Transcript HEALTH CARE SECTOR Suyang Yang Huiting Wang AGENDA Sector Overview  Business Analysis  Financial Analysis  Valuation Analysis  Recommendation  Q&A 

HEALTH CARE SECTOR
Suyang Yang
Huiting Wang
AGENDA
Sector Overview
 Business Analysis
 Financial Analysis
 Valuation Analysis
 Recommendation
 Q&A

HEALTH CARE SECTOR

Stocks relates to medical & healthcare goods or
services

Health Care Sector includes:
Hospital management firms
 Health maintenance organizations (HMOs)
 Biotechnology
 Medical products

SECTOR SIZE
Sector
Number of Constituents Adjusted Market Cap. In
$ Mil
Energy
40
1,127,143
Materials
30
309,561
Industrials
59
920,442
Consumer Discretionary
78
830,996
Consumer Staples
41
1,089,057
Health Care
53
1,153,936
Financials
Information Technology
Telecommunications
Services
Utilities
79
76
1,337,608
1,737,657
9
35
281,594
336,174
SECTOR WEIGHT
S&P 500
SIM
Utilities;
3,68%
Telecomm ,
3.51%
Telecomm
3.09%
Materials;
3,39%
Energy;
12,35%
IT; 19.04%
Industrials
; 10,09%
Consumer
Discretion
ary; 9,11%
Financials;
14,66%
Health
Care;
12,65%
Consumer
Staples;
11,94%
Utilities; 3,19%
Materials;
4,52%
Energy;
12,80%
IT, 21.97%
Industrials;
11,97%
Financials;
6,59%
Health
Care;
13,13%
Consumer
Discretionary;
7,51%
Consumer
Staples;
12,23%
SECTOR WEIGHT
Sector
S&P 500 Weight
SIM Weight
Change
Energy
12.35%
12.80%
0.45%
Materials
3.39%
4.52%
1.13%
Industrials
Consumer
Discretionary
10.09%
11.97%
1.88%
9.11%
7.51%
-1.60%
Consumer Staples
11.94%
12.23%
0.29%
Health Care
12.65%
13.13%
0.48%
Financials
Information
Technology
14.66%
6.59%
-8.07%
19.04%
21.97%
2.93%
Telecom Services
3.09%
3.51%
0.42%
Utilities
3.68%
3.19%
-0.49%
HEALTH CARE INDUSTRIES
Biotechnology
Account for 78% of the sector
Health Care- Distribution/Service
Health Care-Equipment
2,97%
12,49%
Health Care-Facility
14,52%
Health Care-Managed Care
51,68%
Health Care-Service
6,87%
1,56%
Health Care-Supplies
Health Care-Technology
6,01%
Life Science Tools
Pharmaceuticals
3,28%
0,39%
0,23%
HEALTH CARE INDUSTRY
Pharmaceutical is the KEY driver of the sector

Represent 51.7% of Health Care Sector & 6.6% of S&P 500
by Mkt. Cap

Industry develops, produces, and markets drugs licensed for
use as medications

Pharmaceutical Sales include:

Prescribed drugs

OTC medications
TOP HEALTH CARE COMPANIES
Company
Ticker
% of S&P500
Industry
Market Cap
(In $ Bil)
Johnson &
Johnson
JNJ
1.79%
Pharmaceutical
163.9
Pfizer
PFE
1.49%
Pharmaceutical
136.7
Abbott
Laboratories
ABT
0.86%
Pharmaceutical
78.7
Merck & Co.
MRK
0.72%
Pharmaceutical
65.9
Amgen
AMGN
0.58%
Biotechnology
53.2
Teva
Pharmaceutical
Industries Ltd.
TEVA
Pharmaceutical
47.1
Schering-Plough
SGP
0.51%
Pharmaceutical
46.4
Medtronic
MDT
0.44%
HealthCareEquipment
40.0
Gilead Sciences
GILD
0.42%
Biotechnology
38.6
SIM HOLDINGS
Company
Ticker
% of Asset
Industry
Market Cap
(In $ Bil)
Cardinal Health
Inc.
CAH
2.05%
HC-Distributor
10.3
CareFusion Corp.
CFN
0.81%
HC-Equipment
5.0
Gilead Sciences
Inc.
GILD
3.12%
Biotechnology
38.6
Johnson &
Johnson Co.
JNJ
3.73%
Pharmaceutical
163.9
Teva
Pharmaceutical
Industries Ltd.
TEVA
3.42%
Pharmaceutical
47.1
JNJ & TEVA are two top holdings of SIM Portfolio
BUSINESS ANALYSIS
Overall, Health Care sector is in Maturity stage of life cycle

Pharmaceutical Industry(51.7%) is in the grey area between Growth
and Maturity

Health Care-Equipment(14.52%) is in Maturity stage

Biotechnology Industry(12.5%) is in Growth stage
5 FORCE
Concentrate on several
large companies: JNJ,
PFE, MRK,ABT (40%)
Low- no buyer
has any
particular
influence on
product or price
Rivalry
Buyer Power
Substitutes
Generic Drugs
Barriers to Enter

High barriers to
enter, due to huge
demand for R&D

Costly Regulations

Patent
Supplier Power
Low- Major supplier is
chemical industry and
have competitive
suppliers
PATENT EXPIRATION & GENERIC DRUGS
20 YR Patent Length, 10 yr avg for FDA approval
 2009-2014, expires @ the rate of 3 drugs/year
 Generic Drugs: cost-saving alternative

5 FORCE
Concentrate on several
large companies: JNJ,
PFE, MRK,ABT (40%)
Low- no buyer
has major
influence on
product or price
Rivalry
Buyer Power
Substitutes
Generic Drugs
Barriers to Enter

High barriers to
enter, due to huge
demand for R&D

Costly Regulations

Patent
Supplier Power
Low- Major supplier is
chemical industry and
have competitive
suppliers
FACTORS INFLUENCES HEALTH CARE SECTOR
Demographic
National
Health
Expenditure
Health Care
Reform
Exchange
Rate
DEMOGRAPHICS & BABY BOOMERS
Demographic trend shows that there is a very big potential market for Health Care
Sector in the near future. Also, Baby boomers are getting older.
NATIONAL HEALTH EXPENDITURE
$ in Mil
4 500 000
4 000 000
3 500 000
3 000 000
2 500 000
2 000 000
1 500 000
1 000 000
500 000
0
2002
2004
2006
2008
2010
2012
2014
Health Expenditure is in an up trend, which indicate future market of
Health Care Sector
2016
EXCHANGE RATE
Euro/USD Ratio Chart
HEALTHCARE REFORM
Period of controversy (UNCERTAINTY)
 Worst-case scenario are priced in
 Sector is over-sold

25,0%
% of S&P 500
20,0%
16.0%-12.7%
15,0%
% of SIM
10,0%
21.0%-13.1%
5,0%
0,0%
окт.08
дек.08
фев.09
мар.09
май.09
июл.09
авг.09
окт.09
дек.09
FINANCIAL ANALYSIS-NPM
Net profit marginsector and industries
SPX: 8.0%
35,0%
HCX: 10.0%
30,0%
DRUGS: 22.0%
25,0%
HCX
20,0%
SPX
DRUGS
15,0%
BIOTK
HCDIS
10,0%
HCEQP
5,0%
0,0%
2004
2005
2006
2007
2008
2009
current
BIOTK: 30% for 3 years
FINANCIAL ANALYSIS-NPM
Net Profit MarginsMajor companies
50,0%
40,0%
30,0%
20,0%
JNJ
10,0%
GILD
0,0%
CAH
2004
2005
2006
2007
-10,0%
-20,0%
-30,0%
-40,0%
-50,0%
2008
2009 current
TEVA
SPX
Due to purchased inprogress research and
development expenses.
This is a unusual expense.
FINANCIAL ANALYSIS-ROE
ROE
30,0%
25,0%
20,0%
HCX
SPX
15,0%
DRUGS
BIOTK
10,0%
HCDIS
HCEQP
5,0%
0,0%
2004
2005
2006
2007
2008
2009
current
HCX:24.1%
SPX: 11.0%
DRUGS: 28.5%
BIOTK: 23.7%
HCDIS: 17.0%
HCEQP: 19.2%
FINANCIAL ANALYSIS-CF
Cash Flow Per Share
90,00%
80,00%
70,00%
Good job: BIOTK
60,00%
HCX
50,00%
DRUGS
BIOTK
40,00%
HCDIS
30,00%
HCEQP
20,00%
10,00%
0,00%
2004
2005
2006
2007
2008
2009
current
Stable: DURGS
FINANCIAL ANALYSIS-EBITDA
EBITDA
60,0%
Current 2009:
50,0%
40,0%
HCX
HCX: 16.9%
SPX
30,0%
DRUGS
BIOTK
20,0%
HCDIS
HCEQP
10,0%
0,0%
2004
2005
2006
2007
2008
2009
current
SPX: 17.4%
FINANCIAL ANALYSIS-Revenue Growth

HCX Revenue is
increasing at
average 9% for the
past 5 years.
VALUATION ANALYSIS
VALUATION ANALYSIS-Sector fP/E
Absolute Price to Earnings Ratio
Price to Earnings Relative to S&P 500
High: 39.7
Low: 10.0
Median: 17.9
Current 11.6
High: 1.6
Low: 0.69
Median: 1.1
Current 0.71
VALUATION ANALYSIS-Industry fP/E
Drugs Price to Earnings Relative to S&P 500
Biotk Price to Earnings Relative to S&P 500
High: 1.1
Low: 0.64
Median: 1.0
Current 0.65
High: 3.2
Low: 0.78
Median: 1.5
Current 0.78
VALUATION ANALYSIS-Industry fP/E
Hcdis Price to Earnings Relative to S&P 500
Hceqp Price to Earnings Relative to S&P 500
High: 1.6
Low: 0.65
Median: 0.99
Current 0.82
High: 1.8
Low: 0.79
Median: 1.3
Current 0.84
VALUATION ANALYSIS-Sector P/S
Absolute Price to Sales Ratio
Price to Sales Relative to S&P 500
High: 4.7
Low: 1.0
Median: 2.0
Current 1.2
High: 2.4
Low: 1.1
Median: 1.3
Current 1.1
VALUATION ANALYSIS-Industry P/S
Drugs Price to Sales Relative to S&P 500
Biotk Price to Sales Relative to S&P 500
High: 3.9
Low: 2.1
Median: 2.5
Current 2.3
High: 10.5
Low: 3.8
Median: 5.5
Current 4.0
VALUATION ANALYSIS-Industry P/S
Hcdis Price to Sales Relative to S&P 500
Hceqp Price to Sales Relative to S&P 500
High: 0.4
Low: 0.1
Median: 0.2
Current 0.1
High: 3.6
Low: 1.8
Median: 2.7
Current 2.3
VALUATION ANALYSIS-Sector P/B
Absolute Price to Book Value Ratio
Price to Book Value Relative to S&P 500
High: 10.1
Low: 2.2
Median: 4.2
Current 2.9
High: 2.5
Low: 1.2
Median: 1.4
Current 1.4
VALUATION ANALYSIS-Industry P/B
Drugs Price to Book Relative to S&P 500
Biotk Price to Book Relative to S&P 500
High: 3.3
Low: 1.2
Median: 1.5
Current 1.4
High: 4.9
Low: 1.2
Median: 1.8
Current 1.5
VALUATION ANALYSIS-Industry P/B
Hcdis Price to Book Relative to S&P 500
Hceqp Price to Book Relative to S&P 500
High: 1.5
Low: 0.5
Median: 0.9
Current 0.9
High: 2.6
Low: 1.2
Median: 1.9
Current 1.3
VALUATION ANALYSIS-Sector P/CF
Absolute Price to Cash Flows Ratio
Price to Cash Flow Relative to S&P 500
High: 163.1
Low: 7.6
Median: 14.4
Current 9.4
High: 9.8
Low: 0.9
Median: 1.3
Current 0.9
VALUATION ANALYSIS-Industry P/CF
Drugs Price to Cash Flow Relative to S&P 500
Biotk Price to Cash Flow Relative to S&P 500
High: 2.0
Low: 0.8
Median: 1.2
Current 0.8
High: 3.8
Low: 1.1
Median: 2.0
Current 1.1
VALUATION ANALYSIS-Industry P/CF
Hcdis Price to Cash Flow Relative to S&P 500
Hceqp Price to Cash Flow Relative to S&P 500
High: 2.0
Low: 0.7
Median: 1.3
Current 0.8
High: 2.0
Low: 1.1
Median: 1.6
Current 1.1
VALUATION ANALYSIS-Sector Summary
Absolute Basis
High
Low
Median
Current
Difference
Under/Over
P/Trailing E
19.6
9.9
17.8
12.0
(5.8)
Under
P/Forward E
18.6
10.0
16.7
11.6
(5.1)
Under
P/B
4.3
2.2
3.8
2.9
(0.9)
Under
P/S
2.0
1.0
1.8
1.2
(0.6)
Under
P/CF
15.5
7.6
13.3
9.4
(3.9)
Under
Relative to SP500
High
Low
Median
Current
Difference
P/Trailing E
1.2
0.7
1.1
0.7
(0.4)
Under
P/Forward E
1.2
0.7
1.1
0.7
(0.4)
Under
P/B
1.6
1.2
1.3
1.4
0.1
Over
P/S
1.6
1.1
1.2
1.1
(0.1)
Under
P/CF
1.4
0.9
1.2
0.9
(0.3)
Under
Under/Over
Recommendations
Current SIM Weight
Current S&P 500 Weight
13.13%
12.65%
• Short Term: Increase 52 basis point
bring the SIM
portfolio 100 basis point overweight relative to S&P 500.
• Long Term: Decrease weight when economy shows definite
signs of improvement due to the defensive nature of Health Care
sector.
Questions?
Thank You!