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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 SIM +/-‐ 12.07% 11.30% -‐0.77% 9.67% 9.51% -‐0.16% Energy 10.29% 9.12% -‐1.17% Financials 16.43% 14.75% -‐1.68% 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% 100.00% 100.00% 0.00% Consumer Discre?onary Consumer Staples Health Care Total S&P Index Health Care Sector Industry Performance as of 6/20/14 per Fidelity.com 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 11.26% 21.32% & Supplies 45.88% 82.33% Health Care Providers & Services 61.61% 172.64% 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% Industry YTD % Change 9.01% 27.89% Health Care Technology -‐6.50% SIM Health Care Holdings Security Ticker Industry 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 Shrs Held Mkt Price Mkt Value $1,814,520 Bloomberg S5HLTH Top Ten (By Revenue) Rank Name Ticker Industry Revenue Market Cap (millions) (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 Revenues (millions) (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 c hanging 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” more than doubled during • Biotech industry’s revenue growth 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” • 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. • High FCF yield represents a good investment opportunity, as investors are paying a smaller price and gerng higher FCF in return. 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 11.26% 21.32% 45.88% 82.33% Equipment & Supplies C Health Care Providers 9.01% 27.89% 61.61% 172.64% & Services 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 Shrs. Mkt. S&P Cap IQ Schwab Stock Fidelity Stock Held Price Mkt. Value Stock Ra8ng Ra8ng Ra8ng Security Ticker Industry Providers & 9.2/10 Services (very bullish) Aetna AET 5,600 $68.05 $381,093 Buy B Gilead 9.8/10 Sciences GILD Biotechnology 7,150 $81.21 $580,652 (very bullish) Buy C Providers & 9/10 Services (bullish) McKesson MCK 2,500 $189.64 $474,100 Outperform A 9.4/10 (very bullish) Teva TEVA Pharmaceu?cals 7,500 $50.49 $378,675 Neutral A 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.