HEALTHCARE

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• HEALTHCARE
• Tom Dent
• Nidhi Dhar
• Prem Patel
• Vishal Saboo
• Jon Wissman
• Shane Yan

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Recommendation

• Overweight
• Currently 5.74 above
• Recommend same

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Sector Overview

• Market cap - 1,506 billion, 14.41 of the SP
  500
• Current SIM Portfolio 20.15
• Four industries
• Health Care Equipment Supplies
• Health Care Providers Services
• Biotechnology
• Pharmaceuticals
• Largest Companies Medtronic, Cardinal Health,
  Amgen, Pfizer.

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Business Analysis

• Industry differences
• Pharmaceutical and Biotechnology
• Growth
• Services and Equipment/Supply
• Maturing
• Overall sector
• Growth/defensive

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Business Analysis

• Demographics
• Government Influence
• Long Product Development Cycle

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Demographics

• Fastest growing segment of population - Baby
  Boomers
• Over - 50 age group will exceed 95 million by
  2010 versus 75 million now
• Increasing need for healthcare
• Higher life spans

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Government Influence

• Regulation
• Patents - High initial barrier to entry
• Government policy directs research funding

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Product Development Life Cycle

• Long Time Period (time to bring product to
  market)
• Expensive - 200 billion in last decade
• High rate of research failure

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Revenues, Earnings, Margins

• Revenue and EPS trends stable-positive growth
• Net Profit margin and ROE stable increase over
  past four years
• More noise in Pre-tax margin
• Net Profit margin, Pre-tax margin, and ROE all
  compare favorably with SP 500

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Cash Flow

• Positive cash flows
• Net increase is WC
• Cash flow sufficient to fund investments
• Cash flow sector vs SP 500

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FS predictors of stock performance Bernstein
research results
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Dupont/ Financial analysis

• Turns, EBIT, Interest burden, Tax burden, and
  Leverage all stable with a small overall
  improvement in product (ROE)
• Trend in ratios (1998 2001)

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Forecasts - Overall

• Growth very attractive
• Near term 1 to 2 over SP 500 growth
• Longer term growth 15 - 16
• Financial analysis conclusion
• slightly mixed possible concerns economic
  cycle, investment/expansion, and pipeline
  concerns for growth (pharmaceuticals)
• overall positive for sector

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Healthcare Services Industry
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Sector Valuation Analysis

• P/E, P/S, P/B, and P/CF all higher than SP 500
• Defensive growth sector
• People have to take medicine when they become
  ill.
• Better performing sector historically

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Sector Valuation Analysis

• Why relatively higher valuations?
• Aging population (baby boomers)
• Increasing living standards in the U.S.
• Increasing usage of healthcare systems
• Global expansion
• Huge RD investment
• Innovative products

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Industry Valuation Analysis

• Biotechnology High Growth
• P/E ranges from 19.9 to 92.0
• Pharmaceuticals Growth
• Big names such as Pfizer, Merck, Eli Lilly
• Healthcare Equipment Supplier Growth
• Healthcare Providers Services Value
• P/E ranges from 15.3 to 34.2

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Technical Analysis

• Upward trend
• Resistance level at 56
• Support level at 45
• Recent Price 46.3 as of 04/26/2002

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Sector Valuation Summary

• Higher valuation than SP 500
• Current valuation level lower than historical
  average
• Be greedy when people are fearful
• Investors concerned with thin pipelines of those
  large pharmaceuticals
• Buying opportunity
• Overweight in the sector for the long term

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Summary

• Positives
• Financial strength
• Non-substitutable
• Barriers to entry (scale issues)
• Growth potential
• Population trends
• Economic uncertainty (defense)
• Valuations

• Negatives
• Historical out performance (reversion to mean)
• Economic recovery not a positive for
  growth/defensive
• Pipeline concerns
• Investment spending
• Price pressures

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Recommendation

• Maintain current OVERWEIGHT
• 5