HealthCare Sector Strategy

1
HealthCare Sector Strategy

• Tami Willis
• Suzie Stiling
• Joe Swartz
• Chris Yugulis

2
Outline

• Sector Overview SIM Holdings
• Business Analysis
• Financial Analysis
• Value Analysis
• Conclusion

3
Recommendation

• Currently bet is 1.44 overweight
• Recommend Maintaining Current Overweight

4
Economic Landscape

• Established by 824 Analysts
• Yield Curve - Normal
• Fed Policy - Expansionary
• Economic Phase - Soft Landing
• Current Yield Curve

5
Health Care Sector Leaders

• Market cap - 1,313 billion, 14.40 of the SP
  500
• Four industries
• Health Care Equipment Supplies 1.92
• Medtronic 61.02 billion
• Health Care Providers Services 1.76
• United Health Group 32.30
  billion
• Biotechnology 1.35
• Amgen 89.91 billion
• Pharmaceuticals 9.55
• Pfizer/Pharmacia 260.0
  billion
• Current SIM Portfolio 16.06 (overweight 1.44)

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SIM Health Care Sector

• Health Care Equipment Supplies
• Medtronic 61.02 billion 1
• Health Care Providers Services
• AmeriSource Bergen 7.39 billion 3
• Cardinal Health 29.08 billion 1
• United Health Group 32.30 billion 4
• Biotechnology
• Amgen 89.91 billion 1
• Pharmaceuticals
• Johnson Johnson 155.2 billion 2
• Rankings by Sales Revenue

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Outline

• Sector Overview SIM Holdings
• Business Analysis
• Financial Analysis
• Value Analysis
• Conclusion

8
Business Analysis

• Cycles
• External Factors
• Industry Environment

9
Business Analysis Cycles

• Phase of Life Cycle Growth
• BioTech High Growth
• Drug, Equipment Supply Growth
• Providers Services - Value
• Sector Growth/ Defensive
• Perform independently of economic cycle
• Steady above average rate of growth

10
Business Analysis External Factors

• Demographics
• Expenditure Trends
• Government Influence
• Product Development Cycle
• Direct to Consumer Advertising

11
Business Analysis External Factors Demographics

• Median age continues to rise
• Average life span continues to lengthen
• The baby boom generation continues to get older
  and approaches retirement
• Baby Boomers represent 23 of the US Population
• By 2010 the Over 50 age group will exceed 95
  million (currently 75 million)
• By 2020 the 65 segment will represent 17
• Increasing need for Healthcare

12
Business Analysis External Factors Demographics
13
Business Analysis External Factors National
Expenditures
1990-2000 Health Expenditures accounted for
13.06 of GDP
14
Business Analysis External Factors Government
Influence

• Regulation
• Generic Drug Initiative June 12, 2003
• Patents
• High initial barrier to entry
• FDA easing generic drug approval
• Government policy
• Policy directs research funding

15
Business Analysis External Factors Product
Development

• Current drug development costs including failures
  estimated at 800 Million
• Research suggests amount doubles every 5 years
• High research failure rate
• Only 15 of new drugs ever reach market
• Long Investment Horizon
• Average 12 years to bring new product to market
• New technology is speeding development
• Blockbusters coming off patent
• New FDA patent regulation streamlining generic
  drug approval

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Business Analysis External Factors Product
Development
New Drug Approvals doubled over last 3
decades Annual RD spending increased 12 times
(adjusted for inflation)
17
Business Analysis External Factors DTC
Advertising

• Example The Purple Pill - Nexium
• DTC advertising of Pharmaceuticals exceeds 3
  billion
• Decreases geographic patterns in prescriptions
• 1 in 5 people say that DTC advertising prompted
  them to call or visit their doctor to discuss
  advertised drugs
• However research concluded DTC increased
  likelihood of new prescription only slightly
• FDA increasing effort to regulate advertisements

18
Business Analysis Industry Environment
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Outline

• Sector Overview SIM Holdings
• Business Analysis
• Financial Analysis
• Value Analysis
• Conclusion

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Financial Analysis
21
Income Statement Analysis
22
Balance Sheet Analysis
23
Healthcare Cash Flow
24
Cash Flow and ROE
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Healthcare Dupont Analysis
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Industry Dupont Analysis
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Outline

• Sector Overview SIM Holdings
• Business Analysis
• Financial Analysis
• Value Analysis
• Conclusion

28
Valuation Analysis

• Three components to return
• Dividends
• 0.85 vs. SP5A
• Earnings Growth
• 1.11 vs. SP5A
• Change in Valuation
• 1.13 vs. SPA

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Valuation Analysis

• Various Price Multiples (P/E, P/S, P/CF, P/B)
• Higher valuation than the market
• Lower than 10yr Means and Peak (Cheap?)

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Valuation Analysis

• Recent Price trends by Industry
• Biotechnology Strong
• Equip Supplies Medium/Strong
• Pharmaceuticals Medium
• Prov Services Medium

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Valuation Analysis

• Momentum
• Current momentum is positive

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Outline

• Sector Overview SIM Holdings
• Business Analysis
• Financial Analysis
• Value Analysis
• Conclusion

37
What sector to choose?

• Heath Care Sector -

• Growth Defensive

Defensive sectors less affected and have a
quicker reversal!!
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Key Decision Factors

• Dividend yield
• Earnings growth
• Change in valuation

39
Cheap
Growth Potential
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Recommendations

• Maintain Current Overweight in the HealthCare
  Sector