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HEALTHCARE

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... there is stronger evidence for inline pricing or at least negative trends. ... in mathematical terms, ... Gilead Sciences Inc. GS. – PowerPoint PPT presentation

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Title: HEALTHCARE


1
HEALTHCARE
Sarah Hemmelgarn Billy Wong Alex Wisler Jason
Wattier
2
Size and Composition
3
Sector Weight
SP 500 Weight SIM Weight /-
Consumer Discretionary 8.97 7.50 -1.46
Consumer Staples 12.32 12.36 0.04
Energy 12.05 10.68 -1.37
Financials 13.70 9.33 -4.37
Health Care 14.06 13.58 -0.49
Industrials 9.79 11.57 1.78
Information Technology 18.43 20.19 1.76
Materials 3.20 4.12 0.92
Telecommunication Services 3.39 3.28 -0.11
Utilities 4.10 3.87 -0.23
Cash 0.00 3.53 3.53
  • 49 basis points underweight.

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

Industry Market Cap (B) Market Cap ()
Drug Manufacturers Major 935.74 52.97
Biotechnology 216.35 12.25
Medical Instruments Supplies 176.76 10.01
Drug Manufacturers - Other 141.46 8.01
Medical Appliances Equipment 106.52 6.03
Health Care Plans 87.77 4.97
Medical Laboratories Research 22.84 1.29
Drug Delivery 15.24 0.86
Specialized Health Services 13.22 0.75
Diagnostic Substances 11.61 0.66
Hospitals 10.71 0.61
Drug Related Products 10.33 0.58
Drugs - Generic 8.42 0.48
Home Health Care 5.02 0.28
Long-Term Care Facilities 4.26 0.24
Medical Practitioners 0.38 0.02
5
TOP HEALTCARE COMPANIES BY MARKET CAP
TOP 10 HEALTHCARE COMPANIES BY MARKET CAP
JOHNSON AND JOHNSON 169.5 B
PFIZER INC 111.2 B
NOVARTIS AG ADS 100.4 B
GLAXOSMITHKLINE PLC 97.0 B
SANOFI-AVENTIS SA 86.4 B
ABBOTT LABORATORIES 69.6 B
ASTRAZZENECA PLC ADS 68.8 B
MERCK 65.3 B
WYETH 63.1 B
AMGEN, INC 61.7 B
6
SIM Stocks
MARKET CAP AND INDUSTRY OF SIM HEALTHCARE STOCKS
COMPANY MARKET CAP INDUSTRY
JOHNSON JOHNSON CO 169.5 B DRUG MANUFACTURERS, MAJOR
GILEAD SCIENCES, INC 43.9 B BIOTECH
ELI LILLY CO 39.9 B DRUG MANUFACTURERS, MAJOR
WELLPOINT 25.5 B HEALTHCARE PLANS
CARDINAL HEALTH INC 11.8 B DRUGS, WHOLESALE
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.
Prevalence of Obesity Among U.S. Children and Adolescents Prevalence of Obesity Among U.S. Children and Adolescents Prevalence of Obesity Among U.S. Children and Adolescents Prevalence of Obesity Among U.S. Children and Adolescents Prevalence of Obesity Among U.S. Children and Adolescents
(Aged 219 Years) (Aged 219 Years) (Aged 219 Years) (Aged 219 Years) (Aged 219 Years)
Survey Periods 19761980 19881994 19992002 20032006
Ages  
2 through 5 5 7.20 10.30 12.40
6 through 11 6.50 11.30 15.80 17.00
12 through 19 5 10.50 16.10 17.60
10
The Aging Population
The baby boomers are reaching old age where much
more healthcare will be needed.
11
Healthcare Reform and Cost Controls
Obamas 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 CONTROL Uses have exceeded sourcesthere
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
Industry Market Cap (B) Market Cap ()
Drug Manufacturers Major 935.74 52.97
Biotechnology 216.35 12.25
Medical Instruments Supplies 176.76 10.01
Drug Manufacturers - Other 141.46 8.01
Medical Appliances Equipment 106.52 6.03
Health Care Plans 87.77 4.97
Medical Laboratories Research 22.84 1.29
Drug Delivery 15.24 0.86
Specialized Health Services 13.22 0.75
Diagnostic Substances 11.61 0.66
Hospitals 10.71 0.61
Drug Related Products 10.33 0.58
Drugs - Generic 8.42 0.48
Home Health Care 5.02 0.28
Long-Term Care Facilities 4.26 0.24
Medical Practitioners 0.38 0.02
Industries represented in SIM Portfolio
(double-check Specialized Health Services /
Cardinal Health)
16
Phase of Life Cycle
Biotechnology Drug Manufacturers - Major Health Care Plans Medical Appliances Medical Instruments
  • Health Care Sector is
  • Defensive
  • Weighted towards maturity stage

17
Business Driver Demographics
  • Aging population -gt 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 RD 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
  • RD 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
2004 2005 2006 2007 2008
Revenue Growth 16 10 13 7 10
EBITDA Margin 17.1 17.0 16.4 16.7 16.4
Profit Margin 10 9.9 9.4 10.2 10.1
Return on Equity 22.4 22.4 21.7 22.1 22.9
  • 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 SP 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 SP 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 SP500

29
Sector P/Forward E
30
Sector P/Book
31
Sector P/Sales
32
Sector P/CF
33
Sector P/EBITDA
34
Summary Look
Health Care - Absolute Health Care - Absolute    
  Over/Under 5 Yr Med Trend
P/Forward E Under -29 Positive
P/B Under -24 Positive
P/S Under -32 Positive
P/CF Under -31 Positive
P/EBITDA Under -34 Positive
Health Care - Relative Health Care - Relative    
  Over/Under 5 Yr Med Trend
P/Forward E Under -31 Negative
P/B Under -1 Negative
P/S Over 3 Level
P/CF Under -17 Level
P/EBITDA Under -9 Negative
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
Drug/Pharm      
  Over/Under Trend
P/Forward E Under -29 Negative
P/B Over 8 Negative
P/S Over 7 Level
P/CF Under -16 Level
P/EBITDA Under -6 Negative
Biotech      
  Over/Under Trend
P/Forward E Under -19 Negative
P/B Over 14 Negative
P/S Over 17 Positive
P/CF Under -9 Positive
P/EBITDA Under -2 Positive
HC Equipment HC Equipment    
  Over/Under Trend
P/Forward E Under -38 Negative
P/B Under -15 Negative
P/S Under 0 Negative
P/CF Under -17 Negative
P/EBITDA Under -14 Negative
37
Appendix Pharm Charts
38
Appendix Biotech Charts
39
Appendix HC Equip Charts
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