Healthcare Sector
Recommendation
Alexander Bishop
Justin Gibbs
Bethaditya Winarno
Jie Zhang
Agenda
 Healthcare Sector Recap
 Recommendation
 Q&A
Health Care Recap
Sector
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecommunication Services
Utilities
Cash
Dividend Receivables
S&P 500 Weight
SIM Weight
9.83%
11.58%
11.14%
16.00%
12.65%
10.28%
18.77%
3.42%
2.82%
3.51%
0.00%
0.00%
6.69%
12.11%
11.48%
8.98%
13.99%
12.76%
19.67%
3.29%
3.48%
2.72%
4.63%
0.20%
+/-
-3.14%
0.53%
0.33%
-7.01%
1.35%
2.48%
0.90%
-0.12%
0.65%
-0.79%
4.63%
0.20%
SIM Holdings
Security
Amgen Inc.
Ticker
AMGN
CareFusion Corp.
Gilead Sciences Inc.
Johnson & Johnson
Co.
Teva Pharmaceutical
Industries Ltd.
%age Assets
2.50%
Eq shares out
995.000
CFN
0.84%
221.645
GILD
3.22%
899.925
JNJ
3.68%
2,759.100
TEVA
3.75%
923.960
Recommendation
 Buy 72 bp of Gilead
 Buy 100 bp of Teva
 Sell 84 bp of Care Fusion
 Reduce 50 bp of Amgen
Gilead Sciences
 Founded in 1987
 Biopharmaceutical company that discovers, develops and
commercializes therapeutics
 Specializes in HIV/AIDS therapies and Hepatitis B therapies
 Derives the majority of revenues through product sales
Gilead Advantages
 HIV Franchise
 Atripla and Truvada account for nearly 70% of patients on HIV
therapy
 Patients on antiretroviral therapy has grown by 4% on an annual
moving total basis
 Truvada and Atripla sales have increased 30%
 Gilead captures 85% treatment naïve patients
 Hepatitis B Franchine
 CV Therapeutics
 Cayston approval
Gilead- Advantages
 Government Action
 Veterans Administration
 Medicare
 California
 Ryan White Healthcare Act
 US Dept. of Health and Human Services
 Non-retail sales
Gilead- Advantages
 Patent Expiration
Product
Vistide
Hepsera
Letairis
AmBisome
Tamiflu
Macugen
Viread
Ranexa
Lexiscan
Emtriva
Truvada
Atripla
Cayston
US Patent Expiration
2010
2014
2015
2016
2016
2017
2017
2019
2019
2021
2021
2021
2021
European Patent Expiration
2012
2011
2015
2008
2016
2017
2018
2019
2020
2016
2018
2018
2021
Gilead- Advantages
 Pipeline
Ambrisentan- Phase 3
Potential Indication: Idiopathic Pulmonary Fibrosis
Truvada/TMC 278 Fixed-dose Regimen- Phase 3
Potential Indication: HIV/AIDS
Elvitegravir- Phase 3
Potential Indication: HIV/AIDS
Integrase Fixed-dose Regimen "Quad" – Phase 2
Potential Indication: HIV/AIDS
Gilead- Risks
 Truvada and Atripla account for 70% total revenues
 Royalty revenue and Tamiflu
 Pipeline
 FX Exchange
 Healthcare reform and reimbursements
 Competition
Gilead- Revenue Growth
 31% between 08 and 09, topped $7 billion
Gilead- Valuation Analysis
Relative to S&P 500
High
Low
Median
Current
P/Trailing E
13.9
.86
2.0
.89
P/Forward E
5.8
.82
1.7
.90
P/B
7.9
1.6
4.4
3.6
P/S
34.1
5.1
9.3
5.1
P/CF
12.7
1.3
3.2
1.4
Relative to Industry
High
Low
Median
Current
P/Trailing E
7.4
1.0
1.3
1.0
P/Forward E
3.4
.97
1.3
.97
P/B
5.2
.3
2.4
2.2
P/S
3.4
.7
1.9
1.3
P/CF
5.2
1.2
1.9
1.2
Gilead- Valuation Analysis
Absolute
Valuation
High
Low
Median
Current
B.
C.
D.
E.
A.
Target
Multiple
Target
Value/
share
Your Target
Price
(F x G)
G.
H.
F.
P/Forward E
94.4
13.2
26.7
13/2
18
3.91
70.38
P/S
71.3
6.1
13.9
6.1
9
7.76
69.84
P/B
23.6
6.8
12.4
7.6
11
6.26
68.86
P/EBITDA
131.04
10.37
23.6
11.15
16
4.25
68
P/CF
135.5
14.6
33.4
14.6
21
3.26
68.46
Current Price: $47.10
DCF Target Price: $68.36
Target Price: $69.11
DCF Upside: 45%
Implied Upside: 46%
Weighted Average Upside: $68.74, 45.5%
Gilead- DCF
Gilead Sciences
Analyst: Alex Bishop
3/7/2010
(000s)
Year
Terminal Discount Rate =
Terminal FCF Growth =
2009E
Revenue
7,011,383
% Grow th
2010E
7,723,307
10.2%
Operating Income
3,501,956
Operating Margin
49.9%
Interest Income
42,397
Interest % of Sales
0.6%
Taxes
876,364
Tax Rate
28.0%
3,795,797
49.1%
92,680
1.2%
1,062,823
28.0%
2011E
8,721,962
12.9%
4,653,099
53.3%
95,942
1.1%
1,302,868
28.0%
2012E
9,506,939
9.0%
5,228,816
55.0%
104,576
1.1%
1,281,060
25.0%
2013E
10,267,494
8.0%
5,647,122
55.0%
112,942
1.1%
1,438,887
26.0%
10.5%
5.0%
2014E
10,986,219
7.0%
6,042,420
55.0%
120,848
1.1%
1,539,609
26.0%
2015E
11,755,254
7.0%
6,465,390
55.0%
129,308
1.1%
1,647,381
26.0%
2016E
12,460,569
6.0%
6,853,313
55.0%
137,066
1.1%
1,746,224
26.0%
25% based on 1/26/10 guidance
Net Income
2,625,592
% Grow th
4.1%
Add Depreciation/Amort
117,145
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
190,139
4,095,293
6.6%
205,350
4,381,963
7.0%
219,724
4,688,701
7.0%
235,105
4,970,023
6.0%
249,211
2.0%
2.0%
2.0%
2.0%
(280,696)
(300,066)
(249,664)
(294,715)
(318,292)
(340,573)
(364,413)
(386,278)
-4.0%
-3.9%
-2.9%
(230,057)
(193,083)
(218,049)
3.3%
2.5%
2.5%
16.2
23.5
11.7
17.0
903,038
$
$
14.7%
2.0%
23,691,545
38,038,669
61,730,214
6.33%
Shares Outstanding
152,634
3,843,180
1.8%
2,761,148
2.6%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
22.6%
1.8%
2,692,098
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Debt
Cash
Cash/share
135,158
3,350,231
1.7%
% Grow th
Current Price
Implied equity value/share
Upside/(Downside) to DCF
2,732,974
47.10
68.36
45.1%
1,161,030
1,272,958
1.41
3,471,251
25.7%
38%
62%
100%
15.6
22.6
10.8
15.7
12.7
18.4
8.8
12.8
-3.1%
237,673
2.5%
3,500,930
0.9%
-3.1%
256,687
2.5%
3,725,663
6.4%
-3.1%
274,655
2.5%
3,986,459
7.0%
-3.1%
293,881
2.5%
4,265,511
7.0%
-3.1%
311,514
2.5%
4,521,442
6.0%
Terminal Discount Rate
(%)
Gilead- Sensitivity Matrix
47.10
10
10.2
10.4
10.5
10.6
10.8
11
12
3.5
63.63
61.64
59.76
58.86
57.99
56.31
54.73
47.94
4
66.89
64.64
62.54
61.54
60.57
58.71
56.96
49.53
Terminal FCF Growth (%)
4.5
5
70.73
75.35
68.18
72.39
65.81
69.65
64.66
68.36
63.57
67.11
61.49
64.74
59.53
62.53
51.33
53.39
5.5
81
77.5
74.3
72.79
71.34
68.61
66.08
55.76
6
88.05
83.83
80
78.21
76.5
73.29
70.34
58.53
Gilead- Performance YTD
Gilead- Performance 1yr
Gilead- Performance 3yr
Gilead- Performance 10yr
Lines of business
 API- Active Pharmaceutical Ingredients.
 Vertical integration
 Higher operating margins
 Core competency
operating margins
Teva
24.23%
MRK
17.70%
MYL
16.32%
NVS
22.80%
RDY
18.42%
 Generic drugs
 75% of sales
 Must be bioequivalent of their predecessors.
 Can’t be marketed until patents are expired or proven
illegitimate.
 Branded drugs
 Increased investment, expected output to be doubled between
2007 and 2012
 Risky
Macro drivers in Teva’s favor
 Aging of the population
 Increasing health concerns
 Increased government spending leads to cost
cutting efforts=generic drugs have an advantage
Teva
Analyst: Justin Gibbs
1/24/2010
Terminal Discount Rate =
13.0%
Terminal FCF Growth =
3.0%
Millions
Year
Revenue
2010E
16,860
% Grow th
Operating Income
Operating Margin
Financial exp. Net
Interest % of Sales
Taxes
Tax Rate
Net Income
% of Sales
Plus/(minus) Changes WC
% of Sales
19,727
17.0%
4,552
5,326
6,741
26,838
7.5%
7,246
28,583
6.5%
7,717
29,440
2017E
30,324
3.0%
7,949
2018E
31,233
3.0%
8,187
3.0%
8,433
2019E
32,170
3.0%
8,686
8,947
27.0%
27.0%
27.0%
169
197
223
250
268
286
294
303
312
322
331
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1,082
24.7%
3,306
1,266
24.7%
3,869
1,431
24.7%
4,365
1,603
24.7%
4,889
1,723
24.7%
5,255
1,835
24.7%
5,597
1,890
1,947
24.7%
5,765
2,005
24.7%
5,938
24.7%
6,116
2,065
24.7%
6,299
2,127
24.7%
6,488
17.0%
12.8%
12.0%
7.5%
6.5%
3.0%
3.0%
3.0%
3.0%
3.0%
515
593
669
749
805
857
883
910
937
965
994
3.1%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
4,469
2,356
4.6%
7,471
% Grow th
5,911
-20.9%
NPV of Cash Flows
47,462
NPV of terminal value
34,768
42%
Projected Equity Value
82,231
100%
Free Cash Flow Yield
16.07%
3,344
15.0%
1,115
5.0%
7,263
22.9%
3,745
15.0%
1,248
5.0%
8,134
12.0%
4,026
15.0%
1,342
5.0%
8,744
7.5%
4,287
15.0%
1,429
5.0%
9,313
6.5%
4,416
4,549
4,685
4,826
15.0%
15.0%
15.0%
15.0%
883
910
937
965
994
3.0%
3.0%
3.0%
3.0%
3.0%
10,181
10,486
9.3%
10,801
3.0%
3.0%
11,125
3.0%
Terminal Value
Free Cash Yield
12.0
10.6
24.9
21.3
18.8
11.6
9.9
8.8
18.7
16.0
14.2
820
13.1
14.0%
13.0%
12.0%
11.0%
10.0%
1.0%
49%
63%
80%
100%
124%
2.0%
54%
70%
88%
110%
139%
$ 100.28
3.0%
60%
77%
98%
124%
157%
4.0%
67%
86%
110%
141%
182%
5.0%
75%
97%
126%
164%
217%
1,598
1.95
9.71%
Terminal EV/EBITDA
$ 56.68
Cash
118,022
18.2
Implied equity value/share
13,994
3.0%
Terminal P/E
Current Price
Debt
11,458
58%
14.1
76.9%
3.0%
4,970
15.0%
Sensitivity
Cash/share
3.0%
27.0%
4.9%
Upside/(Downside) to DCF
33,135
27.0%
Capex % of sales
Shares Outstanding
2020E
27.0%
906
Projected EV/EBITDA
12.0%
2016E
27.0%
11.9%
Current EV/EBITDA
6,019
24,966
2015E
27.0%
820
Projected P/E
13.0%
2014E
27.0%
26.5%
Current P/E
22,291
2013E
27.0%
Subtract Cap Ex
Free Cash Flow
2012E
27.0%
% Grow th
Add Depreciation/Amort
2011E
Company Overview (CFN)
•Global medical technology company providing healthcare
products and services
• Offer products in areas of intravenous, infusion, medication
and supply dispensing, respiratory care, infection prevision,
and surgical instruments.
•2 main lines of business:
 Critical Care Technologies
 Medical Technologies and Services
CFN Status Quo
 Market Cap: 5.75 B
 SIM Weight: 0.84%
 Current Price: $29.7
 Target Price: $27.8
 Upside:6.81%
Market Performance (6 months)
Year
Revenue
% Growth
Carefusion(CFN)
Terminal Discount Rate =
9.85%
Terminal FCF Growth =
5.10%
FY 2010 E FY 2011 E FY 2012 E FY 2013 E FY 2014 E FY 2015 E FY 2016 E FY 2017 E FY 2018 E FY 2019 E FY 2020
4,162.52
4,209.80
1.14%
4,368.80
3.78%
4,539.19
3.90%
4,720.76
4.00%
4,914.31
4.10%
5,125.62
4.30%
5,346.02
4.30%
5,570.56
4.20%
5,793.38
4.00%
6,025.11
4.00%
Operating Income
Operating Margin
424.77
10.20%
453.71
10.78%
517.08
11.84%
522.01
11.50%
542.89
11.50%
565.15
11.50%
589.45
11.50%
614.79
11.50%
640.61
11.50%
666.24
11.50%
692.89
11.50%
Interest and Other
% of Sales
-45.79
-1.10%
-46.31
-1.10%
-48.06
-1.10%
-56.74
-1.25%
-59.01
-1.25%
-61.43
-1.25%
-64.07
-1.25%
-66.83
-1.25%
-69.63
-1.25%
-72.42
-1.25%
-75.31
-1.25%
Taxes
Tax Rate
135.05
28.70%
142.51
28.50%
159.93
28.30%
166.68
28.80%
173.35
28.80%
180.45
28.80%
188.21
28.80%
196.31
28.80%
204.55
28.80%
212.73
28.80%
221.24
28.80%
Net Income
% Growth
335.50
357.51
6.56%
405.20
13.34%
412.07
1.69%
428.55
4.00%
446.12
4.10%
465.30
4.30%
485.31
4.30%
505.70
4.20%
525.92
4.00%
546.96
4.00%
Add Depreciation/Amort
Capex % of sales
200.00
4.80%
74.38
1.79%
158.18
3.80%
193.65
4.60%
-18.49
-0.44%
143.13
3.40%
192.23
4.40%
-69.14
-1.58%
161.65
3.70%
195.19
4.30%
-83.97
-1.85%
172.49
3.80%
193.55
4.10%
-87.33
-1.85%
174.67
3.70%
201.49
4.10%
-90.91
-1.85%
181.83
3.70%
205.02
4.00%
-94.82
-1.85%
184.52
3.60%
208.49
3.90%
-98.90
-1.85%
187.11
3.50%
211.68
3.80%
-103.06
-1.85%
189.40
3.40%
214.35
3.70%
-107.18
-1.85%
191.18
3.30%
216.90
3.60%
-111.46
-1.85%
198.83
3.30%
Free Cash Flow
451.71
389.54
-13.76%
366.65
-5.88%
350.79
-4.33%
360.10
2.65%
374.86
4.10%
390.98
4.30%
407.79
4.30%
424.92
4.20%
441.92
4.00%
453.57
2.64%
2,405.94
3,922.41
6,328.35
38.02%
61.98%
100.00%
Terminal Value =
10,035.84
Free Cash Yield =
4.52%
Terminal P/E =
18.35
Terminal EV/EBITDA
11.68
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
% Grow th
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
17.66
18.86
10.43
11.08
Shares Outstanding
213.12
Current Price
Implied equity value/share
Upside/(Downside) to DCF
$27.80
$29.69
6.81%
Debt
Cash
Cash/share
1,390.00
797.00
3.74
16.57
17.70
10.07
10.69
14.62
15.62
9.19
9.76
Valuation
Relative to Industry
High
Low
Median
Current
P/Trailing E
0.97
0.82
0.92
0.94
P/Forward E
1.4
1.1
1.2
1.2
P/B
0.4
0.3
0.4
0.4
P/S
0.6
0.0
0.4
0.6
P/CF
0.8
0.1
0.1
0.8
Absolute
Valuation
High
Low
Median
Current
#Your Target
Multiple
*Your Target E, S,
B, etc/Share
Your Target Price
(F x G)
A.
B.
C.
D.
E.
F.
G.
H.
P/Forward E
15.3
12.6
14.4
15.2
15.57
1.57
24.49
P/S
18.6
16.3
17.6
17.6
1.58
16.28
25.72
P/B
1.2
0.8
1.1
1.2
1.23
20.94
25.75
P/EBITDA
1.5
0.0
1.1
1.5
9.06
3.29
29.8
P/CF
1.0
0.6
0.7
1.0
7.9
3.81
30.06
Target Price = $ 28.16
Leverage:
 Demographic factors
 Technology leadership and innovation
 Favorable valuation
Risks:





Inability to enhance existing products or introduce new products
Subject to complex and costly regulation
2nd Quarter earnings drop & below expectation
Uncertainty after the spinoff from Cardinal Health
Significant amount of indebtedness
Decrease Amgen Inc. (AMGN) by 50 bps
Current Weight: 250 bps
Price: $57.24
Open: $56.75
High: $57.26
Low: $56.21
Market Capitalization: $56.88B
Shares Outstanding: 995M
12 Month Target Price: $77
% Change: 35%
52 Week High: $64.76
52 Week Low: $44.96
Yield: N/A
Average Daily Volume: 6.3M
• Prolia (Osteoporosis drug) likely to be approved by FDA
• Decrease weight to avoid loss due to failure to secure Prolia, maintain
significant weight to maintain exposure to future revenue growth
• No near future patent expiration
• Favorable tax incentives due to increased profits and operations in
international locations (Puerto Rico) tax rate dropped to 11.5% from
20%
• Advancing pipeline, long term potential growth, wide variety of drugs in
various phases in the pipeline
Questions?