Connor Roll, Louis Tumukunde, Yuqiao Xue & Ping Zhou Healthcare Stocks Presented by: Connor Roll, Louis Tumukunde, Yuqiao Xue & Ping Zhou

Sector Recap Stock Recommendation Summary Q&A Eli Lilly Content Sector Recap Stock Recommendation Eli Lilly Gilead Sciences McKesson Medtronic Summary Q&A

Sector Overview Sector Size: Market Weight: SIM Weight: $4.84T (10/27/2017) Market Weight: 14.55% (10/20/2017) 3rd Largest SIM Weight: 14.46%

Company Overview A global company based in Indianapolis, Indiana that develops, manufactures, and markets pharmaceutical and biotechnology products. The company was founded in 1876 and has since become a large force in the healthcare sector. It as two business segments that it operates which are pharmaceutical products and animal health products. The four main therapeutic areas in which the company develops, manufactures, and markets pharmaceutical products are endocrinology, oncology, cardiovascular, and neuroscience. In 1952, Eli Lilly formed the animal health division, Elanco Products Company, and has since made numerous strategic acquisitions to strengthen its market share. It sells products in 125+ countries and has 42,000 employees.

Investment Thesis Risks Pipeline of new drugs as well as the potential of current ones in the market to grow in market penetration is highly likely Focus on streamlining its operations will result in large cost savings Well entrenched in its main therapeutic areas such as endocrinology which can maintain its market share if other plans are not implemented Strong brand provides stability in an uncertain market Valuations are slightly more expensive that it its 10 year median absolute norms and relative to its main competitors in the sector, but its growth prospects justify these metrics Risks Loss of exclusivity/patent cliffs in high profit earning products in the near future Delays in the FDA pharmaceutical product approval process The uncertainty of the potential healthcare overhaul in the United States Uncertainty of the strategic plan for the company’s animal health product division Increased competition from generic manufacturers

Recent Events Verzenio was launched into the market in Q3 after FDA approval. This breast cancer drug will compete with the products fellow rivals Pfizer and Novartis have already captured the market with. Verzenio is the only one of the three that can be taken on its own Back in Q2, the FDA declined to approve Eli Lilly and Incyte’s drug Olumiant, which treats rheumatoid arthritis. However, recently the product was approved in Japan, signaling the potential it has to be approved in the United States. The company is continuing to illustrate the drug’s efficacy and safety. The company is reviewing its strategic alternatives for its Elanco Animal Health business. These options include an initial public offering, merger, sale, or a retention. A decision will be made by no later than mid-2018

Overarching Drivers: I expect… Top line revenue growth to be higher than that of consensus based on recent and upcoming drug launches R&D and marketing costs to be 49% as a percentage of sales by 2018 The streamlining of their operations and better focus of resources will pay off. This improvement in their cost structure of the company is expected to result in pre-tax savings of $500M. Strong operating margins indicate long-term financial health and overall profitability for the company, so this result will bode well for Eli Lilly. A financially sound strategic plan will be reached in terms of their Elanco Animal Health Products division of the company The financial health and fortress balance sheet of the company will continue to drive the stock price higher   Overarching Drivers: Growing revenue Expanding margins Sustaining a flow of innovation Deploying capital

Current Products & Future Pipeline Eli Lilly has launched nine new medicines since 2014. Relatively new Trulicity drug, Q3 sales for the drug were up 117%. One main driver of this is the rapidly increasing growth rate of the endocrinology segment of the market (Increase from under 30% in 2015 to 63% in 2017). Cyramza has captured nearly 70% of that market in Japan. The drugs penetration in the U.S. market dwarfs its international sale, which leaves room for vast improvement. The animal health division Q3 sales increased 5% as the company revises its strategic plan for the company. In addition Eli Lilly has announced the firm plans to launch 11 more medicines by 2023.

Valuations Eliy Lilly’s current P/E and EBITDA valuations are below their 10 year median indicating it is selling at a slightly more attractive price in regards to its earnings. As earnings continue at a consistent growth rate YoY, these multiples should remain attractive. In terms of its main competition, the company is slightly more expensive. Eli Lilly’s industry leading R&D program (as a % of sales) will pay off in the near future resulting in bottom line earnings growth and bring these multiples back in line with their rivals.   Overall, the healthcare sector as a whole is selling at a premium to its historical averages. The difference between the median and current multiples are extremely minimal so this should not be a concern.

Macro Factors

Company Overview A biopharmaceutical company that develops innovative medicines for HIV, chronic hepatitis, hematology/oncology, cardiovascular and inflammation/respiratory diseases. Founded in 1987 and went public in 1992 Has two business segments: Antiviral, and Other products. Antiviral segment consists of HIC, HBV and HCV drugs, and contributed over 90% of revenue over past three years.

Investment Thesis Risks Sustained growth of HIV product revenue Potential for reviving HCV product sales through entry into China History of successful acquisitions New products in the pipeline Risks Uncertainty about bottoming out of HCV sales Continued pricing pressures from competition Possible pricing pressure from authorities Failure to develop / acquire a blockbuster drug Main HIV product patents expiring in 2017 and 2021 in US and Europe

GILD Financial Analysis - Revenue   2019E 2018E 2017E 2016 2015 2014 2013 2012 2011 Sales ($million) HCV products 4,440 5,162 8,900 14,834 19,140 12,410 139 - HIV and other Antiviral products 14,365 14,223 13,944 12,911 11,067 10,381 9,203 8,142 7050 Other products 2,436 2,365 2,318 2,208 1,944 1,683 1,462 1,256 1053 Royalty, Contract and other revenue 411 407 415 437 488 416 398 304 282 Total 21,651 22,157 25,578 30,390 32,639 24,890 11,202 9,702 8385 Consensus 21,700 22,200 25,800 Guidance 24,500 - 25,500 2017 Revenue projections for Biotech Companies

Relative Valuations

McKesson Corporation distributes pharmaceuticals, medical-surgical supplies, and health and beauty care products throughout North America. The Company also offers analytic, care management, and patient solutions for payers. It belongs to Health Care Sector of S&P 500 and its sub industry is Health Care Distributors.

Investment Thesis: -Single-source brand drug spending portion increases in total spending on drugs and portion of generic drugs with higher margin stays -international revenue contributed 40% of revenue growth in FY2017, benefiting from US dollar devaluation, situation may change in following years -Amazon is ready to enter Healthcare supply chain industry with deep pocket and existing advanced distribution system   Risk to recommendations: -Generic deflation remains a concern and is still down double digits depending on the portfolio of drugs, consistent with 1H2017. -Less profitable generic launches compared to prior years -Moderation of buy-side pharmaceutical manufacturer pricing trends -Deterioration of the hospital spending environment -Risks associated with the integration of acquisitions -Lower-than-expected drug price increase -Amazon!

Industry Outlook

1. Threatened Margin

2. Revenue growth due to Weak Dollar, which is unpredictable

3. Industry Raider: Amazon

Terminal Growth rate & discount rate Margin rate & discount rate

Relative Valuation

Final Target Price

MDT, which positions itself a medical technology, services and solutions provider, is the world-largest company in medical device industry. The company runs its business worldwide and serves physicians, hospitals and patients in 160+ countries. It has four business segments including cardiac and vascular group (35% of revenue), minimally invasive therapies group (33%), restorative therapies group (25%) and diabetes group (6%). Company Overview Key Drivers DCF Multiples Conclusion

Broad and diversified portfolio supporting stable growth; Industry-level By 2020, global medical devices market size will reach USD435.8 billion with CAGR of 6.7% because of aging population, stable growth in US market, rising demand from out-of-U.S. market and technology development. Entity-level Proven market leader in such niche markets as CRM, spine, insulin pump and CGM etc.; Broad and diversified portfolio supporting stable growth; Acquisition synergies from Covidien merger in 2015 and economy of scale; New profit drivers from newly certified products; Close cooperation with 3rd parties to input new technologies into products. Company Overview Key Drivers DCF Multiples Conclusion

Company Overview Key Drivers DCF Multiples Conclusion

Company Overview Key Drivers DCF Multiples Conclusion

Hold Company Overview Key Drivers DCF Multiples Target price Weight   Target price Weight Final DCF 83.97 70% 58.78 Traditional multiples 83.42 30% 25.03  Target Price 83.81  Current Price 79.20 5.82% Upside Hold Company Overview Key Drivers DCF Multiples Conclusion

Summary CURRENT BASIS PROPOSED BASIS CURRENT PRICE TARGET PRICE UPSIDE (DOWNSIDE) RECOMMENDATION 0% 1% 84.81 94.53 11.46% Upside Buy 4.69% 72.59 84.12 15.5% Upside Hold 3.86% 2% 147.8 126.54 15.3% Downside Sell 2.06% 79.20 83.81 5.82% Upside Total

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