growth • Stable and increasing revenues
• New drugs in pipeline
• Street-high revenue estimates
Risks
• Overall macro environment
• Various healthcare legislation
and reform
• FDA Approval for various
drugs
• Generics and imitation drugs
Projections
DCF Sensitivity Analysis
Valuation
•
•
•
•
DCF
3 year projections
11% discount rate
3% terminal year cash flow
DCF Price of $68.07
Multiples Analysis
• Applying a 14X P/E
• Applying 11X
EV/EBITDA
• Average valuation of
$68.40
$68 Price Target
Teva pharmaceutical industries LTD.
Overview
• Market leader in generic pharmaceutical industry
• Holds 14.4% of market
• Spent $13billion on acquisitions over the past 3 years
• Relies on sales from brand name drugs as well
• Copaxone (Multiple Sclerosis)
Ticker
TEVA
SIM portfolio weight
2.55%
Current price
$40.52
52-week price range
$35.00-$57.08
Shares Outstanding
890 million
• Generic drugs
Market Cap.
$36.068 billion
• Brand-named drugs
Dividend Yield
2.21%
2011 Revenue
(through 3rd quarter)
$12.64 billion
2011 Earnings
(through 3rd quarter)
$2.253 billion
• Azilect (Parkinson’s)
• Sales by geographic region (2010)
• North America:
• Europe:
• International markets:
62%
24%
14%
• Product Segments
• Special respiratory
• Active pharmaceutical ingredients
• Women’s health
• Biosimilars
Stock Performance
Stock Performance
YTD: -22.27%
1-year: -20.16%
3-year: -3.32%
5-year: 30.37%
Catalysts
• Successful challenges to brand-named patents
• Teva’s profits are heavily reliant on its exclusivity rights of certain drugs
• Development of non-infringing products
• High capital costs associated with patent infringement
• Production of non-infringing products will reduce costs
• Aging population
• Baby boom generation heavy usage of prescription drugs
• Major patent loss by brand-named drugs
• Lipitor
• Zyprexa (180 days of exclusivity)
• Plavix
• Seroquel
• Focus on lower health care costs
• Obamacare
Risks
• Reliance on challenges of brand-named patents to boost profit
margin
• If successful, Teva obtains 180 days of exclusivity rights
• Net Profit margins have ranged from 5.7-25.6% over the past 5 years
• Limitations of Generic growth
• Generics can only grow as fast as brand-named drugs lose patent protection
• Introduction of generics delayed
• Brand name companies file patent infringement law suits
• Less regulatory cost for brand-named generics
•
obtaining and enforcing new patents on expiring ones
Teva’s discounted cash flow model
Sensitivity analysis
Valuation multiples
Target price summary
• Projected price target: $55.04
• Current price: $38.45
• Potential upside: 43.14%
Teva
Target price
Weight
Discounted cash flow
$55.58
60%
Price/Forward earnings
$54.44
10%
Price/Sales
$59.14
10%
Price/Book
$60.92
10%
Price/Cash flow
$42.40
10%
Pfizer
Overview
Key statistics
Sector : Health care
Industry : Pharmaceuticals
The world's largest pharmaceutical
company, Pfizer produces a wide range of
drugs across a broad therapeutic spectrum.
The company is based in New York City,
New York with its research headquarters
in Groton, Connecticut, United States.
Market CAP
$ 149.67 bn
Dividend Yield
4.1%
Beta
0.73
Ticker
PFE
52 week high
$21.45
52 week low
$16.25
Revenue Diversification
• US – 43%
• Rest of the world – 57%
Trailing PE
13.56
Forward PE
8.45
Revenues(2010)
$67.81 bn
Business Segments
• Biopharmaceutical-86.31%
• Diversified – 13.22%
• Other – 0.47%
Earnings(2010)
$8.26 bn
Performance
PFE - 12 month performance
22
Performance:
21
1 months : 4.17%
20
6 months :7.9%
19
YTD :11.19%
18
1 year: 18.14%
17
16
15
PFE Vs. HCX , S&P
Catalysts
 Revenue Diversification
 Revenue distribution across business segments, countries
 Growth in emerging markets
 Promising Pipeline
 12 NDA,6 drugs in clinical trials,13 drugs in late stage development
 Reduction in R&D costs
 Expected reduction of 25% in Total R&D costs
 Favorable macroeconomic factors – Demographics, Spending
 Synergy from acquisitions
Risks
 Increased Regulation
 High Competition
 Expiration of patents
 Patent protection for Lipitor, Caduet will end by Nov 30,2011.
 Drug approvals
 Expensive, time consuming and risky process
 Health care reform
 Overall impact is uncertain as the impact on revenue is ambiguous
Valuation - DCF
DCF Valuation
Discount rate
11%
Terminal FCF growth rate
1.5%
NPV of cash flows
$119497
NPV of terminal values
$71475
Projected Equity value
$190973
Shares outstanding
8074
Current Price
18.96
Implied Equity value
23.65
Upside
24.74%
DCF Sensitivity Analysis
Discount rate
Terminal FCF Growth rate
0.50%
0.75%
1.00%
1.25%
1.50%
1.75%
2.00%
2.25%
0.025
9.25%
27.09
27.44
27.82
28.22
28.65
29.11
29.59
30.12
30.68
9.50%
26.36
26.69
27.04
27.41
27.80
28.22
28.67
29.15
29.66
9.75%
25.67
25.98
26.30
26.65
27.01
27.40
27.81
28.24
28.71
10.00%
25.02
25.31
25.61
25.93
26.26
26.62
26.99
27.40
27.83
10.25%
24.41
24.67
24.95
25.24
25.55
25.88
26.23
26.60
27.00
10.50%
23.82
24.07
24.33
24.60
24.89
25.19
25.51
25.85
26.22
10.75%
23.26
23.49
23.73
23.99
24.25
24.53
24.83
25.15
25.48
11.00%
22.73
22.94
23.17
23.40
23.65
23.91
24.19
24.48
24.79
11.25%
22.22
22.42
22.63
22.85
23.08
23.33
23.58
23.85
24.14
11.50%
21.74
21.93
22.12
22.33
22.54
22.77
23.01
23.26
23.52
11.75%
21.27
21.45
21.63
21.82
22.03
22.24
22.46
22.69
22.94
12.00%
20.83
20.99
21.17
21.35
21.53
21.73
21.94
22.16
22.38
12.25%
20.41
20.56
20.72
20.89
21.06
21.25
21.44
21.64
21.86
12.50%
20.00
20.14
20.29
20.45
20.62
20.79
20.97
21.16
21.36
12.75%
19.61
19.74
19.88
20.03
20.19
20.35
20.52
20.69
20.88
Price multiples valuation
Absolute
Valuation
P/Forward E
P/S
P/B
P/EBITDA
P/CF
Your
Target
E, S, B,
etc/Sha
re
Your
Target
Price
High
Low
Median
Current
Your
Target
Multiple
28.9
5.9
12
8.6
11
1.83
20.13
9.2
17
38.11
36.9
1.7
1.3
5.22
3.9
3.7
2.6
10.05
9
2.2
1.7
5.22
5.6
2.5
2
9
8
8.95
11.34
2.15
2.86
22.38
22.68
19.35
22.88
Price target
Current price : $18.96
Target Price* : $23.10
Potential Upside: 20.68%
*Weights: 80% - DCF, 20% - Price multiples
Analysts consensus
Current Month
Last Month
Two Months
Ago
Three Months
Ago
Strong Buy
9
9
9
7
Buy
10
9
9
11
Hold
4
4
3
4
0
0
0
0
0
0
0
0
Underperform
Sell
Target price consensus
Mean Target
Median Target
High Target
Low Target
No. of Brokers
$23.36
$23.00
$30.00
$19.00
17
Johnson & Johnson
Johnson & Johnson
• Currently trading: $62.94
• 52 week high: $68.05
• 52 week low: $57.50
• Dividend/yield: $0.57/3.62%
• Target Price $73
• Upside Potential: 15.9%
Current SIM Weight
• Position Size: $404,229
• Percent Basis: = 3.96%
• YTD Return: 1.76%
Business Model
• 3 Key Segments
• Consumer Products
• Medical Devices & Diagnostics
• Pharmaceuticals
Consumer Products
• Baby care, skin care, wound care, women’s health care
•
•
•
•
and oral care fields.
Brands include: Tylenol, Clean & Clear, Neutrogena,
Lubriderm, Listerene & Band-Aid.
Revenue: $14.6 bb
Profit: $2.3 bb
Projected growth: -1 to -3%
Pharmaceuticals
• Areas include: anti-infective, antipsychotic, contraceptive,
•
•
•
•
dermatology, gastrointestinal, immunology, neurology,
oncology and pain.
Brands: Remicade, Stelara, Velcade, Nucynta, Risperdal,
Consta, Procrit, Levaquin.
Revenue: $22.4 bb
Profit: $7.1 bb
Projected Growth: 5-9%
Medical Devices & Diagnostics
• Broad range of products including circulatory disease
management products, orthopedic joint reconstruction,
surgical products and diabetes care products.
• Revenue: $22.46 bb
• Profit: $8.3 bb
• Projected Growth: 4-6%
Discounted Cash Flow Analysis
Technical Analysis
Summary
• Go overweight 100 bps in healthcare
• 50 bps in Amgen (NASDAQ: AMGN)
• 50 bps in Teva Pharmaceuticals (NASDAQ: TEVA)
Questions?