Joseph Farfsing
David Garman
Ash Yijun Gu
Scot Helton
Timothy Keith




Recap of sector presentation
Stock recommendation/proposals
Analysis of proposals
Summary


Underweight Healthcare by 390 basis point to
keep in line with S&P 500
Factors to consider in Healthcare:
 Uncertainties related with government regulation,
healthcare reforms and political risk
 Increasing aging populations
Security
Unrealized
Gain/(Loss) as %
of total cost*
Beta
Current
Weight
Proposed Action
weight
Cardinal
Health Inc.
-22.22%
0.89
3.55%
2.97%
Sell 58 bps
Eli Lilly Co.
-27.82%
0.93
2.6%
2.18%
Sell 42 bps
Johnson &
Johnson Co.
-13.34%
0.68
5.15%
4.69%
Sell 46 bps
Medtronic
Inc.
15.66%
0.83
2.4%
-
Liquidate
Wellpoint
-43.78%
1.02
4.04%
3%
Sell 104
bps
Gilead
Science Inc.
-
0.81
-
1%
Buy 100
bps
Total
-
-
17.74%
13.84%
-
Forward absolute P/E
30.0000
25.0000
20.0000
CAH
MDT
15.0000
JNJ
LLY
WLP
10.0000
5.0000
0.0000
04/01/2004
04/01/2005
04/01/2006
04/01/2007
04/01/2008
04/01/2009
Liquidate Current Position
Sell 240 bps


-
Industry: Medical Equipment
Strengths/Opportunities:
Technical prowess
Intellectual property portfolio
Experience with regulators
Sector Market Drivers (demographics)
Threats/Concerns:
- Regulation reform (i.e, intellectual prop.)
- Foreign exposure: 30+ %
- Litigation
- Most recently a news item: Medtronic paid
J&J $270 m to end a dispute over royalties
involving use of stents
- Political risk related to sector

We are the least optimistic about the upside over
a one year horizon for this security: strong
hold for analysts
-History of litigation and general sector risk only
enhance these feelings
Opportunity to take some profit for SIM portfolio
-approx. $48,000 unrealized gain
-Only current SIM stock in sector without loss
In a nut shell: take a break while we are ahead
and reevaluate MDT after things shake out in
terms of risk
Cardinal Health (CAH)
Sell 58 bps



Industry – Health Care Distributors
Cardinal Health is a global manufacturer and distributor of
medical and surgical supplies and technologies dedicated to
making healthcare safer and more productive.
Customers include hospitals, medical centers, retail and mailorder pharmacies, clinics, physicians, pharmacists and other
healthcare providers.
 Extremely
tight margins - around 6% on
average – which could be seriously hurt from
decreased hospital spending and price control
regulation
 Lack
year
of Health Care spending over the next
 Negative
synergies from the spin-off of the
Clinical and Medical Products division
Terminal Discount Rate =
Terminal FCF Growth
=
13.4%
2.6%
Current Price
Implied equity value/share
Upside/(Downside) to DCF
34.23
40.59052
18.582%
Implied equity value / share
is most sensitive to changes
in the Terminal Discount Rate
Percentile Forecast values
0%
$25.73
10%
$33.95
20%
$35.96
30%
$37.57
40%
$39.14
50%
$40.65
60%
$42.19
70%
$44.10
80%
$46.50
90%
$50.17
100%
$83.36
Statistic
Forecast values
Trials
10,000
Mean
$41.52
Median
$40.65
Standard Deviation
$6.65
Coeff. of Variability
0.1603
Minimum
$25.73
Maximum
$83.36
Mean Std. Error
$0.07
SELL 42 bps




Founded in 1876,
Headquartered in Indianapolis, IN
Principle activities are to discover, develop,
manufacturer and market pharmaceuticalbased health care solutions
Specializes in the treatment of diabetes
worldwide




Pharmaceutical—mature
Highly competitive, threats from generic drug
makers
Extensive expenditure in R&D
Lengthy process of laboratory and clinical
testing, data analysis, manufacturing
development and regulatory review




Currently the 10th largest pharmaceutical
company in the world
Invested heavily in biotech, and by far the fifth
largest biotech company in the world
Core competency: combine deep, therapeutic
knowledge in targeted disease areas with the
capability of generating potential biotech
solutions alongside more traditional, chemistrybased work
Fully integrated pharmaceutical network:
sophisticated partners all over the world, have
access to critical resources around the globe,
easier to expand overseas




Costly and highly uncertain drug research
and development—delay drug introduction
Intense competition from multinational
pharmaceutical companies and generic
companies
Subject to increasing government price
controls and other heathcare cost
containment measures
Weaker foreign currency and prolonged
economic downturn may adversely affect
business operation
Sensitivity analysis of Terminal discount rate and FCF growth rate to target price
51
10.00%
11.00%
12.00%
13.00%
14.00%
2%
61.86
54.52
48.67
43.91
39.95
2.50%
64.13
56.16
49.89
44.83
40.67
3.00%
66.74
58.02
51.25
45.86
41.45
3.50%
69.74
60.12
52.77
46.98
42.31
4.00%
73.24
62.52
54.48
48.24
43.25
4.50%
77.38
65.28
56.42
49.64
44.30
Sensitivity analysis of Termianl discount rate and FCF growth rate to P/E value
10.8
10%
11%
12%
13%
14%
2%
12.04
10.70
9.63
8.76
8.03
2.50%
12.90
11.39
10.19
9.22
8.42
3.00%
13.89
12.16
10.81
9.73
8.84
3.50%
15.04
13.03
11.50
10.29
9.31
4.00%
16.37
14.03
12.28
10.91
9.82
4.50%
17.94
15.18
13.16
11.61
10.39
Absolute
Valuation
High
Low
Mean
Current Target
Multiple
Target E, S, Target
B etc/share Price
Forward
P/E
25.4
7.1
16.6
8.3
14.7
4.15
61
P/B
8.5
2.8
5.4
5.1
5.4
9
48.6
P/S
6.6
1.6
4
1.9
3.4
16.94
57.6
P/CF
24.1
5.9
14.8
6.5
12.5
4.5
56.25
Current Price
34.34
Average Multiple Price
55.86
DCF Price
51.25


Prasugrel (co-developed by Daiichi Sankyo
Company, Limited and Eli Lilly) reduced the
risk of multiple types of heart attacks in
phase III TRITON-TIMI 38 study
Eli Lilly will launch two global trials to
advance second Alzherimer’s disease
treatment candidate into late-stage testing both phase iii pivotal trials begin enrollment
in may 2009; reinforces Lilly's commitment to
alzheimer's disease and biotech product
research
Johnson & Johnson (JNJ)
Sell 46 bps

Market Leader in Pharmaceuticals and Medical
Devices and Diagnostics

Strong Presence in Consumer Health Care
products with brands such as Band-AID, Aveeno,
Listerine, and Neutrogena

Consistent Earnings, Strong ROE, Modestly
Leveraged, Recent Dividend Increase to 3.5%
Div. Yield

Consumer Health Care

Pharmaceuticals

Medical Devices & Diagnostics
◦ OTC availability of ZYRTEC
◦ Strong Growth in Baby Care & Skin Care products
◦ Strong International Sales
◦ Strong Sales of Drugs REMICADE, CONCERTA, and TOPAMAX
◦ Strong Pipeline of New Drugs with 7 to 10 to complete filings
for FDA approval in 2009 and 2010.
◦ European Commission Approval of STELARA and PREZISTA
During 1st Quarter
◦ Number 1 position in Ophthalmic Lens Manufacturing
◦ Growth Rate of 6.4% from 2007 to 2008

Generic competition for RISPERDAL resulted
in 38% decrease in sales for the drug
 Negative
Quarter
currency impact of 12.6% for First
 Prolonged
unemployment may lead to lower
than expected spending on health care
 Potential
negative health care reform
Forward P/E
Price to Book
Price to Sales
Price to Cash Flow
Sell 104 bps
 WellPoint
Inc., was formed in 2004 with the
merger between WellPoint Health Networks
Inc. and Anthem Inc.
 Leading provider of Health benefits plans by
enrollment with 35 million members.
 Independent licensee of Blue Cross and Blue
Shield plans in 14 states with exclusive rights.
 Diverse product offerings including PPO’s,
HMO’s, CDHP’s, PBM, and many self-funded
individual plans.




Highly competitive; Price competition
contracts profit margins
Over 95% of revenue is derived from
premiums
Barriers to entry are high from heavy
regulation and medium concentration with
the top four players contributing about 44%
of revenues
Large exposure to the U.S.




High customer retention rates allowing for
high growth potential contingent on rising
employment levels.
Strong brand name through the Blue Cross
Blue Shield.
Cost controls, this QTR reduced MCR from
85.%1 to 81.6% YoY. Exiting high cost
Medicaid operations in Ohio and
Connecticut
Acquisitions resulting in larger more diverse
revenue streams. Acquired DeCare Dental
adding 4 million new members.




Consumer trends to higher deductible lower
premium plans (CDHP’s). Up 14% in Q1.
Rising unemployment contributing to loss
of enrollment. 1st QTR enrollment down
2.3% YoY. Expect a drop to 33.9 million
members, or 3% YoY, by end of the 2009.
Investment losses. Reduced EPS for 1st QTR
2009 by $.46. Expect total year to be $.45
per share.
High SG&A expenses increased 90 bp YoY
to 15.5%.


Cost savings from
IT initiatives and
pay for
performance
standards.
Being able to tap
into the market of
the over 46 million
Americans who are
uninsured


Premium and
deductible
limitations
deteriorating profit
margins.
Mandatory coverage
imposing adverse
selection on the
industry
Growth RateSensitivity
Discount Rate sensitivity
$100.00
$90.00
$90.00
$80.00
$80.00
$70.00
$70.00
$60.00
$60.00
$50.00
$50.00
$40.00
$40.00
$30.00
$30.00
$20.00
$20.00
$10.00
$10.00
$0.00
0.0%
5.0%
10.0%
15.0%
20.0%
Terminal Discount Rate
25.0%
$0.00
0.00%
2.00%
4.00%
6.00%
Terminal Growth Rate
8.00%
Buy 100 bps
Respiratory
HEALTH CARE - BIOTECHNOLOGY
.
.
Gilead’s primary areas of focus
include HIV/AIDS, liver disease
and serious cardiovascular and
respiratory conditions.
Cardiovascular
Liver Disease
Gilead discovers, develops
and commercializes
therapeutics that advance
patient care.
HIV/AIDS
DCF Valuation
Ticker: GILD
Health Care
Year
Terminal Discount Rate =
Terminal FCF Growth =
2009E
2010E
2011E
2012E
2013E
13.8%
2.8%
Forecast
2014E
2015E
2016E
2017E
2018E
2019E
12,832
14,886
17,119
19,686
22,442
25,584
18.00% 16.00% 15.00% 15.00% 14.00% 14.00%
29,166
14.00%
Revenue
% Growth
6,509
7,810
20.00%
9,216
18.00%
10,875
18.00%
Operating Income
Operating Margin
3,332
51.20%
3,999
51.20%
4,719
51.20%
5,546
51.00%
6,519
50.80%
7,532
50.60%
8,628
50.40%
9,843
11,221
12,792
50.00% 50.00% 50.00%
Interest - net
Interest % of Sales
(137)
-2.10%
(164)
-2.10%
(194)
-2.10%
(190)
-1.75%
(190)
-1.48%
(190)
-1.28%
(190)
-1.11%
(190)
-0.97%
(190)
-0.85%
(190)
-0.74%
(190)
-0.65%
Taxes
Tax Rate
Minority Interest
798
23.0%
9
1,041
25.0%
9
1,228
25.0%
9
1,434
25.0%
9
1,677
25.0%
9
1,931
25.0%
9
2,204
25.0%
9
2,508
25.0%
9
2,853
25.0%
9
3,246
25.0%
9
3,693
25.0%
9
3,062
17%
3,624
18%
4,311
19%
5,040
17%
5,800
15%
6,622
14%
7,533
14%
8,567
14%
9,745
14%
11,088
14%
200
3.07%
(378)
-5.81%
100
1.54%
234
3.00%
(346)
-4.42%
115
1.47%
258
2.80%
(373)
-4.05%
125
2.00%
304
2.80%
(326)
-3.00%
217
2.00%
353
2.75%
(385)
-3.00%
257
2.00%
409
2.75%
(595)
-4.00%
298
2.00%
428
2.50%
(685)
-4.00%
342
2.00%
394
2.00%
(787)
-4.00%
394
2.00%
449
2.00%
(898)
-4.00%
449
2.00%
512
2.00%
(1,023)
-4.00%
512
2.00%
583
2.00%
(1,167)
-4.00%
583
2.00%
2,333
2,836
22%
3,384
19%
4,071
20%
4,752
17%
5,316
12%
6,023
13%
6,746
12%
7,669
14%
8,722
14%
9,922
14%
Net Income
% Growth
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
2,611
Free Cash Flow
YOY growth
Terminal Value
NPV of free cash flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
92,723
27,164
25,455
52,618
4.43%
939.6
$ 42.33
$ 56.00
32.29%
52%
48%
Terminal
Value
14,583
50.00%
Terminal
P/E
EV/EBITDA
Free Cash Yield
92,723.0
8.4
6.05
10.70%
(Normal Distribution)
Sensitivity Analysis
Terminal Discount Rate
Terminal FCF Growth
=
=
Current Price
Implied equity value/share
Upside/(Downside) to DCF
Terminal Discount Rate
Terminal FCF Growth
Simulation Parameters
Mean
Std Dev
12.50%
1.50%
2.50%
0.30%
13.8%
2.8%
$ 42.33
$ 56.00
32.29%
Statistic
Trials
Mean
Median
Standard Deviation
Variance
Coeff. of Variability
Minimum
Maximum
Forecast values
10,000
$66.16
$64.08
$13.25
$175.61
0.2003
$34.42
$166.89
Percentile Forecast values
0%
$34.42
10%
$51.50
20%
$55.35
30%
$58.31
40%
$61.18
50%
$64.08
60%
$67.20
70%
$70.91
80%
$75.52
90%
$83.11
100%
$166.89

Buy:
Gilead Science—100 bps

Sell:
Cardinal Health—58 bps
Eli Lilly— 42 bps
Johnson & Johnson— 46 bps
Medtronic— 240 bps
Wellpoint— 104 bps
QUESTIONES???