Health Care Sector

Jocelyn Mayfield, Sam Vermillion, Wendy Wiemers,

Kevin Zakes, Chad Zipfel

BUS-FIN 724/824

May 8, 2007

Health Care Sector• S&P500 is currently comprised of 54 Health Care companies

• The S&P500 Health Care sector includes:

- Healthcare Equipment and Services

- Healthcare Equipment and Supplies

- Healthcare Providers and Services

- Healthcare Technology

- Biotechnology, Pharmaceuticals, and Life Sciences

- Biotechnology

- Pharmaceuticals

- Life Sciences Tools and Sciences

Market & Sector Overview

• Market Cap for total health care sector is approximately $1.64 trillion

• Health care as a percentage of S&P500– 12.22%– Third largest weighting in S&P500 behind

Financials and Information Technology with $2.9 and $2.0 trillion, respectively

Health Care Sector Breakdown

3.2%

0.2%

0.4%

0.5%

2.5%

13.7%

3.7%

11.2%

53.6%

11.2%

Biotechnology

Distributors

Equipment

Facilities

Services

Supplies

Technology

Life Sciences Tools andServicesManaged Health Care

Pharmaceuticals

Health Care Leaders in S&P500

Ticker Company Market Cap ($B) P/E Company Type

PFE Pfizer, Inc 194.04 10.60 Drug Manufacturer

JNJ Johnson & Johnson 185.97 18.32 Medical Products/Supplies

MRK Merck & Co. 112.72 24.62 Drug Manufacturer

ABT Abbott Laboratories 90.96 58.66 Drug Manufacturer

WYE Wyeth 77.15 18.06 Drug Manufacturer

AMGN Amgen 73.90 24.58 Biotechnology

UNH UnitedHealth Group 72.12 17.73 Health Maintenance Services

Health Care Sector Performance • 2007 QTD

– S&P 500: 5.97%– Health Care Sector: 8.77%

• 2007 YTD– S&P 500: 6.16%– Health Care Sector: 9.45%

• Other top sectors YTD performance– Utilities 14.53% YTD– Materials 12.45% YTD– Telecom Services 10.07% YTD

Current SIM Holdings

• SIM current holdings include the following industries:

• Pharmaceuticals

• HealthCare Equipment/Supplies

• Biotechnology

• Health Care Providers/Services

• Healthcare Technology and Life Sciences and Tools and Sciences are not currently represented in the SIM portfolio

• The two industries represent less than 1% of the total health care market cap so this is insignificant

•Overall, well diversified within the sector

SIM Current Holdings

Ticker Name SIM Weight Avg. Cost

Current Price

(May 4, 2007)

Gain/Loss(%)

DNA Genentech Inc* 2.47% $82.54 $81.42 (1.36%)

JNJ Johnson and Johnson 4.64% $60.22 $64.48 7.07%

SYK Stryker Corp 3.74% $43.78 $65.86 50.43%

TEVA Teva Pharmaceutical* 3.53% $32.11 $39.15 21.92%

WLP Wellpoint 3.08% $76.73 $81.43 6.12%

* Not a member of S&P 500, but a member of NASDAQ

Total SIM Weight 18.26%

S&P Weight 12.22%

SIM Overweight 6.04%

Business Analysis

• Phase of the life cycle– Expansion

• This is the stage between growth and mature.• There are high growth rates in yearly revenues

within the sector due to innovations in technology but the power players have become apparent.

– The success of the Healthcare industry is largely independent of the success of domestic or foreign economies due to the nature of the products.

External Factors

• Regulations– Food and Drug Administration– Center for Drug Evaluation and Research– Medicare Fair Prescription Drug Price Act of

2007– Patent Term Restoration

• Treble Damages

External Factors

• Research and Development– Biotechnology market value is expected to

grow by 79% from 2005 to 2010.– It has been found that a 10% increase in the

real price of drugs, increases R&D expenses by 6%.

• Largely linked to regulation by the government on the increase in drug prices to the consumer price index.

External Factors

• Demographics– In many countries, fertility rates have declined because of

an interconnected set of reasons that include: • The availability of contraception which has allowed women to achieve

higher levels of education, enhanced opportunities for employment, and greater individual financial independence.

• The trend toward urbanization which makes it harder to support more than one or two children.

• Governmental initiatives to limit family size in countries like China and Iran.

– In the U.S., the over-85 population is expected to increase from the present 5 million to over 18 million by 2050.

– This sector is largely dependent upon the United States, particularly biotechnology which currently accounts for 56.8% of revenues and global health services at 42.1%.

Five Force Analysis

Barriers to Entry (+)

• Economies of scale• Patent and High R&D

Expense• Heavily Regulated

Supplier Power (-)

• Substitutes• Low concentration

Buyer Power (N)

• Price sensitivity• High switching

cost

Substitute (+ or -)

• Generic drugs

Industry Rivalry (+)• Large players and

small players• Low product

differentiation in some industries

U.S. Demographics

U.S. Demographics

Financial Analysis

Financial Analysis

Free Cash Flow - Adjusted

-

1,000

2,000

3,000

4,000

5,000

2006 2005 2004 2003 2002 2001 2000 1999

Dividends Common (Per Shr)

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

2006 2005 2004 2003 2002 2001 2000 1999

Revenues ($ Mil)

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999

EPS Adjusted

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999

Financial Analysis

Margins

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

2006 2005 2004 2003 2002 2001 2000 1999

Gross Margin Operating Margin Net Margin

R & D as % of Sales

5.8%

6.0%

6.2%

6.4%

6.6%

6.8%

7.0%

7.2%

7.4%

2006 2005 2004 2003 2002 2001 2000 1999

Inventory Turnover

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2006 2005 2004 2003 2002 2001 2000 1999

ROE - Adjusted

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2006 2005 2004 2003 2002 2001 2000 1999

Financial Analysis

Days Sales Outstanding

-

10

20

30

40

50

60

2006 2005 2004 2003 2002 2001 2000 1999

Debt to Sales

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2006 2005 2004 2003 2002 2001 2000 1999

HealthCare Sector Valuation• P/E: 17.2 10 yr mean: 22.0

5 yr mean: 17.2

• P/S: 1.97 10 yr mean: 3.00

5 yr mean: 2.08

• P/B: 4.2 10 yr mean: 6.6

5 yr mean: 4.2

• P/CF: 15.4 10 yr mean: 21.1

5 yr mean: 15.9

HealthCare vs SP500 (10 yrs) StockVal®S&P HEALTH CARE SECTOR COMP ADJ (SP-35) Price 47.44

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20081997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

PRICE / YR-FORWARD EPS ESTS RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.8

1.0

1.2

1.4

1.6

HI 1.46 LO 0.94 ME 1.17 CU 1.11

05-02-199705-04-2007

PRICE / SALES RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd1.2

1.5

1.8

2.1

2.4

HI 2.28 LO 1.22 ME 1.66 CU 1.28

05-02-199705-04-2007

PRICE / BOOK VALUE RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd1.2

1.6

2.0

2.4

2.8

HI 2.54 LO 1.26 ME 1.73 CU 1.36

05-02-199705-04-2007

PRICE / CASH FLOW ADJUSTED RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.8

1.2

1.6

2.0

2.4

HI 2.16 LO 1.20 ME 1.63 CU 1.32

05-02-199705-04-2007

HealthCare vs SP500 (5 yrs)StockVal®S&P HEALTH CARE SECTOR COMP ADJ (SP-35) Price 47.44

2002 2003 2004 2005 2006 2007

PRICE / YR-FORWARD EPS ESTS RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.9

1.0

1.1

1.2

1.3

HI 1.23 LO 0.99 ME 1.13 CU 1.11

05-03-200205-04-2007

PRICE / SALES RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd1.2

1.4

1.6

1.8

HI 1.75 LO 1.22 ME 1.38 CU 1.28

05-03-200205-04-2007

PRICE / BOOK VALUE RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd1.2

1.5

1.8

2.1

2.4

HI 2.22 LO 1.26 ME 1.45 CU 1.36

05-03-200205-04-2007

PRICE / CASH FLOW ADJUSTED RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd1.0

1.2

1.4

1.6

1.8

HI 1.79 LO 1.20 ME 1.38 CU 1.32

05-03-200205-04-2007

HealthCare Equipment & Supplies vs. Sector StockVal®S&P IND HEALTH CARE EQUIP & SUPP Price 46.89

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20081997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

PRICE / YR-FORWARD EPS ESTS RELATIVE TO SP35 M-Wtd0

1

2

3

HI 2.36 LO 0.99 ME 1.42 CU 1.35

05-02-199705-04-2007

PRICE / SALES RELATIVE TO SP35 M-Wtd4

6

8

10

HI 12.34 LO 4.91 ME 7.79 CU 7.77

05-02-199705-04-2007

PRICE / BOOK VALUE RELATIVE TO SP35 M-Wtd1

2

3

4

5

HI 4.44 LO 1.11 ME 2.26 CU 1.23

05-02-199705-04-2007

PRICE / CASH FLOW ADJUSTED RELATIVE TO SP35 M-Wtd0

1

2

3

HI 2.24 LO 0.92 ME 1.40 CU 1.22

05-02-199705-04-2007

HealthCare Providers & Services vs. Sector

StockVal®S&P IND HEALTH CARE PROV & SVCS Price 56.221997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

PRICE / YR-FORWARD EPS ESTS RELATIVE TO SP35 M-Wtd0.9

1.0

1.1

1.2

HI 1.10 LO 0.97 ME 1.02 CU 0.99

05-02-199705-04-2007

PRICE / SALES RELATIVE TO SP35 M-Wtd0.9

1.0

1.1

1.2

1.3

HI 1.24 LO 0.97 ME 1.10 CU 1.20

05-02-199705-04-2007

PRICE / BOOK VALUE RELATIVE TO SP35 M-Wtd0.8

0.9

1.0

1.1

1.2

HI 1.13 LO 0.86 ME 1.00 CU 0.90

05-02-199705-04-2007

PRICE / CASH FLOW ADJUSTED RELATIVE TO SP35 M-Wtd0.96

0.99

1.02

1.05

1.08

HI 1.08 LO 0.96 ME 1.01 CU 1.02

05-02-199705-04-2007

Biotechnology vs. SectorStockVal®S&P IND BIOTECHNOLOGY M-Wtd (S352010A) Price 62.29

2002 2003 2004 2005 2006 20072002 2003 2004 2005 2006 2007 2008

PRICE / YR-FORWARD EPS ESTS RELATIVE TO SP35 M-Wtd0.8

1.2

1.6

2.0

2.4

2.8

HI 2.75 LO 1.02 ME 1.61 CU 1.15

05-03-200205-04-2007

PRICE / BOOK VALUE RELATIVE TO SP35 M-Wtd1.0

1.2

1.4

1.6

1.8

2.0

2.2

HI 2.18 LO 1.03 ME 1.40 CU 1.24

05-03-200205-04-2007

PRICE / CASH FLOW ADJUSTED RELATIVE TO SP35 M-Wtd0.8

1.2

1.6

2.0

2.4

2.8

3.2

HI 3.12 LO 1.12 ME 1.80 CU 1.26

05-03-200205-04-2007

Pharmaceuticals vs. SectorStockVal®S&P IND PHARMACEUTICALS M-Wtd (S352020A) Price 42.59

2002 2003 2004 2005 2006 20072002 2003 2004 2005 2006 2007 2008

PRICE / YR-FORWARD EPS ESTS RELATIVE TO SP35 M-Wtd0.6

0.9

1.2

1.5

1.8

HI 1.56 LO 0.72 ME 1.06 CU 1.00

05-03-200205-04-2007

PRICE / SALES RELATIVE TO SP35 M-Wtd4

6

8

10

HI 12.74 LO 5.16 ME 8.14 CU 7.75

05-03-200205-04-2007

PRICE / BOOK VALUE RELATIVE TO SP35 M-Wtd0

1

2

3

HI 2.99 LO 0.91 ME 1.62 CU 1.39

05-03-200205-04-2007

PRICE / CASH FLOW ADJUSTED RELATIVE TO SP35 M-Wtd0.4

0.8

1.2

1.6

2.0

HI 1.64 LO 0.59 ME 0.99 CU 0.96

05-03-200205-04-2007

Recommendations

• Maintain current SIM position (6.04% overweight)

• Relative valuation analysis supports rebalancing of SIM’s Health Care holdings.

• Demographic data supports continued growth in sector-wide spending.