Healthcare Sector The Stock Market SIM, Professor West Yiping Yang, Lu Yu 1
Agenda Sector Overview Business and Economic Analysis Financial Analysis Valuation Analysis Recommendation 2
Sector Overview Sector Size: $4.97 T Market Cap Weighting of Market: 15.1% 3 rd largest weight 3
Sector Overview Industries within Healthcare Sector Pharmaceuticals Biotechnology Health Care Providers & Services Health Care Equipment & Supplies Health Care Technology Life Sciences Tools & Services 4
Sector Overview Largest by Market Cap in Healthcare Sector Company Market Cap ($B) 1) Johnson & Johnson 276.92 2) Novartis AG 240.32 3) Pfizer, Inc. 210.47 4) Gilead Sciences 176.06 5) Merck & Company, Inc. 163.98 6) Novo Nordisk A/S 145.70 7) Sanofi 129.48 8) Amgen, Inc. 122.20 9) CVS Health Corporation 119.01 10) Allergan plc. 118.66 5
Sector Overview 6
Sector Overview Healthcare Sector Performance Year-to-Date: 11.39% returns Quarter-to-Date: 2.75% returns Best performing sector over the past few years 7
Sector Overview Citation: http://www.yardeni.com/pub/peacockperf.pdf 8
Business & Economic Analysis Economy Outlook U.S. economy: mid-cycle expansion expectations to grow, jobs, healthcare spend Strong U.S. Dollar exposure to FX risk Low inflation Plunge in oil prices lower raw material and distribution cost 9
Business & Economic Analysis Business Analysis Defensive industry Relatively inelastic demand Consolidation among companies 10
Business & Economic Analysis 5 Forces Analysis: Barriers to Entry High Pharma/Biotech: huge upfront investment, high requirement on research Health insurance: large consumer base, brand, network 11
Business & Economic Analysis 5 Forces Analysis: Power of Suppliers Low Fragmented industry Low switching costs Many suppliers 12
Business & Economic Analysis 5 Forces Analysis: Power of Buyers Low Pharma/Biotech: pharmacies, retailers Health insurance: policyholders, through employers 13
Business & Economic Analysis 5 Forces Analysis: Intensity of Rivalry High Especially in generic drugs Patented drug is monopoly Race for new drugs M&A activity may increase though 14
Business & Economic Analysis 5 Forces Analysis: Substitutes Low Health services is a necessity Alternative therapies not viable 15
Business & Economic Analysis 5 Forces Analysis: Summary Attractive Industry Good for established players Hard for newcomers and smaller companies Competition/Consolidation/ACA may impact margins 16
Business & Economic Analysis External Factors Patient Protection and Affordable Care Act (Obamacare) Members/Coverage, Exchanges King v. Burwell Regulations FDA regulations Slowing patent expirations Expanded coverage 17
Business & Economic Analysis Users and Geography Aging global population Expanding middle market in developing countries 18
Financial Analysis Key Observations Increasing revenues Free cash flow generator Shrinking margins Lower margin than the market 19
Valuation Analysis Healthcare Sector CY 2009 CY 2010 CY 2011 CY 2012 CY 2013 CY 2014 P/E 12.99 11.99 12.22 14.76 20.01 22.35 P/B 2.44 2.37 2.52 2.68 3.50 4.22 P/S 1.25 1.16 1.18 1.34 1.74 1.88 P/CF 9.59 11.17 12.22 14.76 19.83 21.96 Gross Margin Operating Margin Profit Margin 33.91 34.34 34.35 33.85 33.90 33.16 12.48 12.10 12.25 11.74 10.62 10.81 9.60 7.28 7.59 7.60 8.33 7.98 ROE 22.00 15.39 16.36 15.68 17.56 17.85 20
Valuation Analysis Current ratios P/E P/B P/S P/CF S&P 500 18.67 2.82 1.81 11.99 Healthcare 22.53 4.45 1.96 17.77 IT 20.04 3.86 3.27 13.75 Financials 15.26 1.41 2.37 11.40 Materials 20.18 3.51 1.61 11.49 Telecom 14.59 3.48 1.43 5.90 Utilities 16.12 1.63 1.54 6.53 Cons. Discret. 22.11 5.10 1.55 13.76 Cons. Staples 19.80 5.39 1.35 14.76 Industrials 17.31 3.82 1.60 11.87 Energy 16.17 1.75 1.21 7.62 21
Valuation Analysis Fastest Expanding Industry In terms of multiples Horizontally and vertically Due to economy recovery and regulations 22
Recommendation Strengths Outstanding performance Sound fundamentals Defensive nature Advantageous regulations Consolidations 23
Recommendation Risks High valuation overvalue/bubbles Demand in foreign markets Uncertainty on ACA/regulations Anti-trust issues among consolidations 24
Recommendation Weighting Recommendation Portfolio: Cautiously Overweight Healthcare Sector Overweight industry: Healthcare Provider & Services Underweight industry: Healthcare Equipment & Supplies 25
Questions? 26
Thank You! 27