Health Care Sector – Stock Presentation Kailas Joshi Daniel Kurth

Health Care Sector – Stock Presentation

Kailas JoshiDaniel Kurth

Agenda

• Sector Review• Johnson & Johnson (JNJ)• Eli Lilly (LLY)• WellPoint (WLP)• Cardinal Health (CAH)• New Recommendations• Q&A

3/3/2009 2

Health Care Sector Review

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Healthcare Sector Overview

• The sector market capitalization is at $1.15 Trillion

• The Sector represents 15.94% of the S&P 500 by Market Cap

• Sector Revenues represented $63,874 million in 2008

Source: www.standardandpoors.com, US Equity Indices, as of 1/30/2009

Sector Review LLY CAH & WLP RecommendationsJNJ

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Sector Description# of Cos.

Adjusted Market Cap

SP-5A S&P 500 500 $7,192,455

SP-10 Energy 39 $1,014,055

SP-15 Materials 29 $218,994

SP-20 Industrials 59 $763,552

SP-25 Consumer Discretionary 80 $589,017

SP-30 Consumer Staples 40 $924,124

SP-35 Health Care 54 $1,146,392

SP-40 Financials 81 $770,678

SP-45 Information Technology 75 $1,166,403

SP-50Telecommunications Services

9 $267,760

SP-55 Utilities 34 $331,480

S&P 500 Sectors – Overview

*Values in USD millions

Source: www.standardandpoors.com, US Equity Indices, as of 12/31/2008


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Key External Factors

• Positive Demographic Shift• Increased prevalence of Heart Disease and

Obesity • Increased Government involvement

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Sector Weights in SIM Portfolio

As of 1/30/20093/3/2009 7


Sector Performances in S&P 500Sector Review LLY CAH & WLP RecommendationsJNJ

Source: 2008 Market Update, Fidelity Management & Research Co. (FMRC) as of 12/31/2008

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Recommendations

• S&P 500 weighting = 15.94%• SIM Weighting = 21.50%• Sector is overweight by 5.56%• Recommended sector weight: 19.00%• Action: reduce weight by 250 basis points• Reasons:

– 21.5% is extremely overweight– SIM portfolio could experience serious losses if the

sector underperforms the rest of the market– Changes in weights of other sectors will naturally tend to

increase the weight of Health care

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Crisis/Recession Flu The Healing Sector OSU SIM PortfolioAnalyses & Valuation

Recommendation

3/3/2009

Holding YTD Return Return Since 1/1/2008

Cardinal Health (CAH) (2.83%) (43.84%)

Eli Lilly (LLY) (20.59%) (44.20%)

Johnson & Johnson (JNJ) (12.18%) (23.67%)

WellPoint (WLP) (14.35%) (60.43%)

SIM Portfolio Holdings

As of 1/31/2008


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Proposal

• Current Holdings– Johnson & Johnson (JNJ) – HOLD– Eli Lilly (LLY) – SELL– Cardinal Health (CAH) – SELL– WellPoint (WLP) – HOLD

• New Holding– Medtronic (MDT) – BUY

• Resulting Portfolio Weight– 19.0%

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Johnson & Johnson (JNJ)

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Market Cap $138 Billion

• Price: $47.92• P/E: 10.95• EPS: 4.57• Div: 1.84 (3.50%)

• Segments: • 1. Consumer• 2. Medical Devices• 3. Pharmaceutical

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OverviewSector Review LLY CAH & WLP RecommendationsJNJ

Valuations – DCF Valuation

Terminal Discount Rate: 11.0% Terminal Value $218,546

Terminal FCF Growth: 2.5% NPV of Free Cash Flows 87,297 (53%)

NPV of Terminal Values 76,968 (47%)

Projected Equity Value 164,265

Shares Outstanding 2,758.9

Current Price $47.92

Implied Equity Value $59.54

Upside/(Downside) to DCF 24%

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Valuations - Multiples

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Absolute Valuation High Low Mean Current Target

MultipleTarget E, S, B, etc/Share

Target Price

P/Forward E 35.8 12.4 18.5 13.0 14.5 4.55 $68.25

P/S 6.35 2.47 4.02 2.61 3.5 23.07 $80.75

P/B 9.7 3.5 6.0 3.6 4.7 16.19 $76.09

P/EBITDA 25.6 8.5 13.1 8.8 12.0 6.62 $79.44

P/CF 32.3 10.3 17.3 10.6 14.0 5.498 $76.97

P/E/G ratio 2.7 1.3 1.7 1.7 1.7 34.28 $58.28

ROE 30.6 23.2 28.1 28.7 28.1 2.03 $57.04Target Price $66.54

• Risperdal (anti-psychotic) and Topamax (anti-epilepsy) come off patent

• No major new drugs until end of 2009 (Golimumab)

• Medical Devices: strong growth through DePuy orthopedic joint replacements

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OutlookSector Review LLY CAH & WLP RecommendationsJNJ

• Solid Performance in 2009– Good Dividend, AAA Bond Rating

• Currently 7.4% of SIM Portfolio• Recommendation: HOLD

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ActionSector Review LLY CAH & WLP RecommendationsJNJ

Eli Lilly (LLY)

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• Market Cap: $32.05B• Current Price: $27.75• P/E: N/A• EPS: -1.89• Div: 0.49 (6.90%)• Segments:

– Pharmaceuticals– Animal Health

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Terminal Discount Rate: 11.0% Terminal Value $67,417

Terminal FCF Growth: 3.0% NPV of Free Cash Flows $25,158 (51%)

NPV of Terminal Values $23,743 (49%)

Projected Equity Value $48,901

Shares Outstanding 1,090.8


Implied Equity Value $44.83

Upside/(Downside) to DCF 61.5%

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Target Price

P/Forward E 42.5 7.30 22.6 8.80 9.00 4.18 $37.62

P/S 11.84 1.63 5.59 1.98 3.00 20.21 $60.63

P/B 24.60 2.40 7.50 2.90 4.00 12.38 $49.52

P/EBITDA 32.40 7.60 17.80 9.20 10.00 5.28 $52.80

P/CF 41.00 6.30 20.00 7.40 8.00 5.04 $40.30

Target Price $42.00


Outlook

• Growth Factors– Acquisition of ImClone should provide

operations and cost synergies– Current neuroscience drugs are performing

quite well

• Key Concerns– Growing competitive environment– Lack of block-buster drug pipeline

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Actions

• SELL SIM position in LLY by 190 bps– Strong earnings growth– Main theme of the portfolio going forward is to

be more diversified across the industries in the Health Care sector

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Cardinal Health (CAH) &WellPoint (WLP)

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Cardinal Health (CAH) WellPoint (WLP)

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Price Performance (5 years)Sector Review LLY CAH & WLP RecommendationsJNJ

Valuations – Analyst Opinions

Price Target Summary CAH ($/Share) WLP ($/Share)

Mean Target 45.59 51.80

Median Target 46.00 51.50

High Target 50.00 61.00

Low Target 37.00 44.00

Number of Analysts 11 10

Current Stock Price(3/2/2009) 30.92 32.65

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Source: www.finance.yahoo.com – as of 2/27/2009

• Healthcare Supply Chain Services

– Delivers pharmaceutical and medical devices to pharmacies, hospitals etc

– 4% growth rate– 1.56% Profit margin

• Clinical Medical Products– Manufactures technologies and

services that help hospitals prevent medical errors

– 30% Growth Rate– 15.96% Profit Margin

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Overview CAHSector Review LLY CAH & WLP RecommendationsJNJ

Valuations – DCF Valuation (CAH)

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Current CAH CAH without Clinical & Medical Products

Shares Outstanding 364.0 Shares Outstanding 364.0

Current Price $30.92 Current Price $30.92

Implied Equity Value / Share $38.43 Implied Equity Value / Share $36.29

Upside/(Downside) to DCF 24% Upside/(Downside) to DCF 17%

Terminal Discount Rate: 12.5%Terminal FCF Growth: 2.5%

Outlook for CAH

• Key Growth Drivers:– Spinoff of Clinical and Medical Supplies from Healthcare

Supply Chain Services– Captured 1/3 of all distributed pharmaceutical products in

their supply chain– Strong growth in nuclear pharmacy

• Key Concerns– “In many ways we see fiscal ’09 as a transitional year for

Cardinal Health, where we put the foundation for future growth under both segments” –CEO R. Kerry Clark

– CVS and Walgreens accounted for 22% and 19% of the companies revenue in 2008 (CVS expires on 6/30)

– Lowered earnings outlook due to spending delays by hospitals

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Actions

• Eliminate our position in CAH– Negative outlook for the next 6-12 months– Restructuring will potentially affect earnings– Two customers equal 41% of business with one

contract expiring in 2009– General economic conditions are not conducive

to higher performance in the 6-12 month time frame

• Maintain position in WLP

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Recommendations

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Stock Recommendations

Medtronic (MDT)

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• Current Price: $27.22• Market Cap: 32.99

Billion• Revenue $13.5 Billion• P/E Ratio: 11.69• EPS: 2.53• Main Segments

– Cardiac Rhythm Management

– Spinal– Cardiovascular

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Valuations – Analyst Opinions

Price Target Summary MDT ($/Share)

Mean Target 45.59

Median Target 46.00

High Target 50.00

Low Target 37.00

Number of Analysts 11

Current Stock Price(3/2/2009) 27.22

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MDT

Shares Outstanding 1142.0


Implied Equity Value / Share $33.09

Upside/(Downside) to DCF 22%

Terminal Discount Rate: 11.0%Terminal FCF Growth: 3.0%


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Target Price

P/Forward E 55.5 9.7 28.4 10.8 14.00 3.21 $44.94

P/S 14.43 2.33 6.87 2.62 4.00 11.83 $47.32

P/EBITDA 44.5 8.7 22.3 9.0 15.00 3.00 $45.00

Target Price $40.00


Key Growth Drivers

• Cardiac Rhythm Management– EnRythm: first pace maker to include Managed Ventricular

Pacing. Reduces unnecessary pacing

• Spinal– CD Horizon Legacy Peek: provides stability and reduces stress

on spine. 10% growth compared to 2007

• Cardio-Vascular– Endeavor: first drug eluting stent approved by FDA since 2004.

30% increase in demand from 2007. Contributed $175 million in revenue

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Outlook

• Key Factors– $1.75 Billion in Cash and Short Term Investments

(purchased Ventor Technologies and CoreValve)– No customer represents over 10% of the companies

sales in 2008, 2007 or 2006– Strong position in heart, diabetes and spinal segments

• Concerns– Cutting executive pay 5% and freezing wages for all

employees in May

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Comparative ChartsSector Review LLY CAH & WLP RecommendationsJNJ

1-year

5-year

Summary of Actions

Holding IndustryCurrent Price (2/27/2009)

Target Price(12 month) Action

Current Weight

Change in Weight

Resulting Weight

Johnson & Johnson (JNJ)

Major Pharmaceuticals $47.92 $66.54 HOLD 7.4% N/C 7.4%

Eli Lilly Major Pharmaceuticals $29.38 $42.00 SELL 5.3% (1.9%) 3.4%

Cardinal Health Health Care Supplies $30.92 $45.94* SELL 5.2% (5.2%) 0%

WellPoint Health Care Services $32.65 $51.80* HOLD 4.2% N/C 4.2%

Medtronic Health Care Equipment $27.22 $40.00 BUY 0 4.0% 4.0%

SIM weighting in Health Care Sector 21.5% (2.5%) 19.0%

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* Based on Mean Analyst Target Price from www.finance.yahoo.com

Questions?

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Documents

Health Care Sector – Stock Presentation Kailas Joshi Daniel Kurth