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Health care sector. Suyang Yang Huiting Wang. Agenda. Sector Overview Business Analysis Financial Analysis Valuation Analysis Recommendation Q&A. Health Care Sector. Stocks relates to medical & healthcare goods or services Health Care Sector includes: Hospital management firms
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Health care sector Suyang Yang Huiting Wang
Agenda • Sector Overview • Business Analysis • Financial Analysis • Valuation Analysis • Recommendation • Q&A
Health Care Sector • Stocks relates to medical & healthcare goods or services • Health Care Sector includes: • Hospital management firms • Health maintenance organizations (HMOs) • Biotechnology • Medical products
SECTOR WEIGHT S&P 500 SIM
Health Care Industry Pharmaceutical is the KEY driver of the sector • Represent 51.7% of Health Care Sector & 6.6% of S&P 500 by Mkt. Cap • Industry develops, produces, and markets drugs licensed for use as medications • Pharmaceutical Sales include: • Prescribed drugs • OTC medications
SIM HOLDINGS JNJ & TEVA are two top holdings of SIM Portfolio
Business Analysis Overall, Health Care sector is in Maturity stage of life cycle • Pharmaceutical Industry(51.7%) is in the grey area between Growth and Maturity • Health Care-Equipment(14.52%) is in Maturity stage • Biotechnology Industry(12.5%) is in Growth stage
5 force Concentrate on several large companies: JNJ, PFE, MRK,ABT (40%) Low- no buyer has any particular influence on product or price • High barriers to enter, due to huge demand for R&D • Costly Regulations • Patent Buyer Power Substitutes Generic Drugs Barriers to Enter Supplier Power Low- Major supplier is chemical industry and have competitive suppliers
Patent Expiration & Generic Drugs • 20 YR Patent Length, 10 yr avg for FDA approval • 2009-2014, expires @ the rate of 3 drugs/year • Generic Drugs: cost-saving alternative
5 force Concentrate on several large companies: JNJ, PFE, MRK,ABT (40%) Low- no buyer has major influence on product or price • High barriers to enter, due to huge demand for R&D • Costly Regulations • Patent Buyer Power Substitutes Generic Drugs Barriers to Enter Supplier Power Low- Major supplier is chemical industry and have competitive suppliers
Demographics & Baby Boomers Demographic trend shows that there is a very big potential market for Health Care Sector in the near future. Also, Baby boomers are getting older.
National Health Expenditure Health Expenditure is in an up trend, which indicate future market of Health Care Sector
Exchange Rate Euro/USD Ratio Chart
Healthcare Reform • Period of controversy (UNCERTAINTY) • Worst-case scenario are priced in • Sector is over-sold 16.0%-12.7% 21.0%-13.1%
FINANCIAL ANALYSIS-NPM SPX: 8.0% HCX: 10.0% DRUGS: 22.0% BIOTK: 30% for 3 years
FINANCIAL ANALYSIS-ROE HCX:24.1% SPX: 11.0% DRUGS: 28.5% BIOTK: 23.7% HCDIS: 17.0% HCEQP: 19.2%
FINANCIAL ANALYSIS-CF Good job: BIOTK Stable: DURGS
FINANCIAL ANALYSIS-EBITDA Current 2009: HCX: 16.9% SPX: 17.4%
FINANCIAL ANALYSIS-Revenue Growth HCX Revenue is increasing at average 9% for the past 5 years.
VALUATION ANALYSIS-Sector fP/E High: 39.7 Low: 10.0 Median: 17.9 Current 11.6 Absolute Price to Earnings Ratio High: 1.6 Low: 0.69 Median: 1.1 Current 0.71 Price to Earnings Relative to S&P 500
VALUATION ANALYSIS-Industry fP/E High: 1.1 Low: 0.64 Median: 1.0 Current 0.65 Drugs Price to Earnings Relative to S&P 500 High: 3.2 Low: 0.78 Median: 1.5 Current 0.78 Biotk Price to Earnings Relative to S&P 500
VALUATION ANALYSIS-Industry fP/E High: 1.6 Low: 0.65 Median: 0.99 Current 0.82 Hcdis Price to Earnings Relative to S&P 500 High: 1.8 Low: 0.79 Median: 1.3 Current 0.84 Hceqp Price to Earnings Relative to S&P 500
VALUATION ANALYSIS-Sector P/S High: 4.7 Low: 1.0 Median: 2.0 Current 1.2 Absolute Price to Sales Ratio High: 2.4 Low: 1.1 Median: 1.3 Current 1.1 Price to Sales Relative to S&P 500
VALUATION ANALYSIS-Industry P/S High: 3.9 Low: 2.1 Median: 2.5 Current 2.3 Drugs Price to Sales Relative to S&P 500 High: 10.5 Low: 3.8 Median: 5.5 Current 4.0 Biotk Price to Sales Relative to S&P 500
VALUATION ANALYSIS-Industry P/S High: 0.4 Low: 0.1 Median: 0.2 Current 0.1 Hcdis Price to Sales Relative to S&P 500 High: 3.6 Low: 1.8 Median: 2.7 Current 2.3 Hceqp Price to Sales Relative to S&P 500
VALUATION ANALYSIS-Sector P/B High: 10.1 Low: 2.2 Median: 4.2 Current 2.9 Absolute Price to Book Value Ratio High: 2.5 Low: 1.2 Median: 1.4 Current 1.4 Price to Book Value Relative to S&P 500
VALUATION ANALYSIS-Industry P/B High: 3.3 Low: 1.2 Median: 1.5 Current 1.4 Drugs Price to Book Relative to S&P 500 High: 4.9 Low: 1.2 Median: 1.8 Current 1.5 Biotk Price to Book Relative to S&P 500
VALUATION ANALYSIS-Industry P/B High: 1.5 Low: 0.5 Median: 0.9 Current 0.9 Hcdis Price to Book Relative to S&P 500 High: 2.6 Low: 1.2 Median: 1.9 Current 1.3 Hceqp Price to Book Relative to S&P 500
VALUATION ANALYSIS-Sector P/CF High: 163.1 Low: 7.6 Median: 14.4 Current 9.4 Absolute Price to Cash Flows Ratio High: 9.8 Low: 0.9 Median: 1.3 Current 0.9 Price to Cash Flow Relative to S&P 500
VALUATION ANALYSIS-Industry P/CF High: 2.0 Low: 0.8 Median: 1.2 Current 0.8 Drugs Price to Cash Flow Relative to S&P 500 High: 3.8 Low: 1.1 Median: 2.0 Current 1.1 Biotk Price to Cash Flow Relative to S&P 500
VALUATION ANALYSIS-Industry P/CF High: 2.0 Low: 0.7 Median: 1.3 Current 0.8 Hcdis Price to Cash Flow Relative to S&P 500 High: 2.0 Low: 1.1 Median: 1.6 Current 1.1 Hceqp Price to Cash Flow Relative to S&P 500
Recommendations • Short Term: Increase 52 basis point bring the SIM portfolio 100 basis point overweight relative to S&P 500. • Long Term: Decrease weight when economy shows definite signs of improvement due to the defensive nature of Health Care sector.
Questions? Thank You!