Health Care Recommendations
AUGUST 11, 2010
RYAN GREGG
WILLIAM LIUSUDARSO
MELANIE MCFARLAND
CAITLIN MCTIGUE
BRIAN MILLER
Recommendation
y Recommendation: Reduce Health Care sector by
2.25% to 11.95% of the SIM portfolio
Recommendations
y Positives
More end-users from Health Care Reform
Ù Valuations
Ù Aging Demographic
Ù
y Negatives
Overhang from Health Care Reform
Ù Cost structures increasing as a result of Reform
Ù
y Uncertainties
Political Party Control
Ù Implementation and Regulations from Reform
Ù
Recommendations
y Bias towards high-quality names with strong
margins and cash flows
y Tend to overweight Pharma & Biotech
y Underweight Medical Devices & Supplies
Medtronic
Medtronic - BUY
y Medtronic, Inc. develops,
manufactures, and sells
device-based medical
therapies worldwide.
y MDT is the world’s largest
pure-play medical supply
technology company based
on total sales, operating
profit and market
capitalization.
Key Information
Ticker
MDT
Price
$36.98
52 week high
$46.66
52 week low
$34.42
Market Cap
$39.6B
Dividend Yield
2.40%
Annual Dividend $0.90
Trailing PE
11.40
Forward PE
10.70
Medtronic – Business Overview
y MDT breaks out its business into seven business
segments
y 41% of revenues currently come from outside the US
Ù
Predominately Developed Europe
Medtronic – Strong Free Cash Flow
Medtronic – DCF Valuations
y DCF
9.00%
$56.64
$59.20
$62.02
3.50%
3.75%
4.00%
9.25%
$54.18
$56.51
$59.07
9.50%
$51.92
$54.06
$56.38
y Multiples
Absolute
Valuation
P/Forward E
P/S
P/B
P/EBITDA
P/CF
High
Low
Median
Current
Target
Multiple
Target
Metric
/Share
Target
Price
25.6
6.9
6.7
22.75
25.7
9.4
2.3
2.5
7.7
8.4
17.9
4.6
5
14.09
16.8
10.7
2.6
2.9
7.85
9.5
17.9
4.6
5
14.09
16.8
2.8
14.25
13.1
4.84
4
$ 50.12
$ 65.55
$ 65.50
$ 68.20
$ 67.20
**Current Price - $37
Medtronic Catalysts
y CATALYSTS
{
{
{
{
{
{
P/E multiple is at a 5-10% discount; historical is 20-30% premium
Increasing Emerging Market Exposure
Ù Currently ~8% of sales
Ù Focus on Asia / China
Ù More visibility in emerging countries than Developed Europe
Strong Free Cash Flow
Ù Market will soon reward quality – has not been rewarded over last
18 months (high beta rally)
Ù Ability for acquisitions or further leverage EPS growth
Slow growth economy should help lead HC as sector is recessionresistant
Cost reduction in place through 2012
R&D expenditures remain highest among peers
Ù Innovation will be key catalyst for individual HC stocks with reform
overhang
Medtronic Risks
y RISKS
{
{
{
{
{
{
{
Multiples contraction among the industry as a whole – health care
overhang, challenging environment for global implants
Cardiac Rhythm Mgmt and Spinal (two largest segments) had the
two lowest growth rates among their 7 business segments (FY 2010
Actual)
Negative outcome to an outstanding DOJ investigation into sales
practices in the Spinal division
Strengthening US economy could lead to negative sector rotation
Hospital capital equipment spending decreasing amid tight credit
market conditions and stressed municipal and state budgets
Litigation Risks
Elective procedure demands are falling due to consumer confidence
and unemployment
Stryker Corporation
Stryker - BUY
y Stryker Corporation is a
worldwide medical
technology company.
y Two main business
segments: Orthopedic
Implants and MedSurg
Equipment
Key Information
Ticker
SYK
Price
$47.97
52 week high
$59.72
52 week low
$39.40
Market Cap
$19.04 B
Dividend Yield
0.70%
Annual Dividend
$0.60
Trailing PE
$16.32
Forward PE
$13.14
Stryker – Business Overview
Segment
Orthopaedic Implants
MedSurg
Total
Revenue ($Mil) % of Total
$ 4,119
61%
$ 2,603
39%
$ 6,722
100%
Business Units
Orthapaedic Implants
Hip Implant Systems
Knee Implant Systems
Bone Cement
Trauma Implant Systems
Spinal Implant Systems
CMF Implant Systems
MedSurg
Surgical Equipment
Surgical Navigation Systems
Endoscopic and Communications Systems
Patient Handling and Emergency Medical
Stryker – Strong Free Cash Flow
Stryker (SYK)
Year
Revenue
% Grow th
Operating Income
Operating Margin
Interest and Other
Interest % of Sales
Taxes
Tax Rate
Net Income
% of Sales
Plus/(minus) Changes WC
% of Sales
9.5%
Terminal FCF Growth =
4.0%
2011E
2012E
2013E
7,876
8,664
9,530
10.00%
1,676
21.3%
10.0%
1,844
21.3%
10.0%
1,906
20.0%
2014E
10,388
9.0%
2,078
20.0%
2015E
11,219
8.0%
2,244
20.0%
2016E
12,004
7.0%
2,401
20.0%
2017E
12,724
6.0%
2,545
20.0%
2018E
13,488
6.0%
2,698
20.0%
2019E
14,230
5.5%
2,846
20.0%
2020E
14,941
5.0%
2,988
20.0%
2021E
15,539
4.0%
3,108
20.0%
39
43
48
52
56
60
64
67
71
75
78
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
515
566
586
639
690
738
783
830
875
919
956
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
1,201
% Grow th
Add Depreciation/Amort
Terminal Discount Rate =
1,321
10.0%
1,368
3.5%
1,491
9.0%
1,610
8.0%
1,723
7.0%
1,826
6.0%
1,936
6.0%
2,042
5.5%
2,144
5.0%
2,230
4.0%
250
347
381
415
449
480
509
539
569
598
621
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0
0.0%
0.0%
Subtract Cap Ex
100
200
200
200
200
200
200
200
200
200
200
Capex % of sales
-4.1%
-3.7%
-3.4%
-3.4%
-3.4%
-3.4%
-3.4%
-3.4%
-3.4%
-3.4%
3.4%
Free Cash Flow
% Grow th
1,351
1,468
8.6%
1,549
5.5%
1,706
10.2%
1,859
8.9%
2,003
7.8%
2,135
6.6%
2,275
6.6%
2,411
6.0%
2,542
5.4%
2,651
4.3%
Stryker – DCF Valuations
y DCF
9.00%
9.25%
9.50%
3.50% $ 96.69 $ 92.69 $ 89.01
3.75% $ 99.92 $ 95.57 $ 91.15
4.00% $ 102.29 $ 97.68 $ 93.48
y Multiples
Absolute Valuation
High
Low
Median
P/Forward E
P/S
P/B
P/EBITDA
P/CF
42.50
6.00
15.40
32.77
32.50
10.80
2.00
2.40
6.80
8.90
26.50
4.40
7.10
17.66
23.50
**Current Price - $47.97
Target Current
Multiple
14.90
2.90
3.10
9.27
12.50
17.00
4.40
7.10
17.66
23.50
Target Metric Share
4.10
22.08
15.16
5.10
3.76
Target Price
$ 69.70
$ 97.15
$ 107.64
$ 90.07
$ 88.36
Stryker Catalysts
y CATALYSTS
{
Expansion and acquisition
Ù
Ù
{
Aging population that will be in need of joint replacements
Ù
{
{
$525 million purchase of Ascent Healthcare Solutions, Inc.
Increasing International Sales
Exploits a niche that caters to the aging baby-boom population
Strong free cash flow and EPS growth
Healthcare reform will increase the number of insured Americans and
increase the number of surgical procedures using Stryker’s products
Stryker Risks
y RISKS
{
{
Health care reform legislation could tighten margins across the
sector
Litigation Risks
Ù
{
Stryker is currently the defendant in many products liability cases, and
defending these is costly
Government regulations and pricing
Ù Government considering initiatives that would restrict prices in
the medical technology industry
Gilead Sciences Inc.
Gilead - TRIM
y Gilead Sciences (GILD) focuses on
the research, development and
marketing of anti-infective
medications, with a primary focus
on treatments for HIV
y Truvada has been Gilead’s sales
leader, with sales of $2.49 billion in
2009, 18% above 2008
Key Information
Ticker
GILD
Price
$35.82
52 week high
$49.50
52 week low
$31.73
Market Cap
$31.59B
Dividend Yield
N/A
Annual Dividend
N/A
Trailing PE
10.10
Forward PE
9.30
Business Overview
y 90% of their revenue comes from antiviral products
y Truvada and Atripla make up 75% of sales for 2009
Business Overview
• Above average sales and net income growth
• Consistent net margin in last 3 years
• Decreasing %LT debt to capitalization
• Above average ROE
Cash Flow
Year
Revenue
Terminal
Discount Rate
=
Terminal FCF
Growth =
3.5%
2010E
2011E
EBT Margin
Interest
Interest % of Sales
Taxes
Tax Rate
Net Income
10.2%
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
8.2%
3,928,752 4,328,346 4,588,857
49.9%
60,000
0.8%
49.9%
60,000
0.7%
48.9%
60,000
0.6%
982,188 1,082,086 1,147,214
25.0%
25.0%
25.0%
2,946,564 3,246,259 3,441,642
% Growth
Add Depreciation/Amort
2012E
7,867,504 8,666,691 9,375,217
% Growth
EBT
9.5%
2013E
9,750,226
4.0%
4,387,602
45.0%
62,400
0.6%
1,112,500
25.0%
3,337,501
2014E
2015E
2016E
2017E
2018E
10,140,235 10,545,845 10,967,678 11,351,547 11,748,851
4.0%
4,360,301
43.0%
64,896
0.6%
1,106,299
25.0%
3,318,898
4.0%
4,218,338
40.0%
67,492
0.6%
1,071,457
25.0%
3,214,372
4.0%
4,387,071
40.0%
70,192
0.6%
1,114,316
25.0%
3,342,947
3.5%
4,540,619
40.0%
72,648
0.6%
1,153,317
25.0%
3,459,950
3.5%
4,699,541
40.0%
75,191
0.6%
1,193,683
25.0%
3,581,049
2019E
2020E
12,160,061 12,585,663
3.5%
4,864,024
40.0%
77,823
0.6%
1,235,462
25.0%
3,706,385
3.5%
5,034,265
40.0%
80,546
0.6%
1,278,703
25.0%
3,836,109
10.2%
6.0%
-3.0%
-0.6%
-3.1%
4.0%
3.5%
3.5%
3.5%
3.5%
236,025
260,001
281,257
292,507
304,207
316,375
329,030
340,546
352,466
364,802
377,570
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
(336,179)
(199,797)
(177,132)
(185,254)
(192,664)
(200,371)
(208,386)
(215,679)
(223,228)
(231,041)
(239,128)
-4.3%
-2.3%
-1.9%
-1.9%
-1.9%
-1.9%
-1.9%
-1.9%
-1.9%
-1.9%
-1.9%
361,905
260,001
281,257
292,507
304,207
316,375
329,030
340,546
352,466
364,802
377,570
4.6%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
2,484,505 3,046,462 3,264,511
3,596,981
3,152,247
3,126,233
3,014,001
3,134,561
3,244,271
3,357,820
3,475,344
% Growth
22.6%
7.2%
-3.4%
-0.8%
-3.6%
4.0%
3.5%
3.5%
3.5%
3.5%
% of current market cap
9.64%
10.33%
9.98%
9.90%
9.54%
9.92%
10.27%
10.63%
11.00%
11.39%
9.74
9.41
9.09
8.78
P/CF
10.37
GILD P/CF median
33.4
Industry P/CF median
20.5
9.68
10.02
10.10
10.48
10.08
Company Valuation
Absolute
Valuation
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low Median
Current
281.6
94.4
23.6
33.7
135.4
9.4
9.0
3.9
3.8
8.7
9.4
9.0
3.9
3.8
8.7
Relative to S&P High
500
P/Trailing E
13.9
P/Forward E
5.8
P/B
7.9
P/S
23.7
P/CF
12.7
Relative
Industry
P/Trailing E
P/Forward E
P/B
P/S
P/CF
to High
7.4
3.4
5.2
3.4
5.2
30.7
26.4
12.4
13.5
33.4
Low
Median
Current
0.64
0.67
1.9
3.4
1
1.8
1.7
4.3
9.2
3.2
0.64
0.67
1.9
3.4
1
Low
Median
Current
0.77
0.71
0.5
0.8
0.9
1.3
1.2
2.4
1.7
1.8
0.77
0.71
1.5
1.0
0.9
Company Valuation
Gilead – DCF Valuations
y DCF
9.00%
$52.66
$54.20
$55.88
3.50%
3.75%
4.00%
y Multiples
9.25%
$50.42
$51.79
$53.30
Absolute
Valuation
High
Low
Median
Current
#Your
Target
Multiple
P/Forward E
P/S
P/B
P/EBITDA
P/CF
94.4
33.7
23.6
131.07
135.4
9.0
3.8
3.9
6.58
8.7
26.4
13.5
12.4
22.92
33.4
9.0
3.8
3.9
6.58
8.7
15
6
5
9.5
12
**Current Price - $35.82
*Your
Target E,
S,
B,
etc/Share
3.22
8.59
8.5
5
3.79
9.50%
$48.37
$49.60
$50.95
Your
Target
Price
(F x G)
48.3
51.54
42.5
47.5
45.5
Technical Analysis
Source: http://www.thestreet.com/story/10827213/2/charts-of-the-weekdennys-gilead.html
Gilead Catalysts
y Given its market-leading HIV franchise and the progress of next generation
compounds, we view Gilead as a core long-term biotech holding
y The company is well funded, with $4.2 billion of cash as of June 30, 2010
{
Ability to finance acquisitions of early-stage growth assets to diversify revenues
beyond its HIV franchise and to aggressively repurchase its shares
Gilead Risks
y Exposure to U.S. health care reform, which the company said affects about 45%
of its U.S. antiviral business
y European drug price pressures and investor concerns over HIV patent
expirations late in the decade
y Some diversification efforts to date have fallen short of expectations
Teva Pharmaceuticals
Teva - TRIM
y Teva is based in Israel and is
the world’s largest generic
drug manufacturer
y Three main business
segments: Generic
Pharmaceuticals, Brand
Pharmaceuticals and Active
Pharmaceutical Ingredients
Key Information
Ticker
TEVA
Price
$49.78
52 week high
$64.95
52 week low
$46.99
Market Cap
$44.7B
Dividend Yield
1.30%
Annual Dividend
$0.66
Trailing PE
17.68
Forward PE
9.66
Teva – Strong Free Cash Flow
Terminal Discount Rate =
Terminal FCF Growth =
Year
Revenue
% Growth
2010E
16,123
9.50%
4.00%
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
18,541
15.0%
21,044
13.5%
21,886
4.0%
22,762
4.0%
23,672
4.0%
24,619
4.0%
25,604
4.0%
26,628
4.0%
27,693
4.0%
28,801
4.0%
Operating Income
Operating Margin
4,111
25.5%
4,654
25.1%
5,387
25.6%
5,472
25.0%
5,690
25.0%
5,918
25.0%
6,155
25.0%
6,401
25.0%
6,657
25.0%
6,923
25.0%
7,200
25.0%
Interest and Other
Interest % of Sales
235
1.5%
271
1.5%
307
1.5%
320
1.5%
332
1.5%
346
1.5%
359
1.5%
374
1.5%
389
1.5%
404
1.5%
420
1.5%
Taxes
Tax Rate
622
20.0%
703
20.0%
815
20.0%
1,158
20.0%
1,205
20.0%
1,253
20.0%
1,303
20.0%
1,355
20.0%
1,409
20.0%
1,466
20.0%
1,524
20.0%
Net Income
% Growth
3,251
3,676
13.1%
4,262
15.9%
4,633
8.7%
4,818
4.0%
5,011
4.0%
5,211
4.0%
5,420
4.0%
5,637
4.0%
5,862
4.0%
6,097
4.0%
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
855
5.3%
(939)
-5.8%
(855)
-5.3%
834
4.5%
(899)
-4.8%
(1,020)
-5.5%
1,052
5.0%
(593)
-2.8%
(1,094)
-5.2%
1,094
5.0%
(617)
-2.8%
(1,094)
-5.0%
1,138
5.0%
(641)
-2.8%
(1,138)
-5.0%
1,184
5.0%
(667)
-2.8%
(1,184)
-5.0%
1,231
5.0%
(694)
-2.8%
(1,231)
-5.0%
1,280
5.0%
(721)
-2.8%
(1,280)
-5.0%
1,331
5.0%
(750)
-2.8%
(1,331)
-5.0%
1,385
5.0%
(780)
-2.8%
(1,385)
-5.0%
1,440
5.0%
(811)
-2.8%
(1,440)
-5.0%
Free Cash Flow
% Growth
2,312
2,592
12.1%
3,627
40.0%
4,016
10.7%
4,177
4.0%
4,344
4.0%
4,518
4.0%
4,698
4.0%
4,886
4.0%
5,082
4.0%
5,285
4.0%
Teva – DCF Valuations
y DCF
3.50%
3.75%
4.00%
9.00%
9.25%
9.50%
$ 74.33 $ 71.04 $ 68.03
$ 77.75 $ 74.16 $ 70.88
$ 81.52 $ 77.57 $ 73.99
y Multiples
Absolute
Valuation
High
Low
Median
Current
Target
Multiple
Target
Metric/Share
P/Forward E
P/S
P/B
P/EBITDA
P/CF
42.8
7.1
12.3
34.58
44.9
10.8
3
2.2
10.9
10.7
18.1
4.1
4.1
19.21
18.5
11.3
3.5
2.6
11.06
11.8
16
4.1
4.1
15.5
16
3.73
18.49
20.97
4.93
4.62
**Current Price - $49.78
Target
Price
$
$
$
$
$
59.68
75.81
85.98
76.42
73.92
Teva Catalysts
y CATALYSTS
{
Large and fast expanding portfolio of products
Ù
Ù
{
{
Over 200 New Drug Applications before the FDA, including 89
potential first-to-file
Expanding geographic reach
Ù
Ù
{
{
{
Acquisition of Barr has expanded products and reach
Acquisition of Ratiopharm this year – largest generic drugmaker in
Germany (top and bottom line accretion)
Vertical integration competitive advantage
Ù
{
Enable them to gain even more market share in the coming years
Continued strong sales of brand drug Copaxone; in the market for other
specialty drugs as well
One of the largest API suppliers in the market
Likelihood of more favorable foreign exchange
Strong free cash flow and EPS growth
Healthcare reform pushing the use of more generic drugs
Teva Risks
y RISKS
{
{
Proposed AMP legislation could thin margins
Increasing generic price erosion as more competitors emerge
Ù
{
{
Rising competition in high growth international and emerging
markets from various generic manufacturers
Litigation and patent risks
Ù
{
{
Global pricing pressures could impact growth in the U.S.
At-risk launches
Increased FDA regulations around manufacturing and normal
manufacturing and/or pipeline setbacks
Generic threats to its branded business
Ù
Already experiencing patent challenges to its main growth driver
Copaxone (patent until 2014)
Johnson & Johnson
Johnson & Johnson - TRIM
y Johnson & Johnson engages in the research and
development, manufacture and sale of various
products in the health care field worldwide
Johnson & Johnson – Business Overview
JNJ breaks its business into three segments:
y Consumer – provides products used in baby care, skin care, oral care,
wound care, women’s health care, nutrition, over-the-counter
pharmaceutical and wellness and prevention products
y Pharmaceutical – offers products in the areas of anti-infective,
antipsychotic, cardiovascular, contraceptive, dermatology,
gastrointestinal, immunology, neurology, oncology, urology and
virology
y Medical Devices & Diagnostics – offers products for circulatory disease,
orthopedic joint reconstruction, spinal care, sports medicine, surgical
care, aesthetics, women’s health, blood glucose monitoring and insulin
delivery, professional diagnostics and disposable contact lenses
Johnson & Johnson – Strong Free Cash Flow
Johnson & Johnson (JNJ)
Terminal Discount Rate =
Terminal FCF Growth =
Year
Revenue
2010E
62,516
% Grow th
Operating Income
Operating Margin
Interest and Other
Interest % of Sales
Taxes
Tax Rate
Net Income
% of Sales
63,766
2.0%
16,567
26.5%
18,014
28.3%
2012E
66,317
4.0%
18,900
28.5%
2013E
68,306
3.0%
19,467
28.5%
2014E
70,356
3.0%
20,051
28.5%
2015E
72,466
3.0%
20,653
28.5%
2016E
74,640
3.0%
21,272
28.5%
2017E
76,880
3.0%
21,911
28.5%
2018E
79,186
3.0%
22,568
28.5%
2019E
81,561
3.0%
23,245
28.5%
2020E
84,008
3.0%
23,942
28.5%
625
638
663
683
704
725
746
769
792
816
840
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
3,782
22.0%
13,410
% Grow th
Add Depreciation/Amort
2011E
9.5%
3.0%
4,103
22.0%
14,548
8.5%
2,688
2,742
4,304
22.0%
15,260
4.9%
2,852
4,433
22.0%
15,717
3.0%
2,937
22.0%
16,189
3.0%
3,025
22.0%
16,674
3.0%
3,116
22.0%
17,175
3.0%
3,210
22.0%
17,690
3.0%
3,306
22.0%
18,221
3.0%
3,405
22.0%
18,767
3.0%
3,507
22.0%
19,330
3.0%
3,612
-1.3%
-0.2%
-0.5%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Subtract Cap Ex
245
459
784
273
281
290
299
308
317
326
336
Capex % of sales
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
% of Sales
Free Cash Flow
% Grow th
15,054
16,682
10.8%
16,973
1.7%
18,381
8.3%
18,933
3.0%
19,501
3.0%
20,086
3.0%
20,688
3.0%
0
21,309
3.0%
4.3%
5,452
(354)
0
4.3%
5,293
(149)
0
4.3%
5,139
(799)
0
4.3%
4,989
4.3%
0
4.3%
4,844
4.3%
0
4.3%
4,703
4.3%
Plus/(minus) Changes WC
4.3%
4,566
0
21,948
3.0%
4.3%
0
22,607
3.0%
Johnson & Johnson – DCF Valuations
y DCF
9.00%
9.25%
3.50% $ 108.39 $ 103.70 $
3.75% $ 111.62 $ 106.58 $
4.00% $ 115.16 $ 109.74 $
9.50%
99.40
101.99
104.81
y Multiples
Absolute
Valuation
High
Low
Median
Current
#Your
Target
Multiple
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
B.
29.3
6.1
9.0
20.39
27.0
C.
11.1
2.2
3.0
6.94
9.0
D.
17.5
3.9
5.9
12.43
16.5
E.
12.3
2.6
3.1
8.18
10.5
F.
17.5
3.9
5.9
12.43
16.5
**Current Price - $59.96
*Your
Target
E, S, B,
etc/Share
G.
4.81
22.41
18.90
7.16
5.58
Your
Target
Price
(F x G)
H.
84.18
87.40
111.49
89.02
92.05
Johnson & Johnson – Catalysts
Aging population that will be in need of joint
replacements
{ Strong free cash flow and EPS growth
{ Slow growth economy should help lead HC as sector is
recession-resistant
{ Wide range of products produced by the company
{ Healthcare reform will increase the number of insured
Americans and may therefore increase the number of
surgical procedures using J&J’s products
{
Johnson & Johnson - Risks
{
{
{
{
{
{
{
Increasing generic price erosion as more competitors emerge
Rising competition in high growth international and emerging
markets from various generic manufacturers
Multiples contraction among the industry as a whole – health care
overhang, challenging environment for global implants
Strengthening US economy could lead to negative sector rotation
Hospital capital equipment spending decreasing amid tight credit
market conditions and stressed municipal and state budgets
Litigation risks
Elective procedure demands are falling due to consumer confidence
and unemployment
Recommendations
y Bias towards high-quality names with strong
margins and cash flows
y Tend to overweight Pharma & Biotech
y Underweight Medical Devices & Supplies
Final Recommendation
Position
GILD
JNJ
TEVA
MDT
SYK
TOTALS
Current Weight* Proposed Weight
4.20%
3.20%
4.98%
3.05%
5.02%
3.20%
0.00%
1.25%
0.00%
1.25%
14.20%
11.95%
*As of 6/30/2010
Diff
‐1.00%
‐1.93%
‐1.82%
1.25%
1.25%
‐2.25%
Upside Projection
37%
50%
39%
55%
41%