HEALTHCARE
Sarah Hemmelgarn
Billy Wong
Alex Wisler
Jason Wattier
Size and
Composition
Sector Weight
S&P 500 Weight
SIM Weight
+/-
8.97%
7.50%
-1.46%
12.32%
12.36%
0.04%
12.05%
10.68%
-1.37%
13.70%
9.33%
-4.37%
14.06%
13.58%
-0.49%
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
9.79%
11.57%
1.78%
18.43%
20.19%
1.76%
3.20%
4.12%
0.92%
3.39%
3.28%
-0.11%
4.10%
3.87%
-0.23%
0.00%
3.53%
3.53%
Industrials
Information Technology
Materials
Telecommunication Services
Utilities
Cash

49 basis
points
underweight.
SIM Weights:
Health Care--13.58%
Industries
Pharmaceuticals is the largest, at 52.97% of the
sector's market value.
Industry
Drug Manufacturers – Major*
Biotechnology*
Medical Instruments & Supplies
Drug Manufacturers - Other
Medical Appliances & Equipment
Health Care Plans*
Medical Laboratories & Research
Drug Delivery
Specialized Health Services*
Diagnostic Substances
Hospitals
Drug Related Products
Drugs - Generic
Home Health Care
Long-Term Care Facilities
Medical Practitioners
Market Cap ($B) Market Cap (%)
935.74
52.97%
216.35
12.25%
176.76
10.01%
141.46
8.01%
106.52
6.03%
87.77
4.97%
22.84
1.29%
15.24
0.86%
13.22
0.75%
11.61
0.66%
10.71
0.61%
10.33
0.58%
8.42
0.48%
5.02
0.28%
4.26
0.24%
0.38
0.02%
TOP HEALTCARE COMPANIES BY
MARKET CAP
TOP 10 HEALTHCARE COMPANIES BY MARKET CAP
JOHNSON AND JOHNSON
$169.5 B
PFIZER INC
$111.2 B
NOVARTIS AG ADS
$100.4 B
GLAXOSMITHKLINE PLC
$97.0 B
SANOFI-AVENTIS SA
$86.4 B
ABBOTT LABORATORIES
69.6 B
ASTRAZZENECA PLC ADS
68.8 B
MERCK
65.3 B
WYETH
63.1 B
AMGEN, INC
$61.7 B
SIM Stocks
MARKET CAP AND INDUSTRY OF SIM HEALTHCARE STOCKS
COMPANY
MARKET
CAP
INDUSTRY
JOHNSON & JOHNSON CO
169.5 B
DRUG MANUFACTURERS, MAJOR
GILEAD SCIENCES, INC
43.9 B
BIOTECH
ELI LILLY CO
39.9 B
DRUG MANUFACTURERS, MAJOR
WELLPOINT
25.5 B
HEALTHCARE PLANS
CARDINAL HEALTH INC
11.8 B
DRUGS, WHOLESALE
Economic Factors at a
Glance
Summary of Economic Trends
Positive trends include:
 the aging population and the baby boomers
 people living longer with chronic disease
 obesity and diabetes epidemics
 technological advances
 the global reach of disease
 personalized medicine
Negative trends include:
 a single-payer system (Medicare/U.S. government)
 expenditure as an increasing share of gross domestic product (GDP)
 the uninsured
 cost controls
 consumerism
Obesity
Childhood
Obesity has
grown over the
last 30-40 years,
but there is now
more of an
emphasis on
living a healthy
lifestyle. We
expect the
obesity rate to
eventually start
declining in the
long run.
Prevalence of Obesity* Among U.S. Children and
Adolescents
(Aged 2–19 Years)
Survey Periods
2003–
1976–1980 1988–1994 1999–2002 2006
Ages
2 through 5
5%
7.20%
10.30%
12.40%
6 through 11
6.50%
11.30%
15.80%
17.00%
5%
10.50%
16.10%
17.60%
12 through 19
The Aging Population
The baby boomers
are reaching old
age where much
more healthcare
will be needed.
Healthcare Reform
and
Cost Controls
Obama’s proposed Healthcare reform will provide the
industry with much uncertainty. This could be costly to
the healthcare industry which will be pressured to lower
costs, but could be beneficial to the industry because
more people will be insured and able to seek out medical
attention.
COST
CONTROL
Uses have
exceeded
sources—
there will
likely be
pressure/
requirements
for healthcare
companies to
reduce costs.
Patent Expiration

Drugs representing $63B in 2007 sales will
have their patents expire by 2014

Significant because Pharmaceuticals make
up the majority of the Healthcare sector
BUSINESS
ANALYSIS
Component Industries
Industry
Drug Manufacturers – Major*
Biotechnology*
Medical Instruments & Supplies
Drug Manufacturers - Other
Medical Appliances & Equipment
Health Care Plans*
Medical Laboratories & Research
Drug Delivery
Specialized Health Services
Diagnostic Substances
Hospitals
Drug Related Products
Drugs - Generic
Home Health Care
Long-Term Care Facilities
Medical Practitioners
Market Cap ($B)
Market Cap (%)
935.74
52.97%
216.35
12.25%
176.76
10.01%
141.46
8.01%
106.52
6.03%
87.77
4.97%
22.84
1.29%
15.24
0.86%
13.22
0.75%
11.61
0.66%
10.71
0.61%
10.33
0.58%
8.42
0.48%
5.02
0.28%
4.26
0.24%
0.38
0.02%
*Industries represented in SIM Portfolio (double-check Specialized Health Services /
Cardinal Health)
Phase of Life Cycle
Biotechnology
• Health Care Sector is:
• Defensive
• Weighted towards maturity stage
Drug Manufacturers
- Major
Health Care Plans
Medical Appliances
Medical Instruments
Business Driver:
Demographics
• Aging population -> increase demand
• Aging of baby boomers
• Increasing life expectancy
• Number and % of 50+ age group will rise substantially
Business Driver:
Demographics
Business Analysis
Barriers to Entry (Pharmaceuticals)




Very high R&D costs
Long, strict approval process by FDA
Established companies in industry
High capital requirements
Demand


Demand is generally inelastic
Demand will continue to increase as population ages
Business Analysis
Competition and Substitution


Barriers to entry retain industry concentration, especially in pharmaceuticals
Competition and substitution mostly within the industry
Opportunities and Threats
Opportunities



Very high barrier to entry
Inelastic demand
Aging population creates demand
Threats
• R&D is costly and highly
uncertain
• Increasing strict FDA approval
process
• Uncertainty regarding
government controls and
mandates in the future
• Major patent cliff in next 5
years for Pharmaceuticals;
estimated $63B erosion in sales
by 2014
Financial Analysis
Sector Growth and Margins
2004
2005
2006
2007
2008
Revenue Growth
16%
10%
13%
7%
10%
EBITDA Margin
17.1%
17.0%
16.4%
16.7%
16.4%
Profit Margin
10%
9.9%
9.4%
10.2%
10.1%
Return on Equity
22.4%
22.4%
21.7%
22.1%
22.9%
•EBITDA and Profit margins are stable
•Return on Equity averages 22.3% over the past five years
04/01/2009
12/01/2008
08/01/2008
04/01/2008
12/01/2007
08/01/2007
04/01/2007
12/01/2006
08/01/2006
04/01/2006
12/01/2005
08/01/2005
04/01/2005
12/01/2004
08/01/2004
04/01/2004
12/01/2003
08/01/2003
04/01/2003
12/01/2002
08/01/2002
04/01/2002
12/01/2001
08/01/2001
04/01/2001
12/01/2000
08/01/2000
04/01/2000
12/01/1999
Net Profit Margin
35.00%
30.00%
25.00%
20.00%
SP500
15.00%
HCX
BIOTK
10.00%
DRUGS
HCEQP
5.00%
0.00%
•Health care sector net profit margins greater than S&P 500
•Biotechnology, pharmaceutical and health care equipment industries have the
highest profit margins in the sector
04/01/2009
12/01/2008
08/01/2008
04/01/2008
12/01/2007
08/01/2007
04/01/2007
12/01/2006
08/01/2006
04/01/2006
12/01/2005
08/01/2005
04/01/2005
12/01/2004
08/01/2004
04/01/2004
12/01/2003
08/01/2003
04/01/2003
12/01/2002
08/01/2002
04/01/2002
12/01/2001
08/01/2001
04/01/2001
12/01/2000
08/01/2000
04/01/2000
12/01/1999
Return on Equity
60.00%
50.00%
40.00%
30.00%
SP500
HCX
BIOTK
20.00%
DRUGS
HCSVS
10.00%
0.00%
•Health care sector return on equity greater than the S&P 500
•Pharmaceutical industry has highest return on equity
•Biotechnology industry return on equity growing the quickest in recent years
•Health care sector cash flow per share has grown steadily since 2000
•Biotechnology industry cash flow per share is the highest
04/01/2009
12/01/2008
08/01/2008
04/01/2008
12/01/2007
08/01/2007
04/01/2007
12/01/2006
08/01/2006
04/01/2006
12/01/2005
08/01/2005
04/01/2005
12/01/2004
08/01/2004
04/01/2004
12/01/2003
08/01/2003
04/01/2003
12/01/2002
08/01/2002
04/01/2002
12/01/2001
08/01/2001
04/01/2001
12/01/2000
08/01/2000
04/01/2000
12/01/1999
Cash Flow Per Share
80.00
70.00
60.00
50.00
40.00
HCX
BIOTK
30.00
HCEQP
HCMAN
20.00
10.00
-
Valuation Analysis
Valuation Analysis

Absolute vs. Relative Sector Look


Prognosis: HC is shows strong support for being
underpriced on an absolute basis, but mixed to negative
support for underpricing on a relative basis.
Appendix – HC Industries Relative to S&P500
Sector – P/Forward E
Sector – P/Book
Sector – P/Sales
Sector – P/CF
P/CF - Abs
200.00
180.00
160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
June-94
13.33995
9.2662
December-97
May-01
October-04
March-08
P/CF - Relative to S&P
12.00
10.00
8.00
6.00
4.00
2.00
1.26205
0.00
June-94
December-97
May-01
October-04
March-08
Sector – P/EBITDA
P/EBITDA - Abs
30.00
25.00
20.00
15.00
10.78365
10.00
7.1378
5.00
0.00
June-94
December-97
May-01
October-04
March-08
P/EBITDA - Relative to S&P
2.50
2.00
1.65045
1.5036
1.50
1.00
0.50
0.00
June-94
December-97
May-01
October-04
March-08
Summary Look
Health Care - Absolute
Over/Under – 5 Yr
Med
%
Trend
P/Forward E
Under
-29%
Positive
P/B
Under
-24%
Positive
P/S
Under
-32%
Positive
P/CF
Under
-31%
Positive
P/EBITDA
Under
-34%
Positive
Over/Under – 5 Yr
Med
%
Trend
P/Forward E
Under
-31%
Negative
P/B
Under
-1%
Negative
P/S
Over
3%
Level
P/CF
Under
-17%
Level
P/EBITDA
Under
-9%
Negative
Health Care - Relative
RECOMMENDATION
*Keep Healthcare at 49 basis points underweight
(possibly decrease if better opportunities exist)
REASONS:
 Uncertainty in the sector with proposed
healthcare plan and patent expirations
 On a relative basis, the sector is mostly
“underpriced” but experiencing negative
valuation trends.
 If the economy starts to turn around, we expect
better opportunities for returns outside of the
healthcare sector
Appendix – Industry
Valuations
Drug/Pharm
P/Forward E
P/B
P/S
P/CF
P/EBITDA
Over/Under
Under
Over
Over
Under
Under
%
-29%
8%
7%
-16%
-6%
Trend
Negative
Negative
Level
Level
Negative
Over/Under
Under
Over
Over
Under
Under
%
-19%
14%
17%
-9%
-2%
Trend
Negative
Negative
Positive
Positive
Positive
Over/Under
Under
Under
Under
Under
Under
%
-38%
-15%
0%
-17%
-14%
Trend
Negative
Negative
Negative
Negative
Negative
Biotech
P/Forward E
P/B
P/S
P/CF
P/EBITDA
HC Equipment
P/Forward E
P/B
P/S
P/CF
P/EBITDA
Appendix – Pharm Charts
P/Forward E - Relative to S&P
1.20
1.00
0.80
0.60
0.40
0.20
0.00
June-94
P/CF - Relative to S&P
2.50
0.9708
2.00
0.6862
1.50
0.50
December-97
May-01
October-04
0.00
June-94
March-08
P/Book - Relative to S&P
4.00
3.00
3.00
2.00
1.4913
1.3857
1.00
December-97
May-01
October-04
P/Sales - Relative to S&P
5.00
4.00
2.5410
2.36875
2.00
1.00
0.00
June-94
December-97
May-01
October-04
March-08
May-01
October-04
March-08
2.00
1.5509
1.4634
1.00
0.00
June-94
March-08
3.00
December-97
P/EBITDA - Relative to S&P
4.00
0.00
June-94
1.12935
0.9453
1.00
December-97
May-01
October-04
March-08
Appendix – Biotech Charts
P/Forward E - Rel to S&P
P/CF - Relative to S&P
4.00
5.00
3.00
4.00
3.00
2.00
1.3303
1.0723
1.00
0.00
June-94
December-97
May-01
October-04
2.00
0.00
June-94
March-08
P/Book - Relative to S&P
6.00
5.00
4.00
3.00
2.00
1.00
0.00
June-94
December-97
May-01
October-04
March-08
P/EBITDA - Relative to S&P
8.00
6.00
4.00
1.7954
1.5796
December-97
May-01
October-04
5.3035
4.5258
December-97
May-01
October-04
March-08
2.3970
2.00
0.00
June-94
March-08
P/Sales - Relative to S&P
12.00
10.00
8.00
6.00
4.00
2.00
0.00
June-94
1.6916
1.5425
1.00
December-97
May-01
October-04
March-08
Appendix – HC Equip Charts
P/Forward E - Rel to S&P
P/CF - Relative to S&P
2.00
1.50
1.3450
1.00
0.8377
0.50
0.00
June-94
December-97
May-01
October-04
March-08
3.00
2.50
2.00
1.50
1.00
0.50
0.00
June-94
P/Book - Relative to S&P
3.00
2.50
2.00
1.50
1.00
0.50
0.00
June-94
December-97
May-01
October-04
March-08
P/EBITDA - Relative to S&P
15.00
10.00
1.5600
1.3325
December-97
May-01
October-04
March-08
4.00
3.00
2.5229
2.00
1.00
December-97
May-01
October-04
March-08
5.00
0.00
June-94
P/Sales - Relative to S&P
0.00
June-94
1.5297
1.2671
2.0356
1.7491
December-97
May-01
October-04
March-08