Hua Wang. Healthcare. Ran Zhang. Todd White. Simon Wu

Transcription

1 Hua Wang Healthcare Ran Zhang Todd White Simon Wu

2 Sector Overview Business and Economic Analysis Agenda Financial Analysis Recommenda<on Valua<on Analysis

3 1 Sector Overview Numbers & Charts Pie Chart of S&P 500 Sector Size: Market Cap:$4.42T (10/13/2015) Weighting Market: 14.43% (10/09/2015) 3rd largest weight Materials, 2.87% Informa<on Technology, 20.37% Industrials, 9.99% Telecommunica<on Services, 2.37% U<li<es, 3.10% Healthcare, 14.43% Consumer Discre<onary, 13.16% Consumer Staples, 9.90% Energy, 7.09% Financials, 16.28%

4 1 Sector Overview Performance Healthcare Sector Performance 14.46% 7.8% No. 1 Year-to-Date Data through 10/13/2015, by Morningstar Quarter-to-Date Data through 10/13/2015, by Morningstar Best performing sector over the past few years

5 1 Sector Overview Industries (in Billion) Health Care Technology, $58.40, 1% Life Sciences Tools & Services, $159.50, 4% Pharmaceuticals Biotechnology Health Care Providers & Services Health Care Equipment & Supplies Health Care Technology Life Sciences Tools & Services Health Care Equipment & Supplies, $521.40, 12% Health Care Providers & Services, $657.80, 15% Biotechnology, $885.30, 20% Pharmaceu<cals, $2,150, 48%

6 1 Sector Overview Companies Company Johnson & Johnson Market Cap ($B) $ Novartis AG $ Pfizer, Inc. $ Gilead Sciences, Inc. $ Novo Nordisk A/S $ Merck & Company, Inc. $145 Sanofi $ Amgen Inc. $ CVS Health Corp. $ UnitedHealth Group Inc. $114.41

7 2 Business Analysis 5 Forces Analysis Profitability and pricing by reviewing: Power of Suppliers Industry Rivalry Power of Buyers Threats of New Entrants Threats of Substitutes

8 2 Business Analysis 5 Forces Analysis: Threats of New Entrants High Entry Barriers Hard to enter a industry, leading to low adrac@on, but good for ongoing players Pharma/Biotech: Huge upfront investment is required High requirements on research and new medicine Health insurance: large consumer base, brand, network Hard to seize market shares from exis@ng players

9 2 Business Analysis 5 Forces Analysis: Power of Suppliers Low Power of Suppliers Fragmented industry Rela@vely low switching costs Many suppliers out there

10 2 Business Analysis 5 Forces Analysis: Power of Buyers Low Power of Buyers Pharma/Biotech Buyers: Pharmacies, Retailers (Patent, Example of Turing Pharmaceu@cals) Health insurance Policyholders, through employers, switch cost is low. (OSU example)

11 2 Business Analysis 5 Forces Analysis: Threats of Subs<tutes Low Level of Subs Stable performance with nearly low subs@tutes will increase the adrac@on. Health services is a necessity Alterna@ve therapies not viable Obama Care

12 2 Business Analysis 5 Forces Analysis: Intensity of Rivalry High Competition Decreasing the adrac@on of the industry and weakening the ability to gain profits Especially in generic drugs (Cost leader) Patented drug is monopoly (Differen@a@on, High profit Margin) Race for new drugs (Significantly affect the stock price) M&A ac@vity may increase though

13 2 Business Analysis Summary Health Care can be considered as an attractive industry Especially good for established players Hard for newcomers and smaller companies Competition/Consolidation can impact margins

14 2 Economic Analysis Economy Background Economy Outlook Healthcare sector key issues U.S. economy: Mid-cycle expansion Ø Addressing costs of providing care Ø to value-based care; Ø to a realigned market; Ø Achieving scale; Ø Managing regulatory and risk Expecta<ons to grow jobs and healthcare spending Strong U.S. Dollar Lower Interest Rate Lower Inflation Rate Lower Unemployment Rate

15 2 Economic Analysis Characteristics Growing populations and consumer wealth, Expanding middle market in developing countries Aging global population, aging societies and chronic diseases Defensive industry Relatively inelastic demand Consolidation among companies

16 2 Economic Analysis External Factors Patient Protection and Affordable Care Act (Obamacare) More people under coverage FDA Regulations Slowing patent (TPP) Expanded coverage

17 2 Economic Analysis Regression Raw Beta: R(Correlation): 0.825

18 3 Financial Analysis Chart & Numbers Current Gross Margin 34.35% 33.85% 33.90% 33.53% 32.92% Operating Margin 12.25% 11.74% 10.62% 10.68% 10.29% Healthcare Sector Financial Performance Net margin 7.59% 7.60% 8.33% 7.88% 7.31% ROE R&D% % 4.89% 4.76% 4.39% Sales & earnings Growth Rate Sector 1.18% -4.61% Major Companies: Johnson & Johnson 3.4% 21.3% Pfizer -16.2% 22.3% Gilead 15.7% 28% Current 2015E 2016E 6.91% 2.32% 6.1% 22.2% -5.9% 23.5% 15.5% 28.1% 11.81% 8.09% 4.2% 23% -4.0% 24.2% 122.2% 49.1% 8.53% 6.52% -5.3% 22.9% -3.9% 23.5% 67.4% 51.9% 13.53% 36.58% -5.4% 24.7% -3.6% 27.6% 26.7% 56.9% 7.24% 10.90% 3.1% 24.4% 9.4% 27.8% -2.1% 55.9%

19 3 Financial Analysis Observations Increasing revenues Shrinking margins Lower margin than the market Free cash flow generator

20 5 Recommendations Risks Demand in foreign markets High Evalua<ons: Overvalued An<-trust issues among consolida<ons Regula<ons

21 5 Recommendations Strengthens Defensive nature 3 Outstanding performance Sound fundamentals 451% 6 2% 4 Advantageous regulations 5 Consolidations

22 5 Recommendations Valuation Analysis Healthcare Sector vs. Market Current 2015E 2016E Price/Earnings S&P Price/Book S&P EV/Sales S&P EV/EBITDA P/E has a rela<vely contract trend Other rela<ve valua<ons remain constant. The sector is currently overweight (>100bps) and will remain slightly overvalued in the short future. S&P

23 5 Recommendations Weighting Recommendations Portfolio Cau<ously underweight the sector in S&P 500. Therefore keep what we have in SIM. In S&P 500, healthcare sector is overvalued. SIM vs. S&P 500: 13.28% vs %, SIM is already underweight. So keep it.

24 Questions?

25 THANK YOU Healthcare Sector Analysis