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Health Care Sector – Stock Presentation

Health Care Sector – Stock Presentation. Kailas Joshi Daniel Kurth. Agenda. Sector Review Johnson & Johnson (JNJ) Eli Lilly (LLY) WellPoint (WLP) Cardinal Health (CAH) New Recommendations Q&A. Health Care Sector Review. Healthcare Sector Overview. Sector Review. JNJ. LLY.

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Health Care Sector – Stock Presentation

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  1. Health Care Sector – Stock Presentation Kailas Joshi Daniel Kurth

  2. Agenda • Sector Review • Johnson & Johnson (JNJ) • Eli Lilly (LLY) • WellPoint (WLP) • Cardinal Health (CAH) • New Recommendations • Q&A

  3. Health Care Sector Review

  4. Healthcare Sector Overview Sector Review JNJ LLY CAH & WLP Recommendations • The sector market capitalization is at $1.15 Trillion • The Sector represents 15.94% of the S&P 500 by Market Cap • Sector Revenues represented $63,874 million in 2008 Source: www.standardandpoors.com, US Equity Indices, as of 1/30/2009

  5. S&P 500 Sectors – Overview Sector Review JNJ LLY CAH & WLP Recommendations *Values in USD millions Source: www.standardandpoors.com, US Equity Indices, as of 12/31/2008

  6. Key External Factors Sector Review JNJ LLY CAH & WLP Recommendations • Positive Demographic Shift • Increased prevalence of Heart Disease and Obesity • Increased Government involvement

  7. Sector Weights in SIM Portfolio Sector Review JNJ LLY CAH & WLP Recommendations Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecom Services Utilities As of 1/30/2009

  8. Sector Performances in S&P 500 Sector Review JNJ LLY CAH & WLP Recommendations Source: 2008 Market Update, Fidelity Management & Research Co. (FMRC) as of 12/31/2008

  9. Recommendations Crisis/Recession Flu The Healing Sector OSU SIM Portfolio Analyses & Valuation Recommendation • S&P 500 weighting = 15.94% • SIM Weighting = 21.50% • Sector is overweight by 5.56% • Recommended sector weight: 19.00% • Action: reduce weight by 250 basis points • Reasons: • 21.5% is extremely overweight • SIM portfolio could experience serious losses if the sector underperforms the rest of the market • Changes in weights of other sectors will naturally tend to increase the weight of Health care

  10. SIM Portfolio Holdings Sector Review JNJ LLY CAH & WLP Recommendations As of 1/31/2008

  11. Proposal Sector Review JNJ LLY CAH & WLP Recommendations • Current Holdings • Johnson & Johnson (JNJ) – HOLD • Eli Lilly (LLY) – SELL • Cardinal Health (CAH) – SELL • WellPoint (WLP) – HOLD • New Holding • Medtronic (MDT) – BUY • Resulting Portfolio Weight • 19.0%

  12. Johnson & Johnson (JNJ)

  13. Overview Sector Review JNJ LLY CAH & WLP Recommendations Market Cap $138 Billion • Price: $47.92 • P/E: 10.95 • EPS: 4.57 • Div: 1.84 (3.50%) • Segments: • 1. Consumer • 2. Medical Devices • 3. Pharmaceutical

  14. Valuations – DCF Valuation Sector Review JNJ LLY CAH & WLP Recommendations

  15. Valuations - Multiples Sector Review JNJ LLY CAH & WLP Recommendations Target Price $66.54

  16. Outlook Sector Review JNJ LLY CAH & WLP Recommendations • Risperdal (anti-psychotic) and Topamax (anti-epilepsy) come off patent • No major new drugs until end of 2009 (Golimumab) • Medical Devices: strong growth through DePuy orthopedic joint replacements

  17. Action Sector Review JNJ LLY CAH & WLP Recommendations • Solid Performance in 2009 • Good Dividend, AAA Bond Rating • Currently 7.4% of SIM Portfolio • Recommendation: HOLD

  18. Eli Lilly (LLY)

  19. Overview Sector Review JNJ LLY CAH & WLP Recommendations • Market Cap: $32.05B • Current Price: $27.75 • P/E: N/A • EPS: -1.89 • Div: 0.49 (6.90%) • Segments: • Pharmaceuticals • Animal Health

  20. Valuations – DCF Valuation Sector Review JNJ LLY CAH & WLP Recommendations

  21. Valuations - Multiples Sector Review JNJ LLY CAH & WLP Recommendations Target Price $42.00

  22. Outlook Sector Review JNJ LLY CAH & WLP Recommendations • Growth Factors • Acquisition of ImClone should provide operations and cost synergies • Current neuroscience drugs are performing quite well • Key Concerns • Growing competitive environment • Lack of block-buster drug pipeline

  23. Actions Sector Review JNJ LLY CAH & WLP Recommendations • SELL SIM position in LLY by 190 bps • Strong earnings growth • Main theme of the portfolio going forward is to be more diversified across the industries in the Health Care sector

  24. Cardinal Health (CAH) & WellPoint (WLP)

  25. Price Performance (5 years) Sector Review JNJ LLY CAH & WLP Recommendations Cardinal Health (CAH) WellPoint (WLP)

  26. Valuations – Analyst Opinions Sector Review JNJ LLY CAH & WLP Recommendations Source: www.finance.yahoo.com – as of 2/27/2009

  27. Overview CAH Sector Review JNJ LLY CAH & WLP Recommendations • Healthcare Supply Chain Services • Delivers pharmaceutical and medical devices to pharmacies, hospitals etc • 4% growth rate • 1.56% Profit margin • Clinical Medical Products • Manufactures technologies and services that help hospitals prevent medical errors • 30% Growth Rate • 15.96% Profit Margin

  28. Valuations – DCF Valuation (CAH) Sector Review JNJ LLY CAH & WLP Recommendations Terminal Discount Rate: 12.5% Terminal FCF Growth: 2.5%

  29. Outlook for CAH Sector Review JNJ LLY CAH & WLP Recommendations • Key Growth Drivers: • Spinoff of Clinical and Medical Supplies from Healthcare Supply Chain Services • Captured 1/3 of all distributed pharmaceutical products in their supply chain • Strong growth in nuclear pharmacy • Key Concerns • “In many ways we see fiscal ’09 as a transitional year for Cardinal Health, where we put the foundation for future growth under both segments” –CEO R. Kerry Clark • CVS and Walgreens accounted for 22% and 19% of the companies revenue in 2008 (CVS expires on 6/30) • Lowered earnings outlook due to spending delays by hospitals

  30. Actions Sector Review JNJ LLY CAH & WLP Recommendations • Eliminate our position in CAH • Negative outlook for the next 6-12 months • Restructuring will potentially affect earnings • Two customers equal 41% of business with one contract expiring in 2009 • General economic conditions are not conducive to higher performance in the 6-12 month time frame • Maintain position in WLP

  31. Recommendations

  32. Stock Recommendations Sector Review JNJ LLY CAH & WLP Recommendations Medtronic (MDT)

  33. Overview Sector Review JNJ LLY CAH & WLP Recommendations • Current Price: $27.22 • Market Cap: 32.99 Billion • Revenue $13.5 Billion • P/E Ratio: 11.69 • EPS: 2.53 • Main Segments • Cardiac Rhythm Management • Spinal • Cardiovascular

  34. Valuations – Analyst Opinions Sector Review JNJ LLY CAH & WLP Recommendations

  35. Valuations – DCF Valuation Sector Review JNJ LLY CAH & WLP Recommendations Terminal Discount Rate: 11.0% Terminal FCF Growth: 3.0%

  36. Valuations - Multiples Sector Review JNJ LLY CAH & WLP Recommendations Target Price $40.00

  37. Key Growth Drivers Sector Review JNJ LLY CAH & WLP Recommendations • Cardiac Rhythm Management • EnRythm: first pace maker to include Managed Ventricular Pacing. Reduces unnecessary pacing • Spinal • CD Horizon Legacy Peek: provides stability and reduces stress on spine. 10% growth compared to 2007 • Cardio-Vascular • Endeavor: first drug eluting stent approved by FDA since 2004. 30% increase in demand from 2007. Contributed $175 million in revenue

  38. Outlook Sector Review JNJ LLY CAH & WLP Recommendations • Key Factors • $1.75 Billion in Cash and Short Term Investments (purchased Ventor Technologies and CoreValve) • No customer represents over 10% of the companies sales in 2008, 2007 or 2006 • Strong position in heart, diabetes and spinal segments • Concerns • Cutting executive pay 5% and freezing wages for all employees in May

  39. Comparative Charts Sector Review JNJ LLY CAH & WLP Recommendations 1-year 5-year

  40. Summary of Actions * Based on Mean Analyst Target Price from www.finance.yahoo.com

  41. Questions?

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