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Healthcare Sector Analysis


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Title: Healthcare Sector Analysis

Healthcare Sector Analysis
Prepared by Ariel Imas Robert Candella Nanda
Win Student Managed Investment Portfolio
Class Prof. P.V. Viswanath Spring 2002
  • To research, evaluate, and present potential
    equity-investment opportunities in the U.S.
    healthcare sector.

Research Methodology
  • 4-fold approach
  • 1) Industry analysis
  • 2) Quantitative analysis
  • 3) Corporate analysis
  • 4) Recommendation

1) Industry Analysis
  • Total universe identified
  • Elimination criteria applied
  • Financial ratios vs. industry benchmarks
  • Industry analysis performed

Total Universe Identified
  • U.S. Healthcare stocks isolated using StockVal
  • 724 stocks in population

Elimination Criteria Applied
  • Stocks remaining after elimination criteria
  • 246 stocks - Total assets gt 200M
  • 41 stocks Leverage regression
  • 18 stocks - Price/Free cash flow

Financial Ratio vs. Industry Benchmarks Evaluated
  • The financial ratios were selected to complement
    the model inputs later required for the
    quantitative analysis.
  • Financial ratios
  • Financial Strength
  • Profitability Effectiveness
  • Growth
  • Valuation
  • 5 stocks remained after ratios were considered

Financial Ratios
  • Financial Strength
  • Quick Ratio
  • Measures firms ability to generate free cash
  • LT Debt / Common Equity
  • Measures effective use of long-term debt with
    respect to changes in the shareholders equity
  • Total Debt / Equity
  • Measures effective use of total debt with respect
    to changes in the shareholders equity

Financial Ratios
  • 2) Profitability Effectiveness
  • EBITDA Margin
  • measures profitability while eliminating effects
    of financing and accounting methodologies between
  • Return on Equity
  • measures effective use of shareholders equity to
    generate net income
  • Return on Capital
  • measures effective use of capital
  • Net Income per Employee
  • measures managements ability to leverage their
    human resources to generate net income

Financial Ratios
  • 3) Growth
  • Revenue Growth LFY
  • measures firms ability to increase revenues
  • EPS Growth LFY
  • measures firms ability to generate income (less
    dividends) per unit of stock

Financial Ratios
  • 4) Valuation
  • Book Value / Price
  • measures the value of the balance sheet in the
  • Price / Sales
  • measures the price per unit of sales the market
    is willing to pay for the company
  • Price / Free cash flow per share
  • measures price per unit of free cash the market
    will pay for the company
  • Price / Net Work Cap
  • measures price per unit of net working capital
    market will pay for company

1) Industry Analysis
  • Top 5 stocks (in order of ranking)
  • Polymedica Corporation Medical Products
  • Gentiva Health Services Inc. Home Healthcare
  • Datascope Corporation Medical Products
  • Mentor Corporation Medical Products
  • Invitrogen Corporation Biotech

1) Industry Analysis
  • Philosophy If Company A is more undervalued that
    Company B, but Company B is in an industry with
    greater growth potential, Company B presents a
    better investment opportunity.

1) Industry Analysis
  • Industry view
  • Biotech will benefit greatly from genome
    research, but will not mature until patent suits
    and RD investments are realized in another 4-5
    years. Unfavorable.
  • Home Healthcare benefiting from aging U.S.
    demographics and low-cost alternative to
    hospital care. Aggressive pricing will continue
    to drive current profitability. Favorable.
  • Medical Products Equipment benefiting from
    aggressive pricing and growing world market.

1) Industry Analysis
  • Final 4 stocks (in order of rank)
  • Polymedica Corporation Medical Products
  • Gentiva Health Services Inc. Home Healthcare
  • Datascope Corporation Medical Products
  • Mentor Corporation Medical Products Equipment

2) Quantitative Analysis
  • Model selected
  • Type
  • Two-stage Free cash flow to equity discount
  • Purpose
  • To value the equity in a form with two stages of
    growthan initial period of higher growth and
    subsequent period of stable growth
  • Structure
  • 1) Free cash flow to equity
  • 2) Weighted average growth rates for
    high-growth period
  • 3) Discount factor
  • 4) Stable growth period

2) Quantitative Analysis
  • Model Value vs. Market Value

2) Quantitative Analysis
  • Polymedica Corporation

2) Quantitative Analysis
  • Datascope Corporation

2) Quantitative Analysis
  • Gentiva Health Services Inc.

2) Quantitative Analysis
  • Mentor Corporation

2) Quantitative Analysis
  • Subjective variables considerations
  • High-growth rate weights
  • Historical growth rates
  • Outside prediction of growth rate
  • Fundamental prediction of growth rate
  • High-growth rate growth estimates
  • Growth rate in capital spending
  • Growth rate in depreciation
  • Growth rate in revenues
  • Outside estimates (5-yr growth rate)
  • Stable-growth estimates
  • Stable growth rate
  • Stable growth beta

2) Quantitative Analysis
  • Subjective variables justifications
  • High-growth rate weights
  • Fundamental growth rates were more heavily
    weighted to the extent that the model value was
    deemed reasonable. This was because greater
    historical and outside weighting
    significantly inflated the models stock price
    and concurrently diminished the significance of
    the groups fundamental research.
  • High-growth rate growth estimates
  • Parity was maintained between growth rates in
    capital spending and depreciation and the growth
    rates that would be required to promote
    significant revenue growth rates in a high-growth
  • Stable-growth estimates
  • Stable growth rates were kept within reasonable
    economic limits.
  • Current, high-growth betas were applied in the
    stable-growth period to encourage conservative
    model values. This is because industry average
    betas (the beta that a companys beta will
    approach in a stable-growth period) tend to fall
    below 1 in the healthcare sector, which
    significantly overstate prices in the FCFE model.

3) Corporate Analysis
  • Considerations
  • Management review
  • Insider activity
  • Institutional activity
  • SWOT analysis
  • Corporate Overview

Management Review
  • Of all stocks, Mentor Corp. ranked 1
  • Of undervalued stocks, Polymedica ranked 1

Insider Activity
  • Of all stocks, Mentor Corp. exhibited an insider
    buying trend
  • Of undervalued stocks, Polymedica Corp. exhibited
    an insider buying trend

Institutional Activity
  • Of all stocks, Mentor Corp. exhibited the most
    significant positive change in institutional
  • Datascope Corp. exhibited the most significant
    positive change in ownership amongst undervalued

Corporate Overview
  • Polymedica Corporation
  • With formidable growth for years to come,
    Polymedica Corp offers direct-to-customer relief
    medical products and equipment to patients with
    diabetic, respiratory, urology, urinary tract,
    and menopause problems. Their core business
    consists of diabetic and respiratory products,
    both of which have shown significant growth.
    Currently, only consuming 8 of the diabetic
    market, Polymedica has great potential to gain
    market share and achieve even more growth.
    Favored by todays demographics, Polymedica Corp
    relies on government programs to receive most of
    their profits.

Corporate Overview
  • Datascope Corporation
  • With over 6 long established product lines
    consisting of products for clinical health care
    markets in interventional cardiology, critical
    care and cardiovascular and vascular surgery,
    this company is here to stay for years to come.
    2 new products shall propel growth rates even
    higher. Their brand new launch of top-of-the-line
    next generation intra-aortic balloon sets a new
    standard with the Fidelity 8 Fr. This product
    will propel their Cardiac Assist unit to levels
    of great proportions. In the pipeline, upgraded
    VasoSeal (R) arterial puncture sealing devices
    shall reap positive rewards for their Collagen
    Products / Vascular Graft Segment. Having
    undergone a big restructuring with in the
    company, DSCP looks to benefit over 10 Million

Corporate Overview
  • Gentiva Health Services
  • With a positive earnings surprise of 6 cents or
    33 in the fourth quarter, and a positive
    earnings surprise for the past four quarters,
    GTIV is doing something right. Currently, this
    company provides specialty pharmaceutical
    services through 40 pharmacies across U.S.A.,
    along with specialty home health care services.
    With their sale of the Specialty Pharmaceutical
    assets to Accredo, GTIV is focusing on their Home
    Health Care Services. Currently, GTIV holds the
    number one spot in Home Care with a 2-3 market
    share. Their 275 locations enable delivery of
    wide range of services though their nursing and
    care centers. GTIV is actively pursuing
    relationships with managed care organizations.
    Cigna Health Care represents the largest managed
    care organization in which they have direct
    business with in 2001 Cigna represented 19 of
    revenues for GTIV. Recently, both Cigna and GTIV
    renewed their contracts for the seventh
    consecutive time.

Corporate Overview
  • Mentor Corporation
  • Mentor Corporation develops, manufactures, and
    markets a broad range of products for the medical
    specialties of plastic, reconstructive, general
    surgery, and urology. The Company's products
    include a line of implants, incontinence
    products, catheters, impotence products, and
    cancer diagnosis and treatment products. Mentor
    markets its products in the United States and in
    more than 60 companies. Mentor continues to post
    consistent revenue growth earning it the
    distinction of being one of Forbes 200 Best Small
    Companies. Recently divesting its ophthalmology
    business, Mentor focus now is on its core
    businesses--urology and cosmetic surgery markets.
    The urology segment of its core business
    addresses a large underserved population with
    devices for the management and treatment of
    urologic disorders common in the aging
    population. The cosmetic surgery segment, one of
    fastest growing fields in medical practice today,
    experiences annual growth rate of 10-12 percent.
    This well managed company will most definitely
    translate these market opportunities into
    significant earnings growth.

SWOT Analysis
  • Polymedica Corporation
  • Strengths
  • Have a good stranglehold of the Diabetic market
  • Direct mail delivery along with sophisticated
    software and advanced order fulfillment system
    provides products and support quickly and
  • Building brand name and loyalty with their
    customers due to customers recurring orders
  • Headed in the right direction with marketing to
    the right customers
  • Weaknesses
  • A change in Medicare and governmental policies
    will severely alter PLMDs revenues
  • Revenues depend on recurring orders from
    customers if customers do not place any extra
    orders other than their first, PLMD incurs a loss
  • Low-medium barriers of entry
  • Opportunities
  • With an only 8 market share in Diabetic products
    and supplies, there is plenty of room to achieve
    greater success
  • Once business is completely established, PLMD can
    expand internationally
  • Can increase revenue growth by selling other
    products to existing patients in database
  • Increase relations with merchandisers to generate
    extra growth.

SWOT Analysis
  • Datascope Corporation
  • Strengths
  • Many lines of products that make money
  • Pioneer in development of Cardiac Assist products
  • Restructuring will save over 10 M year over year
  • Newly implemented direct sales strategy prove to
    be effective
  • Experiencing great growth in Patient Monitoring
  • Weaknesses
  • Experienced distribution problems
  • Weak dollar hurts international sales
  • Involved in too many projects resulting in higher
  • Opportunities
  • Potential to gain on the Inter Vascular market of
    130 M in U.S.
  • New line of Fidelity 8 Fr. Can significantly
    increase growth
  • VasoSeal new pipelines can significantly
    increase growth
  • Expand to Asian and other European markets

SWOT Analysis
  • Gentiva Health Services
  • Strengths
  • Home Care services prove to be effective and
    strong with 275 locations of deliveries of wide
    range of services
  • New trademarks are developing, making GTIV a
    known source
  • More focus on Home Care services with the sale of
    Specialty Pharmaceuticals
  • Weaknesses
  • Due to the Budgeted Balance of 1997, there is a
    15 reduction in home health care payout limit
  • Depended on Government regulations
  • Opportunities
  • Actively pursuing relationships with managed care
  • With more focus paid on Home Care services GTIV
    can effectively distribute their products through
    nursing and care centers
  • Can gain market share through brand name and
    various projects
  • Threats
  • Outside competition can hurt earnings with price
  • Government regulations can hurt earnings

SWOT Analysis
  • Mentor Corporation
  • Strengths
  • 25-year track record in growing world breast
    augmentation market
  • Competes primarily with one other company in the
    domestic breast implant market, McGhan Medical
  • Competes with only one other company in the
    inflatable penile implant market, American
    Medical Systems, Inc
  • The Company believes that it has second largest
    market share for both Iodine and Palladium
    (brachytherapy seeds for the treatment of
    prostate cancer) seeds, and its recent
    acquisition of South Bay Medical's automated
    workstation will provide the Company with a
    strong competitive advantage
  • Dominant catheters and other disposable
    incontinence products position in the European
  • Weaknesses
  • Limited global reach
  • Recently emerged from FDA consent decree
  • 1,622 employees - 382 in sales and marketing
  • Opportunities
  • Innovative ultrasound liposuction technique under
    FDA review
  • Clear exit strategyto be acquired
  • Viagra introduction and concurrent advertising
    campaign generated an unprecedented amount of
    interest in impotence causes and treatments

SWOT Overview
  • Polymedica Corporation
  • Potential for former venture capital fund manager
    CEO to further capitalize on diabetic and Senior
    demographic trends outweigh price pressures and
    regulatory concerns.
  • Datascope Corporation
  • Innovative, but aging management, recent
    restructuring enables company to have productive
    sales--no long-term debt and significant foreign
    currency exposure--make companys growth
    potential questionable but reasonable. With two
    bran new products and international exposure
    company can see formidable growth for years to
  • Gentiva Health Services
  • Company dominates Home Care and will benefit from
    demographic trends and growth in industry, but
    insider selling at 24, stock at 52-week high (as
    of April 22nd) confirms that stock is overvalued.
  • Mentor Corporation
  • Company will benefit from favorable demographic
    changes and growth trends in core businesses, but
    34-year CEO tenure, recent emergence from FDA
    consent decree, and significant earnings
    increases realized through cost savings and a
    recent acquisition leave make current
    management's ability to grow company

4) Recommendation (A)
  • Polymedica Corporation
  • Access to capital
  • CEO former venture capital fund manager
  • Solid technology investments
  • Co. leverages database of over 5 of all diabetes
    patients in U.S., free shipping, reoccurring
    order processing and automatic billing to retain
    customers and develop new product lines and
  • Regulatory concerns marginal
  • Emerged from SEC investigation unscathed
  • Strong market demographics
  • Market share growth initiatives will be
    complimented by favorable demographic trends

Recommendation (B)
  • Datascope Corporation
  • Solid Future
  • With two bran new products Datacope
    will greatly increase their revenue stream.
  • Cost Cutting
  • Management is doing the right thing in
    curbing costs during recessionary times.
  • Strong Market Demographics
  • Just like Polymedica Corp, Datascope
    will accrue greater sales as the baby boom
    population ages.
  • Good take-over candidate with only a 400 M
    market capital, while penetrating the
    international markets.