Investment Research Presentation

Month Day, 20XX

1

Medical Devices & Equipment

Finance & Investment Club

Healthcare-2 Sector

Senior Analysts: Christy Hermanto & Zayda Romero

Junior Analysts: Izzan Bachir, Valentina Jiang,

Brandon Lepine, Tuan Nguyen

Fall 2016

2

Industry Overview

Increased demand due to various independent factors: aging population, unmet healthcare

needs, positive employment figures, emerging markets – expected to grow annually 10-13%

Rapid technological change and increase in research & development

Not as volatile and sensitive to investor uncertainty in this election year and economic slow-

growth phase as other sectors like Pharmaceuticals and Biotechnology

Displays resilience against economic changes due to indispensable nature of its products

Rationale:

Sources: S&P Global Net Advantage, EY, CharlesSchwab, Fidelity, Advamed

Industry Life Cycle: Growing

IVA to grow at 2.1% CAGR

Low Revenue Volatility

Move to value-based

healthcare

Favorable Legislation: Repeal

of Medical Device Excise Tax –

will save the industry $20bn

Healthcare

Pharmaceuticals,

Biotechnology, Life

Sciences

Healthcare

Equipment &

Services

Healthcare

Devices &

Equipment

Healthcare

Providers &

Services

Healthcare

Technology

3

Industry Analysis

Key Facts

By 2022: Revenue: $529.8 billion

5.2% CAGR 2015-2022

R&D Expenditure: $34 billion

About 6% of total health expenditure

US: 39% of the global market

Strong financials seen through M&A activity:

• Gives firms ability to build and preserve

a lot of cash

• Creates economies of scale

alleviates pricing pressures & boosts

R&D productivity

• Accounts for need to diversify and

revitalize product lines and penetrate

new markets

371 392.2 413.6 436.3 459.4

482.7 506.2 529.8

0

100

200

300

400

500

600

2015 2016 2017 2018 2019 2020 2021 2022

Medical Devices Projected Sales 2015-2022 ($bn)

Sources: Evaluate MedTech, AdvaMed

$- $50,000,000.00 $100,000,000.00 $150,000,000.00

2013

2014

2015

Financing VC vs M&A ($bn)

Venture Financing M&A

4

Agenda

Industry Definition

Product Segmentation

Revenue Generation

Risks

Comparable Companies Analysis

Value Weighted Index

Summary Recommendation

5

Industry Definition – Medical Devices & Equipment

A highly diversified industry that includes companies that create products and instruments used

to prevent, diagnose or treat an illness or disease

Includes surgical and medical instruments, drug delivery systems, cardiovascular & orthopedic

devices, and diagnostic equipment, prosthetic and surgical appliances, dental equipment, x-ray

apparatus, electro-medical and electro-therapy apparatus, ophthalmic equipment.

Johnson & Johnson

NYSE: JNJ

Market Cap: 320.24B

General Electric Co.

NYSE: GE

Market Cap: 278.82B

Medtronic Inc.

NYSE: MDT

Market Cap: 113.42B

Siemens AG

NYSE: SIE

Market Cap: 96.15B

Baxter International Inc.

NYSE: BAX

Market Cap: 26.14B

Fresenius Medical Care

NYSE: FME

Market Cap: 35.92B

Boston Scientific Corp.

NYSE: BSX

Market Cap: 29.33B

Allergan Inc.

NYSE: AGN

Market Cap: 82.19B

Sources: World Health Organization, IBISWorld, Fidelity News & Insights

6

Product Segmentation

Product Segments to Highlight: • In Vitro Diagnostics (IVD): 13.1% will be the largest

segment with sales of $70.8 billion by 2022 & a

market share of 13.4%

• Endoscopy: 4.4% fastest growing segment with a

CAGR of 6.8%

01020304050607080

Sal

es

Current & Projected Sales

Sales ($bn) Sales ($bn)

0.00%

2.00%

4.00%

6.00%

8.00%

% Sales Growth CAGR 2015-2022

Sources: IBISWorld, Evaluate MedTech, S&P Net Advantage

7

Revenue Generation

Research & Development

Prototype

Process Development

Regulatory Approval

Engineering

Components Manufacturing

Software Development

Electronics & Electric

Components

Precision Metal-works

Plastics Extrusion &

Molding

Textiles

Assembly

Assembly

Packaging

Sterilization

Distribution

Final Products

Capital Medical

Equipment

Therapeutic Devices

Surgical and Medical

Devices

Disposables

Marketing & Sales

Market Segments

Cardiovascular

Orthopedics

Infusion Systems

Post Sales Services

Training

Consulting

Maintenance Repair

Sources: Market Realist

R&D where most

mid-cap innovative

companies focus

their revenue on Suppliers Buyers

Mature companies

focus on cutting costs

throughout the value

chain Marketing &

Sales much more

important

8

Trend #1: Aging Population in the US • Aging population along with higher life

expectancies long term sustained increase in

demand for medical devices

• The elderly are more likely to require medical

attention due to increased vulnerability to diseases

• From 2000 to 2010, the population of those aged

60 and over grew by 13.6%, growing at a faster

pace than other demographics.

• By 2022, this demographic will be 55.6 million.

• Largest growth expected from 2020 to 2030:

projected increase of 18.0 million.

0.80

0.85

0.90

0.95

1.00

1.05

1.10

35 40 45 50 55 60

Num

ber

of P

hysi

cian

Vis

its (

in b

illio

ns)

Population Aged 65 and Older (in millions)

Aging Population vs Physician Visits

R-squared:

0.68

0

10

20

30

40

50

60

70

2016 2017 2018 2019 2020 2021 2022 2023

Pop

ulat

ion

(in m

illio

ns)

Population of Adults 65+

Sources: Frost & Sullivan, IBISWorld, Mintel, US Census Bureau

34,000

38,000

42,000

46,000

50,000

35 40 45 50 55Indu

stry

Rev

enue

(in

mill

ions

)

Aging Population (in millions)

Industry Revenue vs Aging Population

R-squared:

0.87

9

Trend #2: Rising R&D Expenditure

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

Total R&D Expenditure CAGR 2010 - 2023 Innovation and rapid technological change

spurred by R&D – either through in-house

R&D or through acquiring another

company’s technology (M&A)

2015: non-commercial leaders boosted R&D

spending by more than 0.5 billion dollars

(17%) to US$2.6 bn.

Pure-play commercial leaders in US spend

about 12% of their revenue on R&D

Non-commercial leaders in US spend about

20% of their revenue on R&D

R&D related innovations not just isolated to

the Healthcare sector

Potential for this industry to use

technology created by other sectors' R&D

->3D printing & robotics could be used to

create new medical devices and cut costs

through automation and faster assembly

>75,000 medical device patents have been

filed with the US Patent and Trademark

Office over the past 30 years

17,596 filed last year

0

5000

10000

15000

20000

25000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Number of Medical Device Patents Issued

Total Patents US Foreign

Sources: US Patent & Trademark Office, IBISWorld, EY Pulse of the Year, Bloomberg Technology

10

Trend #3: Favorable Employment Figures Driving Physician Visits

Rising employment higher healthcare

utilization rates including physician visits

and hospital admissions thanks to increased

healthcare coverage increased demand

Physician visits are a traditional driver of

medical equipment sales

The effects of employment numbers are

expected to be magnified further due to the

recent election president-elect plans to

increase employment through various

spending projects

The unemployment rate is currently at 4.9%

When unemployment rises by 1%,

preventive health services decreases 1.58%

Decrease in unemployment: less Medicaid &

uninsured admissions and more admissions

with profitable commercial, employer-

sponsored health insurance

By 2022, the number of people employed

will increase from 150.8 million in 2016 to

155.5 million, a 3.13% increase 4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

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Unemployment Rate 2011-2016

Sources: Mergent Online, Fidelity, IBISWorld, Bureau of Labor Statistics, Health Services

Research Journal, Market Realist, Congressional Budget Office

30,000.00

34,000.00

38,000.00

42,000.00

46,000.00

50,000.00

130 135 140 145 150Indu

stry

Rev

enue

(in

mill

ions

)

Number of Employees (in millions)

Employment Figures vs Industry Revenue 2007-2021

R-square:

0.84

58.0%

58.4%

58.8%

59.2%

59.6%

60.0%

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Employment-Population Ratio

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Industry Risks

Investor Uncertainty Because of the current political atmosphere, investor uncertainty surrounds

the Affordable Care Act which has been responsible for much of the rise in

demand for the industry in the past few years.

Reduced Access to

Global Markets

Potential restrictions on free trade would hurt profit since 24.9% of

revenues come from international markets.

The future increase in inflation and interest rates would strengthen the

dollar vs other currencies making it harder for companies to export their

products.

Adaptability to

Industry-Wide

Changes

Firms must be able to adapt to constant technological advancements

and new business models in order to maintain a competitive advantage as

well as meet stringent FDA requirements regarding the safety and quality

of their products.

Key Takeaway: Even though companies must adapt to constant

transformation of traditional technologies, this spurs innovation by encouraging

investment in R&D which ultimately leads to long-term sustainable growth. The

uncertainties surrounding the political situation will dissipate with time and be

outweighed by the benefits of decreased regulation.

Sources: IBISWorld, Deloitte & Touch Industry Report, S&P, EY Pulse of the Year

12

Comparable Companies Analysis

Ticker Market

Cap

% of 52

Week

High

Closing

Price

Enterprise

Value

P/E

Ratio

EV/

EBIT

EV/

EBITDA

EV/

Revenue

EBIT

Margin

EBITDA

Margin

Net

Income

Margin

LTM

ROA

LTM ROE

NEOG 2,376.8 99.2% 62.87 2,247.6 64.2 40x 32.3x 6.8x 17.0% 21.1% 11.2% 8.0% 9.5%

ABAX 1,170.2 89.3% 51.93 1,057.6 33.7 23x 20x 4.7x 20.4% 23.4% 15.5% 10.3% 14.3%

MYGN 1,194.5 38.0% 16.93 1,245.1 13.1 8.9x 7.4x 1.7x 18.6% 22.5% 12.5% 8.5% 13.2%

VIVO 726.0 78.9% 16.95 740.4 22.3 13.8x 12.4x 3.8x 27.3% 30.5% 16.4% 19.5% 19.3%

High 2,376.8

99.2% 62.9 2,247.6 64.2 40x 32.3x 6.8x 27.3% 30.5% 16.4% 19.5% 19.3%

Low 726.0 38.0% 16.9 740.4 13.1 8.9x 7.4x 1.7x 17.0% 21.1% 11.2% 8.0% 9.5%

Median 1,182.4 84.1% 34.4 1,151.4 28.0 18.4x 16.2x 4.3x 19.5% 23.0% 14.0% 9.4% 13.8%

Mean 1,366.9 76.3% 37.2 1,322.7 33.3 21.4x 18.0x 4.3x 20.8% 24.4% 13.9% 11.6% 14.1%

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Value Weighted Index

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

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Mid-Cap Companies Performance vs S&P 500

SPX Percentage Change in Market Cap Mid-Cap Medical Device Companies Percentage Change in Market Cap

14

Value Weighted Index

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%11

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Mid cap healthcare companies vs SPSIBI Index

SPSIBI index Mid cap companies

15

Industry Recommendation

Long term increased demand due to: Aging population

Rising number of unmet health issues like

Obesity, Diabetes, etc.

Emerging Markets

Favorable employment figures

Displays resilience to macroeconomic

factors coupled with overall trends toward

deregulation Long-standing threat of regulation regarding

drug prices eradicated with the election

Innovations driving organic growth

Chosen Company: Myriad Genetics

Financial Characteristics:

Market Cap: 1,194.5 mm

Revenue: 747.8 mm

Revenue Growth: 1.4%

Net Income: 93.8 mm

Gross Profit Margin: 78.5%

P/E Ratio: 13.09

ROA: 8.5%

ROE: 13.2%

Industry Rating:

Positive

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