H EALTH C ARE S ECTOR C OMPANY P RESENTATION Sarah Hemmelgarn Jason Wattier Alex Wisler Billy Wong.
Transcript of H EALTH C ARE S ECTOR C OMPANY P RESENTATION Sarah Hemmelgarn Jason Wattier Alex Wisler Billy Wong.
HEALTH CARE SECTORCOMPANY PRESENTATION
Sarah HemmelgarnJason WattierAlex WislerBilly Wong
SECTOR SUMMARY
SIM Weight (as of 7/31/2009)
S&P 500 Weight
SIM Weight +/-
Consumer Discretionary 9.11% 7.19% -1.92%Consumer Staples 11.81% 11.65% -0.16%Energy 12.04% 10.74% -1.31%Financials 13.86% 8.93% -4.93%Health Care 13.73% 13.30% -0.43%Industrials 9.98% 12.37% 2.39%Information Technology 18.72% 20.41% 1.69%Materials 3.40% 4.98% 1.58%Telecommunication Services
3.41% 3.39% -0.02%
Utilities 3.94% 3.61% -0.34%Cash 0.00% 3.38% 3.38%Dividend Receivables 0.00% 0.06% 0.06%
SECTOR SUMMARY
Defensive
Opportunities Aging U.S. Population Universal health care may increase number of people
insured
Risks Branded pharmaceuticals patent cliff Lack of bargaining power under one-buyer system
SECTOR SUMMARY
Currently underweight vs. S&P 500 SIM weight = 13.30% S&P 500 = 13.73%
Bring to even-weight with S&P500 +43 basis points
SECTOR SUMMARY
Current SIM Holdings:
Company % of SIM
Current Price
Target Price
Div. Yield
Total Upside
Cardinal Health 2.51% $33.84 $39.18 2.10% 18.68%
Eli Lilly 2.39% $33.83 $37.61 5.60% 16.79%
Gilead Science 0.96% $45.87 $61.93 0.00% 35.01%
Johnson&Johnson
4.01% $60.72 $75.38 3.27% 27.41%
Wellpoint 3.43% $51.90 $59.48 0.00% 15.30%
*Prices as of market close 8/10/2009
SECTOR SUMMARY
Recommended Action:
Company UpsideActio
n
Current
Weight
Target Weight
Change
Cardinal Health 18.68% Hold 2.51% 2.51% 0.00%
Johnson&Johnson
27.41% Hold 4.01% 4.01% 0.00%
Eli Lilly 16.79% Sell 2.39% 0.00% - 2.39%
Wellpoint 15.30% Sell 3.43% 2.00% - 1.43%
Gilead Science 35.01% Buy 0.96% 2.50% + 1.54%
TEVA 20.91% Buy 0.00% 2.71% + 2.71%
SECTOR TOTAL
13.30%
13.73% + 0.43%
ELI LILLY
Company Overview
Industry: PharmaceuticalsFounded in 1876Develops, manufactures, and sells
pharmaceutical products worldwide Offers medicinal treatments for:
Schizophrenia, Bi-polar disorders, ADHD, Diabetes, Osteoporosis
2008 Sales: $20.378B
Company Overview
SIM Basis = $45.61Market Price = $33.83Dividends = $1.92Unrealized Holding Gain (Loss) = ($11.78)After dividends = ($9.86) Return to Date (after dividends) = -21.62%
Strengths & Opportunities
Diversified Product PortfolioHigh Dividend Yield
Currently at 5.6% annual yield Increased in each of last 42 years
Aging population expected to drive demand for drugs
Risks & Concerns
Steep upcoming patent cliff
2008 US Sales Exposed: $7,277m
% of 2008 Sales Exposed:
Excluding biologics 28.9%Including biologics 35.7%
Risks & Concerns
Weak late-stage pipeline Is it adequate to replace expected lost sales? Big names to replace: Zyprexa, Cymbalta,
Gemzar Up to 35.7% of 2008 sales is exposed to
generic competition through 2015 Last major drug launch: 2005 Not expecting a “steady stream of product
introduction” until 2013 (Annual Report)
Risks & Concerns
Ability to maintain current dividend payout in question Shoring up pipeline is #1 priority Two options:
Increased R&D spending Purchase late-stage pipeline
R&D is costly, time consuming and risky Acquisitions more likely due to immediate need
for product introduction Acquisitions will be priority in use of free cash Can Eli Lilly maintain its current dividend
payout?
Price Target
• Valuation target: $38.71• DCF target price: $37.24• Final target price: $37.61*
• Current price: $33.83• Upside potential (including dividends): 16.79%
*Calculated from 75% DCF and 25% Valuation target prices
Absolute Valuation
High Low Median Current Target
P/Forward E
24.1 7.1 16.4 8.2 $33.65
P/S 6.0 1.6 4.0 1.9 $43.77
Recommendation
Liquidate position in LLYWhy?
Significant percentage of revenue at risk for generic competition, beginning in 2011
Concerns over relatively weak pipeline and impact on future revenue growth
Current dividend yield may not be sustainable with acquisition becoming a priority
Limited long-term upside
WELLPOINT
WELLPOINT
Headquartered in Indianapolis, IndianaManaged Healthcare Organization—Largest
in the United States Sell commercial health benefits
Formed by a merger on Nov 30, 2004 by Anthem, Inc. and Wellpoint Health Networks Inc.
Anthem Blue Shield and Blue Cross licensee in 14 states—brand strength
WELLPOINT
Sector: HealthcareIndustry: Managed Healthcare
Current Price: $51.90Market Cap: 24.66 BillionCurrent SAP Weighting: 3.43%Proposed Change: Sell 143 basis pointsProposed SAP Weighting: 2.00%
Reasons for Selling
Sales and Earnings projections low
Reasons for Selling
Government Regulation Government will likely pressure Managed Healthcare
Companies to cut costs
Profit Margins at risk due to increasing competition
Rising Unemployment—has not yet peaked More unemployment means lower commercial
enrollment in healthcare plans
Wellpoint and Unemployment
Source: Spring 2009 Healthcare Stock Presentation
Obvious Negative Correlation
Possible Reasons Against Taking a Sell Position:
Healthcare reform could actually benefit Wellpoint and other Managed Healthcare companies because more people will be in the healthcare system
Wellpoint is a well diversified company that often engages in mergers and acquisitions
Strong brand name with their Anthem Blue and Blue Cross brands
Valuation
Multiple Target Price: $64.31DCF Target Price : $58.35
Final Target Price: $59.84*
Current Price: 51.90
Upside: 15.3%
*Multiple Target*25%+DCF Target*75%
GILEAD SCIENCE
Gilead Science (GILD)
•Founded in 1987
•Biopharmaceutical company that discovers, develops and commercializes therapeutics
•Focus on antiviral drugs for HIV/AIDS, hepatitis and influenza
•Recently began developing drugs for pulmonary
diseases
Why Gilead?
U.S. HIV drug market share expandingDiversifying product lineIncreasing R&D pipeline investmentProposed changes to health care system
Why Gilead?
Products in pipeline Darusentant Elvitegravir GS-9350 GS-9150 Aztrenam Lysine
Why Gilead?
Brand Name Indication Patent Expiration % Total SalesAmBisome fungal infection, meningitis, candida 2016 6%
Atripla HIV, AIDS 2021 31%
Emtriva HIV, AIDS 2021 1%
Flolan pulmonary hypertension expired <1%
Hepsera Hepatits B 2014 7%
Letairis pulmonary arterial hypertension 2015 2%
Macugen age-related macular degeneration 2017 *
Tamiflu influenza 2016 *
Truvada HIV, AIDS 2021 41%
Viread HIV, AIDS, Hepatitis B 2017 12%
Vistide CMV retinitis 2010 <1%
Risks for Gilead
Slowdown in HIV product salesFailure of pipeline products to gain FDA
approval
Price Target
• Valuation target: $71.31• DCF target: $58.50• Final target: $61.70*• Current price: $45.76• Upside potential: 34.84%
*Calculated from 75% DCF and 25% Valuation target prices
Absolute Valuation High Low Median Current Target PriceP/Forward E 41.1 17 26.2 18.8 74.15
P/S 15.7 7.4 11.9 7.7 82.82P/B 18.2 7.9 11.2 9 59.63
P/EBITDA 32.24 13.93 21.77 15.49 84.69P/CF 49.7 18.6 29.4 20.6 55.27
TEVA Pharmaceuticals
TEVA
Company – Based in Israel, largest generic drug manufacturer in the world.
Investment Thesis: Company’s position as a leader in the generic market, relatively good valuation, along with very favorable macro trends for the generic drug industry, lead us to recommend purchasing 271 basis points.
Why TEVA?
Favorable Macro Trends for Industrya) Availability of Generic Drugs as Substitutes for name-
brands Approximately 75% of all FDA-approved drugs have generic
counterparts. In 2008, 69% of all prescriptions dispensed were generics.
b) Expected Growth of Generic Drug Market $80 billion in 2008, expected to be $84 billion in 2009 and $129.3
billion in 2014 CAGR of 9% for the 5-year period
U.S.: projected $34B in 2009 and $54B in 2014 CAGR of 9.7%
Why TEVA?
c) Cost Discrepancy National Association of Chain Drug Stores [2007]:
Average Retail Price (Brand-Name) = $119.51 Average Retail Price (Generic) = $34.34
d) Broad-based Support from Retailers Price Competition among retailers such as CVS, Walgreen,
and Rite Aid has been a big catalyst behind the greater use of generic drugs. Walmart’s $4 generic medicine offer
Generic drugs represent both lower costs and higher margins to these retailers than brand name drugs.
Why TEVA?
d) Regulatory Favoritism For the most part, many
aspects of U.S. and international health care reforms favor generics in their attempt to curb costs.
Example – Medicare Part D’s, which accounted for 19% of all retail prescriptions in 2007, “success” is attributed in large part to its significant use of generic drugs.
Why TEVA?
Positives:1) Largest generic drug manufacturer in the world2) Enjoyed a 23% sales growth through the first 6
months of 2009 despite global recession, and only had one single-digit growth year in the past 5 years.
3) Worldwide market leader and in North America, the largest generic drug market in the world, and among the leaders in Europe.
4) Has size and capacity to capitalize on the upcoming patent “cliff.”
Why TEVA?
Worries/Risks/Concerns:1) Increased competition among generic manufacturer
and from the “names” of the industry.2) Prevalence of Generics in the market will reduce
incentive for brand-names to invest in new drugs.3) Presence in Asia not as strong as in Europe or North
America.
Valuation
Valuation Method Target Per Share Amount Target Multiple Target Price
P/Forward E 3.35 17 56.95
P/Sale 15.23 4 60.94
P/CF 3.61 16 57.76
P/Book 19.91 3.5 69.67
DCF 63.01
Target Price (75%-DCF, 25%-Multiple) $62.59
Current Price $51.51
Dividend Yield 1.00%
Upside 22.5%
Summary
Recommended Action:
Company UpsideActio
n
Current
Weight
Target Weight
Change
Cardinal Health 18.68% Hold 2.51% 2.51% 0.00%
Johnson&Johnson
27.41% Hold 4.01% 4.01% 0.00%
Eli Lilly 16.79% Sell 2.39% 0.00% - 2.39%
Wellpoint 15.30% Sell 3.43% 2.00% - 1.43%
Gilead Science 35.01% Buy 0.96% 2.50% + 1.54%
TEVA 20.91% Buy 0.00% 2.71% + 2.71%
SECTOR TOTAL
13.30%
13.73% + 0.43%
QUESTIONS?