Joseph Farfsing David Garman Ash Yijun Gu Scot Helton Timothy Keith

 Recap of sector presentation  Stock recommendation/proposals  Analysis of proposals  Summary

 Underweight Healthcare by 390 basis point to keep in line with S&P 500  Factors to consider in Healthcare:  Uncertainties related with government regulation, healthcare reforms and political risk  Increasing aging populations

Security Unrealized Gain/(Loss) as % of total cost* BetaCurrent Weight Proposed weight Action Cardinal Health Inc % %2.97%Sell 58 bps Eli Lilly Co % %2.18%Sell 42 bps Johnson & Johnson Co % %4.69%Sell 46 bps Medtronic Inc % %-Liquidate Wellpoint-43.78% %3%Sell 104 bps Gilead Science Inc %Buy 100 bps Total %13.84%-

Liquidate Current Position Sell 240 bps

 Industry: Medical Equipment  Strengths/Opportunities: - Technical prowess - Intellectual property portfolio - Experience with regulators - Sector Market Drivers (demographics)

 Threats/Concerns: - Regulation reform (i.e, intellectual prop.) - Foreign exposure: 30+ % - Litigation - Most recently a news item: Medtronic paid J&J $270 m to end a dispute over royalties involving use of stents - Political risk related to sector

We are the least optimistic about the upside over a one year horizon for this security: strong hold for analysts -History of litigation and general sector risk only enhance these feelings Opportunity to take some profit for SIM portfolio -approx. $48,000 unrealized gain -Only current SIM stock in sector without loss In a nut shell: take a break while we are ahead and reevaluate MDT after things shake out in terms of risk

Sell 58 bps Cardinal Health (CAH)

 Industry – Health Care Distributors  Cardinal Health is a global manufacturer and distributor of medical and surgical supplies and technologies dedicated to making healthcare safer and more productive.  Customers include hospitals, medical centers, retail and mail- order pharmacies, clinics, physicians, pharmacists and other healthcare providers.

 Extremely tight margins - around 6% on average – which could be seriously hurt from decreased hospital spending and price control regulation  Lack of Health Care spending over the next year  Negative synergies from the spin-off of the Clinical and Medical Products division

PercentileForecast values 0%$ %$ %$ %$ %$ %$ %$ %$ %$ %$ %$83.36 StatisticForecast values Trials10,000 Mean$41.52 Median$40.65 Standard Deviation$6.65 Coeff. of Variability Minimum$25.73 Maximum$83.36 Mean Std. Error$0.07 Terminal Discount Rate =13.4% Terminal FCF Growth =2.6% Current Price34.23 Implied equity value/share Upside/(Downside) to DCF18.582% Implied equity value / share is most sensitive to changes in the Terminal Discount Rate

SELL 42 bps

 Founded in 1876,  Headquartered in Indianapolis, IN  Principle activities are to discover, develop, manufacturer and market pharmaceutical- based health care solutions  Specializes in the treatment of diabetes worldwide

 Pharmaceutical—mature  Highly competitive, threats from generic drug makers  Extensive expenditure in R&D  Lengthy process of laboratory and clinical testing, data analysis, manufacturing development and regulatory review

 Currently the 10th largest pharmaceutical company in the world  Invested heavily in biotech, and by far the fifth largest biotech company in the world  Core competency: combine deep, therapeutic knowledge in targeted disease areas with the capability of generating potential biotech solutions alongside more traditional, chemistry- based work  Fully integrated pharmaceutical network: sophisticated partners all over the world, have access to critical resources around the globe, easier to expand overseas

 Costly and highly uncertain drug research and development—delay drug introduction  Intense competition from multinational pharmaceutical companies and generic companies  Subject to increasing government price controls and other heathcare cost containment measures  Weaker foreign currency and prolonged economic downturn may adversely affect business operation

Sensitivity Analysis Sensitivity analysis of Terminal discount rate and FCF growth rate to target price %11.00%12.00%13.00%14.00% 2% % % % % % Sensitivity analysis of Termianl discount rate and FCF growth rate to P/E value %11%12%13%14% 2% % % % % %

Absolute Valuation HighLowMeanCurrentTarget Multiple Target E, S, B etc/share Target Price Forward P/E P/B P/S P/CF Current Price34.34 Average Multiple Price55.86 DCF Price51.25

 Prasugrel (co-developed by Daiichi Sankyo Company, Limited and Eli Lilly) reduced the risk of multiple types of heart attacks in phase III TRITON-TIMI 38 study  Eli Lilly will launch two global trials to advance second Alzherimer’s disease treatment candidate into late-stage testing - both phase iii pivotal trials begin enrollment in may 2009; reinforces Lilly's commitment to alzheimer's disease and biotech product research

Sell 46 bps Johnson & Johnson (JNJ)

 Market Leader in Pharmaceuticals and Medical Devices and Diagnostics  Strong Presence in Consumer Health Care products with brands such as Band-AID, Aveeno, Listerine, and Neutrogena  Consistent Earnings, Strong ROE, Modestly Leveraged, Recent Dividend Increase to 3.5% Div. Yield

 Consumer Health Care ◦ OTC availability of ZYRTEC ◦ Strong Growth in Baby Care & Skin Care products ◦ Strong International Sales  Pharmaceuticals ◦ Strong Sales of Drugs REMICADE, CONCERTA, and TOPAMAX ◦ Strong Pipeline of New Drugs with 7 to 10 to complete filings for FDA approval in 2009 and ◦ European Commission Approval of STELARA and PREZISTA During 1 st Quarter  Medical Devices & Diagnostics ◦ Number 1 position in Ophthalmic Lens Manufacturing ◦ Growth Rate of 6.4% from 2007 to 2008

 Generic competition for RISPERDAL resulted in 38% decrease in sales for the drug  Negative currency impact of 12.6% for First Quarter  Prolonged unemployment may lead to lower than expected spending on health care  Potential negative health care reform

Price to BookPrice to Cash Flow Forward P/EPrice to Sales

Sell 104 bps

 WellPoint Inc., was formed in 2004 with the merger between WellPoint Health Networks Inc. and Anthem Inc.  Leading provider of Health benefits plans by enrollment with 35 million members.  Independent licensee of Blue Cross and Blue Shield plans in 14 states with exclusive rights.  Diverse product offerings including PPO’s, HMO’s, CDHP’s, PBM, and many self-funded individual plans.

 Highly competitive; Price competition contracts profit margins  Over 95% of revenue is derived from premiums  Barriers to entry are high from heavy regulation and medium concentration with the top four players contributing about 44% of revenues  Large exposure to the U.S.

 High customer retention rates allowing for high growth potential contingent on rising employment levels.  Strong brand name through the Blue Cross Blue Shield.  Cost controls, this QTR reduced MCR from 85.%1 to 81.6% YoY. Exiting high cost Medicaid operations in Ohio and Connecticut  Acquisitions resulting in larger more diverse revenue streams. Acquired DeCare Dental adding 4 million new members.

 Consumer trends to higher deductible lower premium plans (CDHP’s). Up 14% in Q1.  Rising unemployment contributing to loss of enrollment. 1 st QTR enrollment down 2.3% YoY. Expect a drop to 33.9 million members, or 3% YoY, by end of the  Investment losses. Reduced EPS for 1 st QTR 2009 by $.46. Expect total year to be $.45 per share.  High SG&A expenses increased 90 bp YoY to 15.5%.

 Cost savings from IT initiatives and pay for performance standards.  Being able to tap into the market of the over 46 million Americans who are uninsured  Premium and deductible limitations deteriorating profit margins.  Mandatory coverage imposing adverse selection on the industry

Buy 100 bps

Gilead’s primary areas of focus include HIV/AIDS, liver disease and serious cardiovascular and respiratory conditions. Respiratory Cardiovascular Liver Disease HIV/AIDS. Gilead discovers, develops and commercializes therapeutics that advance patient care.. HEALTH CARE - BIOTECHNOLOGY

DCF ValuationTerminal Discount Rate =13.8% Ticker: GILDTerminal FCF Growth =2.8% Health Care ForecastTerminal Year2009E2010E2011E2012E2013E2014E2015E2016E2017E2018E2019EValue Revenue 6,509 7,810 9,216 10,875 12,832 14,886 17,119 19,686 22,442 25,584 29,166 % Growth20.00%18.00% 16.00%15.00% 14.00% Operating Income 3,332 3,999 4,719 5,546 6,519 7,532 8,628 9,843 11,221 12,792 14,583 Operating Margin51.20% 51.00%50.80%50.60%50.40%50.00% Interest - net (137) (164) (194) (190) Interest % of Sales-2.10% -1.75%-1.48%-1.28%-1.11%-0.97%-0.85%-0.74%-0.65% Taxes 798 1,041 1,228 1,434 1,677 1,931 2,204 2,508 2,853 3,246 3,693 Tax Rate23.0%25.0% Minority Interest Net Income 2,611 3,062 3,624 4,311 5,040 5,800 6,622 7,533 8,567 9,745 11,088 % Growth17%18%19%17%15%14% Add Depreciation/Amort % of Sales3.07%3.00%2.80% 2.75% 2.50%2.00% Plus/(minus) Changes WC(378)(346)(373)(326)(385)(595)(685)(787)(898)(1,023)(1,167) % of Sales-5.81%-4.42%-4.05%-3.00% -4.00% Subtract Cap Ex Capex % of sales1.54%1.47%2.00% Free Cash Flow2,3332,8363,3844,0714,7525,3166,0236,7467,6698,7229,922 YOY growth22%19%20%17%12%13%12%14% Terminal 92,723.0 Terminal Value 92,723P/E 8.4 NPV of free cash flows 27,16452%EV/EBITDA 6.05 NPV of terminal value 25,45548%Free Cash Yield10.70% Projected Equity Value 52,618 Free Cash Flow Yield4.43% Shares Outstanding Current Price $ Implied equity value/share $ Upside/(Downside) to DCF32.29%

(Normal Distribution)Simulation Parameters MeanStd Dev Terminal Discount Rate12.50%1.50% Terminal FCF Growth2.50%0.30% StatisticForecast values PercentileForecast values Trials10,0000%$34.42 Mean$ %$51.50 Median$ %$55.35 Standard Deviation$ %$58.31 Variance$ %$61.18 Coeff. of Variability %$64.08 Minimum$ %$67.20 Maximum$ %$ %$ %$ %$ Sensitivity Analysis Terminal Discount Rate =13.8% Terminal FCF Growth =2.8% Current Price $ Implied equity value/share $ Upside/(Downside) to DCF32.29%

 Buy: Gilead Science—100 bps  Sell: Cardinal Health—58 bps Eli Lilly— 42 bps Johnson & Johnson— 46 bps Medtronic— 240 bps Wellpoint— 104 bps

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