Health Care Sector Presentation
BRENT SOLLER
JAMIE SHRAGER
HARISH NAIR
Agenda
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Overview
Portfolio Composition
As of 10/29/10
Industries within the Health Care Sector
Health Care
Pharmaceuticals
& Biotechnology
Pharmaceutical
Biotechnology
Equipment &
Services
Medical
Equipment
Medical
Supplies
Managed Care
Heath Care
Distribution
Largest
Health Care
Companies
Firms highlighted in
blue are owned in the
SIM portfolio.
Company
Ticker
Market Cap
($ billions)
Johnson & Johnson
JNJ
$
178.07
Pfizer Inc.
PFE
$
138.10
Merck & Co.
MRK
$
109.73
Abbott Labs
ABT
$
78.62
Amgen Inc.
AMGN
$
52.76
Britstol Myers Squibb
BMY
$
45.68
United Health Group Inc.
UNH
$
41.43
LLY
$
39.48
Medtronic Inc.
MDT
$
38.17
Gilead Sciences, Inc.
GILD
$
31.76
Eli Lilly & Co.
Sector
Performance
Market Capitalization = $1,240 Billion
Earnings:
Latest Quarter (June 2010)
Latest 12 Months
$7.96
up 15%
$29.94
up 10%
$79.05
up 13%
$306.17
up 13%
Revenues (per share):
Latest Quarter (June 10)
Latest 12 Months
Sector
Performance
Year-to-date health care
sector performance is
the worst in the S&P
500.
Sectors
S&P 500
Consumer Discretionary
Industrials
Information Technology
Materials
Consumer Staples
Telecommunications Services
Energy
Financials
Utilities
Health Care
QTD
7.42%
9.11%
6.42%
12.04%
11.18%
4.24%
2.43%
10.94%
8.41%
1.99%
2.99%
YTD
9.93%
22.32%
18.61%
16.48%
12.51%
9.55%
8.60%
8.18%
8.07%
2.88%
0.58%
Business Analysis
Health Care Snapshot
Stocks within the Health Care sector generally have
more defensive characteristics (Beta = 0.49).
The Health Care sector has an inelastic demand as
health care is a necessity.
Health Care spending accounts for 16% of GDP in
the United States and is increasing.
Demand Factors
Demographics
Obesity
U.S. Health Care Reform
International Health Care Cost Cuts
Demographic
Changes
Average life expectancy
in the U.S. is currently
78.24 years.
Increasing longevity has
driven higher demand
for health care.
The Aging of America
As the population ages, the demand for health care
products and services increases as a proportion of
GDP.
Population 60+ by Age: 1900-2050
Source: U.S. Bureau of the Census
120,000,000
100,000,000
80,000,000
Age
85+
60,000,000
Age
75-84
40,000,000
Age
65-74
20,000,000
Age
60-64
0
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
Obesity Rates
More than 1 in 3
American adults are
obese.
Obesity leads to an
increase in chronic
illness such as diabetes,
cardiovascular illness,
and asthma.
Obesity increases health
care spending.
Obesity Trends Among U.S. Adults
1999
1990
2009
(BMI ≥30, or about 30 lbs. overweight for 5’4” person)
No Data
Source: CDC
<10%
10%–14%
15%–19%
20%–24%
25%–29%
≥30%
Health Care
Reform
It is unknown whether
the effects of the Health
Care Reform will
benefit or harm the
profits of the Health
Care industry. The
impact of the legislation
has been further
complicated by the
recent elections
Is it a panacea or a
Pandora's box?
Countervailing forces:
Coverage has the potential reach
approximately 32 million uninsured.
Large employers incur penalties for not
offering health insurance.
Health care industries may incur new
taxes.
Price pressure from increased
government control could hurt
margins.
International
Health Care
Cost Cutting
The public sector is the
main source of
financing in most
foreign countries.
Governments provide the
majority of health care coverage
in Europe.
Austerity measures may lead to
cuts in health care spending.
Porter’s
Five
Forces
Barriers to Entry: High
High Consumer Switching Costs
Regulation/Compliance Requirements
Large Capital Investment
Biotechnology and Pharmaceuticals require large
investments for R&D with no guarantee of a return
Insurance Companies require large investments for
establishing physician networks
Substitution: None
Power of Suppliers: Low
Large number of suppliers
Porter’s
Five
Forces
Power of Buyers: Medium
The average consumer has low power – health
care is independent of the economy.
As the government becomes more involved
with insurance companies and price
adjustments, buyer power increases.
Rivalry: Moderate
Rivalry is higher among pharmaceuticals &
biotechnology – the need to be first to
market; and for insurance companies.
Rivalry is lower among hospitals – general
needs are served based on location.
Economic Analysis
Health Care is
a Defensive
Industry
Real GDP and the
health care sector are
relatively unrelated
with a correlation
coefficient (r) of only
0.27.
As GDP fluctuates, the
healthcare sector has
tended to protect on the
downside
The most recent
downturn hurt the
health care sector more
than in past recessions
Consumer
Spending
Medical care
spending does
decrease with a
drop in consumer
spending.
Although acute
care continues,
elective and
cosmetic surgeries
are often delayed
in times of
economic
hardship.
Employment
and Health Care
As with consumer
spending, health care
enjoys a fairly strong
relationship with
employment.
If employment
numbers continue to
improve, health care
should see a rebound
as well.
Health Care
Sector
Performance
Relative to the S&P
500, the health
care sector has
recently
underperformed
the index:
1-year: -6.1%
3-year: 3.2%
5-year: 0.4%
10-year: 0.1%
Financial Analysis
Net Profit Margin
After a decline at the beginning of the last decade,
sector-wide net profit margins have remained
relatively steady.
Net Profit Margin Relative to S&P 500
Although it has experienced a decline, health care
sector net profit margin is consistently above that
of the broader market.
Cash Flow
The sector has been generating increasing levels of
cash flow over the last 10 years.
Earnings Per Share
The sector has seen steadily increasing earnings
per share over the last 10 years.
9.0000
8.0000
7.0000
6.0000
5.0000
4.0000
3.0000
2.0000
1.0000
0.0000
Valuation Analysis
Sector Valuation
Absolute Basis
High
Low
Median
Current
P/Trailing Earnings 35.5
9.9
18.9
12.1
P/Forward Earnings 31.6
10
17.7
11.6
P/B
10.1
2.2
4.1
3.2
P/S
4.7
1.0
1.9
1.2
P/CF
27.7
7.6
14.0
10.4
Relative to SP500 High
Low
Median
Current
P/Trailing Earnings 1.5
0.68
1.1
0.79
P/Forward Earnings 1.4
0.69
1.1
0.85
P/B
2.5
1.2
1.4
1.5
P/S
2.4
1.0
1.3
1.0
P/CF
1.9
0.9
1.3
1.1
Every valuation ratio is below its 10-year median on
an absolute and relative basis.
Pharmaceuticals Industry Valuation
Absolute Basis
High
P/Trailing Earnings 36.8
P/Forward Earnings 26.4
P/B
13.7
P/S
6.9
P/CF
28.7
Low
8.9
9.3
2.4
2.0
6.7
Median
16.5
15.9
4.2
3.7
12.6
Current
11.1
10.6
2.4
2.4
9.0
Relative to SP500 High
P/Trailing Earnings 1.6
P/Forward Earnings 1.1
P/B
3.3
P/S
3.9
P/CF
2.0
Low
0.63
0.64
1.1
2.0
0.8
Median
0.97
0.98
1.5
2.5
1.2
Current
0.72
0.8
1.1
2.0
0.9
Biotechnology Industry Valuation
Absolute Basis
High
P/Trailing Earnings 65.8
P/Forward Earnings 58.4
P/B
22.1
P/S
19.5
P/CF
55.3
Low
12.1
11.5
2.8
3.8
10.0
Median
28.1
23.7
4.4
7.1
20.2
Current
13.8
12.7
3.1
4.3
11.7
Relative to SP500 High
P/Trailing Earnings 2.9
P/Forward Earnings 2.7
P/B
4.5
P/S
10.5
P/CF
3.8
Low
0.78
0.8
1.2
3.4
1.1
Median
1.6
1.5
1.6
5.1
1.9
Current
0.9
0.93
1.4
3.5
1.2
Medical Equipment Industry Valuation
Absolute Basis
High
P/Trailing Earnings 23.1
P/Forward Earnings 5.4
P/B
3.9
P/S
18.1
P/CF
23.1
Low
11.7
2.3
2.0
8.7
11.7
Median
19.6
3.8
3.3
14.9
19.6
Current
13.3
2.6
2.3
10.6
13.3
Relative to SP500 High
P/Trailing Earnings 1.5
P/Forward Earnings 1.8
P/B
3.0
P/S
1.7
P/CF
24.4
Low
0.79
1.2
1.9
1.0
12.1
Median
1.3
1.5
2.4
1.4
20.4
Current
0.95
1.2
1.9
1.1
14.1
Medical Supplies Industry Valuation
Absolute Basis
High
P/Trailing Earnings 23.1
P/Forward Earnings 5.4
P/B
3.9
P/S
18.1
P/CF
23.1
Low
11.7
2.3
2.0
8.7
11.7
Median
19.6
3.8
3.3
14.9
19.6
Current
13.3
2.6
2.3
10.6
13.3
Relative to SP500 High
P/Trailing Earnings 19.8
P/Forward Earnings 18.7
P/B
3.2
P/S
2.5
P/CF
18.7
Low
1.6
2.9
0.2
0.1
0.8
Median
4.2
15.2
0.5
0.3
2.2
Current
17.1
16
2.6
2.1
13.6
Managed Care Industry Valuation
Absolute Basis
High
P/Trailing Earnings 25.9
P/Forward Earnings 19.6
P/B
4.5
P/S
1.3
P/CF
18.8
Low
5.9
6.0
1.0
0.3
4.7
Median
16.6
14.2
2.5
0.6
12.1
Current
9.3
10.1
1.4
0.4
7.3
Relative to SP500 High
P/Trailing Earnings 1.3
P/Forward Earnings 1.3
P/B
1.5
P/S
0.9
P/CF
1.7
Low
0.45
0.47
0.4
0.3
0.6
Median
0.86
0.82
0.9
0.5
1.0
Current
0.59
0.7
0.6
0.3
0.8
Health Care Distribution Industry Valuation
Absolute Basis
High
Low
Median
Current
P/Trailing Earnings 19.1
9.9
14.7
12.2
P/Forward Earnings
P/B
P/S
P/CF
10
2.2
1
7.6
14.1
3.4
1.5
11.1
11.7
3.2
1.2
10.4
Relative to SP500 High
Low
Median
Current
P/Trailing Earnings
P/Forward Earnings
P/B
P/S
P/CF
0.68
0.69
1.3
1
0.9
0.95
1
1.4
1.2
1.2
0.79
0.85
1.5
1
1.1
18.3
4.2
1.9
14.5
1.2
1.2
1.6
1.5
1.4
Health Care
Industry
Valuations
Absolute Ratios divided by Median
2
1.8
1.6
1.4
Every current ratio is
below its historical 10year median.
(A value of 1 indicates that the
current valuation ratio equals
its historical median valuation)
1.2
1
0.8
0.6
0.4
0.2
0
Price/Trailing
Earnings
Price/Forward
Earnings
Price/Book
Price/Sales
Price/Cash Flow
Pharmacuticals
Biotech
Medical Equipment
Supplies
Managed Care
Distribution
Relative-to-S&P 500 Ratios divided by Median
Health Care
Industry
Valuations
Most ratios (with the
obvious exception of
health care supplies)
are below their
historical 10-year
medians.
(A value of 1 indicates that the
current valuation ratio equals
its historical median valuation)
8
7
6
5
4
3
2
1
0
Price/Trailing
Earnings
Price/Forward
Earnings
Price/Book
Price/Sales
Price/Cash Flow
Pharmacuticals
Biotech
Medical Equipment
Supplies
Managed Care
Distribution
Recommendation
Health Care
Sectors
Strengths and
Threats
Strengths
Demographics (Aging)
Increasing Spending (Obesity)
Historically undervalued on a relative
and absolute basis
Threats
Austerity spending cuts abroad
Economic improvement
Unknowns
Health Care Legislation Impact
Recent elections
Currently healthcare is in-line
SIM Portfolio
Weight
Recommendation
with the S&P 500 weight.
We recommend that this weight
be increased by 1.00%.
Health Care Sector Presentation
THANK YOU,
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