Health Care Sector Presentation
Andrew Schmidt
Todd Yaross
Zafer Soylu
Agenda






Sector Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Sector Overview
3
Sector
Overview
Sector Overview
4

The health care sector is classic defensive sector


Demand is steady and relatively inelastic



Overall, sector is mature; Biotechnology could be considered growth
Does not go down with the economy
Health care spending comprises approximately 17.6% of
US GDP (in 2009)
Centers for Medicare and Medicaid Services estimates
that total health expenditures reached $2.5 trillion,
which translates to $8,086 per person or 17.6 percent of
U.S. GDP
Portfolio Comparison
5
S&P 500 Weight
SIM Weight
Consumer Discretionary
Consumer Discretionary
Consumer Staples
Consumer Staples
3%
4%
Energy
2%
3%
Energy
10%
10%
19%
3%
4%
3%
9%
Financials
Financials
9%
Health Care
Health Care
22%
13%
12%
Industrials
Industrials
Information Technology
Information Technology
11%
11%
16%
Materials
12%
11%
13%
Telecommunication
Services
Materials
Telecommunication
Services
Utilities
Utilities
Cash
THOMSON REUTERS Baseline (Accessed 15 Feb 2011)
Industries within the Sector
6
Health Care
Sector
Health Care
Equipment &
Services
Health Care
Equipment &
Supplies
Health Care
Providers &
Services
Pharmaceuticals
& Biotechnology
Pharmaceuticals
Biotechnology
Largest Companies in the Industry
7
#
1
2
3
4
5
6
7
8
9
10
11
12
13
Stock Name
Market Cap
Johnson & Johnson
166.48B
Novartis AG (ADR)
127.89B
Merck & Co., Inc.
101.02B
GlaxoSmithKline plc (ADR)
99.40B
Abbott Laboratories
72.27B
AstraZeneca plc (ADR)
68.32B
Amgen, Inc.
50.18B
Alcon, Inc.
49.69B
Teva Pharmaceutical Industries Ltd (ADR)
48.39B
Bristol Myers Squibb Co.
43.84B
Medtronic, Inc.
42.51B
Gilead Sciences, Inc.
31.27B
Express Scripts, Inc.
30.29B
THOMSON REUTERS Baseline (Accessed 15 Feb 2011)
Sector Performance
8

Market Capitalization= $1,282,364 Million
 QTD:
2.8%
 YTD:
2.8%
Sector Performance
9
Stock Sectors: Total Returns
(%)
MTD
QTD
YTD
3.72%
6.18%
6.18%
Energy
3.47%
11.04%
11.04%
Materials
4.65%
4.5%
4.5%
Industrials
4.37%
8.79%
8.79%
Cons Disc
6.02%
5.26%
5.26%
Cons Staples
1.71%
-.07%
-.07%
Health Care
2.41%
2.8%
2.8%
Financials
4.24%
7.12%
7.12%
Info Tech
3.56%
7.91%
7.91%
Telecom Svc
3.01%
-.95%
-.95%
Utilities
-.14%
.92%
.92%
S&P 500 Index
THOMSON REUTERS Baseline (Accessed 15 Feb 2011)
Business Analysis
10
Business
Analysis
Growth Factors
11



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Aging Demographics (US and International)
Expansion into International markets
Health Care Reform may lead to greater access for
the uninsured/underinsured
Longer life expectancy
Aging Global Population
12
The number of older persons has tripled over the last 50 years; it will more than
triple again over the next 50 years –
ALL REQUIRING MEDICAL CARE OF SOME CAPACITY .
13
Health Care Expenditures
Estimated Growth
Growth in National Health Expenditures (NHE) is anticipated to average an annual growth
rate of 6.3% for 2009 through 2019.
NHE as a share of GDP is expected to be 19.3 percent by 2019.
Risk Factors
14
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
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Health Care Reform Uncertainty – potential repeal
could lead to volatility over the short-term
Potential influx of insured persons into the health
care system – could strain the existing infrastructure
Patent Expirations of Blockbuster Drugs
International health care cost cuts
Patent Expiration
15

Pharmaceutical companies are facing a patent cliff

Between 2011 and 2014, patents will continue to expire at the rate of 3
drugs/year representing a cumulative loss of $80 billion in sales

Significant because Pharmaceuticals make up a substantial portion of the
health care sector

The FDA issues patents for a 20 year term; it takes roughly 10 years to
obtain FDA approval

The FDA approval process is slowing:


2010 – 21 drugs approved; 2009 – 25 approved; 2008 – 24 approved
Generics are also expected to increase their market dominance, rising
from 77 percent of prescriptions in on 2010 to as much as 85 percent by
2014, according to the Reuters Health Summit
International Austerity Measures
16
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
European governments provide the substantial
majority of health care coverage
European economic challenges will adversely affect
several health care sub-sectors
 Pharmaceutical;
medical devices; life sciences
 Budget cuts; mandated price controls
Five Forces
17
 Low power
 Consumers have little
bargaining power
 There are mot many
substitutes for drugs,
• Very
low
power
medical
devices,
or
• Not
many
medical attention from
doctors
 Subject to Change
Supplier
Power
 Varied for different
industries within the
sector
 Typically strength is low
due to number of
suppliers
Buyer Power
Threat of New
Entrants
Rivalry
 Intense Rivalry in certain
mature industries (e.g.,
Pharma)
 Less intense in others as
the entry barriers restrain
new entrants
 Typically very low:
 Barriers to Entry are Very
High
 Large capital investments
 Intense regulations
 FDA Approval process
Substitutes
 Relatively low overall –
no real substitute for
health care
 High in Pharma industry
due to generics
Economic Analysis
18
Economic
Analysis
Real GDP and Health Care
19
Health care is a defensive sector, which offers downside protection for
fluctuating GDP figures.
THOMSON REUTERS Baseline (Accessed 15 Feb 2011)
Consumer Spending and Health Care
20
There is a fairly strong correlation; as spending rises, the sector also rises. The health care
sector benefits from discretionary purchases of medical devices, prescriptions and surgical
procedures.
Not surprisingly, health spending tends to fall as overall consumer spending decreases.
THOMSON REUTERS Baseline (Accessed 15 Feb 2011)
Consumer Confidence and Health Care
21
Consumer confidence is a leading indicator for the market generally and is a fairly strong
predictor of health care stock performance.
THOMSON REUTERS Baseline (Accessed 15 Feb 2011)
S&P 500 and Health Care
22
There is a fairly strong correlation here in that the sector tends to follow the broader market.
Health care has recently underperformed the S&P 500, however.
THOMSON REUTERS Baseline (Accessed 15 Feb 2011)
Unemployment v. Sector
23
Over 10 years, there is a negative correlation (-.5).
Market appears concerned with lower availability of health coverage.
As the unemployment rate drops (if the unemployment rates drops), health care should
benefit.
THOMSON REUTERS Baseline (Accessed 15 Feb 2011)
Escalating Costs for Consumers
24
Cost of prescription drugs is
increasing much faster than CPI
Producer Price Index vs. Health
Insurance prices
THOMSON REUTERS Baseline (Accessed 15 Feb 2011)
Opportunities/Threats
25
Opportunities
Threats

Very high barriers to entry


Inelastic demand offers growth
opportunities in various
economic cycles
Increasing strict FDA approval
process

Uncertainty regarding
government controls and
interference

Major patent cliff over next 3-5
years for Pharmaceuticals;
estimated $80B erosion in sales
by 2014

Economic austerity measures

Aging global population

Longer life expectancy; living
with chronic illnesses
Financial Analysis
26
Financial
Analysis
Net Profit Margin
27
Health Care – 10 YR
THOMSON REUTERS Baseline (Accessed 15 Feb 2011)
Net Profit Margin v S&P
28
Health Care v S&P – 10 YR
THOMSON REUTERS Baseline (Accessed 15 Feb 2011)
Other Ratios (ROE)
29
Health Care – 10 YR
Health Care v S&P – 10 YR
THOMSON REUTERS Baseline (Accessed 15 Feb 2011)
Other Ratios (Price to Free Cash Flow)
30
Health Care – 10 YR
Health Care v S&P – 10 YR
THOMSON REUTERS Baseline (Accessed 15 Feb 2011)
Valuation Analysis
31
Valuation
Analysis
Sector Valuation
32
Absolute Basis
High
Low
Median
Current
P/Trailing E
31.9
9.9
18.6
12.0
P/Forward E
29.5
10.0
17.7
11.5
P/Book
8.9
2.2
4.0
2.8
P/Sales
4.3
1.0
1.9
1.2
P/Cash Flow
23.4
7.6
13.8
10.7
Relative to S&P
High
Low
Median
Current
P/Trailing E
1.5
0.68
1.1
0.78
P/Forward E
1.4
0.69
1.1
0.80
P/Book
2.5
1.2
1.4
1.2
P/Sales
2.4
0.9
1.3
0.9
P/Cash Flow
1.9
0.9
1.3
1.1
THOMSON REUTERS Baseline (Accessed 15 Feb 2011)
Biotechnology
33
Absolute Basis
High
Low
Median
Current
P/Trailing E
63.6
12.1
27.2
12.6
P/Forward E
58.4
11.4
22.9
11.4
P/Book
13.4
2.8
4.3
3.0
P/Sales
18.8
3.8
6.8
3.9
P/Cash Flow
50.7
9.5
19.5
10.5
Relative to Sector
High
Low
Median
Current
P/Trailing E
2.0
1.1
1.5
1.1
P/Forward E
2.0
1.0
1.4
1.0
P/Book
1.7
0.6
1.1
1.1
P/Sales
5.3
3.3
3.9
3.3
P/Cash Flow
2.2
1.0
1.4
1.0
Relative to S&P
High
Low
Median
Current
P/Trailing E
2.9
0.78
1.5
0.82
P/Forward E
2.7
0.79
1.4
0.79
P/Book
3.5
1.2
1.6
1.3
P/Sales
10.5
2.9
5.0
2.9
P/Cash Flow
3.8
1.0
1.9
1.0
THOMSON REUTERS Baseline (Accessed 15 Feb 2011)
Pharmaceuticals
34
Absolute Basis
High
Low
Median
Current
P/Trailing E
32.2
8.9
16.4
10.4
P/Forward E
26.4
9.3
15.8
10.1
P/Book
11.7
2.3
4.1
2.3
P/Sales
6.2
2.0
3.6
2.3
P/Cash Flow
24.0
6.7
12.5
7.5
Relative to Sector
High
Low
Median
Current
P/Trailing E
1.0
0.8
0.9
0.9
P/Forward E
1.0
0.8
0.9
0.9
P/Book
1.3
0.8
1.1
0.8
P/Sales
2.1
1.4
1.9
1.9
P/Cash Flow
1.1
0.7
0.9
0.7
Relative to S&P
High
Low
Median
Current
P/Trailing E
1.5
0.63
0.96
0.67
P/Forward E
1.1
0.64
0.98
0.7
P/Book
3.3
1.0
1.5
1.0
P/Sales
3.9
1.7
2.4
1.7
P/Cash Flow
1.9
0.7
1.2
0.7
THOMSON REUTERS Baseline (Accessed 15 Feb 2011)
Health Care Distributor
35
Absolute Basis
High
Low
Median
Current
P/Trailing E
37.1
9.3
18.0
17.1
P/Forward E
31.0
9.0
16.0
16.0
P/Book
5.0
1.5
2.7
2.9
P/Sales
0.6
0.1
0.2
0.2
P/Cash Flow
24.1
6.2
13.9
13.3
Relative to Sector
High
Low
Median
Current
P/Trailing E
1.4
0.6
1.1
1.4
P/Forward E
1.4
0.7
1.0
1.4
P/Book
1.0
0.4
0.6
1.0
P/Sales
0.2
0.1
0.1
0.1
P/Cash Flow
1.2
0.7
1.0
1.2
Relative to S&P
High
Low
Median
Current
P/Trailing E
1.8
0.68
1.0
1.1
P/Forward E
1.6
0.65
0.99
1.1
P/Book
1.5
0.6
1.0
1.2
P/Sales
0.4
0.1
0.2
0.1
P/Cash Flow
2.0
0.7
1.3
1.3
THOMSON REUTERS Baseline (Accessed 15 Feb 2011)
Health Care Managed Care
36
Absolute Basis
High
Low
Median
Current
P/Trailing E
25.9
5.9
16.4
9.9
P/Forward E
19.6
6.0
14.1
10.4
P/Book
4.5
1.0
2.5
1.8
P/Sales
1.3
0.3
0.6
0.5
P/Cash Flow
18.8
4.7
12.0
8.0
Relative to Sector
High
Low
Median
Current
P/Trailing E
1.2
0.5
0.8
0.8
P/Forward E
1.1
0.6
0.8
0.9
P/Book
1.1
0.2
0.5
0.6
P/Sales
0.7
0.1
0.3
0.4
P/Cash Flow
1.3
0.5
0.7
0.7
Relative to S&P
High
Low
Median
Current
P/Trailing E
1.3
0.45
0.86
0.65
P/Forward E
1.3
0.47
0.81
0.72
P/Book
1.5
0.5
0.9
0.8
P/Sales
0.9
0.3
0.5
0.3
P/Cash Flow
1.7
0.6
1.0
0.8
THOMSON REUTERS Baseline (Accessed 15 Feb 2011)
Health Care Supplies
37
Absolute Basis
High
Low
Median
Current
P/Trailing E
36.0
12.1
23.6
15.4
P/Forward E
33.0
11.7
22.0
14.5
P/Book
9.2
2.3
4.7
2.8
P/Sales
5.5
2.0
3.8
2.6
P/Cash Flow
25.6
8.7
16.7
11.5
Relative to Sector
High
Low
Median
Current
P/Trailing E
1.6
1.0
1.3
1.3
P/Forward E
1.4
1.1
1.2
1.3
P/Book
1.5
0.8
1.1
1.0
P/Sales
2.6
1.2
2.0
2.2
P/Cash Flow
1.4
1.0
1.2
1.1
Relative to S&P
High
Low
Median
Current
P/Trailing E
1.7
0.82
1.4
1.0
P/Forward E
1.5
0.79
1.3
1.0
P/Book
2.6
1.1
1.7
1.2
P/Sales
3.6
1.9
2.7
2.0
P/Cash Flow
2.0
1.0
1.6
1.1
THOMSON REUTERS Baseline (Accessed 15 Feb 2011)
Recommendation
38
Recommendation
39


SIM is over weighted by 2%
We recommend selling to either the S&P weight or
underweighting by 2-3%
40

What questions do you have?