Health Care Sector –
Stock Presentation
Kailas Joshi
Daniel Kurth
Agenda
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•
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Sector Review
Johnson & Johnson (JNJ)
Eli Lilly (LLY)
WellPoint (WLP)
Cardinal Health (CAH)
New Recommendations
Q&A
3/3/2009
2
Health Care Sector Review
3/3/2009
3
Healthcare Sector Overview
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
• 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
3/3/2009
4
S&P 500 Sectors – Overview
Sector Review
JNJ
LLY
CAH & WLP
Sector Description
SP-5A S&P 500
Recommendations
# 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
3/3/2009
5
Key External Factors
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
• Positive Demographic Shift
• Increased prevalence of Heart Disease and
Obesity
• Increased Government involvement
3/3/2009
6
As of 1/30/2009
3/3/2009
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Utilities
CAH & WLP
Telecom Services
Materials
LLY
Information
Technology
Industrials
JNJ
Health
Care
Financials
Sector Review
Energy
Consumer Staples
Consumer Discretionary
Sector Weights in SIM Portfolio
Recommendations
Sector Performances in S&P 500
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
Source: 2008 Market Update, Fidelity Management & Research Co. (FMRC) as of 12/31/2008
3/3/2009
8
Recommendations
Crisis/Recession Flu
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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
3/3/2009
9
SIM Portfolio Holdings
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
YTD Return
Return Since
1/1/2008
Cardinal Health (CAH)
(2.83%)
(43.84%)
Eli Lilly (LLY)
(20.59%)
(44.20%)
Johnson & Johnson (JNJ)
(12.18%)
(23.67%)
WellPoint (WLP)
(14.35%)
(60.43%)
Holding
As of 1/31/2008
3/3/2009
10
Proposal
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
• Current Holdings
–
–
–
–
Johnson & Johnson (JNJ) – HOLD
Eli Lilly (LLY) – SELL
Cardinal Health (CAH) – SELL
WellPoint (WLP) – HOLD
• New Holding
– Medtronic (MDT) – BUY
• Resulting Portfolio Weight
– 19.0%
3/3/2009
11
Johnson & Johnson (JNJ)
3/3/2009
12
Overview
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
Market Cap $138 Billion
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Price: $47.92
P/E: 10.95
EPS: 4.57
Div: 1.84 (3.50%)
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Segments:
1. Consumer
2. Medical Devices
3. Pharmaceutical
3/3/2009
13
Valuations – DCF Valuation
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
Terminal Discount Rate:
11.0%
Terminal Value
$218,546
Terminal FCF Growth:
2.5%
NPV of Free Cash Flows
87,297 (53%)
NPV of Terminal Values
76,968 (47%)
Projected Equity Value
164,265
Shares Outstanding
2,758.9
Current Price
$47.92
Implied Equity Value
$59.54
Upside/(Downside) to DCF
24%
3/3/2009
14
Valuations - Multiples
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
Absolute
Valuation
High
Low
Mean
Current
Target
Target E, S, B,
Multiple etc/Share
Target
Price
P/Forward E
35.8
12.4
18.5
13.0
14.5
4.55
$68.25
P/S
6.35
2.47
4.02
2.61
3.5
23.07
$80.75
P/B
9.7
3.5
6.0
3.6
4.7
16.19
$76.09
P/EBITDA
25.6
8.5
13.1
8.8
12.0
6.62
$79.44
P/CF
32.3
10.3
17.3
10.6
14.0
5.498
$76.97
P/E/G ratio
2.7
1.3
1.7
1.7
1.7
34.28
$58.28
23.2
28.1
28.7
28.1
2.03
$57.04
ROE
30.6
Target Price $66.54
3/3/2009
15
Outlook
Sector Review
JNJ
• Risperdal (antipsychotic) and Topamax
(anti-epilepsy) come off
patent
• No major new drugs
until end of 2009
(Golimumab)
• Medical Devices: strong
growth through DePuy
orthopedic joint
replacements
LLY
CAH & WLP
Recommendations
2008
36.28%
25.18%
38.54%
Consumer
Pharmaceutical
Medical Devices and Diagnostics
3/3/2009
16
Action
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
• Solid Performance in 2009
– Good Dividend, AAA Bond Rating
• Currently 7.4% of SIM Portfolio
• Recommendation: HOLD
3/3/2009
17
Eli Lilly (LLY)
3/3/2009
18
Overview
Sector Review
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JNJ
LLY
CAH & WLP
Recommendations
Market Cap: $32.05B
Current Price: $27.75
P/E: N/A
EPS: -1.89
Div: 0.49 (6.90%)
Segments:
– Pharmaceuticals
– Animal Health
3/3/2009
19
Valuations – DCF Valuation
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
Terminal Discount Rate:
11.0%
Terminal Value
$67,417
Terminal FCF Growth:
3.0%
NPV of Free Cash Flows
$25,158 (51%)
NPV of Terminal Values
$23,743 (49%)
Projected Equity Value
$48,901
Shares Outstanding
1,090.8
Current Price
$27.75
Implied Equity Value
$44.83
Upside/(Downside) to DCF
61.5%
3/3/2009
20
Valuations - Multiples
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
Absolute
Valuation
High
Low
Mean
Current
Target
Target E, S, B,
Multiple etc/Share
Target
Price
P/Forward E
42.5
7.30
22.6
8.80
9.00
4.18
$37.62
P/S
11.84
1.63
5.59
1.98
3.00
20.21
$60.63
P/B
24.60
2.40
7.50
2.90
4.00
12.38
$49.52
P/EBITDA
32.40
7.60
17.80
9.20
10.00
5.28
$52.80
P/CF
41.00
6.30
20.00
7.40
8.00
5.04
$40.30
Target Price $42.00
3/3/2009
21
Outlook
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
• Growth Factors
– Acquisition of ImClone should provide
operations and cost synergies
– Current neuroscience drugs are performing
quite well
• Key Concerns
– Growing competitive environment
– Lack of block-buster drug pipeline
3/3/2009
22
Actions
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
• SELL SIM position in LLY by 190 bps
– Strong earnings growth
– Main theme of the portfolio going forward is to
be more diversified across the industries in the
Health Care sector
3/3/2009
23
Cardinal Health (CAH)
&
WellPoint (WLP)
3/3/2009
24
Price Performance (5 years)
Sector Review
JNJ
Cardinal Health (CAH)
3/3/2009
LLY
CAH & WLP
Recommendations
WellPoint (WLP)
25
Valuations – Analyst Opinions
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
Price Target Summary
CAH ($/Share)
WLP ($/Share)
Mean Target
45.59
51.80
Median Target
46.00
51.50
High Target
50.00
61.00
Low Target
37.00
44.00
Number of Analysts
11
10
Current Stock Price
(3/2/2009)
30.92
32.65
Source: www.finance.yahoo.com – as of 2/27/2009
3/3/2009
26
Overview CAH
Sector Review
JNJ
• Healthcare Supply Chain
Services
– Delivers pharmaceutical and medical
devices to pharmacies, hospitals etc
– 4% growth rate
– 1.56% Profit margin
• Clinical Medical Products
– Manufactures technologies and
services that help hospitals prevent
medical errors
– 30% Growth Rate
– 15.96% Profit Margin
LLY
CAH & WLP
2008 Revenue
Recommendations
6.00%
HSCS
CMP
94.00%
2008 Revenue
1.94%
United States
International
98.06%
3/3/2009
27
Valuations – DCF Valuation (CAH)
Sector Review
JNJ
LLY
Current CAH
CAH & WLP
Recommendations
CAH without Clinical & Medical
Products
Shares Outstanding
364.0
Shares Outstanding
364.0
Current Price
$30.92
Current Price
$30.92
Implied Equity Value / Share
$38.43
Implied Equity Value / Share
$36.29
Upside/(Downside) to DCF
24%
Upside/(Downside) to DCF
17%
Terminal Discount Rate: 12.5%
Terminal FCF Growth: 2.5%
3/3/2009
28
Outlook for CAH
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
• Key Growth Drivers:
– Spinoff of Clinical and Medical Supplies from Healthcare
Supply Chain Services
– Captured 1/3 of all distributed pharmaceutical products in
their supply chain
– Strong growth in nuclear pharmacy
• Key Concerns
– “In many ways we see fiscal ’09 as a transitional year for
Cardinal Health, where we put the foundation for future
growth under both segments” –CEO R. Kerry Clark
– CVS and Walgreens accounted for 22% and 19% of the
companies revenue in 2008 (CVS expires on 6/30)
– Lowered earnings outlook due to spending delays by
hospitals
3/3/2009
29
Actions
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
• Eliminate our position in CAH
– Negative outlook for the next 6-12 months
– Restructuring will potentially affect earnings
– Two customers equal 41% of business with one
contract expiring in 2009
– General economic conditions are not conducive
to higher performance in the 6-12 month time
frame
• Maintain position in WLP
3/3/2009
30
Recommendations
3/3/2009
31
Stock Recommendations
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
Medtronic (MDT)
3/3/2009
32
Overview
Sector Review
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JNJ
Current Price: $27.22
Market Cap: 32.99 Billion
Revenue $13.5 Billion
P/E Ratio: 11.69
EPS: 2.53
Main Segments
– Cardiac Rhythm
Management
– Spinal
– Cardiovascular
3/3/2009
LLY
CAH & WLP
2008 Revenue
PhysioControl,
2.43%
Surgical
Technologi
Diabetes, es, 5.77%
7.54%
Cardiac
Rhythm
Disease
Managem
ent,
36.72%
Neuromod
ulation,
9.70%
CardioVasc
ular,
15.77%
Recommendations
Spinal,
22.06%
33
Valuations – Analyst Opinions
Sector Review
3/3/2009
JNJ
LLY
CAH & WLP
Price Target Summary
MDT ($/Share)
Mean Target
45.59
Median Target
46.00
High Target
50.00
Low Target
37.00
Number of Analysts
11
Current Stock Price
(3/2/2009)
27.22
Recommendations
34
Valuations – DCF Valuation
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
MDT
Shares Outstanding
1142.0
Current Price
$27.22
Implied Equity Value / Share
$33.09
Upside/(Downside) to DCF
22%
Terminal Discount Rate: 11.0%
Terminal FCF Growth: 3.0%
3/3/2009
35
Valuations - Multiples
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
Absolute
Valuation
High
Low
Mean
Current
Target
Target E, S, B,
Multiple etc/Share
P/Forward E
55.5
9.7
28.4
10.8
14.00
3.21
$44.94
P/S
14.43
2.33
6.87
2.62
4.00
11.83
$47.32
P/EBITDA
44.5
8.7
22.3
9.0
15.00
3.00
$45.00
Target Price $40.00
3/3/2009
36
Target
Price
Key Growth Drivers
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
• Cardiac Rhythm Management
– EnRythm: first pace maker to include Managed Ventricular
Pacing. Reduces unnecessary pacing
• Spinal
– CD Horizon Legacy Peek: provides stability and reduces stress
on spine. 10% growth compared to 2007
• Cardio-Vascular
– Endeavor: first drug eluting stent approved by FDA since
2004. 30% increase in demand from 2007. Contributed $175
million in revenue
3/3/2009
37
Outlook
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
• Key Factors
– $1.75 Billion in Cash and Short Term Investments
(purchased Ventor Technologies and CoreValve)
– No customer represents over 10% of the companies
sales in 2008, 2007 or 2006
– Strong position in heart, diabetes and spinal segments
• Concerns
– Cutting executive pay 5% and freezing wages for all
employees in May
3/3/2009
38
Comparative Charts
Sector Review
JNJ
LLY
CAH & WLP
Recommendations
1-year
5-year
3/3/2009
39
Summary of Actions
Current Price
(2/27/2009)
Target Price
(12 month)
Action
Current
Weight
Change in
Weight
Resulting
Weight
Holding
Industry
Johnson &
Johnson (JNJ)
Major
Pharmaceuticals
$47.92
$66.54
HOLD
7.4%
N/C
7.4%
Eli Lilly
Major
Pharmaceuticals
$29.38
$42.00
SELL
5.3%
(1.9%)
3.4%
Cardinal Health
Health Care
Supplies
$30.92
$45.94*
SELL
5.2%
(5.2%)
0%
WellPoint
Health Care
Services
$32.65
$51.80*
HOLD
4.2%
N/C
4.2%
Medtronic
Health Care
Equipment
$27.22
$40.00
BUY
0
4.0%
4.0%
21.5%
(2.5%)
19.0%
SIM weighting in Health Care Sector
* Based on Mean Analyst Target Price from www.finance.yahoo.com
3/3/2009
40
Questions?
3/3/2009
41