1. Healthcare Sector Student Investment Management Analysts:
John Laliberte
Andrew Jasen
Zach Janszen
11/1/2016

2. Overview 3rd largest sector in the S&P 500 13.40% of the index
$1.7 Trillion in revenues annually
Over 17 million employees in US
Over 750,000 US companies
Industry Vertical
Market Cap ($Bn)
1 Year Return
Pharmaceuticals
$1,980.0
(6.3%)
Biotechnology
825.1
(11.2%)
Supplies & Equipment
676.4
17.0%
Providers & Services
613.4
2.0%
Life Sciences
187.4
8.7%
Technology
49.1
(8.9%)

3. Companies Companies Market Cap ($Bn) Johnson & Johnson $316.3 Pfizer
Market Cap ($Bn)
Johnson & Johnson
$316.3
Pfizer
189.08
Merck
155.88
UnitedHealth Group
133.09
Medtronic
113.35
Amgen
95.51
Gilead
94.67
AbbVie
85.13
Allergan
84.51
Bristol-Myers Squibb
83.51

4. Performance Recent underperformance Long-term outperformance
Buying opportunity?

5. Business Analysis
Defensive industry – Demand for healthcare products is inelastic. People will give up a lot before healthcare.
Much less affected by economic downturns than other industries.
International IP enforcement serve as potential catalyst for pharma/distributor growth.

6. Business Analysis Continued - Demographics
The two largest generations ever are the Baby Boomers (74.9 million) and the Millennials (75.4 million)
Baby Boomers are reaching retirement age (currently years old)
Millennials are approaching the age of bearing children (19-35 years old)

7. Five Forces Analysis Supplier Buyer Ease of Entry Substitutes
Providers have high bargaining power
Few suppliers relative to number of buyers
Buyer
Weak consumer power due to inelastic demand
Ease of Entry
High regulation
Quasi-capital intensive and IP related
High M&A activity
Substitutes
Low due to IP prevalence
Lack of coverage options
Competition
Intense
Dominated by large companies

8. Raw beta shows there it is a defensive industry
Adjusted beta is even closer to 1, even closer to the market, which further shows the industry’s close relationship to the overall market

9. Healthcare follows the S&P pretty closely, but due to the lower beta, large fluctuations in the overall market will not move the healthcare index as greatly

10. Healthcare performance plotted against US population – further shows that this industry will benefit tremendously from an increasing population and retiring age group (millennials and baby boomers are largest population groups)

11. Economic Analysis Cont.
Rising premiums driven by ACA
Current low interests hurt insurers and savers, but help pharma, med tech, and distributors
Political uncertainty
Trump: repeal ACA, maintain pre-existing conditions
Clinton: “fix” ACA, possible government controlled competitor
Little impact in short term
Report Monday, the 24th: Premiums expected to rise 22% next year under ACA, but 77% of people enrolled under the plan will be able to pay $100 or else a month taking subsidies into account
Patients in ACA are sicker, more expensive, and seek more medical care

12. Financial Analysis

13. Valuation Overview
S&P 500 Health Care Sector Index (S5HLTH) - Valuation Overview
12/31/2009
12/31/2010
12/30/2011
12/31/2012
12/31/2013
12/31/2014
12/31/2015
10/26/2016
12/31/2016
12/31/2017
Valuation Metrics
Price/Earnings
13.0x
12.0x
12.2x
14.8x
20.0x
23.0x
21.8x
19.5x
15.5x
14.1x
Price/Book Value
2.4x
2.5x
2.7x
3.5x
4.1x
3.9x
3.6x
3.4x
3.1x
EV/Sales
1.3x
1.2x
1.4x
1.8x
2.0x
1.7x
EV/EBIT
10.5x
9.8x
12.1x
17.2x
18.8x
19.2x
17.3x
EV/EBITDA
8.1x
7.5x
7.6x
8.8x
14.2x
13.1x
10.8x
10.1x
Dividend Yield
2.0%
2.1%
2.2%
1.6%
1.5%
1.7%
1.8%
1.9%
Fundamentals
Gross Margin
33.9%
34.3%
34.4%
33.5%
32.6%
32.7%
Operating Margin
12.5%
12.1%
12.3%
11.7%
10.6%
10.4%
Profit Margin
9.6%
7.3%
7.6%
8.3%
7.9%
7.4%
7.8%
Return on Assets
9.7%
7.0%
6.7%
7.1%
6.3%
6.5%
8.4%
Return on Equity
22.0%
15.4%
16.4%
15.7%
17.6%
17.2%
16.6%
16.9%
25.3%
27.2%
Sharp drop off in earnings multiples with a simultaneous constant in EV/sales shows that the industry as a whole is developing and maturing – their earnings per share are increasing against a more stagnant sales figure which show that the industry is not in a typical growth stage when it seems to be focusing on margins and operations all with a slight turnaround in 2015

14. Valuation Over Time S&P P/E 24.3x P/E 19.4x P/FCF 17.0x EV/EBITDA
S&P EV/EBITDA
14.1x
The healthcare index is undervalued relative to the S&P on an earnings and enterprise basis
This makes sense given the healthcare market’s fundamentals, low beta, and defensive nature – this little underperformance on a valuation perspective actually surprised us as we expected the enormous bull market that the US entered after the financial crisis would push market valuations much higher (one explanation could be M&A premiums priced into the stocks as this sector has been one of the most active)

15. Valuation Relative Valuation YTD S&P High Median Low Current P/E
S&P
High
Median
Low
Current
P/E
20.51x
19.18x
17.10x
20.11x
P/B
2.53x
2.79x
2.88x
2.81x
P/S
1.95x
1.87x
1.67x
1.92x
EV/EBITDA
13.25x
12.54x
11.43x
13.13x
S5HLTH
22.45x
20.60x
19.40x
19.04x
3.89x
3.70x
3.46x
3.54x
1.72x
1.62x
1.65x
14.72x
13.65x
12.91x
13.07x
Delta
 (Healthcare Index – S&P)
1.94x
1.42x
2.30x
(1.07x)
1.36x
0.91x
0.59x
0.73x
(0.08x)
(0.14x)
(0.06x)
(0.27x)
1.47x
1.11x
1.48x
P/E
Sep-16
Jun-16
Mar-16
Dec-15
Sep-15
Jun-15
Mar-15
Since 2015
Large Pharma
19.7x
23.8x
24.6x
21.2x
16.4x
14.0x
13.3x
6.4x
Manged Care
19.6x
22.8x
21.6x
21.4x
18.8x
21.1x
20.4x
(0.8x)
Hospitals
14.2x
14.6x
13.6x
12.9x
13.9x
17.6x
15.1x
(1.0x)
Biotechnology
21.3x
24.8x
26.4x
34.4x
20.6x
17.5x
16.5x
4.7x
Supply Chain
18.3x
18.6x
16.9x
20.2x
(0.0x)
Medical Devices
22.9x
19.9x
21.0x
18.5x
3.0x
EV/EBITDA
11.5x
9.1x
7.9x
8.3x
5.0x
7.1x
6.9x
6.1x
5.8x
4.1x
1.3x
7.4x
7.2x
7.3x
9.5x
(2.1x)
17.0x
17.8x
22.7x
13.7x
11.1x
5.9x
10.0x
10.6x
9.4x
11.7x
10.2x
(0.2x)
14.4x
12.1x
12.6x
11.0x
13.1x
YTD – on an earnings basis, the general market is outperforming the healthcare sector due to future uncertainty within healthcare – HC companies are still figuring out how to navigate the political landscape

16. Recommendation Risks Strengths Current SIM portfolio: Recommendation:
Political uncertainty and drug pricing
Rising premiums
Strengths
Defensive, inelastic demand
Strong demographics
Favorable valuations
Current SIM portfolio:
Healthcare: 13.44% as of 9/30
S&P500 Healthcare: 14.68% as of 9/30
Recommendation:
OVERWEIGHT
Moving forward the market uncertainty will push investors toward more defensive stocks – a lot of these companies like we stressed earlier are experts at commercialization and monetization for products or services with generally inelastic demand
Global volatility will just further help this sector and the flight-to-safety of capital allocated toward equities will go to stocks in sectors like healthcare
There is relative undervaluation in the sector coupled with favorable growth driven largely by demographics – therefore, overweight this sector moving forward
[In addition to the stated risks and strengths]

17. Questions?