Healthcare

SP-35Michael Mahaney

Tianna Nguyen

Edward Poitras

Matthew Pry

SP-35 Composite

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0%

20%

40%

60%

80%

100%

Cu

mu

lati

ve %

Sector 20.3% 16.0% 11.5% 11.4% 11.3% 10.0% 9.1% 3.6% 3.6% 3.2%

Cumulative 20.3% 36.3% 47.8% 59.2% 70.5% 80.5% 89.6% 93.2% 96.8% 100.0%

FinancialsInformation Technology Health Care Industrials Energy

Consumer Discretionary

Consumer Staples

Telecommunications

ServicesUtilities Materials

• Health Care 3rd largest sector in S&P 500 Comprised of 53 companies

SP-35 Composite

Market Cap P/E (ttm) Ann. Rev. Ann. Net Inc.

179.35B 17.24 53,324.00 11,053.00

175.45B 10.24 48,371.00 11,016.00

107.02B 23.35 22,636.00 4,433.80

82.21B 43.24 22,476.32 1,716.76

79.04B 30.74 9,284.00 2,113.00

74.93B 17.55 20,350.65 4,196.68

65.54B 21.76 14,268.00 2,950.00

63.59B 26.08 15,691.00 2,662.70

SP-35 Returns

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

YT

D R

etu

rn

Sector -2.1% 15.6% 6.1% 16.8% 25.8% 4.3% 5.5% 12.5% 12.2% 23.5%

S&P 500 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4%

FinancialsInformation Technology

Health Care Industrials EnergyConsumer

DiscretionaryConsumer

StaplesTelecommunications Services

Utilities Materials

• Health Care has been outperformed by 6 of the 10 sectors

SP-35 Valuation

• Health Care sector P/E ratios are at 10 year lows

StockVal®S&P HEALTH CARE SECTOR COMP ADJ (SP-35) Price 44.751997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

PRICE / YEAR-FORWARD EARNINGS8

16

24

32 HI 37.5 LO 15.3 ME 21.7 CU 15.8

07-11-199707-19-2007

PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.8

1.0

1.2

1.4 HI 1.53 LO 1.00 ME 1.17 CU 1.00

07-11-199707-19-2007

GROWTH RATE ESTIMATE10

12

14

16 HI 17.98 LO 10.73 ME 15.47 CU 11.09

07-11-199707-19-2007

GROWTH RATE ESTIMATE RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.8

1.0

1.2HI 1.23 LO 0.90 ME 1.02 CU 0.94

07-11-199707-19-2007

Medicare & Medicaid

• Projected Growth of the U.S. Economy and Federal Spending for Major Mandatory Programs

• Medicare and Medicaid spending is to grow at 8% annually until 2017

Gross Domestic Product

Medicare and Medicaid

Social Security

140

120

100

80

60

40

20

0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Population Demographics

• The beginning of the baby boom generation reached the age of 60 in 2005.

Healthcare + Pharmaceutical Costs

http://www.pfizer.com/pfizer/policy/drugcost.jsp

http://www.cms.hhs.gov/NationalHealthExpendData/03_NationalHealthAccountsProjected.asp#TopOfPage

Healthcare Spending

SP-35 Margins

0%

10%

20%

30%

40%

50%

60%

70%

Net Profit Margin Gross Margin

• Margins have been on a downward trajectory over the past 20 years

Risk Factors

• Generic Drugs Generic Drug Initiative – June 12, 2003

Streamline the process for making safe, effective, generic drugs available to consumers

Save consumers an estimated $35 billion over 10 years Drug Price Competition and Patent Term

Restoration Act New drugs have patent term of 20 years Possibility to increase patent term by 5 years

• Pharmaceutical margins are dropping due to fewer blockbuster drugs.

Risk Factors

• Nationalizing Healthcare Immense pressure from public Other nations have achieved success

• Government Regulations Price caps on drugs, medical equipment, supplies

• Lawsuits Possible lawsuits – Merck’s Vioxx fallout

Recommendation

• S&P 5 year RPS growth rate of 10%

• SP-35 5 year RPS growth rate of 13%

• Overweight Healthcare by 3% compared to the S&P 500. Special attention should be

given to choosing stocks with durable profit margins.

• Conclusion: Reduce SP-35 by 2.49%

Growth Rate Estimates

0%

2%

4%

6%

8%

10%

12%

14%

1 2 3 4 5 6 7 8 9 10

Year

Health Care

S&P 500

SP-35 Returns

• 30 year chart shows less optimistic picture

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

S&P HEALTH CARE SECTOR COMP ADJ M-Wtd (SP-35)PRICE 44.75 DATE 07-19-2007PRICE 44.75 DATE 07-19-2007StockVal®

1616

1818

2020

2222

2424

262628283030

3434

3838

4242

4646

50

54

60

The Ohio State UniversityFisher College of Business

Price Change % Diff SP5

1-Day -0.43 -0.88

1-Week -1.60 -1.95

4-Weeks 0.48 -2.18

QTD 1.08 -2.23

YTD 5.68 -3.82

2006 4.70 -8.92

2005 6.08 3.07

2004 0.13 -8.87 FYE Dec 2006 EPS 2.27

First Call Data 2007 2008 2009

Mean Estimate 2.64 2.93 3.26Change +16% +11% +11%

High 2.72 3.15 3.60

Low 2.54 2.69 2.96

Total 20 19 12

# Up 5 4 3

# Down 2 3 2

House Estimate

PE Ratio 16.9 15.3 13.7

Revenues ($Mil) 58,756

Market Value ($Mil) 107,307

Shares Out (Mil) 2,397.7

Volume 60-Day Avg (Th) 13,877

Volume 60-Day Avg ($M) 621.1

Dividend Estimate 0.67

Payout Ratio 25%

Retention Rate 75%

Dividend Yield 1.50%

Data Page # 1

77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

S&P HEALTH CARE SECTOR COMP ADJ M-Wtd (SP-35)PRICE 44.75 DATE 07-19-2007PRICE 44.75 DATE 07-19-2007StockVal®

11

22

33

55

88

1313

2121

3636

59

99

The Ohio State UniversityFisher College of Business

Price Change % Diff SP5

1-Day -0.43 -0.88

1-Week -1.60 -1.95

4-Weeks 0.48 -2.18

QTD 1.08 -2.23

YTD 5.68 -3.82

2006 4.70 -8.92

2005 6.08 3.07

2004 0.13 -8.87 FYE Dec 2006 EPS 2.27

First Call Data 2007 2008 2009

Mean Estimate 2.64 2.93 3.26Change +16% +11% +11%

High 2.72 3.15 3.60

Low 2.54 2.69 2.96

Total 20 19 12

# Up 5 4 3

# Down 2 3 2

House Estimate

PE Ratio 16.9 15.3 13.7

Revenues ($Mil) 58,756

Market Value ($Mil) 107,307

Shares Out (Mil) 2,397.7

Volume 60-Day Avg (Th) 13,877

Volume 60-Day Avg ($M) 621.1

Dividend Estimate 0.67

Payout Ratio 25%

Retention Rate 75%

Dividend Yield 1.50%

Data Page # 1

• 10 year chart shows upward trend

SP-35 Industries

• Pharmaceuticals

• Biotechnology

• Healthcare Facilities

• Medical Equipment

• Medical Supplies

Insurance

• Decrease of individuals covered by insurance

• Number of people currently uninsured Population July 2007 – 302,000,000 18% Uninsured +54,000,000

Insurance

Risk Factor

Risk Factors

• Preventative Medicine More information available to general public Most effective way to treat high dollar diseases is

before they start or in early stages