HealthcareInvestment OpportunitiesDaniel, Eric, Grace, Rebecca, Sunny, Xianming, Natnael, Ryan, Thomas, Zach, Betty, Ariana

HealthcareAgenda

1. Government Policiesa. Affordable Care Actb. Government Spending

2. Industry Activitiesa. Consolidationb. Re-domicilesc. Niche Drugsd. Recent M&As

3. Investment Opportunities4. Sector Performance

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HealthcareGovernment Policies

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Affordable Care Act Implications• 11M no longer uninsured (-

25%), expected to grow

- 67%: newly insured with Medicaid

- 33%: insured via state public insurance exchanges

• Tax penalties for citizens without insurance

• Insurance companies must pay rebates to consumers if non-medical spending is above 15-20%

• Exchanges and Medicaid expansion take effect starting 2014

• Life of Medicare trust fund expanded from 2024 to 2026

Hospitals

• Expected increase in revenue paid due to decrease in uninsured

• Pressure for M&A:

- Diversify as ACA squeezes Medicare reimbursements (outpatient services, etc.)

- Increase in scale lowers administrative & other costs (IT)

InsuranceCompanie

s

• Decreased profit margins from increased number of enrollees

- New enrollees utilize higher levels of care

- New industry taxes to pay for ACA

- Rebates

Pharmas• Increased demand for

prescription drugs for newly insured

General • Innovate to economize on costs

HealthcareGovernment Policies

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Government Spending Implications

• Lower federal deficits• Increased hospitalization• Reductions and delays in

drug approvals

HealthcareIndustry Activities – Consolidation

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What is Consolidation?

• Mergers of hospitals/health care systems

• Acquisitions of physician group by a hospital

Why is it Important?

• Consolidation among hospitals + doctors -> rising health care costs

• Payments to hospitals +3% due to consolidation

What are the Incentives?

• Economies of scale• Hospitals increase prices almost

50% • ACA’s emphasis on care

coordination >> consolidation

Current Consolidation

News• Anthem Blue Cross Vivity

HealthcareIndustry Activities – Re-domiciles

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Tax Inversion

• Companies shift their incorporation abroad to avoid US tax rates

• Taking advantage of lower foreign tax rates

• 9 out of 13 deals relating to tax inversion are in health care

• US: 35%; Ireland: 12.5%• Injected Value • September 2014: U.S.

Treasury curtail tax breaks from international deals

Related Deals

2010: Valeant’s merge with Biovail in Canada (+700%)

2013: Endo buys Paladin($1.6B) to save >$50M/year in tax

2014: Pfizer buys AstraZeneca ($112.6B) to reduce tax rate from 28% to 22%

2014: Medtronic buys Covidien ($42.9B) to move tax base to Ireland

HealthcareIndustry Activities – Niche Drugs

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The Orphan Drug Act of 1983 provides financial incentive for investigating rare disease treatments

Blockbuster drugs are more difficult to develop

Creating drugs for rare diseases provides potential for (temporary) small-market monopolies

Larger companies like Pfizer have been acquiring these startups to move into niche markets

Pharma startups can’t compete on common diseases, so easier to move to “orphans”

Trending towards “nichebuster” rather than “blockbuster” drugs

HealthcareIndustry Activities – Recent M&As

• ACA• Rising

demand for facility and equipment improvement

• Increased need for IT support / capabilities

• Increased compliance costs

• Pharmaceuticals’ reliance on M&As to stay competitive

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Drivers of M&As Recent Deals09/2014: Merck buys Sigma Aldrich ($17B) to reduce reliance on blockbuster drugs and consolidate supply chain

11/2014: Perrigo buys Omega Pharma ($4.5B) to work around regulatory hurdles in Europe

11/2014: LabCorp buys Covance ($6.1B) to increase presence in research and new technology / drugs

Ongoing: Actavis buys Allergan (~$66B) to prevent Allergan’s hostile takeover by Valeant

HealthcareInvestment Opportunities

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Life Sciences

Medical Technology Services

HealthcareACADIA Pharmaceuticals (ACAD)

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Company Overview

LTM Performance Strengths

Products

• Focused on development and commercialization of small molecule drugs dealing with neurological and central nervous system disorders

• Market Cap: $2.78B• Founded: 1993; HQ: San

Diego, CA

• Pimavanserin (aka Nuplazaid)- Potentially first drug approved

for Parkinson’s disease psychosis (P3)

- Also applicable for Alzheimer’s disease psychosis (P2)

• Clinical stage for chronic pain/glaucoma

• Strong 3rd stage drug in the pipeline to treat Parkinson’s related psychosis- If approved by FDA, drug

would be first in its kind- Could reach market by Q2

2015- Potential to be $5B/year

product- Could get acquired by bigger

pharmaceutical company

$27.83

Note: Price as of 11/17/2014

HealthcareGilead (GILD)

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Company Overview

LTM Performance

Strengths

Products

• Develops and commercializes medicines for treatment of HIV, liver diseases, oncology/inflammation, and cardiovascular/respiratory conditions

• Market Cap: $153B• Founded: 1987; HQ: Foster

City, CA

• Working capital up from $1B to $6.5B

• Large market (130M for HepC) – still growing- Sovaldi distribution

pending in the European Union, Japan and New Zealand.

• Potential M&A with Achillion

• Treatment of liver diseases:- Harvoni: FDA approved

10/2014 as 1-pill treatment for HepC

- Sovaldi: FDA approved in 2013 to treat HepC as component of antiviral treatment regimen

$100.44

Note: Price as of 11/17/2014

HealthcareVerisante Technology (VRS)

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Company Overview

LTM Performance

Strengths

Products

● 5th largest medical device company in Canada

● Possesses exclusive rights to technology developed by the BC Cancer Agency for the early detection of cancer

● Market Cap: $10.79M ● Founded: 2006; HQ: Vancouver,

Canada

● Novel technology with continuous revenue stream model

● Works closely with BC Cancer Agency, hospitals, and universities

● Operates by founding members

● Projected revenue for 2015 is $15.14M

● Verisante Aura - only one in the market, continuous revenue stream

● Verisante Core - early diagnosis and treatment

$0.13

Note: Price as of 11/17/2014

Note: Price as of 11/17/2014

HealthcareBrookdale Senior Living (BKD)

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Company Overview

LTM Performance

Strengths

Recent News

• 1,100+ independent or assisted living centers, 46 states, 110,000+ senior citizens

• Management services for other communities, therapy, home health, memory care

• Market cap: $6.1B

• Founded: 1978; HQ: Brentwood, TN

• Largest diversified senior community operator

- 3x larger than next largest competitor

- Aims to be only national senior living brand

• Stands to benefit from aging baby boomers (predicted to grow 3x faster than general population)

• Variety of services & centers: keep customers as their needs change

• 07/2014: $2.8B merger with Emeritus Senior Living to expand into nursing, dementia care, reaching more geographical areas (largest Services M&A in 2014 Q3)

• 09/2014: $1.2B joint venture with HCP real estate investment trust to expand continuing care retirement communities

$33.82

HealthcareSector Performance – 1-year Benchmarks

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Note: Index level as of 11/14/2014

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