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HEALTHCARE

HEALTHCARE. Sarah Hemmelgarn Billy Wong Alex Wisler Jason Wattier. Size and Composition. Sector Weight. 49 basis points underweight. Industries. Pharmaceuticals is the largest, at 52.97% of the sector's market value. TOP HEALTCARE COMPANIES BY MARKET CAP.

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HEALTHCARE

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  1. HEALTHCARE Sarah HemmelgarnBilly WongAlex WislerJason Wattier

  2. Size and Composition

  3. Sector Weight 49 basis points underweight.

  4. Industries Pharmaceuticals is the largest, at 52.97%of the sector's market value.

  5. TOP HEALTCARE COMPANIES BY MARKET CAP TOP 10 HEALTHCARE COMPANIES BY MARKET CAP

  6. SIM Stocks MARKET CAP AND INDUSTRY OF SIM HEALTHCARE STOCKS

  7. Economic Factors at a Glance

  8. 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

  9. 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.

  10. The Aging Population The baby boomers are reaching old age where much more healthcare will be needed.

  11. 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.

  12. COST CONTROLUses have exceeded sources—there will likely be pressure/ requirements for healthcare companies to reduce costs.

  13. 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

  14. BUSINESS ANALYSIS

  15. Component Industries *Industries represented in SIM Portfolio (double-check Specialized Health Services / Cardinal Health)

  16. Phase of Life Cycle • Health Care Sector is: • Defensive • Weighted towards maturity stage

  17. Business Driver: Demographics • Aging population -> increase demand • Aging of baby boomers • Increasing life expectancy • Number and % of 50+ age group will rise substantially

  18. Business Driver: Demographics

  19. 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

  20. Business Analysis Competition and Substitution • Barriers to entry retain industry concentration, especially in pharmaceuticals • Competition and substitution mostly within the industry

  21. Opportunities and Threats 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 Opportunities Very high barrier to entry Inelastic demand Aging population creates demand

  22. Financial Analysis

  23. Sector Growth and Margins • EBITDA and Profit margins are stable • Return on Equity averages 22.3% over the past five years

  24. Net Profit Margin • 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

  25. Return on Equity • 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

  26. Cash Flow Per Share • Health care sector cash flow per share has grown steadily since 2000 • Biotechnology industry cash flow per share is the highest

  27. Valuation Analysis

  28. 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

  29. Sector – P/Forward E

  30. Sector – P/Book

  31. Sector – P/Sales

  32. Sector – P/CF

  33. Sector – P/EBITDA

  34. Summary Look

  35. 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

  36. Appendix – Industry Valuations

  37. Appendix – Pharm Charts

  38. Appendix – Biotech Charts

  39. Appendix – HC Equip Charts

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