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

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

3. 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%

4. 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.

5. 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

6. 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

8. 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

9. 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.

10. 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.

11. Macro Factors

12. 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.

13. 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

14. 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
2017 Revenue projections for Biotech Companies

16. Relative Valuations

17. 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.

18. 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!

19. Industry Outlook

21. 1. Threatened Margin

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

23. 3. Industry Raider: Amazon

24. Terminal Growth rate & discount rate
Margin rate & discount rate

25. Relative Valuation

26. Final Target Price

27. 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

28. 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

29. Company Overview Key Drivers DCF Multiples
Conclusion

30. Company Overview Key Drivers DCF Multiples
Conclusion

31. 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

32. 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

33. Q&A
Question?