HEALTHCARE SECTOR PORTFOLIO COMPARISON
Consumer Discretionary
11% Consumer Staples
11%
Energy12%
Financials14%Health Care
12%
Industrials11%
Information Technology
19%
Materials4%
Telecom3%
Utilities3%
S&P500 WeightConsumer
Discretionary8% Consumer
Staples12%
Energy11%
Financials13%
Health Care14%
Industrials10%
Information Technology
22%
Materials3%
Telecom4%
Utilities3%
SIM Weight
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HEALTHCARE SECTOR
Market Cap 41874.5P/E 20.92ROE 16.05%Dividend Yield 3.72%LT D/E 70.38%P/B 17.58%Net Profit Margin 15.85%P/FCF -60.23%% of S&P500 12%
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HEALTHCARE SECTOR INDUSTRIESBiotechnologyDiagnostic SubstancesDrug DeliveryDrug Manufacturers - MajorDrug Manufacturers - OtherDrug Related ProductsDrugs - GenericHealth Care PlansHome Health CareHospitalsLong-Term Care FacilitiesMedical Appliances & EquipmentMedical Instruments & SuppliesMedical Laboratories & ResearchMedical PractitionersSpecialized Health Services
87%
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LARGEST COMPANIES IN HEALTHCARE
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HEALTHCARE SECTOR PERFORMANCEReturns P/E (fwd) P/B
Margin (EBITDA)
1Yr 12.5% Monthly High 17.9 4.1 16.96mo 14.1% Monthly Low 10.0 2.2 16.3QTD 2.7% Current 12.1 2.6 16.5
P/E (trailing) P/B
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PORTER’S 5 FORCES
•FDA Approvals pose Barrier to Entry and Early Visibility of New Competitors.
Threat of New Competition
•Use of Generic medication is rising.•Numerous patents are expiring.
Threat of Substitutes
•Age Demographics are Growing•Political Forces are Targeting Heath-care.
Bargaining Power of Customers
•Specialized Ingredients with Few Substitutes•Often only one use for the raw materials.
Bargaining Power of Suppliers
•Numerous companies bloomed in this sector.•Fierce competition for new medications.
Intensity of Competitive Rivalry
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EXTERNAL FACTORS
• Average age of Patients are Increasing.
• Patents• Patent Rights Uncertainty – Many of the companies in this sector have
large revenue streams from patented medications. To minimize healthcare costs, early termination of patents has been discussed as a viable option to reduce healthcare costs.
• Common / Preferred Generics - As soon as a patent expires, a low-cost provider readily supplies an alternative causing rapid drops in revenue.
• Regulatory Pressure • Healthcare is a hot political topic . As the demographics grow the need
for low cost healthcare is fueling market adjustments.• FDA – New pharmaceuticals must be clinically tested and approved. This
process is becoming more stringent.
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PATENT EXPIRATIONSOriginating Company Pharmaceutical Expiration
Pfizer Viagra 3/27/12GlaxoSmithKline Cialis 11/21/17Eli Lilly Cymbalta 6/11/13 Sepracor Lunesta 2/14/14Pfizer Detrol 3/25/12Sepracor Xopenex 3/25/13Sankyo Benicar 4/25/16Abbott Zemplar 4/17/12GlaxoSmithKline Lotronex 1/13/13Merck Singulair 2/3/12Amgen Enbrel 10/23/13Johnson & Johnson Cypher 11/06/13
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PHARMACEUTICALS PENDING FDA APPROVAL
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• All companies mention significant product development pipelines.
• Phase 3 or Later• JNJ – 16 Pending Registration• Amgen – 10 Pending Registration• Pfizer – 14 Pending Registration
• Phase 1&2, ~45 per company.
• Annual Reports Show strong investments in R&D with Promising data
HEALTHCARE SECTOR LIFECYCLE
Healthcare Sector
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US POPULATION PROJECTIONS - AGE
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
2010 2015 2020 2025 2030 2035 2040 2045 2050
.100 years and over
.85 years and over
.65 years and over
.45 to 64 years
Data from US Census
Bureau
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REAL GDP AND HEALTHCARE SECTOR
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CONSUMER FOOD SPEND AND HEALTHCARE
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EARNINGS OUTLOOK
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HEALTHCARE SECTOR P/E + PROJECTION
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MARGINS & CASH
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SECTOR LEADERS & FINANCESIndustry Market Cap PEG
Ratio P/B Profit Margin
Operating Margin
Johnson & Johnson (JNJ) DM - Major 176.23B 2.15 2.88 14.87% 24.84%
Novartis AG (NVS) DM - Major 134.51B 2.48 2.06 15.35% 21.49%
Pfizer (PFE) DM - Major 161.81B 3.27 1.81 14.85% 29.32%
GlaxoSmithKline (GSK) DM - Major 134.51B 2.48 2.06 15.35% 21.49%
Merck & Company (MRK) DM - Major 115.55B 2.77 2.11 13.05% 20.77%
Sanofi – Aventis (SNY) DM - Major 99.94B 6.56 1.44 14.49% 20.89%
Abbott Laboratories (ABT) DM - Major 85.85B 1.30 3.50 12.17% 20.40%
AstraZeneca (AZN) DM - Major 60.93B 4.35 2.64 29.72% 38.78%
Novo Nordisk (NVO) DM - Other 75.00B 1.71 11.28 25.77% 33.72%
Amgen (AMGN) Biotechnology 52.62B 1.26 2.8 23.64% 33.96%
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HEALTHCARE SECTOR VALUATION
Absolute Basis High Low Median Current Median -Current
P/Trailing E 28.4 9.9 18.2 12.4 5.8P/Forward E 25.6 10.0 17.2 12.0 5.2
P/B 7.5 2.2 3.8 2.6 1.2P/S 3.1 1.0 1.8 1.2 0.6
P/CF 22.2 7.6 13.4 9.2 4.2
Relative to SP500 High Low Median Current Median -
CurrentP/Trailing E 1.2 0.68 1.0 0.94 0.06P/Forward E 1.2 0.69 1.0 0.92 0.08P/B 2.4 1.1 1.4 1.20 0.20P/S 2.1 0.9 1.2 1.00 0.20P/CF 1.7 0.9 1.3 1.00 0.30
Overall, Healthcare looks cheap compared to historical values.
We believe this is due to . . . Uncertainty surrounding regulations and increasing demands for low-cost healthcare from a growing demographic.
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INDUSTRY VARIATION
Industry variation is low with exception of the Diagnostic Substances and Medical Laboratories & Research industries.
Recall Pharmaceuticals Dominates the Sector, its P/E is at the Mean.
Industry Market Cap P/E ROE % D/E P/B Margin P/FCFMedical Practitioners 3.31B 7.6 12.7 5.92 45.04 5.6 4.3Hospitals 319.8B 10.0 144.0 76.39 -2.49 4.3 489.9Diagnostic Substances 11.94B 179.6 2.5 36.47 4.99 2.7 134.7Medical Laboratories & Research 131.43B 202.8 1.5 75.61 -9.45 0.8 -40.6
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TECHNICAL ANALYSIS: HEALTHCARE SECTOR• Healthcare saw massive growth after
the surge of the pharmaceutical industry.
• Currently the industry is more mature, has reached a sustained growth rate.
• We foresee consolidation through mergers and acquisitions in the future.
• In the long term, other industries within the Healthcare Sector will grow, displacing Pharmaceuticals as they do.
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HEALTHCARE SECTOR RECOMMENDATIONRecommendation – Reduce Healthcare Sector by 200 BP to S&P Weighting.
Current Weights: S&P -12%, SIM-14%
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Positives
•Big Problems Left•Cancer•Alzheimer's
•Life Expectancy and Age Demographics are Growing
Risks
•Legislation•Patents / Generics•Medicaid / Medicare
•Don’t Expect Large Sector Growth
Industries to Overweight
•Generics•Hospitals•Medical Practitioners
Industries to Underweight
•Diagnostic Substances•Medical Laboratories & Research