`

Yajing WangAndrew WeinerChang XuChunwei Xu

`

Agenda

• Overview• Business Analysis• Financial Analysis• Economic Analysis• Valuation Analysis• Risk Analysis• Recommendation

`

Healthcare Sector Weight

Consumer Discretionary

11%Consumer

Staples11%

Energy11%

Financials15%

Health Care11%

Industrials11%

Information Technology

20%

Materials3%

Telecommunication3%

Utilities4%

S&P 500 Weight

Consumer Discretionary

10% Consumer Staples

11%

Energy11%

Financials14%Health

Care14%

Industrials8%

Information Technology

23%

Materials4%

Telecom1%

Utilities4% SIM Weight

`

Sector Performance

P/E Trailing 12.8

P/E Forward 12.4

Dividend Yield 2.1%

EPS 5-Year Historical Growth Rate 9%

Historic One Year Growth Revenue Rate 8%

Estimated Revenue Growth Rate for 2013 4%

Price to Book Ratio 2.7

Price to Cash Flow 9.4

Price to Sales 1.26

Beta .70

Return on Equity (Margin) 21.5%

Recently, healthcare sector stocks have been paying large dividends and acting relatively defensive based on what the sector represents.

`

Top Players

$178.7 billion $172.6 billion $151.5 billion

$119.4 billion $116.6 billion $102.4 billion

SIM holdings: Gilead Sciences, Inc., Pfizer, Wellpoint Inc., and TevaPharmaceutical Industries LTD

`9%

2%81%

3%

3%

Biotechnology - 9%Diagnostic SubstancesDrug Delivery - 2%Drug Manufacturers - Major - 81%Drug Manufacturers - OtherDrug Related ProductsDrugs - Generic - 3%Health Care PlansHome Health CareHospitalsLong-Term Care FacilitiesMedical Applicances and Equipment - 3%Medical Instruments and SuppliesMedical Laboratories and ResearchMedical PracticionersSpecialized Health Services

“A category of stocks relating to medical and healthcare goods or services.”--Investopedia

Industry Breakdown

`

Industry Performance: 10 years

Industry 10-yeargrowth

Biotechnology 106%

Distributors 34%

Equipment 42%

Facility -23%

Managed Care 132%

Services 249%

Supplies 107%

Life Science 226%

Pharma -7%

Industry Breakdown

`

Sector Performance: QTD

`

Sector Performance: YTD

`

Sector Performance: 10 years

Sector Performance: 10 years

`

Agenda

• Overview• Business Analysis• Financial Analysis• Economic Analysis• Valuation Analysis• Risk Analysis• Recommendation

`

Business Cycle

`

Porter’s Five Forces

• Threat of Entry: Low1) There are high barriers to entry due to FDA strict

regulation; 2) Brand equity is costly to build; 3) New company needs to put a lot of capital into

R&D lengthy approval process, marketing, and start up costs before it is able to receive any returns

`

Porter’s Five Forces

• Bargaining Power of Suppliers: Low. Suppliers generally have little room for negotiationNot many other places to direct their products

• Bargaining Power of Buyers: Low - Medium. Most medication is prescribed by the doctors, and

consumers will have to buy the drug at any given price if they need it.Exception: generic medication after patents run out (still

within the healthcare sector)

`

Porter’s Five Forces

• Industry Competition: High. 1) Some mergers and acquisitions are going on, but also require

inter-industry joint partnerships due to heavy input costs and need for more resources;

2) Industry benefits from strong demand from consumers; 3) Threats may come from other global drug manufacturers.

• Threat of Substitutes: Moderate - High. Customers can find substitute medicine if the original product

has an expired patent. However, customers generally have no alternative choice if it is a new product.

When a patent runs out, generic medication is cheaper and will effect pricing structure in the market.

Medication and healthcare products are inelastic goods that have no substitutes outside of the sector.

`

Demographic catalyst• Demographic catalyst: As the baby boomers are

getting old, healthcare products are needed by an increasing number of people. Company revenue will increase as consumption for drugs surges. The stock price may increase when company publishes a nice-looking income statement from increased demand

Demand from international market for advanced U.S. medication.

`

Claim Frequency

`

Claim Severity

`

Agenda

• Overview• Business Analysis• Financial Analysis• Economic Analysis• Valuation Analysis• Risk Analysis• Recommendation

`

Net Profit Margin

`

EBIDA Margin

`

ROE

`

Cash Flow Per Share

`

Revenues Per Share

`

Agenda

• Overview• Business Analysis• Financial Analysis• Economic Analysis• Valuation Analysis• Risk Analysis• Recommendation

`

Real GDP

`

Future Federal Spending on Medicare, Medicaid, and Social

• Percentage of GDP

`

CPI

`

Employment Rate

`

S&P500

`

Gov’t Defense Purchase

`

Trend in the Future

• Opportunities for Innovative• Low Cost /High Value• Increasing Technology-enabled Delivery and

Financing Solutions• Significant Integration and Consolidation• Increase Global Market Share and Offshore

Operation

`

Agenda

• Overview• Business Analysis• Financial Analysis• Economic Analysis• Valuation Analysis• Risk Analysis• Recommendation

`

Sector Vitals

Absolute High Low Median Current

P/Trailing E 27.5 9.9 18 12.6

P/Forward E 24.6 10 16.8 12.2

P/B 7.5 2.2 3.8 2.6

P/S 3.0 1.0 1.8 1.3

P/CF 20.1 7.6 13.3 9.4

Absolute High Low Median Current

P/Trailing E 1.2 .68 1.0 .94

P/Forward E 1.2 .69 1.0 .91

P/B 2.4 1.1 1.4 1.2

P/S 1.9 .9 1.2 1.0

P/CF 1.7 .9 1.2 1.0

`

Dividend Yield

`

Pharma Industry Performance to S&P 500 Performance

Pharma Industry Performance to S&P 500 Performance

`

Biotech Industry Performance to S&P 500 Performance

Biotech Industry Performance to S&P 500 Performance

`

Services Industry Performance to S&P 500

Services Industry Performance to S&P 500

`

Agenda

• Overview• Business Analysis• Financial Analysis• Economic Analysis• Valuation Analysis• Risk Analysis• Recommendation

`

Healthcare Reform

• Healthcare Reform and Act– In theory, Accountable Care Organizations (ACOs) provide financial

incentives for health care organizations to reduce costs and improve quality. In reality, given the complexity of the existing system, health care providers are facing more challenges than ever before.

– Patient Protection and Affordable Care Act (PPACA) leads to a shift in the health care delivery and reimbursement marketplace.

– Part of the Affordable Care Act is intended to limit the influence of drug and medical equipment manufacturers and supplies on physician or hospitals practices.

– Lower Margin but Lower Credit Risk

– May Incur New Taxes

`

FDA Regulatory Changes

• Stricter Rules• Longer Approval Process

`

Increasing Competition

• Mergers and Acquisitions• Insurance Program Alignment• Demand of Technology Upgrades

`

Economic Slowdown

• Rising Capital Costs• Reduced Level of Reimbursement• Loss of Income

`

Uninsured Population

`

Potential Staff Shortages

• Baby Boomers Retirement • Failure to Attract or Retain Top Talent• Declining Healthcare Quality

`

Global Economic Uncertainty

• European Crisis• China’s economic slowdown

`

Agenda

• Overview• Business Analysis• Financial Analysis• Economic Analysis• Valuation Analysis• Risk Analysis• Recommendation

`

Weigh the Pros and Cons

• Negatives– Regulation, changes to Medicare/Medicaid prompts too many questions– Revenue and margin growth outlook is decreasing– Historically underperforms the S&P 500– Increase in competition – particularly from generic substitutes and important patents

expiring– Federal Debt– European Debt Crisis – companies generally require heavy amounts of funding and

cash due to nature of R&D expenses– Approaching median value in sector vitals– Pharmaceutical industry weight

• Positives– Revenue growth– Regulation may increase amount of insured patients– Inelastic good: people need health care sector products to survive– Low external threats: most threats (except for the government)

are internal to the sector, thus providing potential for a competitive advantage– Possible that sector vitals will climb to median– Increased buying power of emerging, developing markets– Demographic trends

`

Recommendation

• Decrease the holding to the S&P 500 level – Decrease by 222 basis points

`

Questions?