1. HEALTHCARE Sarah Hemmelgarn Billy Wong Alex Wisler Jason Wattier

2. Size and Composition

3. Sector Weight S&P 500 WeightSIM Weight+/- Consumer Discretionary 8.97%7.50%-1.46% Consumer Staples 12.32%12.36%0.04% Energy12.05%10.68%-1.37% Financials 13.70%9.33%-4.37% Health Care14.06%13.58%-0.49% Industrials 9.79%11.57%1.78% Information Technology 18.43%20.19%1.76% Materials 3.20%4.12%0.92% Telecommunication Services 3.39%3.28%-0.11% Utilities4.10%3.87%-0.23% Cash 0.00%3.53% 49 basis points underweight.

4. Industries Pharmaceuticals is the largest, at 52.97% of the sector's market value. IndustryMarket Cap ($B)Market Cap (%) Drug Manufacturers – Major*935.7452.97% Biotechnology*216.3512.25% Medical Instruments & Supplies176.7610.01% Drug Manufacturers - Other141.468.01% Medical Appliances & Equipment106.526.03% Health Care Plans*87.774.97% Medical Laboratories & Research22.841.29% Drug Delivery15.240.86% Specialized Health Services*13.220.75% Diagnostic Substances11.610.66% Hospitals10.710.61% Drug Related Products10.330.58% Drugs - Generic8.420.48% Home Health Care5.020.28% Long-Term Care Facilities4.260.24% Medical Practitioners0.380.02%

5. TOP HEALTCARE COMPANIES BY MARKET CAP JOHNSON AND JOHNSON$169.5 B PFIZER INC$111.2 B NOVARTIS AG ADS$100.4 B GLAXOSMITHKLINE PLC$97.0 B SANOFI-AVENTIS SA$86.4 B ABBOTT LABORATORIES69.6 B ASTRAZZENECA PLC ADS68.8 B MERCK65.3 B WYETH63.1 B AMGEN, INC$61.7 B TOP 10 HEALTHCARE COMPANIES BY MARKET CAP

6. SIM Stocks COMPANYMARKET CAP INDUSTRY JOHNSON & JOHNSON CO169.5 BDRUG MANUFACTURERS, MAJOR GILEAD SCIENCES, INC43.9 BBIOTECH ELI LILLY CO39.9 BDRUG MANUFACTURERS, MAJOR WELLPOINT25.5 BHEALTHCARE PLANS CARDINAL HEALTH INC11.8 BDRUGS, WHOLESALE MARKET CAP AND INDUSTRY OF SIM HEALTHCARE STOCKS

7. Economic Factors at a Glance

8. Summary of Economic Trends Positive trends include: the aging population and the baby boomers people living longer with chronic disease obesity and diabetes epidemics technological advances the global reach of disease personalized medicine Negative trends include: a single-payer system (Medicare/U.S. government) expenditure as an increasing share of gross domestic product (GDP) the uninsured cost controls consumerism

9. Obesity Prevalence of Obesity* Among U.S. Children and Adolescents (Aged 2–19 Years) Survey Periods1976–19801988–19941999–2002 2003– 2006 Ages 2 through 55%7.20%10.30%12.40% 6 through 116.50%11.30%15.80%17.00% 12 through 195%10.50%16.10%17.60% Childhood Obesity has grown over the last 30-40 years, but there is now more of an emphasis on living a healthy lifestyle. We expect the obesity rate to eventually start declining in the long run.

10. The Aging Population The baby boomers are reaching old age where much more healthcare will be needed.

11. Healthcare Reform and Cost Controls Obama’s proposed Healthcare reform will provide the industry with much uncertainty. This could be costly to the healthcare industry which will be pressured to lower costs, but could be beneficial to the industry because more people will be insured and able to seek out medical attention.

12. COST CONTROL Uses have exceeded sources— there will likely be pressure/ requirements for healthcare companies to reduce costs.

13. Patent Expiration Drugs representing $63B in 2007 sales will have their patents expire by 2014 Significant because Pharmaceuticals make up the majority of the Healthcare sector

14. BUSINESS ANALYSIS

15. Component Industries IndustryMarket Cap ($B)Market Cap (%) Drug Manufacturers – Major*935.7452.97% Biotechnology*216.3512.25% Medical Instruments & Supplies176.7610.01% Drug Manufacturers - Other141.468.01% Medical Appliances & Equipment106.526.03% Health Care Plans*87.774.97% Medical Laboratories & Research22.841.29% Drug Delivery15.240.86% Specialized Health Services13.220.75% Diagnostic Substances11.610.66% Hospitals10.710.61% Drug Related Products10.330.58% Drugs - Generic8.420.48% Home Health Care5.020.28% Long-Term Care Facilities4.260.24% Medical Practitioners0.380.02% *Industries represented in SIM Portfolio (double-check Specialized Health Services / Cardinal Health)

16. Phase of Life Cycle Biotechnology Drug Manufacturers - Major Health Care Plans Medical Appliances Medical Instruments Health Care Sector is: Defensive Weighted towards maturity stage

17. Business Driver: Demographics Aging population -> increase demand Aging of baby boomers Increasing life expectancy Number and % of 50+ age group will rise substantially

18. Business Driver: Demographics

19. Business Analysis Barriers to Entry (Pharmaceuticals) Very high R&D costs Long, strict approval process by FDA Established companies in industry High capital requirements Demand Demand is generally inelastic Demand will continue to increase as population ages

20. Business Analysis Competition and Substitution Barriers to entry retain industry concentration, especially in pharmaceuticals Competition and substitution mostly within the industry

21. Opportunities and Threats Opportunities Very high barrier to entry Inelastic demand Aging population creates demand Threats R&D is costly and highly uncertain Increasing strict FDA approval process Uncertainty regarding government controls and mandates in the future Major patent cliff in next 5 years for Pharmaceuticals; estimated $63B erosion in sales by 2014

22. Financial Analysis

23. Sector Growth and Margins 20042005200620072008 Revenue Growth16%10%13%7%10% EBITDA Margin17.1%17.0%16.4%16.7%16.4% Profit Margin10%9.9%9.4%10.2%10.1% Return on Equity22.4% 21.7%22.1%22.9% EBITDA and Profit margins are stable Return on Equity averages 22.3% over the past five years

24. Net Profit Margin Health care sector net profit margins greater than S&P 500 Biotechnology, pharmaceutical and health care equipment industries have the highest profit margins in the sector

25. Return on Equity Health care sector return on equity greater than the S&P 500 Pharmaceutical industry has highest return on equity Biotechnology industry return on equity growing the quickest in recent years

26. Cash Flow Per Share Health care sector cash flow per share has grown steadily since 2000 Biotechnology industry cash flow per share is the highest

27. Valuation Analysis

28. Absolute vs. Relative Sector Look Prognosis: HC is shows strong support for being underpriced on an absolute basis, but mixed to negative support for underpricing on a relative basis. Appendix – HC Industries Relative to S&P500

29. Sector – P/Forward E

30. Sector – P/Book

31. Sector – P/Sales

32. Sector – P/CF

33. Sector – P/EBITDA

34. Summary Look Health Care - Absolute Over/Under – 5 Yr Med%Trend P/Forward EUnder-29%Positive P/BUnder-24%Positive P/SUnder-32%Positive P/CFUnder-31%Positive P/EBITDAUnder-34%Positive Health Care - Relative Over/Under – 5 Yr Med%Trend P/Forward EUnder-31%Negative P/BUnder-1%Negative P/SOver3%Level P/CFUnder-17%Level P/EBITDAUnder-9%Negative

35. RECOMMENDATION *Keep Healthcare at 49 basis points underweight (possibly decrease if better opportunities exist) REASONS: Uncertainty in the sector with proposed healthcare plan and patent expirations On a relative basis, the sector is mostly “underpriced” but experiencing negative valuation trends. If the economy starts to turn around, we expect better opportunities for returns outside of the healthcare sector

36. Appendix – Industry Valuations Drug/Pharm Over/Under%Trend P/Forward EUnder-29%Negative P/BOver8%Negative P/SOver7%Level P/CFUnder-16%Level P/EBITDAUnder-6%Negative Biotech Over/Under%Trend P/Forward EUnder-19%Negative P/BOver14%Negative P/SOver17%Positive P/CFUnder-9%Positive P/EBITDAUnder-2%Positive HC Equipment Over/Under%Trend P/Forward EUnder-38%Negative P/BUnder-15%Negative P/SUnder0%Negative P/CFUnder-17%Negative P/EBITDAUnder-14%Negative

37. Appendix – Pharm Charts

38. Appendix – Biotech Charts

39. Appendix – HC Equip Charts