Health  Care  Sector  Seton  Staley  

Industries  in  Health  Care  Sector  per  Fidelity  Industry  Analysis  

•  Basically  encompasses  two  industry  groups.  •  First  group  includes  companies  who  manufacture  health  care  equipment  and  supplies  or  provide  health  care  related  services  (distributors  of  health  care  products,  providers  of  basic  health  care  services,  and  owners  and  operators  of  health  care  facili?es  and  organiza?ons.      

•  Second  group  includes  companies  involved  in  the  research  and  development,  produc?on  and  marke?ng  of  pharmaceu?cals  and  biotechnology  products.      

SIM  Por6olio  Alloca8ons  Sector   S&P  Index   SIM   +/-­‐  

Consumer  Discre?onary   12.07%   11.30%   -­‐0.77%  

Consumer  Staples   9.67%   9.51%   -­‐0.16%  

Energy   10.29%   9.12%   -­‐1.17%  

Financials   16.43%   14.75%   -­‐1.68%  

Health  Care   13.31%   14.93%   1.62%  Industrials   10.73%   7.44%   -­‐3.29%  

Informa?on  Technology   18.41%   22.31%   3.90%  

Materials   3.52%   3.01%   -­‐0.51%  

Telecommunica?ons   2.49%   2.84%   0.35%  

U?li?es   3.08%   3.41%   0.33%  

Cash/Dividends  Rec.       0.00%   1.38%   1.38%  

Total   100.00%   100.00%   0.00%  

Health  Care  Sector  Industry  Performance  as  of  6/20/14  per  Fidelity.com  

  Industry   YTD  %  Change  

1  Yr  %  Change  

3  Yr  %  Change  

5  Yr  %  Change  

S&P  500          6.20%              20.50%            54.37%          113.07%  

Health  Care          9.40%              26.07%            74.58%          131.71%  

Biotechnology          7.38%              44.37%        185.56%          230.11%  

Health  Care  Equipment  &  Supplies  

   11.26%              21.32%            45.88%              82.33%  

Health  Care  Providers  &  Services  

       9.01%              27.89%            61.61%          172.64%  

Health  Care  Technology      -­‐6.50%                  7.33%            78.06%          380.07%  

Life  Sciences  Tools  &  Services  

       5.64%              28.72%            55.49%          150.30%  

Pharmaceu8cals        10.31%              21.27%            68.19%          113.21%  

SIM  Health  Care  Holdings  

Security   Ticker   Industry   Shrs  Held   Mkt  Price   Mkt  Value  

Aetna   AET   Providers  &  Services   5,600   $68.05   $381,093  

Gilead  Sciences   GILD   Biotechnology   7,150   $81.21   $580,652  

McKesson   MCK   Providers  &  Services   2,500   $189.64   $474,100  

Teva   TEVA   Pharmaceu?cals   7,500   $50.49   $378,675  

Total   $1,814,520  

Bloomberg  S5HLTH  Top  Ten  (By  Revenue)  

Rank   Name   Ticker   Industry   Revenue  (millions)  

Market  Cap  (millions)  

1.   McKesson  Corp.   MCK   Providers  &  Services   $137.6   $    42.6  

2.   United  Health  Group   UNH   Providers  &  Services   $123.9   $    76.6  

3.   AmerisourceBergen  Corp.   ABC   Providers  &  Services   $104.0   $    16.2  

4.   Express  Scripts  Holding  Co.   ESRX   Providers  &  Services   $101.9   $    54.0  

5.   Cardinal  Health  Inc.   CAH   Providers  &  Services   $    93.6   $    23.2  

6.   Johnson  &  Johnson   JNJ   Pharmaceu?cals   $    71.9   $288.4  

7.   WellPoint  Inc.   WLP   Providers  &  Services   $    71.6   $    29.7  

8.   Aetna  Inc.   AET   Providers  &  Services   $    51.8   $    28.8  

9.   Pfizer  Inc.   PFE   Pharmaceu?cals   $    50.5   $187.8  

10.   Merck  &  Co  Inc.   MRK   Pharmaceu?cals   $    43.6   $169.7  

Bloomberg  S5HLTH  Top  Ten  (By  Market  Cap)  

Rank   Name   Ticker   Industry   Market  Cap  (millions)  

Revenues  (millions)  

1.   Johnson  &  Johnson   JNJ   Pharmaceu?cals   $288.4   $    71.9  

2.   Pfizer  Inc.   PFE   Pharmaceu?cals   $187.8   $    50.5  

3.   Merck  &  Co  Inc.   MRK   Pharmaceu?cals   $169.7   $    43.6  

4.   Gilead  Sciences  Inc.   GILD   Biotechnology   $122.5   $    13.7  

5.   Amgen  Inc.   AMGN   Biotechnology   $    87.9   $    19.0  

6.   AbbVie  Inc.   ABBV   Pharmaceu?cals   $    86.3   $    19.0  

7.   Bristol-­‐Myers  Squibb  Co.   BMY   Pharmaceu?cals   $    78.6   $    16.4  

8.   UnitedHealth  Group  Inc.   UNH   Providers  &  Services   $    76.6   $123.9  

9.   Biogen  Idec  Inc.   BIIB   Biotechnology   $    72.3   $        7.6  

10.   Eli  Lilly  &  Co.   LLY   Pharmaceu?cals   $    66.3   $    22.2  

What  are  the  global  macro  issues?  2014  Deloife  Global  Health  Care  Outlook  

•  Aging  popula?on  &  Chronic  Diseases  •  Cost  &  Quality  •  Access  to  Care  •  Technology  

Aging  Popula8on  &  Chronic  Diseases  

•  Current  growth  rate  of  the  older  popula?on,  at  1.9  percent,  is  significantly  higher  than  that  of  the  total  popula?on  at  1.2  percent.  

 •  Chronic  diseases  are,  by  far,  the  leading  cause  of  mortality  in  the  world,  represen?ng  63  percent  of  all  deaths.  

Cost  &  Quality  •  United  States  spends  $8,508  per  person  on  health  care,  nearly  $3,000  more  per  person  

       than  Norway,  the  second-­‐highest  spender.    •  23  percent  of  U.S.  adults  and  13  percent  of  adults  in  France  either  had  serious  problems  paying  medical  bills  or  were  unable  to  pay  them.  

 •  1.7  million  pa?ents  develop  infec?ons  while  in  the  hospital,  and  99,000  die  as  a  result  in  the  U.S.  

Access  to  Care  •  More  than  one  billion  people  worldwide  lack  access  to  a  health  care  system.  

•  There  will  be  a  shortage  of  230,000  physicians  across  Europe  in  the  near  future.  

•  The  number  of  caregivers  in  36  countries  in  Africa  is  inadequate  to  deliver  even  the  most  basic  immuniza?on  and  maternal  health  services.  

•  Uneven  distribu?on  of  caregivers  is  also  a  problem.  Developed  countries  increasing,  but  emerging  markets  struggling  to  keep  up.  

 

Technology  •  Advances  in  health  technologies  and  data  analy?cs  can  help  

facilitate  new  diagnos?c  and  treatment  op?ons  but  there  is  the  need  to  contain  these  new  expenditures  by  restructuring  care  delivery  models  and  promo?ng  more  efficient  use  of  resources.  

•  Adop?on  of  new  digital  health  informa?on  technologies  (HIT)  is  driving  change  in  the  way  physicians,  payers,  pa?ents  and  other  sector  stakeholders  interact.  •     Electronic  medical  records  (EMRs),  •     Telemedicine  •     Mobile  health  (mHealth)  applica?ons  •     Electronic  medical  prescrip?ons  

•  Need  to  focus  on  security,  privacy  and  pa?ent  safety  in  addressing  new  technology.  

•  More  about  this  in  our  business  and  economic  analysis.  

Health  Care  in  the  U.S.  •  The  U.S.  spends  more  on  health  care  than  any  other  country  

in  the  world,  totaling  es?mated  17.2%  of  GDP  in  2012,  or  $2.8  trillion.  •  Current  trends  –  health  care  spending  has  been  slowing,  (only  grew  3.7%  in  2012  only  .4%  higher  than  2011),  however…  

•  The  “graying”  of  America  as  the  American  baby  boom  popula?on  enters  re?rement  and  demands  more  health  care.      

•  The  Pa?ent  Protec?on  Affordable  Care  Act  (a.k.a.  “Obamacare”)  •  Uses  a  combina?on  of  an  expanded  federal-­‐state  health  care  

program,  Medicaid,  and  an  individual  health  insurance  mandate  to  extend  coverage  to  around  30  million  previously  uninsured  Americans.      

•  Goal  –  increase  coverage  from  85%  of  popula?on  to  95%  by  2012  as  well  as  slow  the  rise  in  health  care  costs.      

 

5  Big  Trends  in  the  U.S.    Economic  and  Business  Analysis  2014  Deloife  Global  Health  Care  Outlook  

•  Margin  compression  •  Consolida?on  •  Transi?oning  from  volume-­‐  to  value-­‐based  care  •  Technology  •  Consumer  power  

 Margin  Compression  

 •  With  the  implementa?on  of  health  insurance  exchanges  along  with  the  addi?on  of  millions  of  uninsured  Americans  to  Medicaid,  provider  reimbursements  will  decline  which  will  squeeze  provider  margins.      •  In  order  to  break  even,  most  providers  will  have  to  cut  

costs  20-­‐30%.  

 •  Pressures  on  pharmaceu?cal  companies  to  lower  branded  drug  prices  with  an  increasing  demand  for  their  cheaper  generic  counterparts.      

 Consolida8on  

 •  Health  providers  and  plans  have  and  will  con?nue  to  consolidate.      

•  Horizontal  integra?on  (i.e.  hospital  to  hospital  acquisi?ons)  to  befer  collaborate,  priori?ze  programs,  increase  purchasing  power,  consolidate  services,  and  cut  costs.  

•  Ver?cal  integra?on:    Hospitals  are  becoming  true  health  systems  as  they  are  buying  physician  prac?ces,  ambulatory  centers,  diagnos?c  centers,  home  care  services,  and  medical  equipment  and  wellness  companies.      

•  Cross  sector  convergence:    Become  more  common  for  a  health  plan  to  offer  clinical  services  and  for  providers  to  offer  health  care  financing  products.  

•  Implica?ons:    hot  market  for  M&A  in  the  healthcare  sector.  

 Volume-­‐  to  Value-­‐Based  Care  

 •  Reimbursement  models  are  changing  from  compensa?ng  providers  on  the  volume  of  procedures  performed  to  rewarding  providers  for  good  outcomes  in  their  popula?ons.      

 •  Providers  and  health  plans  are  also  learning  to  befer  manage  

risk  through  revenue  diversifica?on.      •  For  example,  most  health  systems  want  more  than  half  of  their  revenue  to  come  from  non-­‐acute  care  sources.  

•  They  are  buying  medical  prac?ces,  office  care  serngs,  labs,  diagnos?c  imaging  centers,  post-­‐acute  care  centers,    and  home  care  companies.  

•  Heath  plans  are  buying  medical  prac?ces  and  entering  the  accountable  care  arena.          

 Technology  

 •  2  main  threads  –  work  flow  tools  and  big  data.  •  Work  flow  tools  –  electronic  health  records,  portals,  mHealth  systems,  home  and  remote  monitoring.  

•  Big  data  –  analy?cs  and  predic?ve  modeling  to  manage  risk,  befer  understand  costs,  and  determine  clinical  effec?veness.  

 •  Medical  technology  will  con?nue  to  advance  (e.g.  human  

genome,  personalized  medicine).    •  Trends  could  drive  up  costs  in  the  short  term  as  more  

lifesaving  technologies  come  on  line  and  impact  na?onal  economies  as  life  spans  are  extended.    In  the  long  term,  these  could  bring  down  costs.  

 Consumer  Power  

 •  Consumers  using  their  increased  purchasing  power  and  access  to  informa?on  to  drive  health  care  decisions  could  be  a  disrup?ve  trend.      

•  No  longer  just  the  employer  paying  for  coverage  –  consumers  want  a  say  in  deciding  where  and  how  to  spend  money  for  healthcare  and  what  courses  of  treatment  to  follow.      

 Business  &  Economic  Implica8ons    

 •  It’s  complicated  –  En??es  that  will  thrive  are  those  within  the  sector  that  are  able  exploit  the  expected  increase  in  demand  for  healthcare  and  while  successfully  realizing  cost  efficiencies  and  minimizing  the  impact  towards  margin  compression.  

•  Mature  industry  exhibi?ng  areas  of  strong  growth,  however  valua?ons  might  be  stretched  (biotechs/health  care  tech)  

 •  Porter’s  5  Forces:  •  Barriers  to  entry  -­‐  higher,  due  to  consolida?on  •  Consumer  power  –  higher,  despite  industry  consolida?on  (more  out  of  pocket,  higher  co-­‐pays,  health  care  insurance  exchanges,    etc.)  

•  Supplier  power  –  lower,  also  due  to  consolida?on  •  Threat  of  Subs?tutes  –  really  no  subs?tute  for  healthcare  •  Rivalry  among  exis?ng  compe?tors  –  mixed,  more  consolida?on,  however  with  increasing  consumer  power.    Generic  medicines  will  be  in  greater  demand.    Will  nurse  prac??oners  replace  primary  care  physicians  in  underserved  areas?      

 Financial  Analysis  

Fidelity’s  “State  of  the  Sector:  Health  Care”    •  Biotech  industry’s  revenue  growth  more  than  doubled  during  

2nd  quarter,  2013  leading  to  excep?onally  strong  earnings  growth.    Investment  in  R&D  is  beginning  to  produce  novel  therapeu?cs  for  unmet  medical  condi?ons.      

•  Earnings  growth  for  health  care  providers  and  services  also  surpassed  analyst’s  expecta?ons  due  to  improving  business  dynamics  in  light  of  the  ACA  and  underlying  rate  of  health  care  infla?on  was  below  long  term  trends.  

 •  Health  care  equipment  and  supplies  underperformed  due  to  muted  organic  growth  and  a  lack  of  major  new  product  introduc?ons.  • However,  strengthening  economy  should  help  fuel  growth  for  medical  products  in  coming  years.  • Small-­‐cap  medical  equipment  investors  could  con?nue  to  benefit  from  acquisi?ons  by  larger  firms  as  the  industry  consolidates.  

 Financial  Analysis  

Fidelity’s  “State  of  the  Sector:  Health  Care”    

•  High  FCF  yield  represents  a  good  investment  opportunity,  as  investors  are  paying  a  smaller  price  and  gerng  higher  FCF  in  return.      

 

•  Valua?ons,  as  measured  by  free-­‐cash-­‐flow  (FCF)  yields  (cash  flow  compared  with  its  market  price)  above  sector’s  historical  average  as  of  August,  2013.  

•  However,  since  2011,  have  been  moving  downward  toward  historic  norms.  

 Financial  Analysis  

S&P  Capital  IQ    

Bloomberg  S5HLTH  Index  Past  5  Years  

Valua8on  Analysis:    Bloomberg  S5HLTH  Price  Mul8ples  

Valua8on  Analysis:    Bloomberg  S5HLTH  vs.  S&P  500  

 Industry  Outlook  

Schwab’s  “Sector  Views”  &  Fidelity’s  “State  of  the  Sector:  Health  Care”    •  Demand  for  health  care  products  and  services  is  less  sensi?ve  to  

economic  ac?vity  and  will  increase  due  to  demographic  trends  and  innova?on  leading  to  a  posi?ve  secular  outlook.      

•  The  poli?cal  bickering  in  Washington  is  about  who  will  pay  for  health  care.    However  implemen?ng  the  numerous  provisions  of  the  ACA  remains  under  debate  and  change  frequently  causing  some  addi?onal  vola?lity  in  the  sector.      

•  Cost  containment  is  and  will  remain  a  high  profile  issue.  •  Recent  sector  underperformance  as  some  of  the  high-­‐flying  biotech  

names  were  hit  over  concerns  as  Congress  has  threatened  to  look  into  the  pricing  of  some  drugs.  

•  In  the  short  to  medium  term  certain  stocks  could  benefit  from  industry  consolida?on  driven  by  the  need  to  reduce  costs,  realize  efficiencies,  and  adopt  to  changing  industry  dynamics.  

•  Growth  from  investments  in  sowware/technology  plaxorms  could  also  drive  long  term  defla?onary  forces  through  the  health  care  economy.  

 Industry  Outlook  

Schwab’s  Sector  Views  &  Ned  Davis  “Sector  Highlights”    

• Sector  Posi8ves  •  Aging  popula?on  •  America’s  obesity  epidemic  •  Balance  sheets  in  health  care  sector  remain  flush  with  cash  (good  for  higher  dividend  payments,  stock  buybacks,  and  mergers  and  acquisi?ons)  •  Federal  health  exchanges  expansion  with  more  insurers  and  broader  networks  •  Pending  legisla?on  for  VA  services  which  will  allow  for  u?liza?on  of  non-­‐government  services  (could  boost  hospitals)  

• Sector  Nega8ves  •  Government  regula?on  likely  to  increase  as  aging  popula?on  demands  interven?on  to  lower  out  of  pocket  costs  • Washington’s  current  fiscal  situa?on  and  its  dysfunc?on  (causes  uncertainty)  •  Increased  government  scru?ny  and  poten?al  drug  pricing  regula?on  par?cularly  weighing  on  the  biotech  industry  •  Demands  for  broader  networks  without  higher  premiums  could  pressure  Managed  Care  margins  •  High  out-­‐of-­‐pocket  costs  on  new  federal  exchange  plans  (prescrip?ons),  makes  health  spending  more  discre?onary  and  thus  pinned  to  slow  U.S.  expansion      

Health  Care  Sector  Industry  Ra8ngs  as  of  6/20/14  per  Fidelity.com  and  Schwab  Industry  Ra?ngs  

 Industry   YTD  %  

Change  1  Yr  %  Change  

3  Yr  %  Change  

5  Yr  %  Change  

Schwab  Industry  Ra8ng  

S&P  500          6.20%              20.50%            54.37%          113.07%  

Health  Care          9.40%              26.07%            74.58%          131.71%  

Biotechnology          7.38%              44.37%        185.56%          230.11%   F  Health  Care  Equipment  &  Supplies  

   11.26%              21.32%            45.88%              82.33%   C  

Health  Care  Providers  &  Services  

       9.01%              27.89%            61.61%          172.64%   B  

Health  Care  Technology  

   -­‐6.50%                  7.33%            78.06%          380.07%   F  

Life  Sciences  Tools  &  Services  

       5.64%              28.72%            55.49%          150.30%   C  

Pharmaceu8cals      10.31%              21.27%            68.19%          113.21%   B  

SIM  Por6olio  Health  Care  Holdings  

Security   Ticker   Industry  Shrs.  Held  

Mkt.  Price   Mkt.  Value  

S&P  Cap  IQ  Stock  Ra8ng  

Schwab  Stock  Ra8ng  

Fidelity  Stock  Ra8ng  

Aetna   AET  Providers  &  Services   5,600   $68.05   $381,093   Buy   B  

9.2/10    (very  bullish)  

Gilead  Sciences   GILD   Biotechnology   7,150   $81.21   $580,652   Buy   C  

9.8/10    (very  bullish)  

McKesson   MCK  Providers  &  Services   2,500   $189.64   $474,100  Outperform   A  

9/10    (bullish)  

Teva   TEVA   Pharmaceu?cals   7,500   $50.49   $378,675   Neutral   A  9.4/10  

 (very  bullish)  

Total   $1,814,520  

 Recommenda8ons  

 •  Market  weight,  do  not  significantly  overweight  healthcare  in  the  SIM  porxolio  –  health  care  stocks  have  enjoyed  a  nice  run  the  last  five  years  and  are  currently  trading  at  premium  to  the  S&P  500.    

•  Pay  afen?on  to  valua?ons.    Premiums  at  which  the  sector  is  trading  may  be  jus?fied  as  secular  outlook  for  health  care  is  generally  posi?ve.      

•  Generally  avoid  biotechs  and  health  care  technology  as  these  industries  have  had  major  run  ups  over  the  past  five  years.  •  Based  upon  independent  ra?ngs,  Gilead  appears  to  be  a  hold,  but  pay  afen?on  to  valua?on  in  future.    Currently  trading  at  a  mul?ple  of  29.8  of  trailing  earnings.      

•  Focus  in  reasonably  valued  stocks  in  the  health  care  providers  &    services,  pharmaceu?cals,  and  health  care  equipment  &  supplies  industries.