Mid-Year Sector Review: Healthcare

1. Mid-Year Sector Review:Healthcare By: Jacob Allen; Nick Pascoe; Trevor Boren; Garrett Lachney;Joe Brendel

2. Overview • Companies that cater to the needs of people through pharmaceuticals, hospitals, doctors’ offices, nursing homes, and other health-related facilities • Demand: demographics & advances in technology • Segments • Drug manufacturers, biotechnology, medical supplies/equipment

3. Current State of Sector • Professional Viewpoint: Slightly Bullish • Baby Boomer Population • Life expectancy approaching 80 in the US • Political Viewpoint: Uncertain • Affordable Care Act • Politics in Healthcare

4. Recent Headline News • Bright Horizons & LipoScience IPO expected this week • Brean analyst Jon Aschoff downgraded Celsion shares last Thursday – shares dropped 32% that day (ended with a 13% loss on the day) • Obama’s 2nd inaugural address and healthcare

5. Macroeconomics • Healthcare sector is usually described as defensive • Demand for health services and products are essential and relatively constant across different economic expansions and contractions • Not affected by cyclical forces or monetary policy as much as others • Healthcare is, however, influenced by government regulation

6. Key Drivers • Though the health care sector is very diverse in terms of the industries within it, there are some key drivers that apply to nearly all of them. • Governmental Regulation: - Vast sums of money hinge on the acceptance of federal regulatory institutions. - The patent industry. • Ageing Population: • This driver is very universal in its effects in the industry. • In general, any sharp increase in the population of unhealthy people will result in the healthcare industry seeing more business.

7. Key Drivers • R&D: - R&D easily reaches into the billions on an annual basis. - Inability to innovate and come out with new and successful products, many times is attributed to shortfalls in research and design. • The Economy: - Boils down to employment and government spending. - When the un-employment levels are high, the level of uninsured Americans increases. - When the economy starts to tumble government spending comes under increased scrutiny. Things like government subsidies for R&D, or grants for medical research are all at risk of being downsized.

8. Relevant Valuation Matrices • As with the key drivers, some valuation matrices are more applicable to one industry than another within the healthcare sector. Though for the healthcare sector, there are some specific ratios that must be taken into consideration before actively investing. • P/E and Forward P/E: - Though some industries within this sector can have slightly volatile earnings, the P/E ratio is still important to the more stable and mature companies in the sector. • P/CF: - Many of the companies in the healthcare sector are very large, and have large portfolios of assets. This can lead to P/E ratio not showing a clear enough picture. So the P/CF ratio can give a more accurate picture of the value that a firm can return to shareholders.

9. Relevant Valuation Matrices • PEG ratio: - This ratio is good for companies with high growth prospects, such as startup Pharmaceutical firms. The PEG ratio takes into account the potential for high relative growth, and therefore the comparison of PEG ratios must be between companies with above average growth prospects. • Debt/equity: - Many companies in the sector, such as hospitals, have high amounts of debt. And due to various factors in the healthcare system, they are often left with a fair amount of uncollectible accounts. The ability to meet debt obligations is something that investors must examine thoroughly before taking a position in this sector.

10. Healthcare Sector (XLV)

11. HC – Stock Recommendations • UnitedHealth Group Inc. (UNH) - 10/11/12 • Cardinal Health Inc. (CAH) - 10/16/12 • DaVita (DVA) - 10/18/12 • Johnson & Johnson (JNJ) - 10/23/12 • WellPoint Inc. (WLP) - 10/30/12 • Pfizer Inc. (PFE) - 11/8/12 • Baxter (BAX) - 11/15/12 • Eli Lilly (LLY) - 11/29/12 • Stryker Corporation (SYK) - 11/29/12

12. United Health Group (UNH) • Date Presented: Oct. 11 • Recommendation: No • Vote: N/A • Price Then: $57.66 • Price Now: $55.74

13. United Health Group

14. Cardinal Health Inc. (CAH) • Date Presented: Oct. 16 • Recommendation: Buy • Vote: No • Price Then: $42.05 • Price Now: $44.61

15. Cardinal Health Inc.

16. DaVita (DVA) • Date Presented: Oct. 18 • Recommendation: Buy • Vote: No • Price Then: $109.87 • Price Now: $114.68

17. DaVita

18. Johnson & Johnson (JNJ) • Date Presented: Oct. 18 • Recommendation: No • Vote: No • Price: $71.86 • Price Now: $72.70

19. Johnson & Johnson

20. WellPoint Inc. (WLP) • Date Presented: Oct. 30 • Recommendation: Buy • Vote: Yes • Price Then: $61.01 • Price Now: $63.60 • Earnings released today: • Profits surge, beat estimates

21. WellPoint Inc.

22. Pfizer (PFE) • Date Presented: Nov. 8 • Recommendation: Yes • Vote: No • Price: $24.71 • Price Now: $26.65

23. Pfizer

24. Baxter International (BAX) • Date Presented: Nov. 15 • Recommendation: No • Vote: No • Price: $65.95 • Price Now: $66.95

25. Baxter International

26. Eli Lilly (LLY) • Date Presented: Nov. 29 • Recommendation: No • Vote: N/A • Price Then: $48.58 • Price Now: $53.29

27. Eli Lilly

28. Stryker Corporation (SYK) • Date Presented: Nov. 29 • Recommendation: No • Vote: N/A • Price Then: $54.05 • Price Now: $61.56

29. Stryker Corporation

30. Cyclicality • The Health Care Sector (XLV) is very non-cyclical. • Defensive stock • Low beta: 0.66 • Health is always a top priority • Not affected much during weakened economy

31. Industry Cyclicality • Most of the Health Care sectors are non-cyclical. • The biotechnology industry is the most cyclical. • Due to being heavily tied in with technology

32. Sources • Reuters.com • Finance.Yahoo.com • http://www.rttnews.com/2041816/wellpoint-q4-profit-surges-beats-view-sees-lower-fy13-earnings.aspx?type=corp