Fred Macaraeg
Xin Shen
Chern Yuik Saw
 Overview
 Business
Analysis
 Economic Analysis
 Financial Analysis
 Valuation Analysis
 Recommendation
 Defensive


Stable & predictable earnings
No spectacular growth
 2nd

highest dividend yield
3.84
 Highest

P/B ratio
13.42
 Highest

sector
15.59
net profit margin
Government Spending (Billions)
1200
1000
800
600
400
200
0
-200
Government Spending (Billions)
S&P 500 Breakdown
Telecom Svc
3%
Utilities
3%
Energy
13%
Materials
4%
Info Tech
19%
Industrials
11%
Financials
15%
Cons Disc
11%
Health Care
11%
Cons Staples
10%
Industries in Health Care Sector
2%
0%
0%
0%0%
1%
00%
0%
% 0%
0%
2%
2%
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
Medical Laboratories & Research
92%
Medical Practitioners
Specialized Health Services
200
180
160
140
120
100
80
60
40
20
0
Johnson & Johnson
Pfizer Inc.
Novartis AG (ADR)
GlaxoSmithKline plc
(ADR)
Merck & Co., Inc.
 Defensive


sector:
products and services are essential to people’s
life.
Historically low Beta:0.69
 The
third best YTD performance
(yield:12.51%) behind Real Estate and Energy
 Outperformed the S&P 500 for the past
quarter
 But underperformed the S&P 500 for the past
month
What’s going on with the HealthCare Sector?
Positive
Aspects
Negative
Aspects
 Obamacare

Affordable health care to all Americans




Reduce premium costs
The insurance exchange
Cover people with pre-existing conditions
More access to innovative medical therapies



Overview
Extend drug discounts to hospitals
Promote biologics price competition
Revenue provision


Reform excise tax on insurance companies
Impose fees on various industries of health care sector
 Fully
implemented until 2018
 Voice of appealing
Reduce the sales
revenue by lowering
premium
 Decrease the selling
price by triggering
price wars

 Increase
the
expense by imposing
various fees
 Although the reform
covers
approximately 20
million uninsured
into the healthcare
sector – Moral
Hazard effect &
Lemon principle
 Increase uncertainty
 Debt



Ceiling – current provision
Reduce 3.7 trillion deficit over the next 10 years
About 70% of the target through reduction of
government spending
One overspending area: the healthcare
 Expiration

Potential to increase the tax rate, especially the
capital gain tax rate
 Increasing

restriction to Health Care sector
Overuse of medicines and therapies
 Foreign

of Bush Tax Cut
issues
The economic recession in EU
 Patent



pressure
Expire 20 years from the date of filing
FDA approval requires 10 years and millions of
dollars
Patent protected products turn into generic
products, pricing and revenue plummet
 Saturated



markets
Medical devices:
Cardiac, Spinal, Stent (Johnson & Johnson left
the stent line)
Lots of acquisition and merging
 Aging

population
In the U.S. (baby boomer) and global
 Longer
life expectancy
 Obesity

Trigger various kinds of diseases, especially
chronic diseases (high blood pressure, diabetes,
heart attack)
 Emerging


market in BRICS
China is slowly building up a pension system
Extend health insurance and basic health care
For the next two decades, the
population of 65+ in the U.S. will
approximately double. It requires
more health care be provided.
No Data
<10%
10%–14%
No Data
<10%
10%–14%
15%–19%
≥20
No Data
<10%
10%–14%
15%–19%
20%–24%
≥25%
The obesity rate keeps increasing
•Individual consumers: low
power
•Hospitals and health care
center: moderate power,
long-term cooperation
Low threat:
•Huge capital
investment
Patent protection
Bargaining
Power of
Suppliers
Moderate power
•A large number of
suppliers
•Customized and
delicate materials
Bargaining
Power of
Buyer
New Entrant
Porter’s
Five
Forces
•Low: no substitution for
health care product
•Within the sector: high
for generic products, low
for patented products
Substitutes
Rivalry
Among
Competitors
Moderate:
•High rivalry due to the
maturity of certain business
lines, the large capital
investment and the generic
products
•Low rivalry due to patent
protection, and emerging
new business lines


Negative aspects:
 Hard to predict the true impacts
 People’s expectation swings
 Increase the risk and volatility relative
to the history
Positive aspects:
 Long-term increasing consumer base
 Huge potential market in Asia
 Low competition : Oligopoly
Short-term:
Negative outweighs the positive aspects
Long-term: Continuous sales growth
Ratio
High
Low
Median
Current
Price/Trailing E.
1.4
.68
1.1
.9
Price/Forward E.
1.2
.69
1.1
.88
Price/Book
2.5
1.2
1.4
1.3
Price/Sales
2.4
.9
1.3
1.0
Price/Cash Flow
1.9
.9
1.3
1.2
Ratio
High
Low
Median
Current
Price/Trailing E.
29.5
9.9
18.4
12.8
Price/Forward E.
27.2
10.0
17.4
12.2
Price/Book
8.7
2.2
3.9
3.0
Price/Sales
3.7
1.0
1.8
1.3
Price/Cash Flow
22.9
7.6
13.7
11.8
Ratio
High
Low
Median
Current
Price/Trailing E.
2.0
.89
1.3
1.2
Price/Forward E.
1.5
.85
1.2
1.0
Price/Book
2.7
.8
1.4
2.1
Price/Sales
1.7
.3
.6
.5
Price/Cash Flow
1.8
1.1
1.4
1.3
Ratio
High
Low
Median
Current
Price/Trailing E.
28.7
8.9
16.1
11.3
Price/Forward E.
26.4
9.3
15.7
11.0
Price/Book
11.3
2.3
4.1
2.5
Price/Sales
5.6
2.0
3.6
2.5
Price/Cash Flow
23.2
6.7
12.2
8.0
Ratio
High
Low
Median
Current
Price/Trailing E.
1.7
.82
1.4
1.1
Price/Forward E.
1.5
.79
1.3
1.0
Price/Book
2.6
1.1
1.6
1.3
Price/Sales
3.6
1.9
2.6
2.0
Price/Cash Flow
2.0
1.0
1.6
1.2
Ratio
High
Low
Median
Current
Price/Trailing E.
36.0
12.1
23.2
15.4
Price/Forward E
31.4
11.7
21.3
14.6
Price/Book
9.0
2.3
4.6
2.9
Price/Sales
5.5
2.0
3.7
2.7
Price/Cash Flow
25.6
8.7
16.2
11.8
Ratio
High
Low
Median
Current
Price/Trailing E.
3.2
.85
1.9
2.9
Price/Forward E
2.5
1.8
2.1
2.5
Price/Book
2.5
2.0
2.3
2.5
Price/Sales
3.7
.7
1.8
3.7
Price/Cash Flow
2.4
.5
.9
2.4
Ratio
High
Low
Median
Current
Price/Trailing E.
74.1
15.3
32.8
41.7
Price/Forward E
34.5
22.8
28.2
34.5
Price/Book
5.8
4.4
5.3
5.8
Price/Sales
4.9
.9
2.5
4.8
Price/Cash Flow
23.8
4.3
9.5
23.8
Ratio
High
Low
Median
Current
Price/Trailing E.
2.0
.89
1.3
1.2
Price/Forward E
1.5
.85
1.2
1.0
Price/Book
2.7
.8
1.4
2.1
Price/Sales
1.7
.3
.6
.5
Price/Cash Flow
1.8
1.1
1.4
1.3
Ratio
High
Low
Median
Current
Price/Trailing E.
45.3
15.3
21.2
17.0
Price/Forward E
22.3
13.1
18.1
14.2
Price/Book
6.6
2.4
4.1
4.6
Price/Sales
2.7
.5
.8
.6
Price/Cash Flow
21.9
10.3
14.9
12.8
 Current
SIM Portfolio is 2% UNDERWEIGHT
relative to the S&P 500
 We recommend increasing overall sector
exposure by 3%
 We believe that increased exposure to the
Healthcare sector offers potential portfolio
growth in upward trending markets while
providing possible stability during market
pullbacks.