health care sector stock presentation
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Health Care Sector Stock Presentation. Joseph Farfsing David Garman Ash Yijun Gu Scot Helton Timothy Keith. Agenda. Recap of sector presentation Stock recommendation/proposals Analysis of proposals Summary. Sector recommendation. - PowerPoint PPT PresentationTRANSCRIPT
Joseph FarfsingDavid Garman
Ash Yijun GuScot Helton
Timothy Keith
Recap of sector presentation Stock recommendation/proposals Analysis of proposals Summary
Underweight Healthcare by 390 basis point to keep in line with S&P 500
Factors to consider in Healthcare: Uncertainties related with government regulation,
healthcare reforms and political risk Increasing aging populations
Security Unrealized Gain/(Loss) as % of total cost*
Beta Current Weight
Proposed weight
Action
Cardinal Health Inc.
-22.22% 0.89 3.55% 2.97% Sell 58 bps
Eli Lilly Co. -27.82% 0.93 2.6% 2.18% Sell 42 bpsJohnson & Johnson Co.
-13.34% 0.68 5.15% 4.69% Sell 46 bps
Medtronic Inc.
15.66% 0.83 2.4% - Liquidate
Wellpoint -43.78% 1.02 4.04% 3% Sell 104 bps
Gilead Science Inc.
- 0.81 - 1% Buy 100 bps
Total - - 17.74% 13.84% -
Liquidate Current Position Sell 240 bps
Industry: Medical Equipment
Strengths/Opportunities:- Technical prowess- Intellectual property portfolio- Experience with regulators- Sector Market Drivers (demographics)
Threats/Concerns:- Regulation reform (i.e, intellectual prop.)- Foreign exposure: 30+ %- Litigation - Most recently a news item: Medtronic
paid J&J $270 m to end a dispute over royalties involving use of stents
- Political risk related to sector
We are the least optimistic about the upside over a one year horizon for this security: strong hold for analysts
-History of litigation and general sector risk only enhance these feelings
Opportunity to take some profit for SIM portfolio-approx. $48,000 unrealized gain-Only current SIM stock in sector without lossIn a nut shell: take a break while we are ahead
and reevaluate MDT after things shake out in terms of risk
Sell 58 bps
Cardinal Health (CAH)
Industry – Health Care Distributors
Cardinal Health is a global manufacturer and distributor of medical and surgical supplies and technologies dedicated to making healthcare safer and more productive.
Customers include hospitals, medical centers, retail and mail-order pharmacies, clinics, physicians, pharmacists and other healthcare providers.
Extremely tight margins - around 6% on average – which could be seriously hurt from decreased hospital spending and price control regulation
Lack of Health Care spending over the next year
Negative synergies from the spin-off of the Clinical and Medical Products division
Percentile Forecast values0% $25.73 10% $33.95 20% $35.96 30% $37.57 40% $39.14 50% $40.65 60% $42.19 70% $44.10 80% $46.50 90% $50.17
100% $83.36
Statistic Forecast valuesTrials 10,000Mean $41.52 Median $40.65 Standard Deviation $6.65 Coeff. of Variability 0.1603Minimum $25.73 Maximum $83.36 Mean Std. Error $0.07
Terminal Discount Rate = 13.4%Terminal FCF Growth = 2.6%
Current Price 34.23Implied equity value/share 40.59052Upside/(Downside) to DCF 18.582%
Implied equity value / shareis most sensitive to changesin the Terminal Discount Rate
SELL 42 bps
Founded in 1876, Headquartered in Indianapolis, IN Principle activities are to discover, develop,
manufacturer and market pharmaceutical-based health care solutions
Specializes in the treatment of diabetes worldwide
Pharmaceutical—mature Highly competitive, threats from generic
drug makers Extensive expenditure in R&D Lengthy process of laboratory and clinical
testing, data analysis, manufacturing development and regulatory review
Currently the 10th largest pharmaceutical company in the world
Invested heavily in biotech, and by far the fifth largest biotech company in the world
Core competency: combine deep, therapeutic knowledge in targeted disease areas with the capability of generating potential biotech solutions alongside more traditional, chemistry-based work
Fully integrated pharmaceutical network: sophisticated partners all over the world, have access to critical resources around the globe, easier to expand overseas
Costly and highly uncertain drug research and development—delay drug introduction
Intense competition from multinational pharmaceutical companies and generic companies
Subject to increasing government price controls and other heathcare cost containment measures
Weaker foreign currency and prolonged economic downturn may adversely affect business operation
Sensitivity analysis of Terminal discount rate and FCF growth rate to target price
51 10.00% 11.00% 12.00% 13.00% 14.00%
2% 61.86 54.52 48.67 43.91 39.95
2.50% 64.13 56.16 49.89 44.83 40.67
3.00% 66.74 58.02 51.25 45.86 41.45
3.50% 69.74 60.12 52.77 46.98 42.31
4.00% 73.24 62.52 54.48 48.24 43.25
4.50% 77.38 65.28 56.42 49.64 44.30
Sensitivity analysis of Termianl discount rate and FCF growth rate to P/E value
10.8 10% 11% 12% 13% 14%
2% 12.04 10.70 9.63 8.76 8.03
2.50% 12.90 11.39 10.19 9.22 8.42
3.00% 13.89 12.16 10.81 9.73 8.84
3.50% 15.04 13.03 11.50 10.29 9.31
4.00% 16.37 14.03 12.28 10.91 9.82
4.50% 17.94 15.18 13.16 11.61 10.39
Absolute Valuation
High Low Mean
Current
Target Multiple
Target E, S, B etc/share
Target Price
Forward P/E
25.4 7.1 16.6 8.3 14.7 4.15 61
P/B 8.5 2.8 5.4 5.1 5.4 9 48.6P/S 6.6 1.6 4 1.9 3.4 16.94 57.6P/CF 24.1 5.9 14.8 6.5 12.5 4.5 56.25
Current Price 34.34Average Multiple Price
55.86
DCF Price 51.25
Prasugrel (co-developed by Daiichi Sankyo Company, Limited and Eli Lilly) reduced the risk of multiple types of heart attacks in phase III TRITON-TIMI 38 study
Eli Lilly will launch two global trials to advance second Alzherimer’s disease treatment candidate into late-stage testing - both phase iii pivotal trials begin enrollment in may 2009; reinforces Lilly's commitment to alzheimer's disease and biotech product research
Sell 46 bps
Johnson & Johnson (JNJ)
Market Leader in Pharmaceuticals and Medical Devices and Diagnostics
Strong Presence in Consumer Health Care products with brands such as Band-AID, Aveeno, Listerine, and Neutrogena
Consistent Earnings, Strong ROE, Modestly Leveraged, Recent Dividend Increase to 3.5% Div. Yield
Consumer Health Care◦ OTC availability of ZYRTEC◦ Strong Growth in Baby Care & Skin Care products◦ Strong International Sales
Pharmaceuticals◦ Strong Sales of Drugs REMICADE, CONCERTA, and
TOPAMAX◦ Strong Pipeline of New Drugs with 7 to 10 to complete
filings for FDA approval in 2009 and 2010.◦ European Commission Approval of STELARA and PREZISTA
During 1st Quarter
Medical Devices & Diagnostics◦ Number 1 position in Ophthalmic Lens Manufacturing◦ Growth Rate of 6.4% from 2007 to 2008
Generic competition for RISPERDAL resulted in 38% decrease in sales for the drug
Negative currency impact of 12.6% for First Quarter
Prolonged unemployment may lead to lower than expected spending on health care
Potential negative health care reform
Price to Book Price to Cash Flow
Forward P/E Price to Sales
Sell 104 bps
WellPoint Inc., was formed in 2004 with the merger between WellPoint Health Networks Inc. and Anthem Inc.
Leading provider of Health benefits plans by enrollment with 35 million members.
Independent licensee of Blue Cross and Blue Shield plans in 14 states with exclusive rights.
Diverse product offerings including PPO’s, HMO’s, CDHP’s, PBM, and many self-funded individual plans.
Highly competitive; Price competition contracts profit margins
Over 95% of revenue is derived from premiums
Barriers to entry are high from heavy regulation and medium concentration with the top four players contributing about 44% of revenues
Large exposure to the U.S.
High customer retention rates allowing for high growth potential contingent on rising employment levels.
Strong brand name through the Blue Cross Blue Shield.
Cost controls, this QTR reduced MCR from 85.%1 to 81.6% YoY. Exiting high cost Medicaid operations in Ohio and Connecticut
Acquisitions resulting in larger more diverse revenue streams. Acquired DeCare Dental adding 4 million new members.
Consumer trends to higher deductible lower premium plans (CDHP’s). Up 14% in Q1.
Rising unemployment contributing to loss of enrollment. 1st QTR enrollment down 2.3% YoY. Expect a drop to 33.9 million members, or 3% YoY, by end of the 2009.
Investment losses. Reduced EPS for 1st QTR 2009 by $.46. Expect total year to be $.45 per share.
High SG&A expenses increased 90 bp YoY to 15.5%.
Cost savings from IT initiatives and pay for performance standards.
Being able to tap into the market of the over 46 million Americans who are uninsured
Premium and deductible limitations deteriorating profit margins.
Mandatory coverage imposing adverse selection on the industry
Buy 100 bps
Gilead’s primary areas of focus include HIV/AIDS, liver disease and serious cardiovascular and respiratory conditions.
Respiratory
Cardiovascular
Liver Disease
HIV/AIDS
.
Gilead discovers, develops and commercializes therapeutics that advance patient care.
.
HEALTH CARE - BIOTECHNOLOGY
DCF Valuation Terminal Discount Rate = 13.8%Ticker: GILD Terminal FCF Growth = 2.8%Health Care
Forecast TerminalYear 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E Value
Revenue 6,509 7,810 9,216 10,875 12,832 14,886 17,119 19,686 22,442 25,584 29,166 % Growth 20.00% 18.00% 18.00% 18.00% 16.00% 15.00% 15.00% 14.00% 14.00% 14.00%
Operating Income 3,332 3,999 4,719 5,546 6,519 7,532 8,628 9,843 11,221 12,792 14,583 Operating Margin 51.20% 51.20% 51.20% 51.00% 50.80% 50.60% 50.40% 50.00% 50.00% 50.00% 50.00%
Interest - net (137) (164) (194) (190) (190) (190) (190) (190) (190) (190) (190) Interest % of Sales -2.10% -2.10% -2.10% -1.75% -1.48% -1.28% -1.11% -0.97% -0.85% -0.74% -0.65%
Taxes 798 1,041 1,228 1,434 1,677 1,931 2,204 2,508 2,853 3,246 3,693 Tax Rate 23.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%Minority Interest 9 9 9 9 9 9 9 9 9 9 9
Net Income 2,611 3,062 3,624 4,311 5,040 5,800 6,622 7,533 8,567 9,745 11,088 % Growth 17% 18% 19% 17% 15% 14% 14% 14% 14% 14%
Add Depreciation/Amort 200 234 258 304 353 409 428 394 449 512 583 % of Sales 3.07% 3.00% 2.80% 2.80% 2.75% 2.75% 2.50% 2.00% 2.00% 2.00% 2.00%Plus/(minus) Changes WC (378) (346) (373) (326) (385) (595) (685) (787) (898) (1,023) (1,167) % of Sales -5.81% -4.42% -4.05% -3.00% -3.00% -4.00% -4.00% -4.00% -4.00% -4.00% -4.00%Subtract Cap Ex 100 115 125 217 257 298 342 394 449 512 583 Capex % of sales 1.54% 1.47% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% Free Cash Flow 2,333 2,836 3,384 4,071 4,752 5,316 6,023 6,746 7,669 8,722 9,922 YOY growth 22% 19% 20% 17% 12% 13% 12% 14% 14% 14%
Terminal 92,723.0 Terminal Value 92,723 P/E 8.4 NPV of free cash flows 27,164 52% EV/EBITDA 6.05 NPV of terminal value 25,455 48% Free Cash Yield 10.70%Projected Equity Value 52,618 Free Cash Flow Yield 4.43%
Shares Outstanding 939.6
Current Price $ 42.33 Implied equity value/share $ 56.00 Upside/(Downside) to DCF 32.29%
(Normal Distribution) Simulation ParametersMean Std Dev
Terminal Discount Rate 12.50% 1.50%Terminal FCF Growth 2.50% 0.30%
Statistic Forecast values Percentile Forecast valuesTrials 10,000 0% $34.42 Mean $66.16 10% $51.50 Median $64.08 20% $55.35 Standard Deviation $13.25 30% $58.31 Variance $175.61 40% $61.18 Coeff. of Variability 0.2003 50% $64.08 Minimum $34.42 60% $67.20 Maximum $166.89 70% $70.91
80% $75.52 90% $83.11 100% $166.89
Sensitivity Analysis
Terminal Discount Rate = 13.8%Terminal FCF Growth = 2.8%
Current Price $ 42.33 Implied equity value/share $ 56.00 Upside/(Downside) to DCF 32.29%
Buy: Gilead Science—100 bps Sell: Cardinal Health—58 bpsEli Lilly— 42 bpsJohnson & Johnson— 46 bpsMedtronic— 240 bpsWellpoint— 104 bps
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