HEALTHCARE

Sarah HemmelgarnBilly WongAlex WislerJason Wattier

Size and Composition

Sector Weight

S&P 500 Weight SIM Weight +/-

Consumer Discretionary8.97% 7.50% -1.46%

Consumer Staples12.32% 12.36% 0.04%

Energy 12.05% 10.68% -1.37%

Financials13.70% 9.33% -4.37%

Health Care 14.06% 13.58% -0.49%

Industrials9.79% 11.57% 1.78%

Information Technology18.43% 20.19% 1.76%

Materials3.20% 4.12% 0.92%

Telecommunication Services3.39% 3.28% -0.11%

Utilities 4.10% 3.87% -0.23%

Cash

0.00% 3.53% 3.53%

49 basis points underweight.

SIM Weights: Health Care--13.58%

IndustriesPharmaceuticals is the largest, at 52.97% of the

sector's market value.

IndustryMarket Cap ($B) Market Cap (%)

Drug Manufacturers – Major* 935.74 52.97%Biotechnology* 216.35 12.25%Medical Instruments & Supplies 176.76 10.01%Drug Manufacturers - Other 141.46 8.01%Medical Appliances & Equipment 106.52 6.03%Health Care Plans* 87.77 4.97%Medical Laboratories & Research 22.84 1.29%Drug Delivery 15.24 0.86%Specialized Health Services* 13.22 0.75%Diagnostic Substances 11.61 0.66%Hospitals 10.71 0.61%Drug Related Products 10.33 0.58%Drugs - Generic 8.42 0.48%Home Health Care 5.02 0.28%Long-Term Care Facilities 4.26 0.24%Medical Practitioners 0.38 0.02%

TOP HEALTCARE COMPANIES BY MARKET CAP

JOHNSON AND JOHNSON $169.5 B

PFIZER INC $111.2 B

NOVARTIS AG ADS $100.4 B

GLAXOSMITHKLINE PLC $97.0 B

SANOFI-AVENTIS SA $86.4 B

ABBOTT LABORATORIES 69.6 B

ASTRAZZENECA PLC ADS 68.8 B

MERCK 65.3 B

WYETH 63.1 B

AMGEN, INC $61.7 B

TOP 10 HEALTHCARE COMPANIES BY MARKET CAP

SIM Stocks

COMPANY MARKET CAP

INDUSTRY

JOHNSON & JOHNSON CO 169.5 B DRUG MANUFACTURERS, MAJOR

GILEAD SCIENCES, INC 43.9 B BIOTECH

ELI LILLY CO 39.9 B DRUG MANUFACTURERS, MAJOR

WELLPOINT 25.5 B HEALTHCARE PLANS

CARDINAL HEALTH INC 11.8 B DRUGS, WHOLESALE

MARKET CAP AND INDUSTRY OF SIM HEALTHCARE STOCKS

Economic Factors at a Glance

Summary of Economic Trends

Positive trends include: the aging population and the baby boomers people living longer with chronic disease obesity and diabetes epidemics technological advances the global reach of disease personalized medicine  Negative trends include: a single-payer system (Medicare/U.S. government) expenditure as an increasing share of gross domestic product (GDP) the uninsured cost controls consumerism

Obesity

Prevalence of Obesity* Among U.S. Children and Adolescents

(Aged 2–19 Years)

Survey Periods 1976–1980 1988–1994 1999–2002 2003–2006

Ages  

2 through 5 5% 7.20% 10.30% 12.40%

6 through 11 6.50% 11.30% 15.80% 17.00%

12 through 19 5% 10.50% 16.10% 17.60%

Childhood Obesity has

grown over the last 30-40 years, but there is now

more of an emphasis on

living a healthy lifestyle. We expect the

obesity rate to eventually start declining in the

long run.

The Aging Population

The baby boomers are reaching old age where much more healthcare will be needed.

Healthcare Reform and Cost Controls

Obama’s proposed Healthcare reform will provide the industry with much uncertainty. This could be costly to the healthcare industry which will be pressured to lower costs, but could be beneficial to the industry because more people will be insured and able to seek out medical attention.

COST CONTROL

Uses have exceeded sources—there will likely be pressure/ requirements for healthcare companies to reduce costs.

Patent Expiration

Drugs representing $63B in 2007 sales will have their patents expire by 2014

Significant because Pharmaceuticals make up the majority of the Healthcare sector

BUSINESS ANALYSIS

Component IndustriesIndustry Market Cap ($B) Market Cap (%)Drug Manufacturers – Major* 935.74 52.97%Biotechnology* 216.35 12.25%Medical Instruments & Supplies 176.76 10.01%Drug Manufacturers - Other 141.46 8.01%Medical Appliances & Equipment 106.52 6.03%Health Care Plans* 87.77 4.97%Medical Laboratories & Research 22.84 1.29%Drug Delivery 15.24 0.86%Specialized Health Services 13.22 0.75%Diagnostic Substances 11.61 0.66%Hospitals 10.71 0.61%Drug Related Products 10.33 0.58%Drugs - Generic 8.42 0.48%Home Health Care 5.02 0.28%Long-Term Care Facilities 4.26 0.24%Medical Practitioners 0.38 0.02%

*Industries represented in SIM Portfolio (double-check Specialized Health Services / Cardinal Health)

Phase of Life Cycle

Biotechnology

Drug Manufacturers -

MajorHealth Care Plans

Medical Appliances

Medical Instruments

• Health Care Sector is:• Defensive• Weighted towards maturity stage

Business Driver: Demographics

• Aging population -> increase demand• Aging of baby boomers• Increasing life expectancy• Number and % of 50+ age group will rise substantially

Business Driver: Demographics

Business Analysis

Barriers to Entry (Pharmaceuticals)

Very high R&D costs Long, strict approval process by FDA Established companies in industry High capital requirements

Demand

Demand is generally inelastic Demand will continue to increase as population ages

Business Analysis

Competition and Substitution

Barriers to entry retain industry concentration, especially in pharmaceuticals

Competition and substitution mostly within the industry

Opportunities and Threats

Opportunities

Very high barrier to entry Inelastic demand Aging population creates

demand

Threats

• R&D is costly and highly uncertain

• Increasing strict FDA approval process

• Uncertainty regarding government controls and mandates in the future

• Major patent cliff in next 5 years for Pharmaceuticals; estimated $63B erosion in sales by 2014

Financial Analysis

Sector Growth and Margins

2004 2005 2006 2007 2008

Revenue Growth 16% 10% 13% 7% 10%

EBITDA Margin 17.1% 17.0% 16.4% 16.7% 16.4%

Profit Margin 10% 9.9% 9.4% 10.2% 10.1%

Return on Equity 22.4% 22.4% 21.7% 22.1% 22.9%•EBITDA and Profit margins are stable•Return on Equity averages 22.3% over the past five years

Net Profit Margin

•Health care sector net profit margins greater than S&P 500•Biotechnology, pharmaceutical and health care equipment industries have the highest profit margins in the sector

Return on Equity

•Health care sector return on equity greater than the S&P 500•Pharmaceutical industry has highest return on equity•Biotechnology industry return on equity growing the quickest in recent years

Cash Flow Per Share

•Health care sector cash flow per share has grown steadily since 2000•Biotechnology industry cash flow per share is the highest

Valuation Analysis

Valuation Analysis

Absolute vs. Relative Sector Look Prognosis: HC is shows strong support for being

underpriced on an absolute basis, but mixed to negative support for underpricing on a relative basis.

Appendix – HC Industries Relative to S&P500

Sector – P/Forward E

Sector – P/Book

Sector – P/Sales

Sector – P/CF

Sector – P/EBITDA

Summary Look

Health Care - Absolute    

 Over/Under – 5 Yr

Med % Trend

P/Forward E Under -29% Positive

P/B Under -24% Positive

P/S Under -32% Positive

P/CF Under -31% Positive

P/EBITDA Under -34% Positive

Health Care - Relative    

 Over/Under – 5 Yr

Med % Trend

P/Forward E Under -31% Negative

P/B Under -1% Negative

P/S Over 3% Level

P/CF Under -17% Level

P/EBITDA Under -9% Negative

RECOMMENDATION*Keep Healthcare at 49 basis points underweight

(possibly decrease if better opportunities exist)

REASONS: Uncertainty in the sector with proposed

healthcare plan and patent expirations On a relative basis, the sector is mostly

“underpriced” but experiencing negative valuation trends.

If the economy starts to turn around, we expect better opportunities for returns outside of the healthcare sector

Appendix – Industry Valuations

Drug/Pharm        Over/Under % TrendP/Forward E Under -29% NegativeP/B Over 8% NegativeP/S Over 7% LevelP/CF Under -16% Level

P/EBITDA Under -6% Negative

Biotech        Over/Under % TrendP/Forward E Under -19% NegativeP/B Over 14% NegativeP/S Over 17% PositiveP/CF Under -9% Positive

P/EBITDA Under -2% Positive

HC Equipment      Over/Under % TrendP/Forward E Under -38% NegativeP/B Under -15% NegativeP/S Under 0% NegativeP/CF Under -17% Negative

P/EBITDA Under -14% Negative

Appendix – Pharm Charts

Appendix – Biotech Charts

Appendix – HC Equip Charts