australia healthcare overall - livewire · 2020-02-06 · global healthcare etfs etfs offer an...

June 11, 2015

IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP

AUSTRALIA HEALTHCARE - OVERALL

A healthy global portfolio In an increasingly volatile environment, pinpointing strong sector themes and companies underpinned by long-term structural growth is becoming more critical for investors seeking offshore diversification. We believe the healthcare sector fits the bill, with Healthcare Services (eg, ESRX, MCK, and CI (not rated) positioned as standout performers over the medium term, followed by Biotechnology (eg, BIIB and GILD (not rated)), Pharmaceuticals (eg, MRK and NVS (not rated)) and Medical Technology (eg, MDT and SJT (not rated)). In addition, we view two ETFs, domestically-traded iShares Global Healthcare EFT (IXJ (not rated)) and US listed iShares US Healthcare Providers (IHF (not rated)) as offering top-down sector exposure and options for investors seeking broader diversification in the space.

Figure 1: Featured stocks – Bloomberg forecasts

Company Ticker

Price

(US$)

Mkt Cap

(US$m)

Div

Yield

Fwd

PE

Blmg

rating

(B/H/S)

Blmg

cons PT

(US$)

Upside/

downside

Express Scripts ESRX.US 87.00 63,400 NA 14.5 17/11/0 95.28 10%

McKesson MCK.US 233.42 54,051 0.41 16.1 20/2/0 259.67 11%

Cigna Corp CI.US 138.77 35,710 0.03 14.6 10/6/1 145.79 5%

Biogen Idec BIIB.US 386.37 90,890 NA 20.0 14/9/0 474.5 23%

Gilead Sciences GILD.US 113.70 167,091 NA 10.3 23/4/1 122.23 8%

Merck MRK.US 58.87 168,320 2.96 15.5 11/11/0 65.88 12%

Novartis NVS.US 101.44 245,520 2.59 18.5 4/3/0 110.13 9%

Medtronic MDT.US 75.14 107,080 1.59 15.5 16/10/0 87.23 16%

St Jude Medical STJ.US 73.14 20,490 1.48 16.9 18/9/1 79.32 8%

iShares Global Healthcare IXJ.AU 109.26 2,245* ~0.39 29.4 0.48%^

iShares US Healthcare Providers IHF.US 136.51 893.7* ~0.13 24.9 0.43%^

Prices as at 8 June 2015. SOURCES: BLOOMBERG; *TOTAL NET ASSETS; ^EXPENSE RATIO; ~DISTRIBUTION YIELD

Diversifying offshore…but where should you invest? As the ASX200 is widely expected to underperform global markets again this year and offers poor diversification, investors are increasingly turning to international markets. The only question is where to invest? We believe global healthcare sits in a sweet spot, offering long-term structural growth via tailwinds from ageing populations, higher ROIC than most other industries, sustainable margins with high barriers to entry, continuous innovation and limited inter-exchangeability.

Value-based medicine - Healthcare Services front and centre Given an increasing focus on cost-effective healthcare, along with growing availability of generic drugs and Obamacare insurance mandates, we believe competitive power is shifting from drug manufacturers/suppliers to healthcare service providers. Thus, we believe Healthcare Services will be the standout performer over the medium term, featuring stocks such as Pharmaceutical Benefit Manager Express Scripts (ESRX), distributor McKesson (MCK); and insurer Cigna Corp (CI).

Global healthcare ETFs ETFs offer an increasingly popular way to gain direct access to global healthcare through a single trade. IXJ, the only Australia-listed ETF, has returned 71% over the past two years (>60% versus ASX200), while US-listed IHF, has seen a 63% two-year return (source: Bloomberg).

Sources: CIMB. COMPANY REPORTS

Notes from the Field

—————————————————————————————————————————

Derek Jellinek T +61 (2) 7903 2704 E [email protected]

Scott Power T +61 (7) 3334 4884 E [email protected]

Morgans Financial Limited (Morgans) does not formally research the companies

mentioned.

HEALTHCARE - OVERALL June 11, 2015

2

KEY CHARTS

Healthcare spending is unstoppable… Despite advances in medical technology, countries are struggling with rising healthcare costs, changing insurance coverage and uneven quality of care. Nowhere is this more evident than in the US, where since 2008, expenditure on health has totaled US$2.8trn, representing 17 .7% of GDP, an increase of 120bps. The personal burden is evident in a 2008 study that showed more than 60% of bankruptcies are due to high medical expenses. Unfortunately, healthcare spending is projected to continue on its growth path, with US CMS (Centres for Medicare and Medicaid Services) estimating a 6.3% CAGR to US$4.6trn through 2019, in line with the 7 % CAGR seen over the last decade and representing c20% of GDP.

8,508

5,643

4,522 4,4954,118 3,925 3,800

3,405 3,213 3,072 3,012

373

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

US Swit Canada Ger France Swed Oz UK Japan Spain Italy ChinaUS$ per capita health spend Health spend as % GDP 2011 (RHS)

… a complex volume-based system… The US healthcare distribution and purchasing system entails numerous transactions and caters to various stakeholders. Manufacturers tend to provide products through various distributors who supply end customers. The government sets drug-pricing benchmarks that are used to determine government reimbursement rates. Health plans, group purchasing organisations (GPOs) and pharmacy benefit managers (PBM for drugs) negotiate with manufacturers for discounts and rebates for the individuals enrolled in their plans or under their management based on volume, market share and formulary placement.

…transforming to focus on value and cost Against the above backdrop, we believe suppliers of products and services must spend time and effort to ensure justification of cost and utilisation to differentiate product offerings. In 2013, Harvard Business School Professor Michael Porter embraced this ‘value-agenda’, proposing a fundamentally new strategy to focus on high-value care with a goal to achieve the best patient outcomes at the lowest cost. Essentially, moving away from a supply-driven healthcare system organised around what physicians do to a patient-centred system organised around what patients need entails six interdependent and mutually reinforcing components.

Healthcare Services look most attractive Given the increasing focus on delivery of more efficient and cost effective healthcare, we believe competitive power is shifting from drug manufacturers and suppliers to Healthcare Services (eg Distributors, Pharmaceutical Benefit Managers (PBMs) and Managed Care Organisations (MCOs; insurers)). Thus, we believe Healthcare Services will be the standout performer over the medium term.

0

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30

35

0% 5% 10% 15% 20% 25% 30%

12 mnth fwd PE

3yr Earnings CAGR

Biotechnology

Medical Technology

PharmaceuticalsDistributors

PBMs

Insurers

MCK

ESRX

BIIB

BMY

CELG

ABC

SNY

PFE

RMD

BSX

CSL

COH

Australian Companies

GILD

CAH

SHL

PRY

STJ

MDTSYK

ABTAZN

HSIC

PDCO

HUM

UNH

AETCIJNJ

NVS

BAX

MRK

BAYN

GSK ANTM

LLY

ROG

AMGN

SOON

ZMH

CVS

CTRX

ABBV

SOURCE: MORGANS, BLOOOMBERG


3

Figure 2: Healthcare Services peer comparison

Ticker ROE

Div Yield

(%) FY0 FY1 FY2 FY3 FY0 FY1 FY2 FY3 FY1 FY2 FY3 3Y CAGR

Healthcare services

Distributors

McKesson MCK 54,790 25.9 0.41 12.7 11.5 10.0 9.1 21.7 18.8 16.3 14.2 13.3% 15.4% 14.9% 14.6% 1.5

Cardinal Health CAH 29,123 21.5 1.6 12.1 11.0 10.1 9.0 23.1 20.2 18.0 15.7 13.8% 11.9% 14.7% 13.4% 1.7

AmerisourceBergen ABC 24,710 46.3 1.0 15.0 12.8 11.0 9.5 28.7 22.8 20.3 17.6 24.2% 12.6% 14.9% 17.1% 1.7

Henry Shein HSIC 11,885 14.9 NA 15.2 13.9 12.5 11.3 26.4 24.0 21.5 19.3 9.0% 11.3% 11.7% 10.7% 2.5

Patterson Companies PDCO 4,923 15.1 1.7 12.5 11.4 10.7 10.2 21.3 19.5 17.9 16.4 7.6% 9.1% 9.5% 8.7% 2.4

Average 13,839 25.4 1.4 14.2 12.7 11.4 10.3 25.5 22.1 19.9 17.8 13.6% 11.0% 12.0% 12.2% 2.2

PBMs

CVS Health CVS 114,898 14.1 1.2 11.8 10.9 9.9 10.2 22.7 19.7 17.2 14.9 22.5% 14.5% 15.2% 17.3% 1.3

Express Scripts ESRX 62,792 17.2 NA 11.1 10.7 10.1 9.5 17.6 15.8 14.3 12.8 11.5% 10.7% 11.9% 11.4% 1.6

Average 88,845 15.6 1.2 11.4 10.8 10.0 9.8 20.1 17.8 15.8 13.9 17.0% 12.6% 13.5% 14.3% 1.4

Insurers

UnitedHealth UNH 112,087 17.4 1.3 10.5 9.4 8.9 7.8 20.9 18.8 16.0 14.1 9.9% 17.3% 13.9% 13.7% 1.5

Anthem ANTM 43,234 10.5 1.2 11.2 9.6 9.4 8.4 18.5 16.3 14.8 13.4 13.7% 10.3% 10.7% 11.6% 1.6

Aetna AET 40,972 16.2 0.8 10.5 9.2 8.3 7.4 17.5 15.8 14.3 12.9 10.6% 10.5% 11.1% 10.8% 1.6

Cigna CI 36,420 18.7 0.0 10.6 9.9 9.4 8.7 19.1 16.6 14.9 13.0 14.7% 11.2% 14.7% 13.5% 1.4

Humana HUM 32,164 13.1 0.5 12.4 10.9 9.7 8.1 28.4 24.6 21.7 18.8 16.0% 13.5% 15.5% 15.0% 1.9

Average 52,975 15.2 0.8 11.0 9.8 9.1 8.1 20.9 18.4 16.4 14.4 13.0% 12.6% 13.2% 12.9% 1.6

Medical Labs/Research

Sonic Healthcare SHL 6,131 12.8 4.4 11.4 12.6 11.0 10.1 20.0 19.6 16.9 15.6 -14.4% 16.0% 8.2% 2.4% 8.3

Primary Healthcare PRY 2,047 5.6 5.6 8.9 11.6 10.7 9.6 15.3 17.0 14.6 13.2 -10.0% 15.9% 11.2% 5.1% 3.0

Thermo Fisher Scientif ic TMO 51,576 14.2 0.5 16.0 15.2 13.8 12.6 18.7 17.6 15.9 14.4 5.5% 10.7% 10.8% 9.0% 2.1

Agilent Technologies A 13,805 10.7 1.1 16.5 15.7 13.6 12.3 13.4 24.2 20.9 18.4 -44.2% 16.0% 13.8% -9.7% -1.4

Laboratory Corp of America LH 11,847 17.2 NA 12.0 10.9 9.4 8.6 17.4 15.3 13.7 12.1 13.3% 12.1% 12.7% 12.7% 1.4

Quest Diagnostics DGX 10,738 13.0 1.8 10.1 9.3 8.7 7.9 18.4 15.6 14.5 13.2 16.6% 8.0% 9.7% 11.4% 1.6

Qunitiles Q 8,519 72.0- NA 14.1 12.6 10.7 9.2 26.2 22.5 19.7 17.5 14.7% 14.0% 12.8% 13.8% 1.9

PerkinElmer PKI 5,955 13.6 0.5 15.5 14.2 12.7 11.5 22.0 20.4 18.3 16.4 4.7% 11.5% 11.3% 9.1% 2.4

Qiagen QIA 5,714 9.1 NA 14.3 14.7 13.0 11.3 23.4 22.2 20.2 18.5 10.8% 9.9% 9.4% 10.1% 2.3

Average 15,451 0.8 1.0 14.1 13.2 11.7 10.5 19.9 19.7 17.6 15.8 3.0% 11.7% 11.5% 8.0% 1.5

Overall average 42,778 14 1.1 12.7 11.6 10.6 9.7 21.6 19.5 17.4 15.5 11.7% 12.0% 12.6% 11.9% 1.7

Mkt Cap

(US$)

EV/EBITDA (x) PE (x) EPS growth

PEG 3Y

CAGR

SOURCES: BLOOMBERG


4

Figure 3: Pharmaceutical, Biotechnology and Medical Device peer comparison

Ticker ROE

Div Yield


Pharmaceuticals

Johnson & Johnson JNJ 277,249 23.8 2.9 10.0 10.7 9.7 9.0 16.8 16.3 15.6 14.7 2.8% 4.6% 6.1% 4.5% 3.8

Novartis NVS 275,570 14.4 2.6 15.5 14.5 13.5 12.2 19.7 19.9 18.8 16.4 -0.04% 6.2% 14.2% 6.5% 3.0

Pfizer PFE 212,378 19.9 3.1 8.9 11.6 10.7 9.6 15.3 17.0 14.6 13.2 -10.0% 15.9% 11.2% 5.1% 3.0

Merck MRK 170,191 21.2 3.0 9.9 11.8 10.7 11.0 17.3 17.5 15.8 15.2 -1.4% 11.0% 3.9% 4.4% 3.9

AbbVie ABBV 116,586 59.8 2.8 16.2 13.7 11.5 10.3 20.3 15.7 13.3 11.7 27.6% 18.3% 13.7% 14.9% 1.0

GlaxoSmithKline GSK 107,642 85.6 5.7 11.1 11.3 10.8 10.1 15.4 17.4 15.9 14.9 -8.0% 9.8% 6.9% 7.7% 2.0

Bristol-Myers Squibb BMY 109,687 19.8 2.2 28.0 29.1 22.6 17.2 36.6 37.5 28.7 22.4 -5.0% 30.5% 28.1% 16.7% 2.2

Sanofi SNY 72,860 17.1 1.9 15.4 13.9 12.6 11.7 21.7 22.6 20.3 18.2 -5.2% 11.4% 11.6% 8.1% 2.7

Bayer AG BAYN 16,192 23.4 1.8 10.1 10.7 10.1 9.4 19.7 19.3 17.0 15.8 2.4% 13.6% 7.2% 7.6% 2.6

AstraZeneca AZN 12,380 12.1 4.5 14.4 13.1 11.9 10.2 25.3 23.2 20.8 18.6 9.3% 11.7% 12.0% 11.0% 2.3

Eli Lilly LLY 11,847 20.1 2.5 12.0 10.9 9.4 8.6 17.4 15.3 13.7 12.1 13.3% 12.1% 12.7% 12.7% 1.4

Average 125,689 28.8 3.0 13.8 13.7 12.1 10.8 20.5 20.2 17.7 15.7 2.3% 13.2% 11.6% 9.0% 2.5

Ticker ROE

Div Yield


Biotechnology

CSL CSL 33,116 44.8 1.5 18.1 17.5 16.1 14.4 25.6 23.8 21.8 19.6 7.1% 9.3% 11.4% 9.2% 2.8

Roche ROG 254,063 52.6 2.9 11.6 12.8 11.8 10.9 18.7 19.4 17.8 16.4 -3.4% 8.8% 8.2% 4.4% 4.3

Gilead Sciences GILD 167,447 87.5 NA 10.2 7.8 7.7 7.3 14.5 10.6 10.3 9.6 36.4% 2.3% 7.1% 14.3% 1.0

Amgen AMGN 118,945 26.9 1.8 13.9 12.2 10.5 7.7 18.2 16.3 14.8 12.9 12.7% 10.1% 14.9% 12.5% 1.5

Biogen BIIB 91,180 32.9 NA 18.9 15.9 13.8 12.1 28.6 23.2 20.0 17.8 22.3% 15.8% 12.3% 16.7% 1.7

Celgene Corporation CELG 90,323 52.4 NA 20.8 18.8 13.9 10.6 30.7 24.0 18.4 14.7 53.3% 30.2% 24.9% 35.6% 0.9

Regeneron REGN 52,558 37.8 NA 54.6 39.3 27.4 19.6 50.6 45.6 38.3 30.1 209.9% 19.2% 27.1% 67.4% 0.8

Shire Pharmaceuticals SHP 50,782 23.7 0.3 17.5 17.1 13.8 11.4 23.9 22.3 19.2 16.3 7.2% 16.3% 17.8% 13.7% 1.7

Baxter BAX 36,122 22.7 3.1 9.7 11.7 10.8 9.7 13.6 16.6 16.3 15.0 -18.3% 1.7% 8.9% 3.8% 3.6

Alexion ALXN 32,713 21.4 NA 28.0 26.2 18.8 12.6 31.5 32.5 27.2 21.5 34.0% 19.3% 26.5% 26.5% 1.2

Vertex VRTX 30,420 33.5- NA 45.0 35.0 22.5 18.0 NA 28.0 26.1 14.8 65.0% 554.0% 76.1% 29.9% 0.9

Average 87,061 33.6 1.9 22.6 19.5 15.2 12.2 25.6 23.8 20.9 17.2 38.7% 62.5% 21.4% 21.3% 1.8

Ticker ROE

Div Yield


Medical Technology

Resmed RMD 8,363 18.6 1.8 16.0 17.3 16.3 15.2 24.7 23.1 21.0 18.9 3.7% 10.1% 11.0% 10.7% 2.3

Cochlear COH 3,746 45.1 2.9 24.5 20.1 17.2 16.0 46.0 30.8 26.1 24.4 21.3% 17.7% 7.3% 15.3% 3.0

Medtronic MDT 109,559 18.9 1.6 18.4 14.3 13.6 12.5 18.3 17.3 15.7 14.3 4.1% 10.2% 9.3% 7.8% 2.3

Abbott Laboratories ABT 72,860 14.4 1.9 15.4 13.9 12.6 11.7 21.7 22.6 20.3 18.2 -5.2% 11.4% 11.6% 5.6% 3.8

Stryker SYK 36,369 19.2 1.4 13.6 13.1 11.8 10.4 20.3 19.1 17.4 16.1 6.4% 9.4% 8.6% 8.1% 2.5

Boston Scientif ic BSX 24,521 16.7 NA 16.8 14.6 12.8 11.2 22.1 20.3 17.7 15.7 7.3% 14.7% 12.8% 11.5% 1.9

St Jude STJ 20,866 24.2 1.5 13.2 13.7 12.4 11.3 18.7 18.8 17.1 15.6 -0.7% 9.5% 10.0% 6.2% 3.0

Zimmer ZMH 19,453 12.0 0.8 10.7 13.3 11.2 10.4 18.9 17.0 15.1 13.7 10.6% 13.0% 9.8% 11.1% 1.7

Intuitive Surgical ISRG 18,397 15.9 NA 23.0 21.5 18.5 17.1 32.1 30.1 25.8 22.3 22.6% 16.7% 15.7% 18.3% 1.8

Smith & Nephew SN 15,861 17.1 1.9 13.3 12.3 10.9 9.8 21.5 20.7 18.4 17.0 3.0% 12.7% 8.0% 7.8% 2.7

Edw ards Lifesciences EW 14,117 20.0 NA 26.3 20.2 18.5 16.5 38.8 30.7 28.0 24.7 22.2% 9.4% 13.4% 14.9% 2.6

Sonova SOON 10,109 19.8 1.4 17.2 16.9 15.3 14.1 24.4 23.2 20.5 19.2 5.3% 13.2% 6.7% 8.4% 2.9

Average 19,962 17.6 1.5 16.8 15.7 13.9 12.6 24.6 22.5 20.0 18.0 9.6% 12.3% 10.6% 10.8% 2.4

Mkt Cap

(US$)


PEG 3Y

CAGR

Mkt Cap

(US$)


PEG 3Y

CAGR

Mkt Cap

(US$)


PEG 3Y

CAGR

SOURCES: BLOOMBERG


5

Healthcare- Going global

1. BACKGROUND

In a banks/resource-centric market, where the yield trade looks overdone, commodity prices are likely to remain volatile and overall earnings growth is modest, Australian investors have been increasingly turning to international investments to diversify portfolios, lower risk and potentially increase returns. However, given a soft global backdrop and increasing volatility, we believe investors buying overseas should pinpoint strong sector themes and focus on companies underpinned by long-term structural growth. We believe the healthcare sector fits the bill. Specifically, we believe ‘value-based medicine’ is the main catch-phrase across the space, with our segmental investment pecking order placing Healthcare Services as standout performers over the medium term (eg Express Scripts- ESRX; McKesson- MCK; Cigna Corp- CI; all not rated), followed by Biotechnology (eg Gilead Sciences- GILD; Biogen- BIIB; all not rated), Pharmaceuticals (Merck- MRK; Novartis- NVS; all not rated) and Medical Technology (Medtronic- MDT; St Jude Medical- SJT; all not rated). In addition, we v iew the only domestically-traded iShares Global Healthcare EFT (IXJ) and US listed iShares US Healthcare Providers (IHF) as offering top-down sector exposure and potential options for investors seeking broader diversification in the space.

2. THE LAY OF THE LAND

2.1 Defensive yield has delivered solid returns…

Since the beginning of 2010, the ASX has appreciated more than 55%, driven by defensive yield plays (+96%) offset by mining (-20%). However, in the current environment where economic growth is varied, global accommodative policies may diverge and US inflation looks likely to be stoked, we believe this trade may have reached a point of exhaustion. As prices of these defensive yield plays exceed underlying earnings and as market volatility ramps up, we think there is a high likelihood that this underlying fundamental gap differential will close.

Figure 4: Yield vs market

Title:

Source:

Please fill in the values above to have them entered in your report

60

80

100

120

140

160

180

200

220

S&P/ASX 100 Defensive Yield Domestic Cyclical Mining

TR Index

SOURCES: MORGANS, BLOOMBERG

2.2 …with Australian healthcare performing strongly

Over this same period, ASX200 healthcare index has appreciated more than 110%, reflective of strong earnings growth, high returns on capital, solid balance sheets, increasing cash flow, effective capital management and helpful FX tailwinds.

Table of Contents

1. BACKGROUND p.5

2. THE LAY OF THE LAND p.5

3. GOING GLOBAL p.9

4. HEALTHCARE SERVICES…BUYING THE DIPS

p.12

5. BIOTECHNOLOGY p.16

6. PHARMACEUTICALS p.18

7. MEDICAL TECHNOLOGY p.21

8. APPENDIX p.35


6

Figure 5: ASX200 Healthcare

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2.3 Absolute valuation looks a bit stretched…

The healthcare index is trading on an absolute PE of 24.8x based on 12-month forward Bloomberg consensus EPS estimates, 26% above its longer-term mean of 19.7x. However, on a relative PE basis, the healthcare index is trading 7% above its 5-year average PER of 1 .39x.

Figure 6: ASX200 Healthcare index 12-month forward PE Figure 7: ASX200 Healthcare index 12-month forward PER

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12 mnth f wd relativ e PE to ASX200

-1 St dev

+1 St dev

SOURCES: MORGANS, BLOOMBERG SOURCES: MORGANS, BLOOMBERG

2.4 …but fundamentals remain solid…

Looking forward, we continue to see healthcare as a standout sector against a backdrop of low global growth, as the defensive sector offers businesses with long-term structural growth prospects via:

• Tailwinds from ageing population

• Higher ROI than most other industries due to duopolies or oligopolies

• Higher pricing power, high innovation and limited inter-exchangeability

• M&A

• Expansion into emerging markets

• Implementation of the Patient Protection and Affordable Care Act (Obamacare)


7

2.5 … supporting market leading earnings growth

Comparing 3-year earnings CAGR to 12-month forward PE across the market, healthcare and industrial sectors appear to stand out from the pack as well as the benchmarks. While valuations may appear extended, we believe in a world where global uncertainties are high, growth slowing, and risk of earnings revisions increasing, healthcare is still likely to catch a bid as the defensive sector offers businesses with long-term structural growth prospects, earnings consistency and certainty, along with the added potential benefits from lower AUD.

Figure 8: ASX200 industry sectors- PE vs 3-year EPS CAGR

Title:

Source:


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12 mnth fwd PE

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Utilities

MaterialsTelcosIT

Consumer Discretionary Energy

Healthcare

Consumer Staples

ASX200

Property

Financials


2.6 Global exposure and stock diversification is lacking…

The Australian stock market represents only 3% of global share markets, with high concentration risk as the top 10 stocks account for 55% of the ASX 200 and financials make up 40% of the index. Notably, the healthcare sector represents a mere 5% of the index, a far cry from the global MSCI index where healthcare has a 15% allocation.

Figure 9: ASX sector allocation (as at 1 June 2015)

Title:

Source:


Consumer discretionary, 4%

Utilities, 2%

Energy, 5%

Telecom, 6%

Healthcare, 6%

Consumer staples, 7%

Industrials, 7%

Materials , 15%

Financials , 47%

IT, 1%


2.7 …making international names more attractive…

We believe the lack of investment opportunities creates a “scarcity premium” in local healthcare stocks, where domestic investors pay a higher multiple for equity return compared to similar companies offshore.


8

Figure 10: Global healthcare indices; PE vs ROE [as at 8 June 2015]

Title:

Source:


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0% 10% 20% 30% 40% 50% 60% 70%

MSCI Asia ex Japan HC

ASX200 HC

ASX200

S&P500 HC

MSCI Euro HC

FTSE 350 HC

PE

ROE


Over the past several years, the ASX200 Healthcare index has outperformed the US S&P500 Healthcare index relative to its respective market index (30% versus 24%). However, the US S&P500 has eclipsed the ASX200 Healthcare index by 14% on an absolute basis (54% versus 40%) and currently trades 5.9 PE points below its Australian peer (18.3x versus 24.2x).

Figure 11: ASX200 Healthcare vs S&P500 Healthcare- Price appreciation

Figure 12: ASX200 Healthcare vs S&P500 Healthcare- Fwd PE

Title:

Source:


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2.8 …with bullishness seen across subsectors…

Using the same time period as above, strength of the S&P500 Healthcare index can be seen in almost across the majority of subsectors such as medical services providers, biotechnology, pharmaceuticals and medical devices. Compared to the ASX200 Healthcare index, the biotechnology sector takes a lead position, outperforming the index by nearly 40%, followed by providers (37%) and medtech (20%), with pharmaceuticals essentially the same. However, while the PE of the S&P500 Healthcare index has expanded 16% to 18.3x over this time, PEs across subsectors have varied widely, with expansion seen across providers (45% to 17 .8x), medtech (29% to 18.6x) and pharma (20% to 18.4x), while the biotechnology sector contracted (22% to 17 .5x) as earnings were adjusted higher and stock prices have pulled back on profit taking and pricing concerns.


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Figure 13: S&P500 Healthcare subsectors Figure 14: S&P500 Healthcare subsectors

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3. GOING GLOBAL

3.1 Healthcare Services sit in the sweet spot

We believe a transformational shift is underway, where the traditional volume-based, fee-for-service healthcare is morphing into a value-based, consumer-driven structure, with increasing global awareness focusing the spotlight on cost and quality while customers have greater control over personal health management. Given the objective to deliver more efficient and cost effective healthcare, along with growing availability of generic drugs and Obamacare insurance mandates, we believe competitive power is shifting from drug manufacturers and suppliers to healthcare services (eg distributors, top tier pharmaceutical benefit managers (PBMs) and managed care organisations (MCOs; insurers)). Thus, we believe Healthcare Services will be the standout performer over the medium term.

Figure 15: Healthcare Services look most attractive across global healthcare

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3.2 ETF- instant geographic and stock diversification

We believe for investors seeking higher exposure to international healthcare equities and who do not want to buy companies directly or choose active fund managers with a record in international equities, ETFs offer a convenient top-down strategy to ‘buy’ markets. We highlight below two healthcare focused ETFs that have enjoyed strong momentum and have potentially superior weighting methodologies, which could allow these to continue leading the healthcare space going forward.


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iShares Global Healthcare ETF (IXJ) - The only Australia-listed ETF that can provide investors with a broadly diversified portfolio of the mostly liquid, large cap global healthcare names. The US$2.2bn fund tracks the S&P Global Healthcare Sector Index, with 90 holdings across all healthcare sub-segments (ie biotech, pharma, medtech, and healthcare services). However, holdings are skewed to pharma/biotech (74%) and medtech (25%). The fund has returned 22.7% over the last 5 years and 40% over the past year, beating the ASX 200 Healthcare Index. Currently, the fund trades at a PE of 29.8x and has a P/B of 6.8x.

Figure 16: Top holdings - IXJ Figure 17: Country allocation - IXJ

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6.50%

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iShares U.S. Healthcare Providers (IHF) - A US$859.6m US-listed ETF that follows the Dow Jones US Select Healthcare Providers Index with exposure to companies that provide health insurance, diagnostics and specialised treatment. We v iew IHF as a good way to play the key thematic of value-based medicine as noted above. The fund holds 49 securities in its basket with the largest allocation going to healthcare providers (96.5%), with United Health (UNH) and Express Scripts (ESRX) at 13.8% and 9.5%, respectively. The fund has returned 12% since its 2006 inception, with returns of 21% over the past 5 years and 35% over the past year. Currently, the fund trades at a PE of 24.6x and has a P/B of 2.9x.

Figure 18: Top holdings - IHF Figure 19: Allocation - IHF

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Please fill in the values above to have them entered in your report13.70%

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http://www.zacks.com/stock/quote/ESRX?q=esrx


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Strong share performance

We compared the iShares IHF and IXJ to the ASX200 healthcare index and broader market over the last two years. As seen in the chart below, iShares IXJ has been a fairly consistent outperformer, returning 71% over the past two years, 8% ahead of IHF, 30% above the ASX200 healthcare index and more than 60% above the ASX200. Given our belief that the healthcare service providers are better placed than pharmaceutical and biotechnology companies in the current cost-conscious, value-based operating environment, we believe IHF may prove to be a superior investment to IXJ, but see both outperforming the Australian healthcare index and broader market going forward.

Figure 20: iShares IXJ and IHF compared to ASX200 healthcare and broader market

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4. HEALTHCARE SERVICES…BUYING THE DIPS

While not as well known as top-tier pharmaceutical, biotechnology and medical technology companies, we believe healthcare services, comprised of distributors, PBMs, and insurers, play a pivotal role in the provision and delivery of healthcare and should experience stable demand and good returns given:

• large market share and operating efficiency

• well-positioned- as a core fundamental driver is the need to control total healthcare costs; increased pricing scrutiny of all medical procedures and products including: surgeries, medical implants, pharmaceuticals, and capital equipment; cost-benefit will be questioned; playing squarely into regulatory mandates

• scale, networks, switching costs

• industry consolidation and partnerships

Figure 21: Healthcare Services SWOT

Strengths Weaknesses

Organic growth via aging population, customer awareness and new tech Need to show operational efficiencies across businesses

Healthy profit growth for drug suppliers Leverage with manufacturers/suppliers

Benefitting from patent expirations and new generic drugs Modest revenue growth as blockbuster drugs lose patents

At the heart of a system focused on higher efficiencies and lower cost Under heavy state and federal government regulation

Opportunities Threats

Improving sourcing and building efficient supply chains Increasing staff requirement and costs

Consumer-driven healthcare (CDHC) under Obamacare M&A among drugmakers putting pressure on distributor fees

Increasing scale, service networks and increasing switching costs Growing fee for billing, collection and payment processes

Profitable perhipheral healthcare services Capped insurer profits, restricted underwriting, increased competition

SOURCES: MORGANS, COMPANY REPORTS

Given this current cost-conscious, value-driven operating environment, we believe competitive power has shifted to drug distributors, top-tier PBMs, certain MCOs and health insurers, from manufacturers and suppliers as the latter must contend with increasing pricing pressure. We believe stock picking, in lieu of sector allocation, is the best strategy as sector valuation looks a little toppy.

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4.1 PBMs - a critical cog in the healthcare value chain

We believe PBMs are becoming increasingly important in the provision of healthcare. PBMs manage drug benefits on behalf of employers and health plans through negotiating favourable prices from drug makers, where they receive a portion of that discount as payment, and creating and managing the formularies that dictate which drugs are covered and how much patients will pay out of their own pockets. In addition, PBMs also sell drugs, operating large specialty and mail-order pharmacies.

Figure 23: PBM share appreciation- 2 years

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4.2 Featured stock - Express Scripts (ESRX, not rated)

US$63bn market cap; trades cUS$86, against a 52-week range of US$65-91.21; PE 14.3x; +2% YTD; Bloomberg consensus: price target: US$95.28; 5 year earnings CAGR of 12.8%, PEG 1 .3x.

• Headquartered in St. Louis, Missouri, USA, the company is the one of the largest managers of prescription drug benefits from US employers and insurers, distributes specialty pharmaceuticals and medical supplies to providers, clinics, and hospitals, and also provides consulting services for pharmaceutical manufacturers to collect scientific evidence to guide the use of medicines.

• It manages more than one billion prescriptions each year for tens of millions of patients, with the aim to make drugs safer and more affordable. The company controls c50% of the US market (with CVS Health/Caremark control the remainder).

• A vocal critic of high drug prices, which the company has used to promote its services to potential customers, it is looking to negotiate with pharmaceutical firms to provide differentiated pricing depending on how well the medicines work.

• Management claims that ESRX challenges faced with digesting the US$29bn merger with Medco Health Solutions back in 2012 to become the biggest PMB in the US and losing its largest client UnitedHealth, which decided to run its own in-house pharmacy benefit business, are behind it.

• Management believes the company should benefit from a number of sector trends: has the clout to negotiate favourable prices from drug makers for health plans, and gets a cut of those savings; rising demand for specialty drugs should benefit the mail-order and specialty drug pharmacy business.

4.3 Distributors - a rational oligopoly

We believe the drug distribution space should continue to benefit from generic drug penetration, emerging biosimilars, an aging population, drug price inflation, new drug discoveries, and increased acquisitions and strategic


14

partnering. While patent losses on several blockbuster drugs and mergers among major drugmakers may put pressure on the distribution fees and limit strong top line growth over the near term, we view longer-term growth supported, as up to 26-28 million additional Americans will eventually be covered by health insurance under Obamacare by 2019 and better able to afford pharmaceuticals, targeting high-single to low-double-digit annual EPS gains. We also see stock benefiting from cost controls, divestitures of underperforming units, linking up with retail pharmacies in strategic partnerships and efficient capital allocation into acquisitions and common share buybacks. Currently, three companies generate 85-90% of all revenues across the US sector, Amerisource Bergen (ABC, not rated), Cardinal Health (CAH, not rated), and McKesson Corp (MCK, not rated).

Figure 24: Distributor share performance- 2 years

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4.4 Featured stock - McKesson Corp (MCK- NYSE, not rated)

US$55bn market cap; trades cUS$238, against a 52-week range of US$178-244; PE 16.4x; +15% YTD; Bloomberg consensus: price target: US$259.67; 5 year earnings CAGR of 16.7 %, PEG 1.1x; Payout ratio of 15% with current 0.5% div idend yield

• Headquartered in San Francisco, California, USA, the 182 year old company (ranked 15th on the FORTUNE 500) is the largest pharmaceutical distributor in the US (c38% market share) and also delivers enterprise-wide clinical, patient care, financial, supply chain, and strategic management software solutions to healthcare organisation.

• MCK looks well-placed as a premier global pharm distributor, with strong supplier pricing power, scale advantages and a solid track record of outperformance.

• Management sees benefits from high-growth specialty markets via expansion of current customer contracts, notably Wal-Mart (WMT), Target(TGT), and exclusive 5 year contract with Rite Aid, as traditional retailers look to distributors with larger scale to get better pricing and manage new regulatory burdens.

• McKesson continues to build scale in the US and global pharmaceutical distribution market, actively pursuing deals and acquisitions to drive growth (October 2013: US$8.3bn deal to buy German drugs wholesaler Celesio, given access to extensive drug distribution network in EU and US$10bn worth of generic drugs annually) expanding its global reach and drug purchasing power

4.5 Insurers benefiting from Obamacare

While the introduction of the Affordable Care Act/Obamacare in March 2010 saw investor angst over the potential impact of new restrictions, fees and taxes

http://www.thestreet.com/quote/WMT.html

http://www.thestreet.com/quote/TGT.html


15

created by the law, five years later those investors are reaping benefits as the nine largest publicly traded US insurers have each at least doubled, and some have tripled over this time (S&P 500 +75%; ASX200 +19%; ASX200 HC +117%). Obamacare can be credited as the main driver of this growth, as the law forces people to buy health insurance, with subsidies offered via private insurers, it increased state-federal run Medicaid program, which is often run through private insurers, and new charges have been passed onto customers. In addition, Obamacare is driving sector consolidation, and helps to build a moat around existing players, resulting in lower competition, increased profit margins and growing shareholder returns.

Figure 25: US insurer performance- 2 year

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4.6 Featured stock - Cigna Corp (CI-NYSE, not rated)

US$37bn market cap; US$144, against a 52-week range of US$86-145.3; PE 15.2x; +40% YTD; Bloomberg consensus: price target: US$145.79; 5 year earnings CAGR of 12.1%, PEG 1 .3x

• Headquartered in Bloomfield, Connecticut, USA, the 223 year old company provides insurance and related products and services in the US and internationally.

• While CI needs to handle new regulatory mandates under Obamacare, pressure from Medicare advantage rate cut and higher medical costs, management believes the company has a differentiated business portfolio, has a strong global supplemental business, solid market position plans, growing membership base (expected 2-4%) and ongoing expansion of Seniors and Medicare business position to act as offsets

• Prudent capital allocation and a healthy balance sheet allows the company access to US$1.3bn for deployment for the balance of 2015

• The insurer has delivered earnings surprises in the last four quarters, with a 1Q15 surprise of 6.5% driven by strong revenue growth, specialty contributions and continued effective medical cost management.

• 2015 guidance was revised upward, now targeting EPS between US$8.15 to US$8.50 on revenue growth between 8-10%, with Bloomberg consensus sitting on EPS of US$8.52 and revenue growth of 10%.


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5. BIOTECHNOLOGY

We believe biotechnology is the highest-profile subsector across healthcare, boasting high demand for effective treatments and new cures. However, the sector is facing increasing criticism about the rising and unsustainable cost of new therapies (eg hepatitis C, cancer, diabetes, etc) and an increasing emphasis on quality of care and value-based pricing.

Figure 26: Biotechnology SWOT


Strong earnings growth and ROI underpinned by solid industry dynamics Sentiment-linked, with risks around R&D pipelines, M&A and regulators

Rich R&D piplines with a favourable regulatory environment Capital intensive with long development timelines


M&A to broaden geographic reach and product offering Biosimilars (ie generic versions of biologic-based drugs)

Core drug discovery engine for pharma industry Fragmented, with smaller companies lacking capital for development

Non-cyclical provides defensive tilt to portfolios Recruiting and retention of the best and brightest

Scientific advances and growing unmet medical needs Political pressure and price controls

Improving efficiencies Increasing power of distributors, insurers and payers

Convergence of technologies Rapid technololgy innovation


5.1 Performance remains robust…valuation is attractive

This growth sector has posted 2 year returns of nearly 80%, with GILD and BIIB the standouts. While the sector is up 7% since the beginning of 2015, we believe there is a bit of "sell the leader” mentality across the space, as we would expect given a long stretch of continuous gains and significantly high valuations. However, we v iew recent pullbacks on pricing concerns, possibly cooling M&A and ‘risk-off’ sentiment, as a buying opportunity as fundamentals are positive, scientific advances endure, clinical progression is strengthening pipelines, the regulatory landscape looks supportive and higher efficiencies all make for bright prospects for continued sector growth. Interestingly, the US biotechnology index has outperformed the broader market 8 out of 10 times over in the 2Q/3Q timeframe.

Figure 27: Biotechnology performance- 2 year Figure 28: Biotechnology forward PE

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5.2 Featured stocks - BIIB, GILD

Biogen (BIIB-NYSE, not rated)

US$95bn market cap; trades cUS$400, against a 52-week range of US$290 to US$480; PE 23.8x; +19% YTD; Bloomberg consensus: price target: US$474.50; 5 y ear earnings CAGR of 16.8%, PEG 1 .4x

• Headquartered in Cambridge, Massachusetts, USA, the company is focused on neuorgenerative, haemophilia, and autoimmune disorders,

• Holds a dominant position in the treatment for multiple sclerosis, with drugs Avonex, Tysabri, and Tecfidera

• US$5bn buyback authorised over the next 5 years

• Recently announced positive interim results of a Phase 1b study evaluating BIIB037 (aducanumab) for the treatment of patients with early-stage Alzheimer's disease.

• Outstanding product pipeline.

• Buying opportunity off the back of Q1 weakness on MS drug Tecfidera (US$825 million -10% qoq) appears temporary (ie due to fewer shipping weeks; Medicare doughnut-hole issues).

• Stock trades at 16% off of its 20 March high of US$480, as results missed Q1 forecasts in late April as its multiple-sclerosis drug Tecfidera ran into unexpected headwinds, sending the share price down 13%.

• Scope for upside value; favorable risk/reward profiles based on defensible core business and strong pipeline and launch upside.

Gilead Sciences (GILD-NYSE, not rated)

US$167bn market cap; trades cUS$113, against a 52-week range of US$78.50 to US$117; PE 10.3x; +19% YTD; Bloomberg consensus: price target: US$122.23; 5 y ear earnings CAGR of 13.3%, PEG 0.8x

• Headquartered in Foster City, California, USA, the company is focused on HIV, liver disease, oncology and cardiovascular disease, with antiviral therapies representing 83% of total sales.

• Controls 49% of the US$16bn hepatitis C market with its revolutionary treatments Sovaldi and Harvoni.

• 1Q results exceeded expectations, bottom line jumped 99% to US$2.94, US$0.64 above forecasts, with HCV sales hitting US$4.55bn (double US$2.27bn in 1Q14), with 2015 sales guided to US$28-29bn (prior $26-27bn) so growth of at least 12.4%.

• Consensus projections call for slowing growth (2Q at 13%) on tougher comparisons and pricing pressures, but price wars could actually be strengthening, as insurers are not putting up roadblocks for treatment, so volumes are offsetting ASP declines

• Its line of HIV drugs continues to grow and the company believes it has promising cancer treatments in the pipeline.

• Capital management sees the company pay its first dividend in June (1.7% y ield) and a US$15bn share buyback is underway.

• Is the least expensive biotechnology, trading on 10-11x forward PE based on Bloomberg consensus.

• A US$14.5bn cash hoard to be deployed for strategic M&A, according to management.


18

6. PHARMACEUTICALS

We believe the pharmaceutical industry continues to evolve, as patent cliff issues and Obamacare impacts that had investor on edge for years are largely behind the large integrated firms, as the fundamentals continue to strengthen as the population ages leading to growing demand for drugs and services to fight disease such as obesity, diabetes and cancer. In addition, while clinical development remains costly, the sector is becoming much more focused on R&D projects with significant potential, culling non-performing assets and looking to growth inorganically via M&A.

Figure 29: Pharmaceutical SWOT


Large operators with quality-focused strategic portfolios R&D budgets increasing as ROI declines

Strong manfacturing base with growing R&D pipelines Operate in a highly regulated environment and politically sensitive

Knowledge-based with strong clinical/regulatory expertise Innovative effectiveness varies widely

Strong brand reputations Fragmented internal capabilities


Increasing consumer health focus Increasing aggressive generic industry

M&A to broaden geographic reach and product offering Biosimilars (ie generic versions of biologic-based drugs)

Globalisation and expansion in emerging markets Price pressure and exclusion formularies

Innovation and R&D pipelines Rebates and discounts for formulary position


6.1 Performance strong, but valuation looks toppy

The US Pharmaceutical Index is up more than 12% YTD, a solid showing compared to the S&P 500 gaining only 3% over the same period. However, returns over the past two years vary widely, with BMY and BAYN the standouts at more than 55%, while GSK and SNY have been the laggards, down more than 10% over the same time period. In addition, the index trades above 1SD rich. Nevertheless, over the longer term, drug stocks tend to pay investors 4x higher returns that the boarder market. We believe this track record is not likely to slow any time soon, but would advocate stock selection over sector allocation, with major M&A deals happening and a host of clinical trial catalysts that could offer some outstanding breakthrough drug treatments.

Figure 30: Pharmaceutical performance- 2 year Figure 31: Pharmaceutical forward PE

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6.2 M&A likely to keep the sector well bid

We believe competition for tomorrow’s blockbuster drugs is more intense than ever. In fact, pharmaceutical deals have accounted for 10.5% of total M&A worldwide through 1Q15, up from the historic 3-4% range. In 1Q15, M&A transactions targeting pharmaceutical and biotechnology companies has reached US$59.3bn, a 94% yoy increase and the highest activity seen in 6 years. This heightened activity is likely to remain, in our view, as drugmakers continue to intently watch developing drug candidates at other firms as their own R&D portfolios need to be replenished and older drugs are eroded by generic substitutes.

Figure 32: Pharmaceutical M&A activity

SOURCES: MORGANS, THOMSON REUTERS

6.3 Patent exposure and pipeline depth

We analysed key drug patent expiries over the next 5 years for top tier pharmaceutical companies as a percentage of total revenue to better understand what companies have the most exposure to potential declining revenues. While AbbVie appears to have the most to lose as Humira, a biologic for treatment of rheumatoid arthritis and at least five other diseases, patents expire (2017 US/2018 EU), we believe manufacturing complexity is likely to slow generic penetration. On the other hand, Bayer sit on top as it has very few patent losses over the next five year. The number of drug candidates in R&D pipelines over this timeframe can act as a counterbalance to patent expires. While we acknowledge differences in the probabilities of success, exact timing of launches and market potential make direct comparison difficult, we view pipeline depth as offering some insight into R&D productivity.


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Figure 33: Pharmaceutical patent exposure (% of sales) Figure 34: Pharmaceutical drug pipeline

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6.4 Featured stocks - MRK, NVS

Merck & Co (MRK-NYSE)

US$169bn market cap; trades cUS$59.70, against a 52-week range of US$52.49 to US$63.62; PE 15.7x; +5% YTD; Bloomberg consensus: price target: US$65.88; 5 year earnings CAGR of 4.4%, PEG 3.9x; 3% dividend yield

• Headquartered in Kenilworth, New Jersey, the company is the world’s fourth-biggest drug maker by revenue and is focused on a variety of conditions, including cardiovascular disease, asthma, cancer, infections, and osteoporosis

• Develops numerous prescription medicines, vaccines, biologic therapies and consumer care and animal health products are provided to customers in more than 140 countries

• Strategic shift in its R&D pipeline from well-treated areas in osteoporosis and allergy toward areas of unmet medical in cancer and neurology.

• Key patent losses have seen years of declining sales and generic competition, but a strategic shift specialty drugs serving areas of high unmet medical need looks well placed.

• Keytruda, part of a new wave of immuno-oncology drugs, with recent data in advanced colon cancer showing 62% tumour shrinkage using a new genetic biomarker.

• While R&D has yielded only moderate results to date, weighing on the company’s near-term growth rate, with one of the best pipelines of high-margin drugs in the space, with at least 16 different compounds, the company believes that the wide line-up of high-margin drugs and an improving pipeline should increase growth and a strong ROIC over the long term.

Novartis AG (NVS- NYSE, not rated)

US$250bn market cap; trades cUS$103, against a 52-week range of US$84.17 to US$105.82; PE 18.8x; +12% YTD; Bloomberg consensus: price target: US$110.13; 5 year earnings CAGR of 7 .8%, PEG 2.6x; Payout ratio 32%, currently yielding 2.75%.

• Headquartered in Basel, Switzerland, the 120 year old company is the largest drug company by sales (US$58bn in 2014) and one of the largest by market capitalisation, with a diverse operating divisions (Alcon, Sandoz and consumer) producing a profitable line of pharmaceutical and over-the-counter products across many facets of healthcare and for a


21

variety of diseases (eg oncology, cardio-metabolic, immunology and dermatology, retina, respiratory, neuroscience, and established medicines).

• Management highlights a number of growth opportunities, with a number of drugs in the pipeline (at least 19) that could hold strong pricing power, leading in accelerated developments, exposure to biosimilars (10% of total sales), and high potential in emerging markets

• Solid financials (D/E 0.29; OCF US$14bn; ROE 14.4%), with consistent revenue and net income growth over the past 3 years and boasting a 20% net profit margin.

• Targeting mid-single digit top-line growth, with a safe yield and potential for inorganic growth as well as continued organic growth

• While acknowledging FX risk associated with owning ADRs, volatility of the Swiss Franc can present an opportunity, as a strong Franc may be used to acquire companies and add to inorganic growth.

7. MEDICAL TECHNOLOGY

We believe significant changes to the healthcare market over the past few years have impacted the medical technology sector the most. Intense pressure to control healthcare costs has focused manufactures on delivering increased value to the buyer at a decreased cost. While increasing value of a medical device and lowering its cost appears would appear to put profitability at risk, R&D needs to effectively identify value from stakeholders (eg physicians, nurses, technicians, and supply chain decision) to design a product that meets value expectations. We believe medical technology companies are addressing the burdens of stringent and complex procedures, through expanding product offerings, investing in emerging geographies and efficient capital allocation plans to gain scale.

Figure 35: Medical Technology SWOT


Innovative research and product development Bridging the cost/value gap

Distinctive brands with diverse sources of healthcare revenue R&D effficiencies and value-based products

Rising consumerism A stringent, complex and highly regulated operating environment

Formulating efficient capital allocation plans Better differentiation


Ongoing scienfitic progress High competitive intensity

Higher healthcare consumption on demographic shift Intense global pressure to control healthcare costs

Divestures of non-core businesses Regulatory hurdles and increasing product commoditisation

M&A, collaborations and alliances Challenging economic conditions


7.1 Performance strong

The US medical technology industry has grown at 5% per annum compared with 4% for the rest of the economy from 1997 to 2013. During this time, surgical appliance and supplies manufacturing, the largest component, grew at 6%, while ophthalmic goods manufacturing recorded 8% growth. We forecast continued mid-to high single digit sector growth, given the benefit from an average of 10k baby boomers retiring each day over the next decade and stability due to its recession-proof moniker. Given these strong fundamentals, the sector performance strongly and is current trading at 30% above its longer term average PE.


22

Figure 36: Medical technology performance- 2 year Figure 37: Medical Technology forward PE

Title:

Source:


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12 mnth f wd PE- Medtech

+1 St dev

-1 St dev


7.2 Featured stocks - MDT, STJ

Medtronic (MDT-NYSE, not rated)

US$109bn market cap; US$76.70, against a 52-week range of US$58.32-79.50; PE 17 .4x; +6% YTD; Bloomberg consensus: price target: US$87.23; 5 year earnings CAGR of 7.2%, PEG 2.4x

• Headquartered in headquartered in Dublin, Ireland, the 66 year old company provides medical technologies, services, and solutions worldwide, with a broad product offering focused on Pacemakers/defibrillators, Cardiovascular, Spinal, Diabetes, Neuromodulation and Surgical Technologies.

• The 26 January 2015 acquisition of Covidien for US$42.9bn, an Irish producer of medical devices, formed an Ireland-based company that is expected to meaningfully accelerate growth and amass significant market shares due to the strength of both firms.

• There has been share weakness on the back of a drug-infusion pump recall for patients with back pain, but the company details more than 400 products across a wide variety of diseases.

• Internationally growth is quite strong and demographic trends are tending to accentuate demand.

• The company expects 7%+ annual earnings growth over the next 5 years to be driven by high demand from developing markets, where penetration rates for many implantable devices are far below those of the US and EU.

St Jude Medical (STJ-NYSE, not rated)

US$21bn market cap; US$74.21, against a 52-week range of US$54.80-75.73; PE 17 .1x; +14% YTD; Bloomberg consensus: price target: US$79.32; 5 year earnings CAGR of 10%, PEG 1 .9x; dividend yield 1 .6%

• Headquartered in St. Paul, Minnesota, this global medical device manufacturer is focused on developing cost-effective medical technologies across four major areas of unmet medical need including: cardiac rhythm management, heart failure, cardiovascular diseases and neuromodulation.

• The company is streamlining its four product divisions to leverage scale, reduce costs and strengthen its customer focus, with an innovation based growth strategy looking to reduce the cost of healthcare and improve patient outcomes in markets worth more than US$21bn and growing c4% per annum


23

• Word out of the recent annual Heart Rhythm Society conference is that the cardiac-rhythm-management field is fairly stable to slightly positive, and the atrial-fibrillation market continues to grow rapidly.

• May 2014 FDA-approved CardioMEMS HF System is the only implantable, wireless heart failure monitor proven to significantly reduce HF-hospital admissions and improve quality of live, which could lead to greater adoption in the current healthcare environment (ie positive hospital reimbursement, readmission penalties, payers focus to lower HF costs).

• There has been positive physician feedback from the annual Heart Rhythm Society conference on new ablation catheters to treat atrial-fibrillation.


24

Figure 38: Express Scripts (ESRX-US)

Company at a Glance - Express Scripts Holding Company (ESRX-US)

Currency : USD | Exchange : NASDAQ | Sector : Health Services Next Rpt Date: 28/07/2015

Company Description

Express Scripts Holding Co. is a holding company that operates through

its two wholly owned subsidiaries, Express Scripts, Inc. and Medco Health

Solutions, Inc. The company provides pharmacy benefit management services

and clinics healthcare account administration services in North America.

It also offers full range of services to its clients, which include

managed care organizations, health insurers, third-party administrators,

employers, union-sponsored benefit plans, worker's compensation plans and

government health programs. The company operates its business through two

segments: Pharmacy Benefit Management (PBM) and Other Business

Operations. The Pharmacy Benefit Management segment provides domestic and

Canadian retail network pharmacy management, home delivery pharmacy

services, benefit design consultation and drug utilization review. The Price LTM EPS LTM PE Price/Book Market/Enterprise Value

Other Business Operations segment provides distribution of 87.73 2.64 33.2x 3.1x 63,981/75,396

pharmaceuticals and medical supplies to providers and clinics, scientific 52 Wk H/L FY1 EPS FY1 PE Price/Sales Shares Outstanding (MM)

evidence to guide the safe, effective and affordable use of medicines. 91.2/ 65.1 5.44 16.1x 0.6x 729.3

YTD Chg. FY2 EPS FY2 PE Price/EBITDA Annual Dividend

Address Website 3.6% 6.02 14.6x 10.8x 0.00

One Express Way http://www.express-scripts.com 1 Yr. Chg. NTM EPS NTM PE EV/Sales Dividend Yield

St. Louis, Missouri 63121 US Sector 22.4% 5.70 15.4x 0.7x 0.00%

United States Health Services Beta L.T. Growth PEG (NTM PE) EV/EBITDA Dividend Payout

FactSet Industry 1.05 18.1% 0.85 12.7x -

Services to the Health Industry

Quick Consensus All figures in local millions.

FY 14 FY 15 FY 16 FY 17

PE 16.1 14.6 13.2 11.3

EPS 5.4396 6.0208 6.6687 7.7767

Growth (YoY%) 10.7% 10.8% 16.6%

DPS 0.0000 0.0000 0.0000 #N/A

Growth (YoY%)

EPS 5.4396 6.0208 6.6687 7.7767

Growth (YoY%) 10.7% 10.8% 16.6%

Sales 104984.2 107419.1 112655.2 113936.5

Growth (YoY%) 2.3% 4.9% 1.1%

Gross Income 8596.0 8921.3 9363.9 9553.3

Growth (YoY%) 3.8% 5.0% 2.0%

EBITDA 7046.47 7342.81 7585.73 8026.74

Growth (YoY%) 4.2% 3.3% 5.8%

EBIT 6608.84 6856.34 7182.40 7463.60

Growth (YoY%) 3.7% 4.8% 3.9%

Cap Ex 356.80 428.77 451.22 455.70

Growth (YoY%) 20.2% 5.2% 1.0%

Free Cash Flow 4348.65 5097.84 5092.98 6059.70

Growth (YoY%) 17.2% -0.1% 19.0%

Cash Flow from Operations 4561.21 5391.27 5519.50 6471.10

Growth (YoY%) 18.2% 2.4% 17.2%

-20%

0%

20%

40%

60%

80%

100%

0

20,000

40,000

60,000

80,000

100,000

120,000

12/2010 12/2011 12/2012 12/2013 12/2014 LTM03/2015

Size & Growth

Gross Profit Revenue EBITDA Growth

0%

2%

4%

6%

8%

10%

12%

12/2010 12/2011 12/2012 12/2013 12/2014 LTM03/2015

Profitability

SG&A % of Sales ROA

0.00x

0.50x

1.00x

1.50x

2.00x

2.50x

3.00x

3.50x

4.00x

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

12/2010 12/2011 12/2012 12/2013 12/2014 LTM03/2015

Leverage & Coverage

LTD/ TD + Stkhldr's Equity STD/ TD + Stkhldr's Equity

TD/ EBITDA

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

(200,000)

(100,000)

-

100,000

200,000

300,000

400,000

500,000

12/2010 12/2011 12/2012 12/2013 12/2014 LTM03/2015

Efficiency

Receivables Inventory

Payables Asset Turnover

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

0

10

20

30

40

50

60

70

80

90

100

Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15

Volume (INDEX) Price (INDEX) Price Relative 30 per. Mov. Avg. ((INDEX) Price)

Prices as at 10 June 2015. SOURCES: FACTSET


25

Figure 39: McKesson (MCK-US)

Company at a Glance - McKesson Corporation (MCK-US)

Currency : USD | Exchange : NYSE | Sector : Distribution Services Next Rpt Date: 30/07/2015

Company Description

McKesson Corp. is a health services and information technology company,

which provides medicines, pharmaceutical and care management products. It

operates through two segments: McKesson Distribution Solutions and

McKesson Technology Solutions. The McKesson Distribution Solutions

segment distributes ethical and proprietary drugs, medical-surgical

supplies and equipment and health and beauty care products throughout

North America. This segment also provides specialty pharmaceutical

solutions for biotech and pharmaceutical manufacturers, sells financial,

operational and clinical solutions for pharmacies. The McKesson

Technology Solutions segment provides software, automation, business

services and consulting to hospitals, physician offices, imaging centers

and home healthcare. It also provides interactive connectivity services Price LTM EPS LTM PE Price/Book Market/Enterprise Value

that streamline clinical, financial and administrative communication 235.95 7.29 32.4x 6.8x 54,635/59,138

between patients, providers, payers, pharmacies and financial 52 Wk H/L FY1 EPS FY1 PE Price/Sales Shares Outstanding (MM)

institutions agencies and payers. 243.6/ 178.3 12.59 18.7x 0.3x 231.6



1 Post Street http://www.mckesson.com 1 Yr. Chg. NTM EPS NTM PE EV/Sales Dividend Yield

San Francisco, California 94104-5203 US Sector 27.1% 12.97 18.2x 0.3x 0.41%

United States Distribution Services Beta L.T. Growth PEG (NTM PE) EV/EBITDA Dividend Payout

FactSet Industry 0.65 21.1% 0.86 14.6x 15.28%

Medical Distributors


FY 14 FY 15 FY 16 FY 17

PE 18.7 16.3 14.1 12.8

EPS 12.5933 14.5152 16.7197 18.4700

Growth (YoY%) 15.3% 15.2% 10.5%

DPS 0.9612 1.0254 1.1118 #N/A

Growth (YoY%) 6.7% 8.4%

EPS 12.5933 14.5152 16.7197 18.4700

Growth (YoY%) 15.3% 15.2% 10.5%

Sales 189711.7 200419.7 213072.0 220973.0

Growth (YoY%) 5.6% 6.3% 3.7%

Gross Income 12742.7 13708.9 13939.1 14997.3

Growth (YoY%) 7.6% 1.7% 7.6%

EBITDA 4963.51 5583.38 5971.55 #N/A

Growth (YoY%) 12.5% 7.0%

EBIT 4734.03 5282.35 5633.21 6471.90

Growth (YoY%) 11.6% 6.6% 14.9%

Cap Ex 501.32 519.10 578.78 575.20

Growth (YoY%) 3.5% 11.5% -0.6%

Free Cash Flow 2747.44 3241.43 3705.10 4758.50

Growth (YoY%) 18.0% 14.3% 28.4%


Growth (YoY%) 17.1% 12.9% 25.7%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

0

50,000

100,000

150,000

200,000

03/2011 03/2012 03/2013 03/2014 03/2015 LTM03/2015

Size & Growth


0%

1%

1%

2%

2%

3%

3%

4%

4%

5%

5%

03/2011 03/2012 03/2013 03/2014 03/2015 LTM03/2015

Profitability

SG&A % of Sales ROA

0.00x

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1.00x

1.50x

2.00x

2.50x

3.00x

3.50x

4.00x

0%

10%

20%

30%

40%

50%

60%

03/2011 03/2012 03/2013 03/2014 03/2015 LTM03/2015

Leverage & Coverage


TD/ EBITDA

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

03/2011 03/2012 03/2013 03/2014 03/2015 LTM03/2015

Efficiency



0.00

0.50

1.00

1.50

2.00

2.50

3.00

0

50

100

150

200

250

300





26

Figure 40: Cigna (CI-US)

Company at a Glance - Cigna Corporation (CI-US)

Currency : USD | Exchange : NYSE | Sector : Health Services Next Rpt Date: 30/07/2015

Company Description

Cigna Corp. is a global health service organization with subsidiaries

that provides medical, dental, disability, life and accident insurance

and related products and services to businesses, governmental and

non-governmental organizations and individuals. The company operates

through following segments: Global Health Care, Group Disability and

Life, Global Supplemental Benefits, Run-off Reinsurance and Other

Operations. The Global Health Care segment aggregates into two operating

segments: Commercial and Government. The Commercial operating segment

includes both the U.S. commercial and international health care

businesses and offers insured and self-insured medical, dental,

behavioral health, vision, and prescription drug benefit plans, health

advocacy programs and other products and services. The Government Price LTM EPS LTM PE Price/Book Market/Enterprise Value

operating segment offers medicare advantage plans to seniors in thirteen 139.84 7.83 17.9x 3.3x 35,990/42,051

states and the District of Columbia. The Global Supplemental Benefits 52 Wk H/L FY1 EPS FY1 PE Price/Sales Shares Outstanding (MM)

segment offers supplemental health, life and accident insurance products 145.3/ 85.8 8.48 16.5x 1.0x 257.4



900 Cottage Grove Road http://www.cigna.com 1 Yr. Chg. NTM EPS NTM PE EV/Sales Dividend Yield

Bloomfield, Connecticut 06002 US Sector 55.7% 8.90 15.7x 1.2x 0.03%

United States Health Services Beta L.T. Growth PEG (NTM PE) EV/EBITDA Dividend Payout


Managed Health Care


FY 14 FY 15 FY 16 FY 17

PE 16.5 14.8 12.8 10.3

EPS 8.4750 9.4353 10.8917 13.5900

Growth (YoY%) 11.3% 15.4% 24.8%

DPS 0.0253 0.0265 0.0167 #N/A

Growth (YoY%) 4.9% -37.2%

EPS 8.4750 9.4353 10.8917 13.5900

Growth (YoY%) 11.3% 15.4% 24.8%

Sales 38157.0 41200.9 45383.3 47117.0

Growth (YoY%) 8.0% 10.2% 3.8%

Gross Income 16120.0 17342.0 #N/A #N/A

Growth (YoY%) 7.6%

EBITDA 4003.65 4288.89 4552.89 #N/A

Growth (YoY%) 7.1% 6.2%

EBIT 3489.01 3758.44 4020.72 #N/A

Growth (YoY%) 7.7% 7.0%

Cap Ex 515.46 555.07 605.09 #N/A

Growth (YoY%) 7.7% 9.0%

Free Cash Flow 2755.96 2248.68 #N/A #N/A

Growth (YoY%) -18.4%

Cash Flow from Operations 2781.14 2771.99 #N/A #N/A

Growth (YoY%) -0.3%

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Size & Growth


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12/2010 12/2011 12/2012 12/2013 12/2014 LTM03/2015

Profitability

SG&A % of Sales ROA

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Leverage & Coverage


TD/ EBITDA

0.00

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0.70

-

0

0

0

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1

1

1

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1

12/2010 12/2011 12/2012 12/2013 12/2014 LTM03/2015

Efficiency



0.00

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27

Figure 41: Biogen (BIIB-US)

Company at a Glance - Biogen Inc. (BIIB-US)

Currency : USD | Exchange : NASDAQ | Sector : Health Technology Next Rpt Date: 21/07/2015

Company Description

Biogen, Inc. is a global biotechnology company, which develops markets

and manufactures therapies for people living with neurological,

autoimmune and hematologic disorders. Its products include AVONEX,

PLEGRIDY, TECFIDERA, TYSABRI, and FAMPYRA for multiple sclerosis,

ALPROLIX for hemophilia B and ELOCTATE for hemophilia A. The company also

collaborates on the development and commercialization of RITUXAN for the

treatment of non-Hodgkin's lymphoma, chronic lymphocytic leukemia and

other conditions and share profits and losses for GAZYVA which is

approved for the treatment of chronic lymphocytic leukemia. Biogen was

founded on November 12, 2003 and is headquartered in Cambridge, MA.

Price LTM EPS LTM PE Price/Book Market/Enterprise Value

388.50 12.37 31.4x 7.8x 91,387/89,819

52 Wk H/L FY1 EPS FY1 PE Price/Sales Shares Outstanding (MM)

480.2/ 290.9 16.71 23.3x 9.1x 235.2



225 Binney Street http://www.biogenidec.com 1 Yr. Chg. NTM EPS NTM PE EV/Sales Dividend Yield

Cambridge, Massachusetts 02142 US Sector 23.2% 17.92 21.7x 8.9x 0.00%

United States Health Technology Beta L.T. Growth PEG (NTM PE) EV/EBITDA Dividend Payout


Biotechnology


FY 14 FY 15 FY 16 FY 17

PE 23.3 20.0 17.8 15.8

EPS 16.7070 19.4288 21.8450 24.5522

Growth (YoY%) 16.3% 12.4% 12.4%

DPS 0.0000 0.0000 0.0000 #N/A

Growth (YoY%)

EPS 16.7070 19.4288 21.8450 24.5522

Growth (YoY%) 16.3% 12.4% 12.4%

Sales 10992.5 12321.6 13478.8 14841.9

Growth (YoY%) 12.1% 9.4% 10.1%

Gross Income 9715.8 10855.6 11896.4 12627.0

Growth (YoY%) 11.7% 9.6% 6.1%

EBITDA 5473.50 6210.82 6947.92 #N/A

Growth (YoY%) 13.5% 11.9%

EBIT 5244.62 5959.28 6603.02 7266.63

Growth (YoY%) 13.6% 10.8% 10.0%

Cap Ex 440.02 423.28 533.08 459.10

Growth (YoY%) -3.8% 25.9% -13.9%

Free Cash Flow 3308.18 3892.30 5034.97 5622.65

Growth (YoY%) 17.7% 29.4% 11.7%


Growth (YoY%) 16.9% 7.7% 28.9%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

0

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6,000

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Size & Growth


0%

10%

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12/2010 12/2011 12/2012 12/2013 12/2014 LTM03/2015

Profitability

SG&A % of Sales ROA

0.00x

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12/2010 12/2011 12/2012 12/2013 12/2014 LTM03/2015

Leverage & Coverage


TD/ EBITDA

0.00

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Efficiency



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28

Figure 42: Gilead Sciences (GILD-US)

Company at a Glance - Gilead Sciences, Inc. (GILD-US)

Currency : USD | Exchange : NASDAQ | Sector : Health Technology Next Rpt Date: 23/07/2015

Company Description

Gilead Sciences, Inc. is a research-based biopharmaceutical company that

discovers, develops and commercializes innovative medicines in areas of

unmet medical need. Its primary areas of focus include primary areas of

focus include human immunodeficiency virus (HIV), liver diseases such as

chronic hepatitis C virus (HCV) infection and chronic hepatitis B virus

(HBV) infection, oncology and inflammation, and serious cardiovascular

and respiratory conditions. Gilead Sciences was founded by Michael L.

Riordan on June 22, 1987 and is headquartered in Foster City, CA.


117.67 7.35 16.0x 10.1x 172,929/174,009


117.9/ 78.8 10.67 11.0x 6.4x 1,469.6



333 Lakeside Drive http://www.gilead.com 1 Yr. Chg. NTM EPS NTM PE EV/Sales Dividend Yield

Foster City, California 94404 US Sector 47.9% 10.81 10.9x 6.4x 0.00%



Biotechnology


FY 14 FY 15 FY 16 FY 17

PE 11.0 10.7 9.9 8.6

EPS 10.6729 10.9708 11.8279 13.6357

Growth (YoY%) 2.8% 7.8% 15.3%

DPS 1.2943 1.7625 1.6940 2.4850

Growth (YoY%) 36.2% -3.9% 46.7%

EPS 10.6729 10.9708 11.8279 13.6357

Growth (YoY%) 2.8% 7.8% 15.3%

Sales 30120.8 30368.4 31361.2 33830.3

Growth (YoY%) 0.8% 3.3% 7.9%

Gross Income 26082.7 25855.9 30205.5 36424.0

Growth (YoY%) -0.9% 16.8% 20.6%

EBITDA 21113.83 20065.36 21875.40 30180.90

Growth (YoY%) -5.0% 9.0% 38.0%

EBIT 20941.74 20377.36 20797.40 21739.90

Growth (YoY%) -2.7% 2.1% 4.5%

Cap Ex 396.47 390.09 393.50 235.00

Growth (YoY%) -1.6% 0.9% -40.3%

Free Cash Flow 14921.00 15663.67 17286.50 16132.00

Growth (YoY%) 5.0% 10.4% -6.7%


Growth (YoY%) 3.2% 6.6% -4.7%

-50%

0%

50%

100%

150%

200%

250%

0

5,000

10,000

15,000

20,000

25,000

30,000

12/2010 12/2011 12/2012 12/2013 12/2014 LTM03/2015

Size & Growth


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

12/2010 12/2011 12/2012 12/2013 12/2014 LTM03/2015

Profitability

SG&A % of Sales ROA

0.00x

0.50x

1.00x

1.50x

2.00x

2.50x

0%

10%

20%

30%

40%

50%

60%

12/2010 12/2011 12/2012 12/2013 12/2014 LTM03/2015

Leverage & Coverage


TD/ EBITDA

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

(300,000)

(250,000)

(200,000)

(150,000)

(100,000)

(50,000)

-

50,000

100,000

150,000

12/2010 12/2011 12/2012 12/2013 12/2014 LTM03/2015

Efficiency



0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

0

20

40

60

80

100

120





29

Figure 43: Merck (MRK-US)

Company at a Glance - Merck & Co., Inc. (MRK-US)

Currency : USD | Exchange : NYSE | Sector : Health Technology Next Rpt Date: 28/07/2015

Company Description

Merck & Co., Inc. provides various health solutions through its

prescription medicines, vaccines, biologic therapies, animal health, and

consumer care products worldwide. It is a global research-driven

pharmaceutical company that discovers, develops, manufactures and markets

vaccines and medicines to address unmet medical needs. The company

operates through the following segments: Pharmaceutical, Animal Health

and Alliances. The Pharmaceutical segment includes human health

pharmaceutical and vaccine products marketed either directly by the

company or through joint ventures. Its human health pharmaceutical

products consist of therapeutic and preventive agents, generally sold by

prescription, for the treatment of human disorders. The company sells

these products primarily to drug wholesalers and retailers, hospitals, Price LTM EPS LTM PE Price/Book Market/Enterprise Value

government agencies and managed health care providers, such as health 59.61 4.07 14.6x 3.5x 168,411/183,044

maintenance organizations, pharmacy benefit managers and other 52 Wk H/L FY1 EPS FY1 PE Price/Sales Shares Outstanding (MM)

institutions. Its vaccine products consist of preventive pediatric, 63.6/ 52.5 3.44 17.3x 4.1x 2,825.2



2000 Galloping Hill Road http://www.merck.com 1 Yr. Chg. NTM EPS NTM PE EV/Sales Dividend Yield

Kenilworth, New Jersey 07033 US Sector 1.9% 3.61 16.5x 4.5x 2.99%



Pharmaceuticals: Major


FY 14 FY 15 FY 16 FY 17

PE 17.3 15.6 14.9 13.5

EPS 3.4406 3.8139 3.9975 4.4089

Growth (YoY%) 10.9% 4.8% 10.3%

DPS 1.7927 1.8424 1.8577 1.9585

Growth (YoY%) 2.8% 0.8% 5.4%

EPS 3.4406 3.8139 3.9975 4.4089

Growth (YoY%) 10.9% 4.8% 10.3%

Sales 39644.9 41062.1 41288.2 43163.6

Growth (YoY%) 3.6% 0.6% 4.5%

Gross Income 29801.3 31200.2 31505.2 33157.0

Growth (YoY%) 4.7% 1.0% 5.2%

EBITDA 14707.00 17070.14 17178.94 18284.40

Growth (YoY%) 16.1% 0.6% 6.4%

EBIT 12968.37 14058.19 14364.70 15792.40

Growth (YoY%) 8.4% 2.2% 9.9%

Cap Ex 1447.09 1482.92 1463.44 1494.51

Growth (YoY%) 2.5% -1.3% 2.1%

Free Cash Flow 8100.00 12506.00 13238.00 #N/A

Growth (YoY%) 54.4% 5.9%


Growth (YoY%) 26.3% 3.3% -0.3%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

0

10,000

20,000

30,000

40,000

50,000

60,000

12/2010 12/2011 12/2012 12/2013 12/2014 LTM03/2015

Size & Growth


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

12/2010 12/2011 12/2012 12/2013 12/2014 LTM03/2015

Profitability

SG&A % of Sales ROA

0.00x

0.20x

0.40x

0.60x

0.80x

1.00x

1.20x

1.40x

1.60x

1.80x

2.00x

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

12/2010 12/2011 12/2012 12/2013 12/2014 LTM03/2015

Leverage & Coverage


TD/ EBITDA

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

(300,000)

(250,000)

(200,000)

(150,000)

(100,000)

(50,000)

-

50,000

100,000

150,000

12/2010 12/2011 12/2012 12/2013 12/2014 LTM03/2015

Efficiency



0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

48

50

52

54

56

58

60

62

64

66





30

Figure 44: Novartis (NVS-US)

Company at a Glance - Novartis AG Sponsored ADR (NVS-US)


Company Description

Novartis AG develops, manufactures, and markets healthcare products. It

operates through the following segments: Pharmaceuticals, Alcon, Sandoz,

Vaccines and Diagnostics, and Consumer Health. The Pharmaceuticals

segment provides patent-protected prescription medicines. The Alcon

segment offers surgical, ophthalmic pharmaceuticals, and vision care

products. The Sandoz segment provides generic pharmaceuticals. The

Vaccines and Diagnostics segment provides human vaccines and blood

testing diagnostics. The Consumer Health segment contains two divisions,

OTC and Animal Health. The company was founded on February 29, 1996 and

is headquartered in Basel, Switzerland.


102.63 4.16 24.7x 3.2x 243,174/260,924


105.8/ 84.2 5.22 19.7x 5.0x 2,369.4



Lichtstrasse 35 http://www.novartis.com 1 Yr. Chg. NTM EPS NTM PE EV/Sales Dividend Yield

Basel, Basel-Stadt (Basle Town) 4056 Switzerland Sector 13.4% 5.41 19.0x 5.3x 0.00%

Switzerland Health Technology Beta L.T. Growth PEG (NTM PE) EV/EBITDA Dividend Payout


Pharmaceuticals: Major


FY 14 FY 15 FY 16 FY 17

PE 19.7 18.2 16.3 14.6

EPS 5.2225 5.6428 6.2910 7.0104

Growth (YoY%) 8.0% 11.5% 11.4%

DPS 2.8419 3.0201 3.3799 3.6236

Growth (YoY%) 6.3% 11.9% 7.2%

EPS 5.2225 5.6428 6.2910 7.0104

Growth (YoY%) 8.0% 11.5% 11.4%

Sales 52240.9 53542.0 56326.7 60091.8

Growth (YoY%) 2.5% 5.2% 6.7%

Gross Income 37183.4 37952.2 40256.5 43644.7

Growth (YoY%) 2.1% 6.1% 8.4%

EBITDA 18615.76 17635.89 19302.45 20626.55

Growth (YoY%) -5.3% 9.4% 6.9%

EBIT 14083.03 15051.94 16680.05 18741.38

Growth (YoY%) 6.9% 10.8% 12.4%

Cap Ex 3703.85 2423.68 2284.78 3322.46

Growth (YoY%) -34.6% -5.7% 45.4%

Free Cash Flow 14602.42 12640.75 13727.50 14704.94

Growth (YoY%) -13.4% 8.6% 7.1%


Growth (YoY%) -16.8% 8.9% 10.2%

-15%

-10%

-5%

0%

5%

10%

15%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

12/2010 12/2011 12/2012 12/2013 12/2014 LTM03/2015

Size & Growth


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

12/2010 12/2011 12/2012 12/2013 12/2014 LTM03/2015

Profitability

SG&A % of Sales ROA

0.00x

0.20x

0.40x

0.60x

0.80x

1.00x

1.20x

1.40x

1.60x

1.80x

2.00x

0%

5%

10%

15%

20%

25%

30%

12/2010 12/2011 12/2012 12/2013 12/2014 LTM03/2015

Leverage & Coverage


TD/ EBITDA

0.00

0.10

0.20

0.30

0.40

0.50

0.60

(600,000)

(500,000)

(400,000)

(300,000)

(200,000)

(100,000)

-

100,000

200,000

300,000

400,000

12/2010 12/2011 12/2012 12/2013 12/2014 LTM03/2015

Efficiency



0.00

2.00

4.00

6.00

8.00

10.00

12.00

0

20

40

60

80

100

120





31

Figure 45: Medtronic (MDT-US)

Company at a Glance - Medtronic Plc (MDT-US)


Company Description

Medtronic Plc Formerly known as Medtronic, Inc. The Group's principal

activities are manufacturing, developing and marketing medical technology

and providing device-based medical therapies. It operates in eight

segments: Cardiac Rhythm Disease Management (CRDM), Spinal,

CardioVascular, Neuromodulation, Diabetes, Surgical Technologies,

Physio-Control. It provides lifelong solutions for people with chronic

diseases. It also offers therapeutic and diagnostic devices used for the

treatment of diabetes, neurological, gastroenterological, urological, and

movement disorders, spinal and neurosurgery, neurodegenerative disorders

and ear, nose and throat (ENT) surgery. It provides external and manual

defibrillators. The Group operates in the United States, Europe, the Asia

Pacific and other foreign countries. Price LTM EPS LTM PE Price/Book Market/Enterprise Value

76.16 2.89 26.4x - 108,273/108,273


79.5/ 58.3 4.37 17.4x - 1,421.6


Address Website 5.5% 4.85 15.7x - 1.17

710 Medtronic Parkway http://www.medtronic.com 1 Yr. Chg. NTM EPS NTM PE EV/Sales Dividend Yield

Minneapolis, Minnesota 55432-5604 US Sector 23.1% 4.43 17.2x - 1.54%


FactSet Industry 1.16 7.1% 2.44 - -

Medical Specialties


FY 14 FY 15 FY 16 FY 17

PE 17.4 15.7 14.3 13.9

EPS 4.3745 4.8541 5.3300 5.4950

Growth (YoY%) 11.0% 9.8% 3.1%

DPS 1.4260 1.5856 1.7054 #N/A

Growth (YoY%) 11.2% 7.6%

EPS 4.3745 4.8541 5.3300 5.4950

Growth (YoY%) 11.0% 9.8% 3.1%

Sales 28753.8 29860.9 31125.6 32078.0

Growth (YoY%) 3.9% 4.2% 3.1%

Gross Income 20023.1 21549.8 24033.4 22420.5

Growth (YoY%) 7.6% 11.5% -6.7%

EBITDA 9764.45 10496.57 10972.25 #N/A

Growth (YoY%) 7.5% 4.5%

EBIT 8389.51 9096.88 9804.21 8441.00

Growth (YoY%) 8.4% 7.8% -13.9%

Cap Ex 818.50 890.83 911.00 #N/A

Growth (YoY%) 8.8% 2.3%

Free Cash Flow 6168.75 7681.87 8296.75 #N/A

Growth (YoY%) 24.5% 8.0%

Cash Flow from Operations 6778.75 8379.03 9207.75 #N/A

Growth (YoY%) 23.6% 9.9%

-20%

-10%

0%

10%

20%

30%

40%

50%

0

5,000

10,000

15,000

20,000

25,000

04/2011 04/2012 04/2013 04/2014 04/2015 LTM -

Size & Growth


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

04/2011 04/2012 04/2013 04/2014 04/2015 LTM -

Profitability

SG&A % of Sales ROA

0.00x

1.00x

2.00x

3.00x

4.00x

5.00x

6.00x

7.00x

8.00x

0%

10%

20%

30%

40%

50%

60%

70%

04/2011 04/2012 04/2013 04/2014 04/2015 LTM -

Leverage & Coverage


TD/ EBITDA

0.00

0.10

0.20

0.30

0.40

0.50

0.60

(100,000)

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

04/2011 04/2012 04/2013 04/2014 04/2015 LTM -

Efficiency



0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

0

10

20

30

40

50

60

70

80

90





32

Figure 46: St Jude Medical (STJ-US)

Company at a Glance - St. Jude Medical, Inc. (STJ-US)


Company Description

St. Jude Medical, Inc. develops, manufactures and distributes

cardiovascular medical devices for the global cardiac rhythm management,

cardiovascular and atrial fibrillation therapy areas and neurostimulation

medical devices for the management of chronic pain. It operates through

two operating divisions: Cardiovascular and Ablation Technologies and

Implantable Electronic Systems Division. The Cardiovascular and Ablation

Technologies division engages in combining cardiovascular and atrial

fibrillation product divisions. The Implantable Electronic Systems

division engages in combining cardiac rhythm management and

neuromodulation product divisions. The company was founded by Manuel A.

Villafana in 1976 and is headquartered in St. Paul, MN.


74.44 3.46 21.5x 5.4x 20,931/23,709


75.7/ 54.8 3.95 18.8x 3.7x 281.2



One St. Jude Medical Drive http://www.sjm.com 1 Yr. Chg. NTM EPS NTM PE EV/Sales Dividend Yield

St. Paul, Minnesota 55117-9983 US Sector 12.8% 4.12 18.1x 4.2x 1.48%



Medical Specialties


FY 14 FY 15 FY 16 FY 17

PE 18.8 17.2 15.6 13.9

EPS 3.9512 4.3284 4.7619 5.3369

Growth (YoY%) 9.5% 10.0% 12.1%

DPS 1.1204 1.1939 1.3455 1.4306

Growth (YoY%) 6.6% 12.7% 6.3%

EPS 3.9512 4.3284 4.7619 5.3369

Growth (YoY%) 9.5% 10.0% 12.1%

Sales 5505.9 5774.4 6085.1 6407.8

Growth (YoY%) 4.9% 5.4% 5.3%

Gross Income 3890.7 4108.8 4356.0 4612.1

Growth (YoY%) 5.6% 6.0% 5.9%

EBITDA 1679.15 1815.82 1919.94 2003.93

Growth (YoY%) 8.1% 5.7% 4.4%

EBIT 1421.49 1549.12 1665.93 1903.60

Growth (YoY%) 9.0% 7.5% 14.3%

Cap Ex 232.28 239.32 224.00 236.23

Growth (YoY%) 3.0% -6.4% 5.5%

Free Cash Flow 1130.42 1150.13 1284.02 1434.75

Growth (YoY%) 1.7% 11.6% 11.7%


Growth (YoY%) 1.8% 5.7% 12.3%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

0

1,000

2,000

3,000

4,000

5,000

6,000

12/2010 12/2011 12/2012 12/2013 12/2014 LTM04/2015

Size & Growth


0%

10%

20%

30%

40%

50%

60%

12/2010 12/2011 12/2012 12/2013 12/2014 LTM04/2015

Profitability

SG&A % of Sales ROA

0.00x

0.50x

1.00x

1.50x

2.00x

2.50x

3.00x

3.50x

0%

10%

20%

30%

40%

50%

60%

12/2010 12/2011 12/2012 12/2013 12/2014 LTM04/2015

Leverage & Coverage


TD/ EBITDA

0.48

0.50

0.52

0.54

0.56

0.58

0.60

0.62

0.64

(10,000)

(5,000)

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

12/2010 12/2011 12/2012 12/2013 12/2014 LTM04/2015

Efficiency



0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

0

10

20

30

40

50

60

70

80





33

Figure 47:iShares US Healthcare Providers (IHF)

SOURCES: COMPANY REPORTS


34

Figure 48: iShares Global Healthcare EFT (IXJ)

SOURCES: COMPANY REPORTS


35

8. APPENDIX

Figure 49: Morningstar Global Equity recommendations (4 and 5 star rated stocks)

Stock Name

Morningstar

Rating

Price at

Close

Fair

Value

Price/Fair

Value Moat MoatTrend Uncertainty Stewardship

Market

Cap (Bil) Sector

Apache Corporation 5 66.53 98.00 0.68 Narrow Stable Medium Standard 25.1 Energy

Amgen Inc 4 159.19 178.00 0.89 Wide Negative Low Standard 120.8 Healthcare

Anadarko Petroleum Corp 4 83.35 99.00 0.84 Narrow Stable High Standard 42.2 Energy

Banco Santander SA 4 474.5 611.00 0.78 Narrow Stable High Standard 56.9 Financial Services

Baxter International Inc 4 69.25 84.00 0.82 Wide Stable Low Standard 37.6 Healthcare

BNP Paribas 4 52.14 63.00 0.83 Narrow Stable High Standard 64.9 Financial Services

Chevron Corp 4 105.16 124.00 0.85 Narrow Negative Low Exemplary 197.7 Energy

ConocoPhillips 4 64.25 79.00 0.81 Narrow Stable Medium Standard 79.1 Energy

Enterprise Products Partners LP 4 32.54 43.00 0.76 Wide Positive Medium Exemplary 63.1 Energy

Exxon Mobil Corporation 4 87.18 108.00 0.81 Wide Negative Low Exemplary 365.7 Energy

General Electric Co 4 25.66 30.00 0.86 Wide Stable Medium Standard 258.3 Industrials

General Motors Co 4 37.57 50.00 0.75 None Negative High Standard 60.5 Consumer Cyclical

Halliburton Co 4 43.07 60.00 0.72 Narrow Stable Medium Standard 36.6 Energy

HCP Inc 4 41.78 51.00 0.82 Narrow Stable Medium Exemplary 19.3 Real Estate

HSBC Holdings PLC 4 570.6 700.00 0.82 Narrow Stable High Standard 109.7 Financial Services

Merck & Co Inc 4 57.88 69.00 0.84 Wide Stable Low Standard 164.3 Healthcare

National Oilwell Varco Inc 4 54.78 70.00 0.78 Narrow Stable Medium Standard 22.5 Energy

Philip Morris International Inc 4 82.17 92.00 0.89 Wide Stable Low Standard 127.1 Consumer Defensive

Procter & Gamble Co 4 84.35 90.00 0.94 Wide Stable Low Standard 227.8 Consumer Defensive

Schlumberger NV 4 85.14 105.00 0.81 Wide Stable Medium Standard 108.6 Energy

Standard Chartered PLC 4 1,014.50 1300.00 0.78 Narrow Stable Very High Standard 25.1 Financial Services

TransCanada Corp 4 44.5 54.00 0.82 Narrow Positive Medium Standard 31.5 Energy SOURCES: MORNINGSTAR

Figure 50: Top Morningstar rated healthcare stocks

Stock Name

Morningstar

Rating

Price at

Close Fair Value

Price/Fair

Value Moat MoatTrend Uncertainty Stewardship

Market Cap

(Bil)

Abbott Laboratories 3 47.01 48.00 0.98 Narrow Stable Low Standard 70.94

Amgen Inc 4 159.19 178.00 0.89 Wide Negative Low Standard 120.8

AstraZeneca PLC 3 67.79 64.00 1.06 Wide Negative Medium Standard 85.62

Baxter International Inc 4 69.25 84.00 0.82 Wide Stable Low Standard 37.57

Bayer AG 3 132.5 128.00 1.04 Narrow Stable Medium Standard 109.57

Bristol-Myers Squibb Company 3 65.67 69.00 0.95 Wide Stable Medium Standard 109.15

Eli Lilly and Co 3 70.65 65.00 1.09 Wide Negative Medium Standard 78.5

Express Scripts Holding Co 3 84.83 89.00 0.95 Wide Stable Medium Exemplary 61.66

Gilead Sciences Inc 3 103.06 114.00 0.90 Wide Stable Medium Exemplary 153.5

GlaxoSmithKline PLC 3 1571 1510.00 1.04 Wide Stable Medium Standard 84.13

Johnson & Johnson 3 101.65 99.00 1.03 Wide Stable Low Standard 282.64

Merck & Co Inc 4 57.88 69.00 0.84 Wide Stable Low Standard 164.27

Novartis AG 3 99.04 100.00 0.99 Wide Stable Low Standard 237.56

Novo Nordisk A/S 3 47.05 47.00 1.00 Wide Stable Medium Exemplary 124.68

Pfizer Inc 3 34.64 34.00 1.02 Wide Stable Low Standard 212.3

Roche Holding AG 3 256.1 257.00 1.00 Wide Stable Low Standard 217.62

Sanofi 3 87.84 95.00 0.92 Wide Stable Medium Standard 116.02 SOURCES: MORNINGSTAR


36

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QUEENSLAND PORT MA CQUA RIE (02) 6583 1735 BRISBANE - HEAD OFFICE (07) 3334 4888 SCON E (02) 6544 3144 BRISBANE - EDWARD STREET (07) 3121 5677 SY DN EY – LEVEL 7 CURRENCY HOUSE (02) 8216 5111 BRISBANE - TYNAN PARTNERS (07) 3152 0600 SY DN EY – LEVEL 9 (02) 8215 5000 BUN DA BERG (07) 4153 1050 SY DN EY – HUNTER STREET (02) 9125 1788 CA IRN S (07) 4222 0555 (02) 9615 4500 CA LOUN DRA (07) 5491 5422 SY DN EY – REYNOLDS EQUITIES (02) 9373 4452 EMERA LD (07) 4988 2777 WOLLON GON G (02) 4227 3022 GLA DSTON E (07) 4972 8000 GOLD COA ST (07) 5581 5777 ACT IPSWICH/SPRINGFIELD (07) 3202 3995 CA N BERRA (02) 6232 4999 KEDRON (07) 3350 9000 MA CKA Y (07) 4957 3033 VICTORIA MILTON (07) 3114 8600 MELBOURN E (03) 9947 4111 MT GRA VATT/CAPALABA (07) 3245 5466 BRIGHTON (03) 9519 3555 N OOSA (07) 5449 9511 CA MBERWELL (03) 9813 2945 REDCLIFFE (07) 3897 3999 CA RLTON (03) 9066 3200 ROCKHA MPTON (07) 4922 5855 FA RRER HOUSE (03) 8644 5488 SPRING HILL (07) 3833 9333 GEELON G (03) 5222 5128 SUN SHINE COA ST (07) 5479 2757 RICHMON D (03) 9916 4000 TOOWOOMBA (07) 4639 1277 SOUTH Y A RRA (03) 8762 1400 TOWN SV ILLE (07) 4725 5787 SOUTHBA N K (03) 9037 9444 Y EPPOON (07) 4939 3021 TRA RALGON (03) 5176 6055 WA RRNAMBOOL (03) 5559 1500 NEW SOUTH WALES SY DN EY (02) 8215 5055 WESTERN AUSTRALIA A RMIDA LE (02) 6770 3300 PERTH (08) 6462 1999 BA LLIN A (02) 6686 4144 WEST PERTH (08) 6160 8700 BA LMA IN (02) 8755 3333 BOWRA L (02) 4851 5515 SOUTH AUSTRALIA CHA TSWOOD (02) 8116 1700 A DELA IDE (08) 8464 5000 COFFS HA RBOUR (02) 6651 5700 N ORWOOD (08) 8461 2800 GOSFORD (02) 4325 0884 HURSTV ILLE (02) 9570 5755 NORTHERN TERRITORY MERIMBULA (02) 6495 2869 DA RWIN (08) 8981 9555 N EUTRAL BAY (02) 8969 7500 N EWCA STLE (02) 4926 4044 TASMANIA N EWPORT (02) 9998 4200 HOBA RT (03) 6236 9000 ORA N GE (02) 6361 9166

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