JOSEPH FARFSINGDAVID GARMANASH YIJUN GUSCOT HELTON

TIMOTHY KEITH

Health CareSector Presentation

Overview

Size and CompositionBusiness AnalysisEconomic AnalysisFinancial AnalysisValuation AnalysisRecommendation

Size and Composition

Portfolio Composition

Sector SIM S&P500 Over/Under Information Technology 19.921% 18.403% 1.518% Health Care 17.735% 13.835% 3.900% Energy 11.312% 12.510% -1.198% Financials 8.139% 12.186% -4.047% Consumer Staples 13.063% 12.045% 1.019% Industrials 9.437% 10.441% -1.004% Consumer Discretionary 7.931% 9.517% -1.586% Utilities 2.496% 3.982% -1.487% Telecommunication Services 2.396% 3.715% -1.319% Materials 3.883% 3.366% 0.517% Cash 3.687% 0.000% 3.687%

Health Care is the most overweight sector in the SIM portfolio when compared to the S&P500.

Sector Performance

Sectors Sorted by QTD QTD YTDS&P 500 9.39% -3.37%

Financials 22.17%

-13.86

%Consumer Discretionary 18.54% 8.33%Industrials 17.72% -7.91%

Materials 15.09%11.85

%

Information Technology 12.04%16.48

%Energy 4.81% -7.85%Consumer Staples 3.03% -8.62%Telecommunications Services 2.23% -6.43%

Utilities 0.42%

-11.49

%Health Care -0.89% -9.34%

Sectors Sorted by YTD QTD YTD

S&P 500 9.39% -3.37%

Information Technology12.04

% 16.48%

Materials15.09

% 11.85%

Consumer Discretionary18.54

% 8.33%Telecommunications Services 2.23% -6.43%

Energy 4.81% -7.85%

Industrials17.72

% -7.91%

Consumer Staples 3.03% -8.62%

Health Care -0.89% -9.34%

Utilities 0.42%-

11.49%

Financials22.17

%-

13.86%

So far this year, Health Care has not performed well when compared to other sectors.

Global Industry Classification Standard(GICS 35) – Health Care Industries

Industry Group Industry Sub-IndustryMarket

Capitalization

Mkt Cap as % of Healthcare

Sector

Mkt Cap as % of S&P500

Health Care Equipment & ServicesHealth Care Equipment & Supplies Health Care Equipment

174,919,930,000 16.233% 2.306%

Health Care Supplies

4,276,556,000 0.397% 0.056%Health Care Providers & Services Health Care Distributors

32,223,194,000 2.990% 0.425%

Health Care Services

58,752,216,000 5.452% 0.775%

Health Care Facilities

1,075,043,000 0.100% 0.014%

Managed Health Care

82,570,936,000 7.663% 1.089%

Health Care Technology Health Care Technology

2,181,728,000 0.202% 0.029%

Pharmaceuticals, Biotechnology & Life Sciences Biotechnology Biotechnology

142,130,526,000 13.190% 1.874%

Pharmaceuticals Pharmaceuticals

577,124,533,000 53.560% 7.608%

Life Sciences Tools & Services

Life Sciences Tools & Services

2,273,432,000 0.211% 0.030%

TOTAL S&P500 Mkt Cap

7,585,482,000,000 TOTAL Health Care Mkt Cap

1,077,528,094,000

Companies within the Health Care Sector

Companies IndustryMarket Cap(in Billions)

Johnson & Johnson (JNJ) Pharmaceuticals 151.50

Pfizer Inc. (PFE) Pharmaceuticals 97.13

Abbott Laboratories (ABT) Pharmaceuticals 69.43

Wyeth (WYE) Pharmaceuticals 58.79

Merck & Co. Inc. (MRK) Pharmaceuticals 52.31

Amgen Inc. (AMGN) Biotechnology 47.72

Eli Lilly & Co. (LLY) Pharmaceuticals 41.31

Bristol-Myers Squibb Co. (BMY) Pharmaceuticals 40.41

Gilead Sciences Inc. (GILD) Biotechnology 40.04

Medtronic, Inc. (MDT) HC - Equipment 38.30

Schering-Plough Corp. (SGP) Pharmaceuticals 37.56

Unitedhealth Group, Inc. (UNH) Managed HC 34.93

Baxter International Inc. (BAX) HC - Equipment 30.85

WellPoint Inc. (WLP) Managed HC 24.35

MedcoHealth Solutions Inc. (MHS) HC - Services 21.69

A LOOK AT THE COMPONENT INDUSTRIES

Business Analysis

Component Industries:-Diversity among levels of maturity

- Portfolio and Sector weighted toward the more mature

Pharmaceuticals*

Distributors*

Managed Health Care*

Biotechnology

Equipment*

Looking at P/E:

Biotechnology……… 14.4Life Science Tools… 13.4Equipment………….. 12.9Distributors…………. 10.0Pharmaceuticals…… 9.4Managed H.C……….. 7.0Supplies………………. 3.3

Ratios from Thompson Baseline

* Industry represented in SIM portfolio

Life ScienceTools

Supplies

Component Industries: Business Analysis

Porter’s ForcesThreat of Substitutes: Relatively low in

mature industries. Most competition comes from within the same industry. Threat may be more moderate in emerging or growth industries (Biotech).

Power of Suppliers: Moderate to high for industries on forward part of value chain (services). Low for industries not dependent on large medical suppliers (i.e., the suppliers themselves, pharmaceuticals).

Component Industries: Business Analysis

Porter’s ForcesPower of Buyers: Moderate to high for all

industries. Economic drivers aside, the possibility of nationalized healthcare would give much power to a single buyer: the U.S. Government.

Rivalry: Generally moderate. Entry barriers retrain industry concentration. Late movers can piggy-back off early movers, though (generic drugs, U.S. patent laws). Mature industries see the most competition (pharmaceuticals, suppliers, etc)

Component Industries: Business Analysis

Porter’s ForcesBarriers to Entry: High- Very strict and long process for FDA approval- High R&D costs ; cannot be capitalized- High capital requirements to meet expenses- Strict regulation; Food and Drug Admin.- Large firms already established in markets- Political risk (Nationalization)

Industries’ Opportunities

Ability for established firms to carve out niches under barrier protection=> Growth opportunity

Threats

Risk of increased buyer power. Difficult to evaluate current political risk. Sector very sensitive to government policy.

Business Drivers: Demographics

-Baby boomers progressing in age

-50+ age group expected to increase substancially

RECESSION AND REGULATIONS

Economic Analysis

Unemployment and health care coverage

Recessions historically have little impact on the number of people insured.

While the demand for coverage is relatively inelastic the current recession is causing a large number of in-group changes.

Consumers and businesses switch coverage to less expensive policies leading to losses for all healthcare industries.

Households spend less in slow economy

While demand stays relatively inelastic for health insurance patients opt out of medical services that require payment contribution

This can lead to lower MCR’s for Managed Care companies.

Adversely affects all other industries within healthcare

Consumer Confidence

Medical care spending is being driven by consumer confidence, especially on expected conditions.

With 5 years of data the correlation is r=.77. For 2 years of data it rises to r=.83.

Sector performance

As consumers spend more on health care the sector rises.

Another rather high correlation with r=.58.

Unemployment Vs. Sector

With five years of data we see a negative correlation with the unemployment rate where r=-.81

Investors worried about declining membership in health care plans.

Medical Costs

The costs for drugs and Medical supplies growing faster than the overall price index

Medical Costs

Prescription drug costs rising steadily through all economic conditions

Consumers defer treatment or substitute with generic drugs

Health Insurance Costs

Health care coverage is on the rise while insurance companies attempt to protect their profit margins

Government regulations such as lowering premiums and deductibles paid by individuals will deteriorate profit margins in the industry

Healthcare Reform: cost controlsIT could save up to $77 billion a year

Preventive care can lead to adverse selection and impose pay for performance standards that deteriorate profits

Administration plans to increase competition by limiting how much premium revenue can be spent on profits and administration expenses. Also, want to enhance the generic drug market by blocking patents and allowing foreign competition in the U.S.

Financial Analysis

Net Profit Margin•Health care sector greater than S&P 500

• Biotechnology and pharmaceuticals has the highest profit margin

EBITDA Margin• S&P 500 greater than health care sector

• Biotechnology and pharmaceuticals have the highest EBITDA margin

Return on Equity• Health care sector greater than S&P 500

• Pharmaceuticals has highest ROE

• Biotechnology's ROE grows fast

Cash flow per share• Health care in the range of 22 to 35

• Biotechnology has the largest CF per share

Price relative to S&P 500

1. HCX

2. Biotech

3. Pharmaceuticals

Price relative to S&P 500

1. HCDIS

2. HCEQP

3. LFSCT

Valuation Analysis

Valuation Multiples

Forward P/ECurrent: 11.0Median (5yr): 17.3Median (10yr):

18.2

P/BCurrent: 2.6Median (5yr): 3.9Median (10yr):

4.3

Valuation Multiples

P/SCurrent: 1.1Median (5yr): 1.8Median (10yr):

2.2

P/CFCurrent: 8.4Median (5yr): 13.6Median (10yr):

14.7

Health Care Relative to S&P 500

Forward P/ECurrent: .70Median (5yr): 1.1Median (10yr):

1.1

P/BCurrent: 1.3Median (5yr): 1.3Median (10yr):

1.5

Health Care Relative to S&P 500

P/SCurrent: 1.3Median (5yr): 1.2Median (10yr):

1.4

P/CFCurrent: 1.1Median (5yr): 1.3Median (10yr):

1.4

Industry Performance Relative to Sector

Forward P/E

Pharma: 0.9

Equipment: 1.2

Biotech: 1.2

Industry Performance Relative to Sector

P/B

Pharma: 1.1

Equipment: 1.0

Biotech: 1.3

Industry Performance Relative to Sector

P/S

Pharma: 2.0

Equipment: 2.0

Biotech: 4.1

Industry Performance Relative to Sector

P/CF

Pharma: .9

Equipment: 1.2

Biotech: 1.4

Industry Variation

Forward P/EHigh: HC ServicesLow: HC Supplies

Price/BookHigh: HC FacilitiesLow: HC Managed Care

Price/SalesHigh: BiotechLow: HC Distr./Fac.

Price/Cash FlowHigh: HC Serv./SuppliesLow: HC Facilities

Industry Trailing P/E Forward P/E Price/Book Price/Sales Price/Cash FlowsPharmaceuticals 0.73 0.65 1.4 2.5 1.0

Equipment 1.0 0.83 1.3 2.5 1.3Biotechnology 1.1 0.84 1.7 5.1 1.5

Health Care Distributors 0.8 0.66 0.8 0.1 1.1Health Care FacilitIES N/A N/A 5.3 0.1 0.4

Health Care Managed Care 0.63 0.52 0.7 0.4 0.9Health Care Services 1.3 1.0 2.1 0.7 1.7Health Care Supplies 0.27 1.0 1.4 0.5 1.7

Health Care Tech 0.58 0.5 N/A 1.2 0.7Life Science Tools 1.0 0.9 0.7 2.1 1.1

RangeHigh 1.3 1.0 5.3 5.1 1.7Low 0.27 0.5 0.7 0.1 0.4

Trends

Health Care Sector

Price Momentum Better Than 71% of the Stocks on the S&P 500.

Earnings Momentum Better Than 58% of the Stocks on the S&P 500.

Recommendation

SIM Portfolio Weight Recommendation

Currently we are overweight by 390 basis points

We recommend that this overweightedness be cut in half to 195 bps over the S&P500

Reason?