healthcare final
TRANSCRIPT
-
7/29/2019 Healthcare Final
1/38
Healthcare Sector Analysis
Prepared by
Ariel ImasRobert Candella
Nanda Win
Student Managed Investment Portfolio ClassProf. P.V. Viswanath
Spring 2002
-
7/29/2019 Healthcare Final
2/38
Objective
To research, evaluate, and present potential equity-investment
opportunities in the U.S. healthcare sector.
-
7/29/2019 Healthcare Final
3/38
ResearchMethodology4-fold approach:
1) Industry analysis
2) Quantitative analysis
3) Corporate analysis
4) Recommendation
-
7/29/2019 Healthcare Final
4/38
1) Industry Analysis
Total universe identified
Elimination criteria applied
Financial ratios vs. industry benchmarks evaluated
Industry analysis performed
-
7/29/2019 Healthcare Final
5/38
Total Universe Identified
U.S. Healthcare stocks isolated using StockVal:724 stocks in population
-
7/29/2019 Healthcare Final
6/38
Elimination Criteria Applied
Stocks remaining after elimination criteria applied:
246 stocks - Total assets > 200M
41 stocksLeverage regression
18 stocks - Price/Free cash flow
-
7/29/2019 Healthcare Final
7/38
Financial Ratio vs. Industry Benchmarks
Evaluated The financial ratios were selected to complement the model inputs
later required for the quantitative analysis.
Financial ratios1) Financial Strength
2) Profitability & Effectiveness
3) Growth
4) Valuation
5 stocks remained after ratios were considered
-
7/29/2019 Healthcare Final
8/38
Financial Ratios
1) Financial Strength Quick Ratio
Measures firms ability to generate free cash flows
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 theshareholders equity
-
7/29/2019 Healthcare Final
9/38
Financial Ratios
2) Profitability & Effectiveness EBITDA Margin
measures profitability while eliminating effects of financing and
accounting methodologies between industries 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 togenerate net income
-
7/29/2019 Healthcare Final
10/38
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
-
7/29/2019 Healthcare Final
11/38
Financial Ratios
4) Valuation Book Value / Price
measures the value of the balance sheet in the market
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 thecompany
Price / Net Work Cap
measures price per unit of net working capital market will pay forcompany
-
7/29/2019 Healthcare Final
12/38
1) Industry Analysis
Top 5 stocks (in order of ranking):
1. Polymedica CorporationMedical Products
2. Gentiva Health Services Inc.Home Healthcare
3. Datascope CorporationMedical Products4. Mentor CorporationMedical Products
5. Invitrogen CorporationBiotech
-
7/29/2019 Healthcare Final
13/38
1) Industry Analysis
Philosophy: If Company A is more undervalued that Company B, butCompany B is in an industry with greater growth potential, CompanyB presents a better investment opportunity.
-
7/29/2019 Healthcare Final
14/38
1) Industry Analysis
Industry view:
1. Biotech: will benefit greatly from genome research, but will notmature until patent suits and R&D investments are realized inanother 4-5 years. Unfavorable.
2. Home Healthcare: benefiting from aging U.S. demographics andlow-cost alternative to hospital care. Aggressive pricing willcontinue to drive current profitability. Favorable.
3. Medical Products & Equipment: benefiting from aggressivepricing and growing world market. Favorable.
-
7/29/2019 Healthcare Final
15/38
1) Industry Analysis
Final 4 stocks (in order of rank):
1. Polymedica CorporationMedical Products & Equipment
2. Gentiva Health Services Inc.Home Healthcare
3. Datascope CorporationMedical Products & Equipment4. Mentor CorporationMedical Products & Equipment
-
7/29/2019 Healthcare Final
16/38
2) Quantitative Analysis
1. Model selected:
Type:
Two-stage Free cash flow to equity discount model
Purpose:
To value the equity in a form with two stages of growthan initial periodof higher growth and subsequent period of stable growth
Structure:
1) Free cash flow to equity2) Weighted average growth rates for high-growth period
3) Discount factor
4) Stable growth period
-
7/29/2019 Healthcare Final
17/38
2) Quantitative Analysis
Model Value vs. Market ValueCompany Polymedica Corp. Datascope Corp. Gentiva Health Services Inc. Mentor Corp.
Ticker PLMD DSCP GTIV MNTR
Model Value $47.55 $57.35 $23.94 $36.08
Market Value $36.50 $32.98 $25.78 $38.25Model vs. Market Differential 30% 74% -7% -6%
Status Undervalued Undervalued Overvalued Overvalued
-
7/29/2019 Healthcare Final
18/38
2) Quantitative Analysis
Polymedica Corporation
-
7/29/2019 Healthcare Final
19/38
2) Quantitative Analysis
Datascope Corporation
-
7/29/2019 Healthcare Final
20/38
2) Quantitative Analysis
Gentiva Health Services Inc.
-
7/29/2019 Healthcare Final
21/38
2) Quantitative Analysis
Mentor Corporation
-
7/29/2019 Healthcare Final
22/38
2) Quantitative Analysis
Subjective variables considerations1. High-growth rate weights:
Historical growth rates
Outside prediction of growth rate
Fundamental prediction of growth rate
2. High-growth rate growth estimates: Growth rate in capital spending
Growth rate in depreciation
Growth rate in revenues
Outside estimates (5-yr growth rate)
3. Stable-growth estimates:
Stable growth rate
Stable growth beta
-
7/29/2019 Healthcare Final
23/38
2) Quantitative Analysis
Subjective variables justifications1. High-growth rate weights:
Fundamental growth rates were more heavily weighted to the extent that themodel value was deemed reasonable. This was because greater historicaland outside weighting significantly inflated the models stock price andconcurrently diminished the significance of the groups fundamental
research.
2. High-growth rate growth estimates:
Parity was maintained between growth rates in capital spending anddepreciation and the growth rates that would be required to promotesignificant revenue growth rates in a high-growth period.
3. 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 averagebetas (the beta that a companys beta will approach in a stable-growthperiod) tend to fall below 1 in the healthcare sector, which significantlyoverstate prices in the FCFE model.
-
7/29/2019 Healthcare Final
24/38
3) Corporate Analysis
Considerations:
Management review
Insider activity
Institutional activity
SWOT analysis
Corporate Overview
-
7/29/2019 Healthcare Final
25/38
Management Review
Polymedica Corp. Datascope Corp. Gentiva Health Services Inc. Mentor Corp.
PLMD DSCP GTIV MNTR
Title CEO CEO CEO CEO
Age 54 73 48 62
Tenure (years) 12 N/A 3 34
Salary $397,460 $1,000,000 $458,654 $390,000
Bonus $1,160,000 $1,175,000 $650,000 $0
Other Compensation $0 $281,305 $7,777 $0
All Other Compensation $6,550 $17,590 $3,758,078 $4,552
Other Compensation $1,564,010 $2,473,895 $4,874,509 $394,552
Net Income $22,734,000 $34,243,000 $20,988,000 $32,078,000
Salary as a % of Net Income 7% 7% 23% 1%
Mean 10% 10% 10% 10%
% from average -29% -25% 141% -87%
Score 2 3 4 1
Exercised Stock Options 37,024 325,000 0 100,000
Exercisable Stock Options 347,881 215,000 727,073 260,500
Unexercised Stock Options 66,542 0 90,000 183,500
Total Stock Options 451,447 540,000 817,073 544,000
% Exercised 8% 60% 0% 18%
Mean 22% 22% 22% 22%
% from average -62% 177% -100% -15%
Score 2 4 1 3
Product 4 12 4 3
Rank 2 3 2 1
Of all stocks, Mentor Corp. ranked #1 Of undervalued stocks, Polymedica ranked #1
-
7/29/2019 Healthcare Final
26/38
Insider Activity Of all stocks, Mentor Corp. exhibited an insider buying trend
Of undervalued stocks, Polymedica Corp. exhibited an insider buying trend
Polymedica Corp. Datascope Corp. Gentiva Health Services Inc. Mentor Corp.
PLMD DSCP GTIV MNTR
Institutional Ownership 95.0% 71.6% 69.9% 82.1%
# of Institutions 283 238 168 285
Current Activity Buying Selling Selling Buying
-
7/29/2019 Healthcare Final
27/38
Institutional Activity
Polymedica Corp. Datascope Corp. Gentiva Health Services Inc. Mentor Corp.
PLMD DSCP GTIV MNTR
# Institutions 113 101 86 133
Total Shares Held 12,287,280 10,508,648 15,802,032 18,868,990
% Shares Owned 102% 71% 61% 81%
3 Mo. Shares Purchased 1,545,967 1,004,944 4,789,582 4,987,289
3 Mo. Shares Sold (1,817,093) (872,439) (5,053,975) (2,447,674)
3 Mo. Net Change (271,126) 132,505 (264,393) 2,539,615
% Change -8% 7% -3% 34%
# Buyers 50 39 53 67# Sellers 55 57 31 59
Total 105 96 84 126
# Net Buyers -5 -18 22 8
Trend Selling Buying Selling Buying
Of all stocks, Mentor Corp. exhibited the most significant positivechange in institutional ownership
Datascope Corp. exhibited the most significant positive change inownership amongst undervalued companies
-
7/29/2019 Healthcare Final
28/38
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 governmentprograms to receive most of their profits.
-
7/29/2019 Healthcare Final
29/38
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 puncturesealing devices shall reap positive rewards for theirCollagen Products / Vascular GraftSegment. Having undergone a big restructuring with in the company, DSCP looks to benefit
over 10 Million annually.
Corporate Overview
-
7/29/2019 Healthcare Final
30/38
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. Their275 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.
-
7/29/2019 Healthcare Final
31/38
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. Recentlydivesting 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.
-
7/29/2019 Healthcare Final
32/38
SWOT AnalysisPolymedica 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 andefficiently
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 aloss
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.
Threats:
With an advance in technology, elimination of consumable testing supplies for glucose monitoring is inevitable. This line consists of amajor portion of Chronic care sales
Reorders by patients are questionable due to customer preference, competitive pricing pressures, customer transitions to extended carefacilities and mortality rate
Competition with in this market is fierce. Price pressures and market share are difficult to achieve
Government controls companies destiny; limited budgeted expenses towards healthcare
-
7/29/2019 Healthcare Final
33/38
SWOT AnalysisDatascope 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 Labs
Weaknesses:
Experienced distribution problems Weak dollar hurts international sales
Involved in too many projects resulting in higher costs
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
Threats:
Foreign Rate Fluctuations can impact earnings
Costs with in company can increase
Lower R&D investment can weigh negatively on the company
Competition is strong, can force profits to dwindle
-
7/29/2019 Healthcare Final
34/38
SWOT AnalysisGentiva 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 organization
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 pressures
Government regulations can hurt earnings
-
7/29/2019 Healthcare Final
35/38
SWOT AnalysisMentor 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 Corporation
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 ofprostate cancer) seeds, and its recent acquisition of South Bay Medical's automated workstation will provide the Company with a strongcompetitive advantage
Dominant catheters and other disposable incontinence products position in the European market
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 andtreatments
Threats:
FDA regulation
Failure to develop existing distribution channels
Government and market cost containment measures
Strong dollar
-
7/29/2019 Healthcare Final
36/38
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 foryears to come.
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 throughcost savings and a recent acquisition leave make current management's ability to grow company questionable.
-
7/29/2019 Healthcare Final
37/38
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 newproduct lines and services
Regulatory concerns marginal:
Emerged from SEC investigation unscathed
Strong market demographics
Market share growth initiatives will be complimented by favorable demographic trends
-
7/29/2019 Healthcare Final
38/38
Recommendation (B)
Datascope Corporation Solid Future
With two bran new products Datacope will greatly increase their revenue stream.
Cost CuttingManagement 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.