healthcare sarah hemmelgarn billy wong alex wisler jason wattier
TRANSCRIPT
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HEALTHCARE
Sarah HemmelgarnBilly WongAlex WislerJason Wattier
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Size and Composition
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Sector Weight
S&P 500 Weight SIM Weight +/-
Consumer Discretionary8.97% 7.50% -1.46%
Consumer Staples12.32% 12.36% 0.04%
Energy 12.05% 10.68% -1.37%
Financials13.70% 9.33% -4.37%
Health Care 14.06% 13.58% -0.49%
Industrials9.79% 11.57% 1.78%
Information Technology18.43% 20.19% 1.76%
Materials3.20% 4.12% 0.92%
Telecommunication Services3.39% 3.28% -0.11%
Utilities 4.10% 3.87% -0.23%
Cash
0.00% 3.53% 3.53%
49 basis points underweight.
SIM Weights: Health Care--13.58%
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IndustriesPharmaceuticals is the largest, at 52.97% of the
sector's market value.
IndustryMarket 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%
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TOP HEALTCARE 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
TOP 10 HEALTHCARE COMPANIES BY MARKET CAP
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SIM 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
MARKET CAP AND INDUSTRY OF SIM HEALTHCARE STOCKS
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Economic Factors at a Glance
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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
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Obesity
Prevalence of Obesity* Among U.S. Children and Adolescents
(Aged 2–19 Years)
Survey Periods 1976–1980 1988–1994 1999–2002 2003–2006
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%
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.
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The Aging Population
The baby boomers are reaching old age where much more healthcare will be needed.
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Healthcare Reform and Cost Controls
Obama’s 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.
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COST CONTROL
Uses have exceeded sources—there will likely be pressure/ requirements for healthcare companies to reduce costs.
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Patent Expiration
Drugs representing $63B in 2007 sales will have their patents expire by 2014
Significant because Pharmaceuticals make up the majority of the Healthcare sector
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BUSINESS ANALYSIS
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Component IndustriesIndustry Market Cap ($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)
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Phase of Life Cycle
Biotechnology
Drug Manufacturers -
MajorHealth Care Plans
Medical Appliances
Medical Instruments
• Health Care Sector is:• Defensive• Weighted towards maturity stage
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Business Driver: Demographics
• Aging population -> increase demand• Aging of baby boomers• Increasing life expectancy• Number and % of 50+ age group will rise substantially
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Business Driver: Demographics
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Business Analysis
Barriers to Entry (Pharmaceuticals)
Very high R&D 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
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Business Analysis
Competition and Substitution
Barriers to entry retain industry concentration, especially in pharmaceuticals
Competition and substitution mostly within the industry
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Opportunities and Threats
Opportunities
Very high barrier to entry Inelastic demand Aging population creates
demand
Threats
• R&D 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
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Financial Analysis
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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
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Net Profit Margin
•Health care sector net profit margins greater than S&P 500•Biotechnology, pharmaceutical and health care equipment industries have the highest profit margins in the sector
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Return on Equity
•Health care sector return on equity greater than the S&P 500•Pharmaceutical industry has highest return on equity•Biotechnology industry return on equity growing the quickest in recent years
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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
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Valuation Analysis
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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 S&P500
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Sector – P/Forward E
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Sector – P/Book
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Sector – P/Sales
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Sector – P/CF
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Sector – P/EBITDA
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Summary Look
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
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
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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
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Appendix – Industry Valuations
Drug/Pharm Over/Under % TrendP/Forward E Under -29% NegativeP/B Over 8% NegativeP/S Over 7% LevelP/CF Under -16% Level
P/EBITDA Under -6% Negative
Biotech Over/Under % TrendP/Forward E Under -19% NegativeP/B Over 14% NegativeP/S Over 17% PositiveP/CF Under -9% Positive
P/EBITDA Under -2% Positive
HC Equipment Over/Under % TrendP/Forward E Under -38% NegativeP/B Under -15% NegativeP/S Under 0% NegativeP/CF Under -17% Negative
P/EBITDA Under -14% Negative
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Appendix – Pharm Charts
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Appendix – Biotech Charts
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Appendix – HC Equip Charts