Healthcare Sector PPT

Healthcare
--SIM Sector Presentation

Lisa Liu
Nadine Slezak
Mark Venzor
Rachel Wang
Agenda
• Sector Overview
• Business Analysis
• Economic Analysis
• Financial Analysis
• Valuation
• Recommendation
Sector Overview
Sector Overview - S&P 500 Sector Weights
Healthcare
Sector:
14.01%;
$4.56 Trillion
Source: Fidelity.com
As of 03/17/2017
Sector Overview －Industries Included
• Pharmaceuticals • Health Care Equipment & Supplies
• Life Sciences Tools & Services • Health Care Equipment & Services
• Health Care Technology • Biotechnology
• Health Care Providers &

Services
Sector Overview - Top Companies
MKT CAP: $ 110.92 B MKT CAP: $ 31.01 B

MKT CAP: $ 159.0 B
MKT CAP: $ 91.8 B
MKT CAP: $ 77.57 B

MKT CAP: $ 60.98 B MKT CAP: $ 45.25 B
MKT CAP: $ 38.69 B
Sector Overview - Portfolio Composition
Company Portfolio Weight
Gilead Sciences (GILD) 3.51%
Medtronic (MDT) 2.05%
HCA Holdings (HCA) 4.66%
McKesson (MCK) 4.04%
Current S&P 500 Current SIM Concentration of Over/Under Weight

Concentration of Healthcare Healthcare
14.10% 14.26% + 0.16%

Sector Overview - Performance
Sector:
● QTD: 8.20%
● 1Y Ann. Return: 12.12%
S&P 500:
● QTD: 5.20%
● 1y Ann. Return: 17.61%
Source: Dow Jones S&P 500

Business Analysis
Business Analysis
Business Analysis
• Biotechnology 53.1B
• Pharmaceuticals - Diversified 166.5B • Medical Equipment, Supplies & Distribution 42.2B
• Managed Health Care 94.2B • Advanced Medical Equipment 31B
• Pharmaceuticals - Generic & Specialty 72.6B • Healthcare Facilities 14.3B
Business Analysis
• Sector Overview - Defensive
• Supply side increasing: Value added to GDP from Healthcare Sector increased 30%
from 2008 to 2015
• Demand side increasing: Changing Demographics
• Power of Buyers: Low → Limited bargaining/purchasing power by consumer, relatively
inelastic demand
• Uncertainty drug control price regulation
• Barriers to Entry: High → Sector requires large capital expenditures in infrastructure, R&D,
and regulation compliance
• Patent Protection and Exclusivity Rights key value generators
• Foreign Exchange Risks
Business Analysis
• Product Substitution: Moderate → Risk of Loss of patent protections and exclusivity rights,
environment of increasing generic alternatives
• Power of Suppliers: Low → Large number of suppliers, concentration of sales to a small

number of large firms (ex: pharma)
• Industry Competition: High → Limited threat of new competition due to small margins
which drive economies of scale
• High probability of acquisition of smaller firms
Economic Analysis
Current Economic Outlook
• U.S. in the Mid to late Expansionary Period of the Business Cycle
• Fed slowly raising interest rates → Raised during March meeting and currently
at 0.75-1% target
• In the midst of Healthcare Reform/Uncertainty
• Potential for tax reform and lower corporate taxes
• Foreign Exchange Risk → Strong U.S. Dollar
• Unemployment ~4.7%
• Changing Political Arena → likely more protectionist policies
Macroeconomic Factors Affecting the
Healthcare Sector
• Healthcare Sector projected to have largest compounded annual growth of any sector at
~2% from 2014-2024
• Aging Demographics
• Baby Boomers and increased life longevity
• The population of adults 65+ predicted to double in the next 25 years to 72 mil
• 65+ predicted to be ~20% of population by 2030
• Uncertainty over regulation on drug pricing

Regression Analysis
Raw Beta: 0.879

Adj. Beta: 0.919
R (Correlation): 0.799
Financial Analysis
Market Value
• Sector growth has outperformed the S&P 500

• P/E Ratio historically above the S&P 500
• Sector up to 2017, was undervalued
S&P 500 Health Care
• Forecast: Sector’s outperformance of S&P500 will Sector EPS growth rate
continue in the foreseeable future. outperformed S&P 500
since 2012
Dividends
11.2%
S&P 500 Health Care Sector

• Sector has underperformed the S&P 500
Dividends Per Share has
• Healthcare sector requires large amounts of CAPEX grown by 42% vs. S&P 500
• Forecast: Sectors dividend policies will continue to underperform of 48% since 2012
S&P 500, in-line with it being composed of growth stocks
Liquidity Ratio
Debt/EBIDTA ~2.50%
Current Ratio: ~1.5%
• Sector is less leveraged than S&P 500 S&P 500 Free Cash Flow
• Sector is financially healthy grew by 56% S&P 500
• Sector is a generator of Free Cash Flow Health Care Sector grew
by 38% since 2012
• Forecast: Sector to remain less leveraged than S&P 500
Profitability
• Historically S&P 500 stronger margins

• Net income gap margin is tightening
• Sector more efficient at generating income from

equity and capital
• Forecast: Continued to be more efficient at
generating income from equity and capital,
supporting higher earnings
Sector to Company Comparison
Sector Outperformed the S&P 500 Sector Forecasted to Outperform the S&P 500
Market Value Yes Yes, but margins will contract

Profitability Yes Yes
Dividends No No
Liquidity Yes Yes
S&P 500 to Sector to Company Yes Yes
Analysis
Valuation Analysis
Valuation Analysis
S&P 500 Health Care Sector Index
• 50-day moving average stood at 844: outperformance

Valuation Analysis
Healthcare Sector High Low Median Current
P/E 24.39 9.94 15.50 19.48
P/B 4.42 2.20 3.18 3.46
P/S 1.92 0.97 1.44 1.56
P/EBITDA 14.40 6.48 9.62 11.53
Relative to S&P 500 High Low Median Current
P/E 1.35 0.48 0.99 0.92
P/B 1.59 1.06 1.31 1.18
P/S 1.35 0.82 1.05 0.84
P/EBITDA 1.75 0.94 1.32 1.02
• Current relative valuation resides in the high range

• Remain conservative to the healthcare sector
Valuation Analysis
Multiples Entity 2012 2013 2014 2015 2016 Current
Price/Earnings Healthcare 13.63 17.20 22.04 23.02 18.02 19.48
S&P 500 14.39 16.15 17.60 18.37 20.49 21.10
Price/Book Healthcare 2.65 3.23 3.76 4.00 3.48 3.46
Value
S&P 500 2.14 2.41 2.65 2.80 2.93 2.93
Price/Sales Healthcare 1.29 1.59 1.85 1.92 1.61 1.56
S&P 500 1.34 1.52 1.73 1.82 1.97 1.86
Price/EBITDA Healthcare 8.09 10.46 12.94 13.65 11.40 11.53
S&P 500 7.33 8.52 9.03 10.15 10.65 11.28
• Healthcare sector has expanded over the past five years and outperformed the market
• Possible volatility and underperformance in the near future due to policy uncertainty
Recommendation
• Sector Summary - Defensive
• Composed of Growth Stocks
• Positives
• Outperformed the S&P 500 market – Strong ROE and ROC
• Increase demand for healthcare due to aging pool of baby boomers
• Restructuring and cost cutting initiatives sector wide will increase net margins
• Risks “Headwinds”
• Ambiguity in political and regulatory guidance
• Drug Deflation
• Trending to be: Overvalued
• Industry Weight
• Increase Pharmaceutical Distributor Sector weight
Maintain sector weight relative to S&P 500 (Short Term)

Data Sources
Job growth in Healthcare Sector: https://www.bls.gov/news.release/ecopro.t02.htm

Economic Cycle Graph: https://www.forbes.com/sites/fidelity/2016/12/26/economy-2017-outlook/#5a6b8fcd7eab
https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_market.jhtml?tab=sdbusiness&sector=35
Aging Population: https://www.cdc.gov/aging/pdf/State-Aging-Health-in-America-2013.pdf
Industry Concentration: http://markets.on.nytimes.com/research/markets/usmarkets/sectors.asp?sector=56

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Healthcare

--SIM Sector Presentation

• Health Care Technology • Biotechnology

• Health Care Providers &

MKT CAP: $ 110.92 B MKT CAP: $ 31.01 B

MKT CAP: $ 77.57 B

Gilead Sciences (GILD) 3.51%

Medtronic (MDT) 2.05%

HCA Holdings (HCA) 4.66%

McKesson (MCK) 4.04%

Current S&P 500 Current SIM Concentration of Over/Under Weight

14.10% 14.26% + 0.16%

Source: Dow Jones S&P 500

• Power of Suppliers: Low → Large number of suppliers, concentration of sales to a small

• Uncertainty over regulation on drug pricing

Raw Beta: 0.879

• Sector growth has outperformed the S&P 500

S&P 500 Health Care Sector

Current Ratio: ~1.5%

• Historically S&P 500 stronger margins

• Sector more efficient at generating income from

Market Value Yes Yes, but margins will contract

S&P 500 Health Care Sector Index

• 50-day moving average stood at 844: outperformance

P/B 4.42 2.20 3.18 3.46

P/S 1.92 0.97 1.44 1.56

P/EBITDA 14.40 6.48 9.62 11.53

Relative to S&P 500 High Low Median Current

P/E 1.35 0.48 0.99 0.92

P/B 1.59 1.06 1.31 1.18

P/S 1.35 0.82 1.05 0.84

P/EBITDA 1.75 0.94 1.32 1.02

• Current relative valuation resides in the high range

Maintain sector weight relative to S&P 500 (Short Term)

Job growth in Healthcare Sector: https://www.bls.gov/news.release/ecopro.t02.htm

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