HEALTH CARE SECTOR
COMPANY PRESENTATION
Sarah Hemmelgarn
Jason Wattier
Alex Wisler
Billy Wong
SECTOR SUMMARY
 SIM Weight (as of 7/31/2009)
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecommunication Services
Utilities
Cash
Dividend Receivables
S&P 500
Weight SIM Weight
9.11%
7.19%
11.81%
11.65%
12.04%
10.74%
13.86%
8.93%
13.73%
13.30%
9.98%
12.37%
18.72%
20.41%
3.40%
4.98%
3.41%
3.39%
3.94%
3.61%
0.00%
3.38%
0.00%
0.06%
+/-1.92%
-0.16%
-1.31%
-4.93%
-0.43%
2.39%
1.69%
1.58%
-0.02%
-0.34%
3.38%
0.06%
SECTOR SUMMARY
 Defensive
 Opportunities
 Aging U.S. Population
 Universal health care may increase number of people insured
 Risks
 Branded pharmaceuticals patent cliff
 Lack of bargaining power under one-buyer system
SECTOR SUMMARY
 Currently underweight vs. S&P 500
SIM weight = 13.30%
 S&P 500 = 13.73%

 Bring to even-weight with S&P500
 +43 basis points
SECTOR SUMMARY
 Current SIM Holdings:
Company
% of
SIM
Current
Price
Target
Price
Div.
Yield
Total
Upside
Cardinal Health
2.51%
$33.84
$39.18
2.10%
18.68%
Eli Lilly
2.39%
$33.83
$37.61
5.60%
16.79%
Gilead Science
0.96%
$45.87
$61.93
0.00%
35.01%
Johnson&Johnson
4.01%
$60.72
$75.38
3.27%
27.41%
Wellpoint
3.43%
$51.90
$59.48
0.00%
15.30%
*Prices as of market close 8/10/2009
SECTOR SUMMARY
 Recommended Action:
Company
Upside
Action
Current
Weight
Target
Weight
Change
Cardinal Health
18.68%
Hold
2.51%
2.51%
0.00%
Johnson&Johnson
27.41%
Hold
4.01%
4.01%
0.00%
Eli Lilly
16.79%
Sell
2.39%
0.00%
- 2.39%
Wellpoint
15.30%
Sell
3.43%
2.00%
- 1.43%
Gilead Science
35.01%
Buy
0.96%
2.50%
+ 1.54%
TEVA
20.91%
Buy
0.00%
2.71%
+ 2.71%
13.30%
13.73%
+ 0.43%
SECTOR TOTAL
ELI LILLY
Company Overview
 Industry: Pharmaceuticals
 Founded in 1876
 Develops, manufactures, and sells pharmaceutical
products worldwide

Offers medicinal treatments for:

Schizophrenia, Bi-polar disorders, ADHD, Diabetes, Osteoporosis
 2008 Sales: $20.378B
Company Overview
SIM Basis = $45.61
Market Price = $33.83
Dividends = $1.92
Unrealized Holding Gain (Loss) = ($11.78)
After dividends = ($9.86)
Return to Date (after dividends) = -21.62%
$50
Dividend=$0.47
$45
$40
Dividend=$0.49
Dividend=$0.49
$35
$30
Dividend=$0.47
$25
7/31/04
8/31/04
9/30/04
10/31/04 11/30/04
12/31/04
1/31/05
2/28/05
3/31/05
4/30/05
5/31/05
6/30/05
7/31/05
Strengths & Opportunities
 Diversified Product Portfolio
 High Dividend Yield
 Currently at 5.6% annual yield
 Increased in each of last 42 years
 Aging population expected to drive demand for drugs
Risks & Concerns
 Steep upcoming patent cliff
2008 US Sales
Exposed: $7,277m
% of 2008 Sales
Exposed:
Excluding biologics
28.9%
Including biologics
35.7%
Risks & Concerns
 Weak late-stage pipeline
 Is
it adequate to replace expected lost sales?
 Big names to replace: Zyprexa, Cymbalta, Gemzar
 Up to 35.7% of 2008 sales is exposed to generic
competition through 2015
 Last major drug launch: 2005
 Not expecting a “steady stream of product
introduction” until 2013 (Annual Report)
Risks & Concerns
 Ability to maintain current dividend payout in
question
 Shoring up pipeline is #1 priority
 Two options:
 Increased
R&D spending
 Purchase late-stage pipeline
R&D is costly, time consuming and risky
 Acquisitions more likely due to immediate need for
product introduction
 Acquisitions will be priority in use of free cash
 Can Eli Lilly maintain its current dividend payout?

Price Target
Absolute
Valuation
High
Low
Median
Current
Target
P/Forward E
24.1
7.1
16.4
8.2
$33.65
P/S
6.0
1.6
4.0
1.9
$43.77
• Valuation target: $38.71
• DCF target price: $37.24
• Final target price: $37.61*
• Current price: $33.83
• Upside potential (including dividends): 16.79%
*Calculated from 75% DCF and 25% Valuation target prices
Recommendation
 Liquidate position in LLY
 Why?
 Significant percentage of revenue at risk for generic
competition, beginning in 2011
 Concerns over relatively weak pipeline and impact on future
revenue growth
 Current dividend yield may not be sustainable with acquisition
becoming a priority
 Limited long-term upside
WELLPOINT
WELLPOINT
 Headquartered in Indianapolis, Indiana
 Managed Healthcare Organization—Largest in the
United States

Sell commercial health benefits
 Formed by a merger on Nov 30, 2004 by Anthem,
Inc. and Wellpoint Health Networks Inc.
 Anthem Blue Shield and Blue Cross licensee in 14
states—brand strength
WELLPOINT
 Sector: Healthcare
 Industry: Managed Healthcare
 Current Price: $51.90
 Market Cap: 24.66 Billion
 Current SAP Weighting: 3.43%
 Proposed Change: Sell 143 basis points
 Proposed SAP Weighting: 2.00%
Reasons for Selling
 Sales and Earnings projections low
2004
2005
2006
Revenu
e
20,815
45,136 56,953
%Chang
e
116.84% 26.18%
Net Income
%Change
2007
61,134
7.34%
2008
2009
61,251 60,332
2010
2011
60,936
63,068
0.19%
-1.50%
1.00%
3.50%
2004
2005
2006
2007
2008
2009
2010
2011
960
2,464
3,095
3,345
2,491
2,910
2,832
2,911
-2.70%
2.78%
156.67% 25.61%
8.08%
-25.53% 16.84%
Reasons for Selling
 Government Regulation
 Government will likely pressure Managed Healthcare
Companies to cut costs
 Profit Margins at risk due to increasing competition
 Rising Unemployment—has not yet peaked
 More unemployment means lower commercial enrollment in
healthcare plans
Wellpoint and Unemployment
Obvious
Negative
Correlation
Source:
Spring 2009
Healthcare
Stock
Presentation
Possible Reasons Against Taking a Sell Position:
 Healthcare reform could actually benefit Wellpoint
and other Managed Healthcare companies because
more people will be in the healthcare system
 Wellpoint is a well diversified company that often
engages in mergers and acquisitions
 Strong brand name with their Anthem Blue and Blue
Cross brands
Valuation
Absolute
Valuation
High
P/Forward E 18.1
Target
Media Curre Target E,S,B,etc/shar Target
Low
n
nt
Multiple
e
Price
6
13.9
9
13.0
5.0
65.0
P/S
1.4
0.3
0.9
0.5
0.7
104.0
72.8
P/B
2.4
0.8
1.9
1.1
1.4
44.9
62.9
P/EBITDA
18.14
2.99
8.54
5.57
7.4
9.1
67.3
P/CF
19.5
5.1
13.4
7.6
8.5
6.3
53.6
Multiple Target Price: $64.31
DCF Target Price : $58.35
Final Target Price: $59.84*
*Multiple Target*25%+DCF Target*75%
Current Price: 51.90
Upside: 15.3%
GILEAD SCIENCE
Gilead Science (GILD)
•Founded in 1987
•Biopharmaceutical company that discovers, develops
and commercializes therapeutics
•Focus on antiviral drugs for HIV/AIDS, hepatitis and
influenza
•Recently began developing drugs for pulmonary
diseases
Why Gilead?
 U.S. HIV drug market share expanding
 Diversifying product line
 Increasing R&D pipeline investment
 Proposed changes to health care system
Why Gilead?
 Products in pipeline
 Darusentant
 Elvitegravir
 GS-9350
 GS-9150
 Aztrenam Lysine
Why Gilead?
Brand Name
AmBisome
Atripla
Emtriva
Flolan
Hepsera
Letairis
Macugen
Tamiflu
Truvada
Viread
Vistide
Indication
fungal infection, meningitis, candida
HIV, AIDS
HIV, AIDS
pulmonary hypertension
Hepatits B
pulmonary arterial hypertension
age-related macular degeneration
influenza
HIV, AIDS
HIV, AIDS, Hepatitis B
CMV retinitis
Patent Expiration
2016
2021
2021
expired
2014
2015
2017
2016
2021
2017
2010
% Total Sales
6%
31%
1%
<1%
7%
2%
*
*
41%
12%
<1%
Risks for Gilead
 Slowdown in HIV product sales
 Failure of pipeline products to gain FDA approval
Price Target
Absolute Valuation
P/Forward E
P/S
P/B
P/EBITDA
P/CF
High
41.1
15.7
18.2
32.24
49.7
Low
17
7.4
7.9
13.93
18.6
Median
26.2
11.9
11.2
21.77
29.4
• Valuation target: $71.31
• DCF target: $58.50
• Final target: $61.70*
• Current price: $45.76
• Upside potential: 34.84%
*Calculated from 75% DCF and 25% Valuation target prices
Current
18.8
7.7
9
15.49
20.6
Target Price
74.15
82.82
59.63
84.69
55.27
TEVA Pharmaceuticals
TEVA
 Company – Based in Israel,
largest generic drug
manufacturer in the world.
 Investment Thesis: Company’s
position as a leader in the generic
market, relatively good valuation,
along with very favorable macro
trends for the generic drug
industry, lead us to recommend
purchasing 271 basis points.
Why TEVA?
 Favorable Macro Trends for Industry
a) Availability of Generic Drugs as Substitutes for name-brands


Approximately 75% of all FDA-approved drugs have generic counterparts.
In 2008, 69% of all prescriptions dispensed were generics.
b) Expected Growth of Generic Drug Market


$80 billion in 2008, expected to be $84 billion in 2009 and $129.3 billion in
2014
 CAGR of 9% for the 5-year period
U.S.: projected $34B in 2009 and $54B in 2014
 CAGR of 9.7%
Why TEVA?
c) Cost Discrepancy

National Association of Chain Drug Stores [2007]:
 Average Retail Price (Brand-Name) = $119.51
 Average Retail Price (Generic) = $34.34
d) Broad-based Support from Retailers
Price Competition among retailers such as CVS, Walgreen, and Rite
Aid has been a big catalyst behind the greater use of generic drugs.
 Walmart’s $4 generic medicine offer
 Generic drugs represent both lower costs and higher margins to
these retailers than brand name drugs.

Why TEVA?
d) Regulatory
Favoritism
For the most part, many
aspects of U.S. and
international health care
reforms favor generics in
their attempt to curb costs.
 Example – Medicare Part
D’s, which accounted for
19% of all retail
prescriptions in 2007,
“success” is attributed in
large part to its significant
use of generic drugs.

Why TEVA?
 Positives:
1) Largest generic drug manufacturer in the world
2) Enjoyed a 23% sales growth through the first 6 months of 2009
despite global recession, and only had one single-digit growth
year in the past 5 years.
3) Worldwide market leader and in North America, the largest
generic drug market in the world, and among the leaders in
Europe.
4) Has size and capacity to capitalize on the upcoming patent
“cliff.”
Why TEVA?
 Worries/Risks/Concerns:
1) Increased competition among generic manufacturer and from
the “names” of the industry.
2) Prevalence of Generics in the market will reduce incentive for
brand-names to invest in new drugs.
3) Presence in Asia not as strong as in Europe or North America.
Valuation
Valuation Method
Target Per Share Amount
Target Multiple
Target Price
P/Forward E
3.35
17
56.95
P/Sale
15.23
4
60.94
P/CF
3.61
16
57.76
P/Book
19.91
3.5
69.67
DCF
63.01
Target Price (75%-DCF, 25%-Multiple)
$62.59
Current Price
$51.51
Dividend Yield
1.00%
Upside
22.5%
Summary
 Recommended Action:
Company
Upside
Action
Current
Weight
Target
Weight
Change
Cardinal Health
18.68%
Hold
2.51%
2.51%
0.00%
Johnson&Johnson
27.41%
Hold
4.01%
4.01%
0.00%
Eli Lilly
16.79%
Sell
2.39%
0.00%
- 2.39%
Wellpoint
15.30%
Sell
3.43%
2.00%
- 1.43%
Gilead Science
35.01%
Buy
0.96%
2.50%
+ 1.54%
TEVA
20.91%
Buy
0.00%
2.71%
+ 2.71%
13.30%
13.73%
+ 0.43%
SECTOR TOTAL
QUESTIONS?