Healthcare Sector Analysis

Alexander BishopJustin Gibbs

Bethaditya WinarnoJie Zhang

Agenda Healthcare Sector Overview

Business Analysis

Economic Analysis

Financial Analysis

Valuation Analysis

Recommendations

Q&A

Healthcare overview

A category of stocks relating to medical and healthcare goods or services, the sector market capitalization is at $1.96 Trillion

Healthcare Industries

Company Name Industry Market Cap. ($ MIL)

JOHNSON & JOHNSON Pharmaceutical 174000.000

PFIZER Pharmaceutical 144000.000

MERCK & CO. Pharmaceutical 113000.000

ABBOTT LABORATORIES Pharmaceutical 83000.000

AMGEN Biotechnology 57000.000

MEDTRONIC HC-Equipment 47000.000

GILEAD SCIENCES Biotechnology 42000.000

BRISTOL-MYERS SQUIBB Pharmaceutical 41000.000

LILLY (ELI) Pharmaceutical 39000.000

UNITEDHEALTH GROUP HC-Managed Care 38000.000

Sector Leading Companies

SIM Holdings

Security Ticker %age Assets Eq shares outAmgen Inc. AMGN 2.65% 995.000

CareFusion Corp. CFN 0.88% 221.384

Gilead Sciences Inc. GILD 3.35% 899.925 Johnson & Johnson Co. JNJ 3.76% 2,759.100

Teva Pharmaceutical Industries Ltd. TEVA 3.64% 923.960

Sector Performance

YTD: -1.65% QTD: -1.65%

Top 5 Performers

Berkshire Hathaway Inc. 15.52%

Gilead Sciences Inc. 11.56%

NCR Corp. 7.55%

TCF Financial Corp. 7.49%

Amgen Inc.   3.38%

Business Analysis

Phase of Life Cycle

Aging of US population, 16% of US population will be 65+ older by 2020.

Key Driver: Demographic

Porter Five Forces Analysis

• Rivalry: Highly concentrated in large companies, competition between largest companies

• Supplier Power: Low• Substitutes: Generic drugs• Buyer Power: Low, buyers are individual

consumers• Barriers to enter: long & costly FDA approval (10

years on average), high R&D cost, R&D process is very difficult and tedious

Patent Expiration

• Patents grant exclusive rights for 20 years• Generic drug is a low cost substitute• Increasing use of generic drugs

• Substantial loss in market share

Economic Analysis

Positive trends

• Aging population and the baby boomers• People living longer with chronic disease • Obesity and diabetes epidemics • Technological advances • Global reach of disease • Personalized medicine

US Projected Population from 2010-2050

US Obesity Trend

No Data <10% 10%–14% 15%–19% 20%–24% 25%–29% ≥30%

Trends in National Health Expenditure

Healthcare Reform

• Could be beneficial to the industry because more people will be insured and able to seek out medical attention.

• With more people insured, the number of medical procedures performed should increase.

• The sector has been oversold out

Financial Analysis

EBITDA MARGIN

E B IT DA MAR G IN

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2005 2006 2007 2008 2009

Healthc are

B iotec h

Dis tributors

P harma

E quipment

S + P 500

NET PROFIT MARGINNet P rofit Marg in

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2005 2006 2007 2008 2009

Healthc are

B iotec h

Dis tributors

P harma

E quipment

S + P 500

RETURN ON EQUITYR eturn on E quity

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2005 2006 2007 2008 2009

Healthc are

B iotec h

Dis tributors

E quipment

S + P 500

REVENUE GROWTH

R evenue Growth

0

2

4

6

8

10

12

14

2004-2005 2005-2006 2006-2007 2007-2008

Healthc are

S + P 500

EARNINGS PER SHARE

E P S

0

20

40

60

80

100

2005 2006 2007 2008 2009

Healthc are

S + P 500

CASH FLOW/ SHARE

C as h F low/ S hare- Healthc are

20

25

30

35

40

2005 2006 2007 2008 2009

C as h F low/ S hare- S +P

8090

100110120130140150160

2005 2006 2007 2008 2009

Valuation Analysis

Current Valuations

•Below the median in every category•Valuations will revert to the mean after restored market confidence•Not due to a change in industry fundamentals•Future drivers of Revenue look promising

•Demographics•Penetration in emerging markets•Healthcare expenditures up

Relative to S&P 500

Recommendations

Recommendations Add 38 basis points to increase current weight to150 basis points overweight

Reasons:1.Constant revenue growth, outperforming S&P5002.Short-term modest economic growth3.Healthcare reform4.Patent expiration

Questions?