Healthcare
SP-35
Michael Mahaney
Tianna Nguyen
Edward Poitras
Matthew Pry
SP-35 Composite
25.0% 100%
20.0% 80%
Cumulative %
15.0% 60%
10.0% 40%
5.0% 20%
0.0% 0%
Telecommuni
Information Consumer Consumer
Financials Health Care Industrials Energy cations Utilities Materials
Technology Discretionary Staples
Services
Sector 20.3% 16.0% 11.5% 11.4% 11.3% 10.0% 9.1% 3.6% 3.6% 3.2%
Cumulative 20.3% 36.3% 47.8% 59.2% 70.5% 80.5% 89.6% 93.2% 96.8% 100.0%
• Health Care 3rd largest sector in S&P 500
Comprised of 53 companies
SP-35 Composite
SP-35 Returns
30.0%
25.0%
20.0%
YTD Return
15.0%
10.0%
5.0%
0.0%
-5.0%
Information Consumer Consumer Telecommunica
Financials Health Care Industrials Energy Utilities Materials
Technology Discretionary Staples tions Services
Sector -2.1% 15.6% 6.1% 16.8% 25.8% 4.3% 5.5% 12.5% 12.2% 23.5%
S&P 500 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4%
• Health Care has been outperformed by 6 of the
10 sectors
SP-35 Valuation
S&P HEALTH CARE SECTOR COMP ADJ (SP-35) Price 44.75 StockVal®
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
HI 37.5
32 LO 15.3
ME 21.7
24 CU 15.8
16
07-11-1997
8 07-19-2007
PRICE / YEAR-FORWARD EARNINGS
HI 1.53
1.4 LO 1.00
ME 1.17
1.2 CU 1.00
1.0
07-11-1997
0.8 07-19-2007
PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
HI 17.98
16
• Health Care sector P/E ratios are at 10 year
LO 10.73
ME 15.47
14 CU 11.09
12
lows
10
07-11-1997
07-19-2007
GROWTH RATE ESTIMATE
HI 1.23
Medicare & Medicaid
140
120
Medicare and
100
Medicaid
Social Security
80
60
40 Gross Domestic
Product
20
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
• Projected Growth of the U.S. Economy and Federal Spending for Major Mandatory Programs
• Medicare and Medicaid spending is to grow at 8% annually until 2017
Population Demographics
• The beginning of the
baby boom generation
reached the age of 60
in 2005.
Healthcare + Pharmaceutical Costs
http://www.pfizer.com/pfizer/policy/drugcost.jsp
http://www.cms.hhs.gov/NationalHealthExpendData/03_NationalHealthAccountsProjected.asp#TopOfPage
Healthcare Spending
SP-35 Margins
70%
60%
50%
40%
30%
20%
10%
0%
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
Net Profit Margin Gross Margin
• Margins have been on a downward trajectory
over the past 20 years
Risk Factors
• Generic Drugs
Generic Drug Initiative – June 12, 2003
Streamline the process for making safe, effective,
generic drugs available to consumers
Save consumers an estimated $35 billion over 10 years
Drug Price Competition and Patent Term
Restoration Act
New drugs have patent term of 20 years
Possibility to increase patent term by 5 years
• Pharmaceutical margins are dropping due to
fewer blockbuster drugs.
Risk Factors
• Nationalizing Healthcare
Immense pressure from public
Other nations have achieved success
• Government Regulations
Price caps on drugs, medical equipment, supplies
• Lawsuits
Possible lawsuits – Merck’s Vioxx fallout
Recommendation
• S&P 5 year RPS growth rate
of 10%
• SP-35 5 year RPS growth Growth Rate Estimates
14%
rate of 13% 12%
• Overweight Healthcare by 10%
8%
Health Care
3% compared to the S&P 6%
S&P 500
500. 4%
2%
Special attention should be 0%
1 2 3 4 5 6 7 8 9 10
given to choosing stocks with Year
durable profit margins.
• Conclusion: Reduce SP-35
by 2.49%
SP-35 Returns
60
S&P HEALTH CARE SECTOR COMP ADJ M-Wtd (SP-35)
PRICE 44.75 DATE 07-19-2007 54
StockVal® 50
46 46
42
38
34
42
38
34
• 10 year chart shows
30
28
26
30
28
26
upward trend
24 24
22 22
20 20
18 18
The Ohio State University
16 Fisher College of Business 16
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Price Change % Diff SP5 First Call Data 2007 2008 2009 Data Page # 1 99
S&P HEALTH CARE SECTOR COMP ADJ M-Wtd (SP-35)
1-Day -0.43 -0.88 Mean Estimate 2.64 2.93 3.26 Revenues ($Mil) 58,756
PRICE 44.75 DATE 07-19-2007
1-Week -1.60 -1.95 Change +16% +11% +11% Market Value ($Mil) 107,307 ®
StockVal 59
4-Weeks 0.48 -2.18 High 2.72 3.15 3.60 Shares Out (Mil) 2,397.7
QTD 1.08 -2.23 Low 2.54 2.69 2.96 36
Volume 60-Day Avg (Th) 13,877 36
• 30 year chart
YTD 5.68 -3.82 Total 20 19 12 Volume 60-Day Avg ($M) 621.1
2006 4.70 -8.92 # Up 5 4 3 Dividend Estimate 21 0.67 21
2005 6.08 3.07 # Down 2 3 2 Payout Ratio 25%
2004 0.13 -8.87 House Estimate Retention Rate 13 75% 13
FYE Dec 2006 EPS 2.27 PE Ratio 16.9 15.3 13.7 Dividend Yield 1.50%
shows less 8
5
8
5
optimistic picture 3
2
3
2
The Ohio State University
1 Fisher College of Business 1
77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15
Price Change % Diff SP5 First Call Data 2007 2008 2009 Data Page # 1
SP-35 Industries
• Pharmaceuticals
• Biotechnology
• Healthcare Facilities
• Medical Equipment
• Medical Supplies
Insurance
• Decrease of individuals covered by insurance
• Number of people currently uninsured
Population July 2007 – 302,000,000
18% Uninsured
+54,000,000
Insurance
Risk Factor
Risk Factors
• Preventative Medicine
More information available to general public
Most effective way to treat high dollar diseases is
before they start or in early stages