JOSEPH FARFSING DAVID GARMAN ASH YIJUN GU SCOT HELTON TIMOTHY KEITH Health Care Sector Presentation.
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Transcript of JOSEPH FARFSING DAVID GARMAN ASH YIJUN GU SCOT HELTON TIMOTHY KEITH Health Care Sector Presentation.
Overview
Size and CompositionBusiness AnalysisEconomic AnalysisFinancial AnalysisValuation AnalysisRecommendation
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
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
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
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.
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
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 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.