Healthcare Sector
Kailas Joshi
Daniel Kurth
Agenda
•
•
•
•
•
•
The Crisis/Recession Flu
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
Recommendation
Q&A
2
THE CRISIS/RECESSION FLU
3
Major Factors that Affected
the U.S. Market in 2008
Crisis/Recession Flu
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
Recommendation
Positive
Neutral
Negative
• Monetary
Policy
• Valuations
• Energy Prices
• Inflation
• Fiscal Policy
• Geopolitics
• Liquidity
• Economic
Activity
• Corporate
Earnings
Source: 2008 Market Update, Fidelity Management & Research Co. (FMRC) as of 12/31/2008
4
U.S. Equity Performance
Crisis/Recession Flu
The Healing Sector
OSU SIM Portfolio
Source: 2008 Market Update, Fidelity Management & Research Co. (FMRC) as of 12/31/2008
Analyses & Valuation
Recommendation
5
Style and Cap Performance
Crisis/Recession Flu
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
Value
Blend
Growth
-22.2%
-36.8%
-22.5%
-37.6%
-22.8%
-38.4%
-27.2%
Mid Cap
-38.4%
-27.3%
-41.5%
-27.4%
-44.3%
-24.9%
-28.9%
-26.1%
-33.8%
-27.5%
-38.5%
Large
Small
Source: FMRC, Data as of 12/31/2008; The above styles are represented by the following indexes: Large-cap value – Russell
1000® Value; Large-cap blend, Russell 1000®; Large-cap growth – Russell 1000® Growth; Mid-cap value – Russell Mid-Cap®
Value; Mid-cap blend – Russell Mid-Cap®; Mid-cap growth – Russell Mid-Cap® Growth; Small-cap value – Russell 2000® Value;
Small-cap blend – Russell 2000®; Small-cap growth – Russell 2000® Growth. Please refer to the appendix for important index
information.
Recommendation
Q4-2008
2008
6
Sector Performances
Source: 2008 Market Update, Fidelity Management & Research Co. (FMRC) as of 12/31/2008
7
S&P 500 Index
Recommendation
Financials
Materials
Information Technology
Analyses & Valuation
Industrials
Consumer Discretionary
Telecom Services
OSU SIM Portfolio
Utilities
Health Care
Energy
The Healing Sector
Consumer Staples
Crisis/Recession Flu
Sector Performances YTD
Crisis/Recession Flu
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
Recommendation
8
THE HEALING SECTOR
9
S&P 500 Sectors – Overview
Crisis/Recession Flu
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
Sector Description
SP-5A S&P 500
Recommendation
# of
Cos.
Adjusted
Market Cap
500
$7,192,455
SP-10 Energy
39
$1,014,055
SP-15 Materials
29
$218,994
SP-20 Industrials
59
$763,552
SP-25 Consumer Discretionary
80
$589,017
SP-30 Consumer Staples
40
$924,124
SP-35 Health Care
54
$1,146,392
SP-40 Financials
81
$770,678
SP-45 Information Technology
75
$1,166,403
9
$267,760
34
$331,480
SP-50
Telecommunications
Services
SP-55 Utilities
*Values in USD millions
Source: www.standardandpoors.com, US Equity Indices, as of 12/31/2008
10
Healthcare Sector Overview
Crisis/Recession Flu
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
Recommendation
• The sector market capitalization is at
$1.15 Trillion
• The Sector represents 15.94% of the S&P
500 by Market Cap
• Sector Revenues represented $63,874
million in 2008
Source: www.standardandpoors.com, US Equity Indices, as of 1/30/2009
11
Sector Performance – 10 year
Crisis/Recession Flu
Source: StockVal®
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
Recommendation
12
Industries in SP-35 as a % of
The Sector
Crisis/Recession Flu
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
Recommendation
13
Industries in SP-35 as a % of
S&P 500
Crisis/Recession Flu
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
Recommendation
14
YTD Performance of
Sector Industries
Crisis/Recession Flu
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
Recommendation
15
Health Care Leaders in S&P 500
Crisis/Recession Flu
Rank
The Healing Sector
Company
OSU SIM Portfolio
Analyses & Valuation
Current
Price
Industry
Recommendation
Market Cap*
($ billion)
1
Johnson & Johnson
Pharmaceuticals
$57.10
$158.43
2
Pfizer Inc.
Pharmaceuticals
$14.58
$98.31
3
Abbott Laboratories
Pharmaceuticals
$54.94
$85.24
4
Merck & Co., Inc.
Pharmaceuticals
$28.75
$60.78
5
Amgen, Inc.
Biotechnology
$57.90
$60.62
6
Wyeth
Pharmaceuticals
$43.42
$57.81
7
Gilead Sciences, Inc.
Biotechnology
$50.25
$45.75
8
Bristol Myers Squibb Co.
Pharmaceuticals
$21.75
$42.93
9
Eli Lilly & Co.
Pharmaceuticals
$35.43
$40.28
10
Medtronic, Inc.
Health Care Equipment & Services
$32.81
$36.69
16
WellPoint, Inc.
Health Care Providers & Services
$43.75
$22.27
25
Cardinal Health, Inc.
Health Care Providers & Services
$38.10
$13.73
Currently held in the SIM Portfolio
*Market Cap and Prices as of 2/13/2009
16
OSU SIM PORTFOLIO
17
Sector Weights in SIM Portfolio
As of 1/30/2009
18
Utilities
Recommendation
Telecom Services
Materials
Analyses & Valuation
Information
Technology
Industrials
Health
Care
OSU SIM Portfolio
Financials
Energy
The Healing Sector
Consumer Staples
Consumer Discretionary
Crisis/Recession Flu
Sector Holdings & Performance
Crisis/Recession Flu
The Healing Sector
OSU SIM Portfolio
SIM
Weight
Avg.
Cost
Recommendation
Top Ten Holdings by
Market Value
Sector Holdings in SIM Portfolio
Holding
Analyses & Valuation
Current
TTM
Price Gain/Loss
Cardinal Health Inc.
5.02% $43.44 $39.11 (37.46%)
(TKR: CAH)
Ticker
JNJ
Total
$1,021,113
HPQ
$830,525
LLY
$729,036
CAH
$711,585
BBY
$683,688
PEP
$678,105
MSFT
$627,570
BRK/A
$626,514
CL
$624,514
** Current Price - 2/9/2009 closing price
COP
$584,619
*** TTM Gain/Loss is 1 year ending 2/9/2009
Total
Eli Lilly
(TKR: LLY)
5.15% $45.61 $38.12 (25.94%)
Johnson & Johnson
(TKR: JNJ)
7.21% $60.42 $58.50
Wellpoint
(TKR: WLP)
4.13% $76.06 $46.10 (42.86%)
* SIM Weights as of 1/30/2009
(7.95%)
$7,117,139
Currently held in the SIM Portfolio
19
ANALYSES & VALUATION
20
Business Analysis
Crisis/Recession Flu
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
Recommendation
• Classically a defensive
sector
– Few substitutes for
drugs and care
• Business Cycle Phase
– Overall mature
– Biotechnology could be
considered growth
– Pharmaceuticals are in
a grey zone
21
Five Forces Analysis
Crisis/Recession Flu
The Healing Sector
• Very low power
• Not many substitutes
for drugs, medical
devices, or medical
attention from
doctors
Supplier
Power
• Strength varies in
different industries
• Typically strength is
low. Many suppliers
for inputs in medical
devices as well as
pharmaceuticals
OSU SIM Portfolio
Buyer
Power
Analyses & Valuation
Barriers To
Entry
Rivalry
• Fierce competition
for next
blockbuster
product
• Centered mostly
on a handful of
large companies
(JNJ, MRK, PFE)
Recommendation
• Typically very low:
• Huge amounts of capital
for R&D
• Incredible amount of
expertise
• Many, costly regulations
Substitutes
• Low threat
• Not many substitutes
for devices such as
Atrial fibrillation
catheters
• New emergence of
genetic drug
companies
22
External Factors –
Demographics
Crisis/Recession Flu
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
Recommendation
• Demographics
– Baby Boomers starting
to retire
– Good opportunities for
all industries within the
Health Care sector
23
External Factors –
Obesity Trends
Crisis/Recession Flu
The Healing Sector
1990
2007
OSU SIM Portfolio
Analyses & Valuation
Recommendation
1998
No Data
20% - 24%
< 10%
25% - 29%
10% - 14%
≥ 30%
15% - 19%
Source: Centers for Disease Control and Prevention
24
External Factors –
Heart Disease
Crisis/Recession Flu
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
Recommendation
Prevalence of Heart
Disease
•
•
Leading cause of death
in U.S.
In 2006, heart disease
cost more than $258
billion, including health
care services,
medications, and lost
productivity
Source: Centers for Disease Control and Prevention
25
External Factors –
Governmental Policies
Crisis/Recession Flu
•
OSU SIM Portfolio
Analyses & Valuation
Recommendation
Stimulus
–
–
–
•
The Healing Sector
Around $24 Billion for investments in Healthcare IT
$3.5 Billion for biomedical research
$6 Billion for preventative programs
FDA
–
–
–
Rigorous Three Phase test for new drugs
Inspects new medical instruments and devices
Increasingly understaffed
26
National Health Expenditures
Crisis/Recession Flu
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
Source: Centers for Disease Control and Prevention. National Center for Health Statistics. Health Data
Interactive. www.cdc.gov/nchs/hdi.htm. Accessed: 2/7/2009
Recommendation
27
Financial Analysis –
Sector Balance Sheet
Crisis/Recession Flu
The Healing Sector
2007
OSU SIM Portfolio
% Chg
2006
% Chg
Analyses & Valuation
2005
% Chg
2004
Recommendation
% Chg
2003
Cash & Equivalents ($ Mil)
Accounts Receivable
Inventories
Other Current Assets
Total Current Assets
Plant & Equipment Gross
Accumulated Depreciation
Plant & Equipment Net
Other Long-Term Assets
Total Long-Term Assets
Total Assets
8,340
5,980
4,474
3,445
22,240
15,428
6,802
8,626
24,562
33,188
62,294
-10%
7%
6%
13%
4%
5%
8%
2%
8%
6%
4%
9,220
5,591
4,239
3,038
21,342
14,740
6,287
8,453
22,821
31,274
59,757
-11%
10%
11%
-4%
-5%
6%
10%
5%
15%
12%
8%
10,340
5,104
3,834
3,150
22,428
13,885
5,705
8,059
19,825
27,884
55,565
12%
2%
-7%
32%
8%
1%
5%
-2%
2%
0%
-1%
9,256
5,028
4,113
2,393
20,790
13,798
5,425
8,241
19,505
27,746
55,927
29%
8%
3%
4%
15%
8%
13%
4%
3%
4%
9%
7,176
4,649
3,985
2,311
18,122
12,832
4,803
7,902
18,883
26,784
51,451
Accounts Payable
Short-Term Debt
Other Current Liabilities
Total Current Liabilities
Long-Term Debt
Deferred Income Taxes
Other Long-Term Liabilities
Total Long-Term Liabilities
Total Liabilities
Minority Interest
Preferred Equity
Common Equity
Total Equity
Total Liab & Equity
4,128
1,990
7,621
13,739
9,812
2,362
4,029
15,617
34,845
198
7
27,254
27,260
62,294
4%
21%
-5%
1%
21%
21%
27%
22%
8%
2%
-38%
0%
0%
4%
3,952
1,639
8,050
13,641
8,108
1,944
3,166
12,847
32,201
195
11
27,360
27,370
59,757
8%
-32%
8%
1%
19%
7%
-26%
3%
8%
3%
-20%
7%
7%
8%
3,662
2,424
7,427
13,512
6,803
1,813
4,296
12,469
29,804
190
14
25,570
25,581
55,565
3%
15%
5%
6%
6%
-12%
-9%
-2%
-6%
-3%
-15%
6%
6%
-1%
3,561
2,106
7,088
12,755
6,416
2,059
4,707
12,731
31,688
195
17
24,040
24,054
55,927
8%
22%
12%
12%
7%
-4%
6%
4%
6%
-37%
-20%
13%
13%
9%
3,312
1,722
6,309
11,342
5,980
2,151
4,459
12,272
29,818
310
21
21,326
21,343
51,451
Source: StockVal®
28
Financial Analysis –
Income Statement
Crisis/Recession Flu
The Healing Sector
2007
% Chg
OSU SIM Portfolio
2006 % Chg
Analyses & Valuation
2005 % Chg
Recommendation
2004 % Chg
2003
Revenues ($ Mil)
Cost of Goods & Services
Gross Profit
S G & A Expense
R&D Expense
EBITDA
Depreciation & Amortization
EBIT
Interest Expense
Pre-Tax Income
Taxes
55,706
33,485
20,086
9,438
3,808
8,286
1,761
6,525
524
6,000
1,599
-1%
4%
5%
5%
0%
4%
6%
4%
9%
3%
-6%
56,120
32,206
19,160
8,956
3,796
7,946
1,661
6,285
482
5,803
1,694
10%
11%
6%
9%
15%
-2%
8%
-4%
38%
-7%
-7%
51,013
29,035
17,993
8,200
3,310
8,103
1,534
6,569
349
6,220
1,823
12%
6%
4%
5%
6%
13%
6%
14%
20%
14%
12%
45,601
27,334
17,329
7,810
3,109
7,195
1,453
5,741
290
5,452
1,631
12%
12%
13%
9%
9%
23%
17%
24%
6%
25%
21%
40,608
24,345
15,374
7,136
2,855
5,863
1,243
4,620
274
4,346
1,345
Net Income Reported ($ Mil)
Net Income Adjusted
EPS Reported
EPS Adjusted
4,398
5,752
1.89
2.48
-5%
6%
1%
12%
4,613
5,450
1.88
2.22
5%
7%
7%
9%
4,405
5,115
1.76
2.04
15%
6%
19%
9%
3,819
4,826
1.48
1.87
19%
14%
18%
13%
3,207
4,238
1.25
1.66
2,317,697
0.72
10.70
-5%
10%
26%
2,451,179
0.66
8.50
-2%
10%
-4%
2,503,725
0.60
8.80
-3%
7%
148%
2,583,411
0.56
3.60
1%
4%
445%
2,564,728
0.54
0.70
Shares Outstanding (Thou)
Dividends Common (Per Shr)
Dividends Preferred ($ Mil)
Source: StockVal®
29
Sector Valuation – 10 Years
Crisis/Recession Flu
Source: StockVal®
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
Recommendation
High
37.6
Low
10.3
Mean
19.7
Current
11.7
High
4.69
Low
1.05
Mean
2.28
Current
1.20
30
Sector Valuation – 10 Years
Crisis/Recession Flu
Source: StockVal®
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
Recommendation
High
22.4
Low
7.6
Mean
13.7
Current
9.1
High
10.5
Low
2.3
Mean
4.6
Current
2.7
31
Sector Valuation – 10 Years
Crisis/Recession Flu
Source: StockVal®
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
Recommendation
High
34.1
Low
8.7
Mean
17.2
Current
9.7
High
28.9
Low
20.6
Mean
21.8
Current
21.8
32
Sector Valuation –
Sector relative to S&P 500
Crisis/Recession Flu
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
Recommendation
HI
1.43
HI
34.1
LO
0.69
LO
8.7
ME
1.10
ME
17.2
CU
0.85
CU
9.7
HI
34.1
HI
34.1
LO
8.7
LO
8.7
ME
17.2
ME
17.2
CU
9.7
CU
9.7
33
Sector Valuation –
Sector relative to S&P 500
Crisis/Recession Flu
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
Recommendation
HI
2.04
HI
2.03
LO
1.09
LO
1.15
ME
1.38
ME
1.37
CU
1.33
CU
1.50
34
RECOMMENDATION
35
Sector Market Cap and
S&P 500 Weighting
Crisis/Recession Flu
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
Recommendation
SIM Weighting
21.5%
36
Recommendations
Crisis/Recession Flu
•
•
•
•
•
•
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
Recommendation
S&P 500 weighting = 15.94%
SIM Weighting = 21.50%
Sector is overweight by 5.56%
Recommended sector weight: 19.00%
Action: reduce weight by 250 basis points
Reasons:
– 21.5% is extremely overweight
– SIM portfolio could experience serious losses if the
sector underperforms the rest of the market
– Changes in weights of other sectors will naturally
tend to increase the weight of Health care
37
QUESTIONS?
38
SUPPLEMENTARY MATERIALS
39
Sector Valuation Industries –
Health Care Equip. & Services
Crisis/Recession Flu
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
S&P IND GRP HEALTH CR EQUIP & SVCS (S3510A) Price 32.22
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
StockVal®
2010
HI
LO
ME
CU
1.2
1.0
Recommendation
2011
1.35
0.69
1.05
0.85
0.8
02-05-1999
02-10-2009
0.6
PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
HI
LO
ME
CU
0.6
0.71
0.35
0.60
0.67
0.4
02-05-1999
02-10-2009
0.2
PRICE / SALES RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
HI
LO
ME
CU
4
2.41
1.19
1.61
1.53
2
02-05-1999
02-10-2009
1
PRICE / EBITDA RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
HI
LO
ME
CU
1.2
1.52
0.54
1.16
1.05
0.8
02-05-1999
02-10-2009
0.4
PRICE / BOOK VALUE RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
40
Sector Valuation Industries –
Pharmaceuticals & Biotechnology
Crisis/Recession Flu
The Healing Sector
OSU SIM Portfolio
Analyses & Valuation
S&P IND GRP PHARMACEUTICALS & BIO (S3520A) Price 32.20
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
StockVal®
2010
HI
LO
ME
CU
1.2
Recommendation
2011
1.49
0.62
1.08
0.82
0.9
02-05-1999
02-10-2009
0.6
PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
HI
LO
ME
CU
4
4.42
2.25
2.95
3.29
3
02-05-1999
02-10-2009
2
PRICE / SALES RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
HI
LO
ME
CU
4
2.91
1.35
1.79
1.82
2
02-05-1999
02-10-2009
1
PRICE / EBITDA RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
HI
LO
ME
CU
3
3.18
1.18
1.56
1.59
2
02-05-1999
02-10-2009
1
PRICE / BOOK VALUE RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
41
Sector Returns–
Industry comparison
42
Major differences from 1930s
Crisis/Recession Flu
The Healing Sector
Unemployment
Bank failures and
Consumer protection
US Government
Response
Global Response
OSU SIM Portfolio
Analyses & Valuation
Recommendation
Great Depression
(1929-1932)
Today
25%
~ 7%
Hundreds of failures
No deposit insurance
~ 25 failures
Increased deposit insurance
Federal Reserve: Decreased
Money supply
Federal Reserve: Massive
liquidity injections, rate cuts
Federal Government:
Small steps, raised taxes
Federal Government:
Massive recapitalization of
financial system
Raised tariffs, destroyed
world trade
Policies to aid banking
systems
Source: 2008 Market Update, Fidelity Management & Research Co. (FMRC) as of 12/31/2008
43