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Morgan Stanley -Health Care Overweight

VIEWS: 26 PAGES: 26

for US Strategist; Top Picks from Analysts

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									RESEARCH




September 11, 2013

HIGHLIGHTS OF SEPTEMBER 9, 2013 GLOBAL HEALTH CARE CONFERENCE



NORTH AMERIC A



Health Care: Overweight for US Strategist; Top Picks
from Analysts
Adam S. Parker, Ph.D                             David Lewis                                                     Ricky Goldwasser
US Equity Strategy                               Medical Devices, US                                             Health Care Tech and Distribution, US
Morgan Stanley & Co. LLC                         Morgan Stanley & Co. LLC                                        Morgan Stanley & Co. LLC

Daniel Brennan                                   David Risinger
Life Science Tools & Diagnostics, US             Specialty and Major Pharmaceuticals, US
Morgan Stanley & Co. LLC                         Morgan Stanley & Co. LLC




US Equity Strategy
Adam S. Parker, Ph.D
Adam.Parker@morganstanley.com
+1 212 761-1755


Part I: Market Call – Multiple and Earnings
                                                                           Exhibit 1
As we have written before, the lack of a credible bear case                We See Low Double-Digit Upside to the S&P500
seems to be driving multiple expansion for US equities. It                 Over the Next 12-Months
pretty clearly isn’t the base case that is driving it. Our view is
                                                                           




                                                                                               Morgan Stanley 12-Month S&P 500 Price Target Methodology

that the base case is fine, with low growth and modestly                                        Probability                   Middle 2014 to       Scenario Upside /
improving margins pitted against expectations for earnings                     EPS Landscape    of Scenario   2013E   2014E    Middle 2015 Multiple Target (Downside)

that are too high. Thus, we forecast only modest further                       Bull Case             20%       116.3 125.0       131.3      17.7x   2327     39.2%
                                                                                 Growth                        13%     7%         9%
multiple expansion (Exhibit 1). Our base case is slow but                      Base Case             60%       105.5 112.0       118.0      15.6x   1840     10.0%
improving EPS growth, culminating in $118 in EPS from 2H                         Growth                         2%     6%         9%
                                                                               Bear Case             20%        90.0   94.0      91.7       14.7x   1352     (19.1%)
2014 through 1H of 2015. That, coupled with modest further                       Growth                       (13%)    4%        (0%)
multiple expansion (less than one turn), yields a base case                    Probability Weighted S&P 500 Price Target                            1840     10.0%
                                                                               Current S&P 500 Price                                                1672
12-month forward price target of 1840, about 10% above                     




                                                                           Source: Morgan Stanley Research
current levels.




Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley
Research as only a single factor in making their investment decision.
For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
+= Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to
NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
HIGHLIGHTS OF 2013 GLOBAL HEALTH CARE CONFERENCE

September 11, 2013




Exhibit 2 shows the price-to-forward earnings of the S&P500                              50/50 bet (i.e., coin flip) on the direction of the multiple (Exhibit
over time. These data have existed since 1976, and the                                   4). This exhibit really puts historical context around how
median price-to-forward earnings level since then is 13.7x.                              challenging it is to forecast with any degree of confidence the
Admittedly, however, the market has rarely traded at that level                          future market multiple – yet we all do it, and most do it with
for any sustained period. Today we are trading 14.5-15x the                              confidence that completely belies fact or logic.
next 12 months earnings outlook.
                                                                                         Exhibit 4
Exhibit 2                                                                                Forecasting the Forward P/E Multiple Is Challenging
Today’s Multiple Is Slightly Above the Average                                                                  Sample of Factors Tested and Multiple Expansion/Contraction
                                                                                                                                                                               % of Times Multiple
Level                                                                                                                                         % of Times Multiple Expanded       Expand When
                                                                                                                                                         When Factor:                Factor:
                                 Top 500: Price-to-Forward Earnings
                                                                                         Factor                                               Positive     Change   Negative    Lower     Higher
                                       Through August 2013
 35x                                                                                     Year Ahead YoY Change in YoY GDP                       42%          1%         56%      53%       35%
                                                                                         Year Ahead YoY % Change in Housing Starts              46%          1%         53%      42%       49%
                                                                                         Year Ahead YoY % Change in Non-farm payrolls           73%          0%         27%      49%       44%
 30x
                                                                                         Year Ahead YoY Change in Consumer Confidence           50%          0%         50%      45%       45%
                                                                                         Year Ahead YoY Change in ISM                           50%          1%         49%      39%       51%
 25x                                                                                     Year Ahead YoY Change in Unemployment Rate             33%          4%         63%      41%       48%
                                                                                         Year Ahead YoY % Change in Crude Oil (WTI)             52%          1%         47%      49%       40%
 20x                                                                                     Interest Rates
                    Median = 13.7x
                                                                                         Year Ahead YoY Change in 2s,10s Avg. Level             44%          0%         56%      49%       40%
                                                                                         Year Ahead YoY Change in 2s,10s Slope                  50%          0%         50%      31%       59%
 15x
                                                                                         Year Ahead YoY Change in Target Funds Rate             39%          13%        48%      57%       29%
                                                                                         Both Growth & Interest Rates
 10x                                                                                     Year Ahead YoY % Change in Dollar Index                49%          0%         51%      40%       50%
                                                                                         Year Ahead YoY Change in Baa-10Y Treasury Spread       50%          1%         50%      44%       45%
  5x
                                                                                         Source: Factset, Morgan Stanley Research
              76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Source: Factset, Morgan Stanley Research                                                 Exhibit 5 shows the more recent bottom-up consensus
                                                                                         earnings trajectory and how it has tracked over time. From
Multiple expansion has been coincident with higher real rates                            July to September of 2011, the market retreated by nearly
recently, though the multiple certainly expanded well in                                 20% but the bottom-up consensus EPS projections for 2012
advance of higher real rates, beginning in earnest in June of                            fell approximately 4%, from $114 to just below $109. Pretty
2012. Exhibit 3 shows the 80-year relationship between real                              clearly the market was worried about a European break-up, a
yields, on the x-axis, and the price-to-earnings ratio, on the y-                        fiscal crisis in the US, a hard landing in China, and an EPS
axis. Ultimately, extreme rates are bad for multiples, so                                impact that was far greater than just a few percent. In fact, we
investors must believe that real rates will rise and level out in                        received dozens of emails at that time asking whether
a benign 2-4% range. Our colleague Marty Leibowitz calls                                 earnings could be as low as in 1991 or 2001, i.e., around $80.
this relationship the P/E (price-to-earnings) Frown.                                     Investors weren’t concerned about the base case, they were
                                                                                         concerned about a higher probability assigned to the bear
Exhibit 3
                                                                                         case and the potential severity of the bear case if one
Multiple Expansion Occurs with Higher Real Rates
                                                                                         transpired. In 2012, the consensus EPS estimates were also
from Today’s Low Levels
                                                                                         declining at about a 4% rate during the summer, and we
                             P/E Ratio vs. Real Long-Term Treasury Yield
                                              Since 1930
                                                                                         received zero questions about the bear case in earnings. The
              20x                                                                        market multiple, beginning in June of 2012 when EPS
              18x
                                                                                         estimates started to disappoint, began to materially expand. It
              16x
                                                                                         expanded because of the lower probability of the bear case
              14x
  P/E Ratio




                                                                                         surfacing, not because the base case expectations were being
              12x
                                                                                         met. We appear to be in that same scenario now.
              10x
               8x
               6x
               4x
                    < 0%    0-1%     1-2%      2-3%     3-4%      4-5%     5-6%   > 6%
                                       Real Long-Term Treasury Yield

Source: Factset, Morgan Stanley Research


We have written extensively about how forecasting the market
multiple is a challenging task. Even with foreknowledge of
macro factor directional changes, one is still left with close to a


                                                                                                                                                                                                   2
HIGHLIGHTS OF 2013 GLOBAL HEALTH CARE CONFERENCE

September 11, 2013




Exhibit 5                                                                                 Exhibit 7
Earnings Estimates Will Come Down                                                         Forward Earnings Expectations Tend to Decline
                          Annual S&P 500 Consensus EPS                                    Throughout Any Given Year
                                 As of August 2013
 $130                                                                                                                Consensus EPS Growth Forecasts
                                                                                                                               1976 - 2012
                                                                  2014E                    16%
 $125
                                   2013E
                                                                                $122.61    14%
 $120
                2012                                                                       12%
 $115
                                                                                           10%
 $110                                                                           $110.39
                                                                                            8%
 $105
                                                                   $103.21                  6%

 $100
                                                                                            4%
    Jan-11 May-11      Sep-11   Jan-12   May-12   Sep-12   Jan-13 May-13
                                                                                              Jan     Feb     Mar    Apr   May     Jun   Jul    Aug   Sep   Oct   Nov     Dec

Source: Factset, Morgan Stanley Research
                                                                                          Source: Factset, Morgan Stanley Research


Analysts are forecasting the highest fraction of companies to                             Our top-down macro EPS model forecasts S&P500 earnings
post year-over-year margin expansion in our data history,                                 to come in well below the bottom-up consensus expectations
despite the already near-record profit levels today (Exhibit 6).                          (Exhibit 8). Due to stronger than expected financial sector
                                                                                          earnings in the first half of 2013, we raised our 2013 EPS to
Exhibit 6
                                                                                          $105.50 from $103. We now forecast $112 in 2014 EPS vs.
2014 Margin Expectations Are Too High
                                                                                          the consensus view of $123. As we roll forward our price
                    Top 1500 US Stocks (Ex-Fin): Fraction of Stocks
                           with YoY Increase in Net Margin,
                                                                                          target for the S&P500 12 months, we are interested in
                                   Through 2014E                                          S&P500 base case EPS from the middle of 2014 to the middle
 100%                                                                      2014E
                                                                            90%
                                                                                          of 2015. However, the 2015 bottom-up consensus estimates
  90%
                                                                                          are not yet available. With the second half 2014 expectations
  80%
                                                                       2013E              at $63.50, we assume $130 is roughly the 2H2014-1H2015
  70%
                                                                          63%             outlook, vs. our bottom-up forecast of $118.
  60%

  50%
                                                                                          Exhibit 8
  40%                                                                                     We Forecast $106 in 2013 S&P500 EPS and $112 in
  30%                                                                                     2014
  20%
        70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14                             Morgan Stanley and Consensus S&P 500 Earnings Estimates
                                                                                                                             As of August 2013
Source: Factset, Morgan Stanley Research
                                                                                                      Consensus
                                                                                                      MS Estimates
However, investors are accustomed to perennial sell-side                                                                         $123
                                                                                                                                                                   $118
optimism. Since 1976, the median year-over-year growth                                            $110                                   $112
                                                                                                            $106
forecast in January for the full year ahead is 14%, but
expectations on average decline throughout the year to closer
to the 5% average EPS growth we have seen over that period.
Analysts (and company managements) start the year
optimistic and then adjust their optimism as the year
progresses (Exhibit 7).                                                                               2013E                          2014E             Mid-2014 to Mid-2015

                                                                                          Source: Factset, Morgan Stanley Research


                                                                                          Hubris and debt typically define the top of each cycle. One
                                                                                          way we measure hubris is by looking at management
                                                                                          confidence. Exhibit 9 shows the CEO Business Confidence
                                                                                          Survey. While the market is near its all-time high, CEO
                                                                                          confidence remains only slightly above average. Many
                                                                                          corporate CEOs remain concerned about the sustainability of
                                                                                          the recovery, in part given the impact that monetary and fiscal


                                                                                                                                                                                3
HIGHLIGHTS OF 2013 GLOBAL HEALTH CARE CONFERENCE

September 11, 2013




policy has had on boosting the recovery, and wary of future                                               Exhibit 11

demand for their products.                                                                                Debt Maturities Have Been Pushed Out – So 2-3
                                                                                                          Years from Now Much Higher Bond Yields Could Be
Exhibit 9                                                                                                 a Big Problem
CEO Confidence Isn’t Excessive                                                                                                    Loan Distribution by Year of Maturity
                                                                                                              ($Bn)
                                               CEO Business Confidence Survey                                 180.0
 90                                                   (50+ = Positive)                                                                                  12/31/2011    12/28/2012   7/19/2013
                                                                                                              160.0
 80                                                                                                           140.0

 70
                                                                                                              120.0
                                                                                                              100.0
 60
                                                                                                               80.0
 50                                                                                                            60.0
                                                                                                               40.0
 40
                                                                                                               20.0
 30
                                                                                                                0.0
 20                                                                                                                    2013   2014      2015     2016     2017       2018   2019      2020
                     76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
                                                                                                          Source: Factset, Morgan Stanley Research
Source: Conference Board, Haver, Morgan Stanley Research


Another sign of growing management hubris would be
substantial increases in M&A. As Exhibit 10 shows, the                                                    Part II: Top-Down Sector Selection –
number of tender offers for large-capitalization stocks is still                                          Overweight Health Care Stocks
close to the bottom end of the range. All in all, we don’t see
management hubris as having crested.                                                                      Compared to the long-term average incremental margin for
                                                                                                          the S&P 500, we think analysts’ incremental margin
Exhibit 10
                                                                                                          expectations for 2014 are too high for the market, but appear
Large-Cap Offer Intensity Is Near All-Time Low
                                                                                                          relatively more achievable for health care (Exhibit 12).
                                                     Large Cap Offer Intensity
                      6%                                Q4 1983 - Q1 2013                                 Exhibit 12
                                                                                                          Health Care Estimate Achievability Is Better than
                      5%
                                                                                                          Average
 # offers/# stocks




                      4%                                                                                  




                                                                                                                         S&P 500 2014 Consensus Expectations vs. LT Average,
                      3%                                                                                                                As of September 2013
                                                                                                              18%
                      2%
                                                                                                              16%
                                                                                                                                                                 S&P 500 ex-Fin
                      1%                                                                                      14%
                                                                                                                                                                 Health Care
                                                                                                              12%
                      0%
                           83   85   87   89    91    93    95   97   99   01    03   05   07   09   11       10%
                                                                                                              8%
Source: Factset, Morgan Stanley Research
                                                                                                              6%
                                                                                                              4%
Companies’ balance sheets have improved in recent years as                                                    2%
they have extended debt maturities (Exhibit 11). Hence, few                                                   0%
companies are likely to go bankrupt, and the prospects for a                                                                          2014 Incremental Margin Less LT Avg

relief rally where financially stressed companies get capital                                             




                                                                                                          Source: Factset, Morgan Stanley Research
and outperform is quite low. At some point, this could be a
huge problem for companies if bond yields materially back up
                                                                                                          If you look at health care compared to its defensive peers, the
in 2016 or 2017 when they look to refinance, but few US
                                                                                                          sector looks cheap on price-to-forward earnings (Exhibit 13).
equity investors will be that anticipatory.




                                                                                                                                                                                               4
HIGHLIGHTS OF 2013 GLOBAL HEALTH CARE CONFERENCE

September 11, 2013




Exhibit 13                                                                               Exhibit 15
Health Care Valuation Is Compelling vs. Defensive                                        Pharma, Services, and Equipment Are Particularly
Sectors                                                                                  Attractive
                                                                                        




                Price-to-Forward Earnings: Health Care vs. Defensive Sectors                                                                 Health Care Price-to-Forward Earnings
                                   Through August 2013                                                                                     Percentile Relative to Market versus History
    2.5x
                                                                                                          100%                                         1976 - August 2013
    2.3x                                                                                                   90%
                      Defensive Sectors Cheap                            HC/Staples
    2.1x                                                                                                   80%
                                                                         HC/Telecom                        70%
    1.9x




                                                                                             Percentile
                                                                         HC/Utilities                      60%
    1.7x                                                                                                   50%
    1.5x                                                                                                   40%
    1.3x                                                                                                   30%
                                                                                                           20%
    1.1x
                                                                                                           10%
    0.9x                                                                                                    0%




                                                                                                                                                HC Sector




                                                                                                                                                                               Services

                                                                                                                                                                                                   HC Providers




                                                                                                                                                                                                                         Biotechnology



                                                                                                                                                                                                                                            HC Tech
                                                                                                                                                                      Pharma
                                                                                                                         HC Equip. &




                                                                                                                                                                               Life Sci.
    0.7x             Health Care Cheap




                                                                                                                                                                               Tools &
                                                                                                                          Supplies




                                                                                                                                                                                                     & Serv.
    0.5x
           76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12





Source: Factset, Morgan Stanley Research
                                                                                         




                                                                                         Source: Factset, Morgan Stanley Research
Exhibit 14 shows that mega caps in health care are also
cheap on price-to-forward earnings compared to the broader                               In terms of capital deployment, it is well-documented that US
market.                                                                                  corporate cash balances are at all-time highs (Exhibit 16).
                                                                                         Health care accounts for 17% of the $1.5 trillion of cash on
Exhibit 14
                                                                                         balance sheets of US companies today. Our view is that how
Health Care Mega Caps Are Attractive Relative to
                                                                                         this cash is deployed will be one of the most important
the Market
                                                                                         investment debates for the next few years.





                         Mega-Cap Health Care vs Top 500 US Stocks
                            Relative Price-to-Forward Earnings,                          Exhibit 16
    2.0x                           Through August 2013                                   US Corporate Balance Sheets Hold Over $1.5
    1.8x                                                                                 Trillion in Cash
    1.6x                                                            Median = 1.3x        




                                                                                                                                 Share of Cash Balances by Sector (Ex-Financials)
    1.4x                                                                                     40%                                                  As of Q2 2013
                                                                                                                                                                                                                                         35%
    1.2x                                                                                     35%
                                                                                             30%
    1.0x
                                                                                             25%
    0.8x                                                                                     20%                                                                                                                  17%
                                                                                                                                                                               14%             16%
                                                                                             15%
    0.6x
           76   80       84      88      92      96      00       04      08        12       10%                 6%                    6%                   6%

                                                                                             5%
Source: Factset, Morgan Stanley Research                                                     0%
                                                                                                                                       Energy




                                                                                                                                                                               Discretionary




                                                                                                                                                                                                                                         Technology
                                                                                                                 Other




                                                                                                                                                                                                                  Health Care
                                                                                                                                                            Staples




                                                                                                                                                                                               Industrials




In particular, some of the services names and pharma look
relatively attractive based on their current price-to-forward
earnings percentile relative to the market versus history                                




                                                                                         Source: Factset, Morgan Stanley Research
(Exhibit 15).
                                                                                         Health care is relatively attractive on free cash flow yield and
                                                                                         has above average total yield (Exhibit 17 and Exhibit 18).




                                                                                                                                                                                                                                                      5
HIGHLIGHTS OF 2013 GLOBAL HEALTH CARE CONFERENCE

September 11, 2013




Exhibit 17                                                                                                                                                                                                                                                                                                                    Consequently, our largest overweight sector is health care
Health Care’s FCF Yield Ranks 4th Out of the 10                                                                                                                                                                                                                                                                               because of above average estimate achievability, compelling
Sectors                                                                                                                                                                                                                                                                                                                       valuation versus other defensives, and the specter of more
    7.0%                                                                                             Top 1500 FCF Yield,                                                                                                                                                                                                      capital deployment (Exhibit 20).
                                                                                                    As of August 31, 2013
    6.0%
                                                                                                                                                                                                                                                                                                                              Exhibit 20
    5.0%
                                                                                                                                                                                                                                                                                                                              We Are Overweight Health Care, Our Highest
    4.0%
                                                                                                                                                                                                                                                                                                                              Conviction Sector Call
    3.0%
                                                                                                                                                                                                                                                                                                                              




    2.0%                                                                                                                                                                                                                                                                                                                                                                       Morgan Stanley Sector Recommendations
                                                                                                                                                                                                                                                                                                                                   4%
    1.0%                                                                                                                                                                                                                                                                                                                                                                                As of September 2013
                                                                                                                                                                                                                                                                                                                                   3%
    0.0%                                                                                                                                                                                                                                                                                                                           2%
                                                                                                                                                                                                            Discretionary
                                                         Technology




                                                                                                             Materials




                                                                                                                                                                                                                                                                                   Energy
                                                                                    Top 1500




                                                                                                                                                Health Care




                                                                                                                                                                                                                                                 Utilities
                                                                                                                                                                           Industrials




                                                                                                                                                                                                                                                                                                            Staples
                      Telecom




                                                                                                                                                                                                                                                                                                                                   1%
                                                                                                                                                                                                                                                                                                                                   0%
                                                                                                                                                                                                                                                                                                                                  (1%)

Source: Factset, Morgan Stanley Research                                                                                                                                                                                                                                                                                          (2%)
                                                                                                                                                                                                                                                                                                                                  (3%)       Overweights - Health Care, Technology, Industrials
                                                                                                                                                                                                                                                                                                                                             Market-Weights - Financials, Materials, Telecoms, Utilities, Energy
Exhibit 18                                                                                                                                                                                                                                                                                                                        (4%)       Underweights - Staples, Discretionary

Health Care Has Attractive Total Yield                                                                                                                                                                                                                                                                                            (5%)




                                                                                                                                                                                                                                                                                                                                                                  Technology




                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Energy
                                                                                                                                                                                                                                                                                                                                                                                                       Materials




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                Discretionary
                                                                                                                                                                                                                                                                                                                                               Health Care




                                                                                                                                                                                                                                                                                                                                                                                                                                                     Utilities




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     Staples
                                                                                                                                                                                                                                                                                                                                                                                                                        Financials
                                                                                                                                                                                                                                                                                                                                                                                    Industrials




                                                                                                                                                                                                                                                                                                                                                                                                                                          Telecoms
                                                                                                    Total Yield by Sector
                                                                                                    As of August 31, 2013
    12.0%

    10.0%
                                                                                                                                                                                                                                                                                                                              




     8.0%                                                                                                                                                                                                                                                                                                                     Source: Factset, Morgan Stanley Research

     6.0%

     4.0%

     2.0%

     0.0%                                                                                                                                                                                                                                                                                                                     Part III: Market Considerations
                                                                                                                                                                                                                            Materials
                                                                                Technology




                                                                                                                                                                  Energy


                                                                                                                                                                                            Discretionary
                                                         Health Care




                                                                                                  Top 1500




                                                                                                                                                                                                                                                                                      Industrials
                                                                                                                                Staples




                                                                                                                                                                                                                                                             Utilities




                                                                                                                                                                                                                                                                                                             Financials
                         Telecom




                                                                                                                                                                                                                                                                                                                              We have noted in our prior work that stock-specific risk has
                                                                                                                                                                                                                                                                                                                              risen across the market (Exhibit 21).
Source: Factset, Morgan Stanley Research

                                                                                                                                                                                                                                                                                                                              Exhibit 21
As shown in Exhibit 19, there has been a great deal of                                                                                                                                                                                                                                                                        Company-Specific Risk Is at its Highest since Sept.
repurchasing in the sector—every health care industry has                                                                                                                                                                                                                                                                     2007
above average buyback yield.
                                                                                                                                                                                                                                                                                                                                                                               Top 500: Stock Specific Risk, Rolling 252-Day
                                                                                                                                                                                                                                                                                                                                                                                         Through August 30, 2013
Exhibit 19                                                                                                                                                                                                                                                                                                                        90%
Health Care Ranks 2nd Among 10 Sectors in                                                                                                                                                                                                                                                                                         80%
Buybacks                                                                                                                                                                                                                                                                                                                          70%




                                                                                                                                                                                                                                                                                                                                  60%
                                                                                                 Top 1500 Buyback Yield,
    6%                                                                                               August 31, 2013                                                                                                                                                                                                              50%

    5%                                                                                                                                                                                                                                                                                                                            40%

    4%                                                                                                                                                                                                                                                                                                                            30%

    3%                                                                                                                                                                                                                                                                                                                            20%

    2%                                                                                                                                                                                                                                                                                                                            10%
    1%
                                                                                                                                                                                                                                                                                                                                        83      85           87                89   91            93               95   97           99         01   03          05      07    09               11

    0%                                                                                                                                                                                                                                                                                                                        Source: Factset, Morgan Stanley Research
                                                                                                  Discretionary




                                                                                                                                                                                   Energy
                                                                                                                                                              Market
                                Pharma, Biotech & Life


                                                                  Health Care


                                                                                    Technology




                                                                                                                                                                                                                                                                                                Materials
                                                                                                                         HC Equip. & Services




                                                                                                                                                                                                            Industrials


                                                                                                                                                                                                                                        Financials


                                                                                                                                                                                                                                                                         Staples




                                                                                                                                                                                                                                                                                                                  Utilities
            Telecom




                                                                                                                                                                                                                                                                                                                              Given the backdrop of increasing stock-specific risk, we
                                     Sciences




                                                                                                                                                                                                                                                                                                                              examined the efficacy of various factor strategies in periods of
                                                                                                                                                                                                                                                                                                                              rising stock-specific risk (see US Quant Research: Making It

                                                                                                                                                                                                                                                                                                                              Easier, Feb. 11, 2013). Among the sectors and industry
Source: Factset, Morgan Stanley Research                                                                                                                                                                                                                                                                                      groups we considered when stock specific risk is rising, the


                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               6
HIGHLIGHTS OF 2013 GLOBAL HEALTH CARE CONFERENCE

September 11, 2013




raw performance spread to the best factor is higher in health                                                                                 Exhibit 24

care than most areas of the market (see Exhibit 22).                                                                                          Dispersion of Price-to-Forward Earnings Is Slightly
                                                                                                                                              Above Average
Exhibit 22                                                                                                                                    




Performance Improved Following Rising Company-                                                                                                                    Top 1500: Health Care Price-to-Forward Earnings Dispersion,
                                                                                                                                                                                     Through August 2013
Specifics                                                                                                                                         0.09
                                      Best Factor Performance Spread                                                                              0.08
    18%                                 Annualized, Since Dec. 1984
                                                                                                                                                  0.07
    16%
    14%                                                                                                                                           0.06
    12%                                                                                                                                           0.05
    10%
                                                                                                                                                  0.04
     8%
     6%                                                                                                                                           0.03

     4%                                                                                                                                           0.02
     2%                                                                                                                                           0.01
     0%                                                                                                                                                  95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
                                                                                                 Banks/Div.




                                                                                                                                      Media
                                       Energy




                                                                                     Materials
          Retailing


                      Tech

                             Health




                                                                                                                          Insurance
                                                Staples


                                                          Autos/Dur.


                                                                       Industrials




                                                                                                              Utilities
                              Care




                                                                                                                                              
                                                                                                    Fin.




                                                                                                                                              Source: Morgan Stanley Research



Source: Factset, Morgan Stanley Research                                                                                                      Another attractive feature of the health care sector is that the
                                                                                                                                              correlations of returns between large health care stocks are
Looking at the broader market, four of the health care                                                                                        low (Exhibit 25), while the correlations in the market have
industries, led by biotechnology, are among the top industries                                                                                been high. This is an attractive feature for portfolio managers
with high idiosyncratic risk (Exhibit 23).                                                                                                    who worry about propagating factor bets like oil or currency
                                                                                                                                              across their portfolio with big bets in other sectors.
Exhibit 23
Four Health Care Industries Rank Among Top 15                                                                                                 Exhibit 25
Industries                                                                                                                                    Health Care Stocks Offer More Diversification vs.
                                                                                                                                             Other Sectors
                                 Highest Industry Specific Risk                                                                               




                                                                                                                                                                          Correlation of Top Health Care Stocks - Last 5 Years

                                                                                                       Industry Specific                                   JNJ     PFE    MRK    ABT AMGN UNH         BMY ESRX        LLY    GILD   STJ    AGN TOP500
                         Industry                                                                      Risk Percentage                              JNJ    1.00
                                                                                                                                                    PFE    0.61    1.00
    Diversified Consumer Services                                                                           60.8%
                                                                                                                                                    MRK    0.67    0.70   1.00
    Airlines                                                                                                57.8%                                   ABT    0.61    0.55   0.56   1.00
    Multi-Utilities                                                                                         56.0%                                  AMGN    0.60    0.49   0.59   0.34   1.00
                                                                                                                                                    UNH    0.49    0.52   0.54   0.32   0.33   1.00
    Biotechnology                                                                                           54.1%                                   BMY    0.56    0.51   0.68   0.49   0.40   0.34    1.00
    Electric Utilities                                                                                      53.7%                                  ESRX    0.30    0.15   0.04   0.05   0.15   0.24   (0.18)   1.00
                                                                                                                                                    LLY    0.66    0.63   0.61   0.51   0.44   0.53    0.60    0.16   1.00
    Wireless Telecommunication Services                                                                     48.1%                                  GILD    0.37    0.35   0.38   0.32   0.58   0.38    0.25    0.20   0.38   1.00
    Thrifts & Mortgage Finance                                                                              44.4%                                   STJ    0.48    0.40   0.48   0.48   0.19   0.45    0.24    0.31   0.35   0.37   1.00
                                                                                                                                                    AGN    0.56    0.42   0.37   0.33   0.32   0.28    0.40    0.13   0.60   0.26   0.30   1.00
    Food Products                                                                                           44.3%                                 TOP500   0.68    0.64   0.49   0.41   0.46   0.52    0.34    0.62   0.61   0.38   0.54   0.61   1.00
    Independent Power Producers & Energy Traders                                                            40.6%                             




    Multiline Retail                                                                                        34.4%                             Source: Factset, Morgan Stanley Research
    Gas Utilities                                                                                           34.0%
    Textiles, Apparel & Luxury Goods                                                                        33.6%
    Pharmaceuticals                                                                                         32.2%
    Life Sciences Tools & Services                                                                          30.6%

    Health Care Equipment & Supplies                                                                        28.8%                             Part IV: Bottom-Up Stock Selection –
Source: Factset, Morgan Stanley Research                                                                                                      Quantamental Approach

Another way to examine investment opportunity is to study
dispersion of price-to-forward earnings, which is currently                                                                                   We have been able to show that when a Morgan Stanley
above average within health care (Exhibit 24). We wouldn’t                                                                                    analyst has fundamental conviction on a stock and our
say this stands out as a place with wide long-short                                                                                           quantitative models agree, the subsequent performance is
opportunity, though dispersion is still modestly above long-                                                                                  superior to either discipline alone (Exhibit 26). We use this
term averages.                                                                                                                                synergy as the backbone for much of our idea generation.




                                                                                                                                                                                                                                                         7
HIGHLIGHTS OF 2013 GLOBAL HEALTH CARE CONFERENCE

September 11, 2013




Exhibit 26                                                                                                                     Exhibit 27
There Are Important Synergies When Using Quant                                                                                 Free Cash Flow Is An Effective Metric for Health
Tools                                                                                                                          Care Sector
                                                                                                                              




                      Performance of Various Approaches to Investing                          57%                                                Health Care Factor Efficacy: Annualized Relative Returns
                                       2003 to 2010                                           13%                                                               1976 through August 2013
    14%                                                                                                                            14%
                                                           52%
    12%                                                                                                                            12%

    10%                                                     9%                                                                     10%
                  Hit rate: 44%
                                                                                                                                    8%
     8%
                         6%                                                                                                         6%
     6%                                                                                                                             4%                                                       Bottom 3 Factors
     4%                                                                                                                             2%
     2%                                                                                                                             0%
                                                                                                                                   (2%)
     0%
                                                                                                                                   (4%)                Top 3 Factors
                   Fundamental                           "MOST"                             Synergy
     Note: Fundamental is the MS analysts Overweight vs. Equal / Underweights from 2003 to 2010; "MOST" is the Q1-
                                                                                                                                   (6%)
     Q5 spread from our alpha model; Synergy is Overweight rated stocks in Q1 of MOST less Equal / Underweight in                  (8%)
     Q5. Performance is annualized for MOST, "realized" during the recommendation period of the synergy.
                                                                                                                                          Free Cash    EV-to-Free      Accruals*   Inventory-to- YoY Chg in # Forecast LT
                                                                                                                                         Flow Yield   Cash Flow*                     Sales      of Employees   Growth
Source: Morgan Stanley Research Note: Past performance is no guarantee of future results.                                      




Data as of October 31, 2010. Results shown represent total absolute return (including                                          Source: Morgan Stanley Research Note: * indicates that low values are preferred
dividends) and exclude brokerage commissions. These figures are not audited.

                                                                                                                               Exhibit 28 contains health care stocks that are in the top
Which variables are effective in predicting subsequent stock
                                                                                                                               quintiles of both our 3-month alpha model (MOST) and our 24-
return for health care? Free cash flow yield, enterprise value-
                                                                                                                               month alpha model (BEST), and that are rated Overweight by
to-free cash flow, and accruals are the most effective within
                                                                                                                               our fundamental analysts.
the health care sector for 12-month stock return (Exhibit 27).
Inventory-to-sales, year-over-year change in the number of
employees, and forecast long-term growth are negatives for
these stocks.

Exhibit 28
Health Care Names Preferred by Our Quantitative Models and Morgan Stanley Analysts

                                                                     Health Care Companies, Top Quintiles in MOST and BEST,
                                                                                                   and Overweight from Analyst

                                                                                                                                           MOST               BEST
                                                                                                                     Market               Quintile           Quintile              Value/                Analyst
    Ticker           Company                                                                                         Cap ($M)             Latest              Latest               Growth                 Rating
    PFE              Pfizer Inc.                                                                                     187,156                Q1                  Q2                     V               Overweight
    ABBV             AbbVie, Inc.                                                                                     68,982                Q1                  Q2                     G               Overweight
    COV              Covidien Plc                                                                                     28,012                Q2                  Q2                 Neither             Overweight
    ALXN             Alexion Pharmaceuticals, Inc.                                                                    21,962                Q1                  Q2                     G               Overweight
    CAH              Cardinal Health, Inc.                                                                            17,008                Q2                  Q1                 Neither             Overweight
Source: Factset, Morgan Stanley Research. Prices as of 9/10/13: PFE: $28.45, ABBV: $44.78, COV: $61.53, ALXN: $113.62, CAH: $51.13. For important disclosures regarding companies that are
the subject of this screen, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures.




Exhibit 29 lists health care stocks that are in the bottom                                                                     For those interested in our quantitative output, please visit
quintiles of both our 3-month alpha model (MOST) and our 24-                                                                   www.morganstanley.com/equitystrategy and use the
month alpha model (BEST), and that are rated Equal-weight                                                                      alphascreener product for output from our 3-month model
or Underweight by our fundamental analysts.                                                                                    (MOST) and our 24-month model (BEST). A video tutorial is
                                                                                                                               available there, or we or your Morgan Stanley salesperson
                                                                                                                               can give you a brief demonstration.



                                                                                                                                                                                                                            8
HIGHLIGHTS OF 2013 GLOBAL HEALTH CARE CONFERENCE

September 11, 2013




Exhibit 29
Health Care Names Not Preferred by Our Quantitative Models and Morgan Stanley Analysts

                                                Health Care Companies, Bottom Quintiles in MOST and BEST,
                                                           and Underweight or Equal-weight from Analyst

                                                                                                            MOST                BEST
                                                                                        Market             Quintile            Quintile             Value/                Analyst
Ticker         Company                                                                Cap ($M)              Latest              Latest             Growth                  Rating
VRTX           Vertex Pharmaceuticals Incorporated                                      18,198                 Q5                 Q5                    G             Equal-Weight
CERN           Cerner Corporation                                                       15,989                 Q5                 Q5                    G             Equal-Weight
ILMN           Illumina, Inc.                                                            9,943                 Q4                 Q4                    G             Equal-Weight
HSP            Hospira, Inc.                                                             6,457                 Q5                 Q4                    V             Equal-Weight
INCY           Incyte Corporation                                                        5,378                 Q5                 Q4                Neither            Underweight
Source: Factset, Morgan Stanley Research. Prices as of 9/10/13: VRTX: $81.32, CERN: $48.14, ILMN: $80.91, HSP: $39.8, INCY: $37.01. For important disclosures regarding companies that are
the subject of this screen, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures.




                                                                                                                                                                                             9
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September 11, 2013




Medical Devices, US                                                         loses about 20% of its rFVIII business (net of its launch of
David Lewis                                                                 BAX 855), but includes no contribution from the pipeline
David.Lewis@morganstanley.com                                               products listed above. In our view, this dynamic creates a
+1 415 576-2324                                                             favorable setup for future sales acceleration and earnings
                                                                            upside.
Top Pick: Baxter

                                                                            Baxter’s two segments, Biosciences and Medical
Industry View: In-Line
                                                                            Products, may be worth more separately than together;
                                                                            we estimate a separation could drive ~15% upside to the
Investment Thesis: Upside opportunities from an (i)
                                                                            share price. Medical Products may be the more likely
improving plasma market, (ii) stronger pipeline execution,
                                                                            candidate for a value-creating event. To be clear, we have
and (iii) potential strategic action to create additional
                                                                            no knowledge of any plans for Baxter to conduct a strategic
shareholder value remain underappreciated, in our view.
                                                                            event, and company management has not indicated that it is
While key risks, such as Advate competition and generic
                                                                            contemplating such a transaction. In our view, the
losses, are adequately reflected in both sentiment and Street
                                                                            Biosciences and Medical Products businesses are moving in
numbers, we think upside catalysts are largely left out of
                                                                            fundamentally different directions with varied return and risk
investor models and the consensus debate.
                                                                            profiles. In Biosciences, management is shifting investments
                                                                            towards earlier-stage biotherapeutics; in Medical Products,
Baxter’s broad-based pipeline has not gotten the
                                                                            the company is making a bet on emerging markets and
attention it deserves. Investors have honed in on recent
                                                                            renal. We see no material revenue, cost, or selling synergies
disappointments, including HyQ, AD, and LA-rFVIII, but give
                                                                            that demand these businesses operate together.
the company little credit for projects where visibility is higher.
Our detailed analysis (see Extracting Biosciences Value: It’s
                                                                            Our sum-of-the-parts analysis suggests $10 (15% upside
a Two Step Process, 6/5/2013) shows significant value in
                                                                            from current levels) of potential value for shareholders could
multiple projects, including HyQ, rVWF, rFIX, rFVIIa, OBI-1,
                                                                            be created by separating the Bioscience and Medical
and rigosertib. With risk-adjusted sales projections that we
                                                                            Products businesses (for details please see our note from
believe to be reasonably conservative, we estimate that the
                                                                            May 14, SOTP Value Is Higher). This assumes Biosciences
pipeline could contribute $900+ million in sales (5%) and
                                                                            would trade in line with plasma comps CSL and Grifols or
$0.45 in EPS (7%) by 2017, as shown in the table below.
                                                                            select biotherapeutic comps at 12x 2014e EBITDA and
Exhibit 30                                                                  places Medical Products valuation at 9.0x 2014e EBITDA, in
Risk-adjusted Pipeline Sales and EPS Contribution                           line with key hospital supply and renal comps. Several
Summary 2014-17                                                             important hurdles remain before the company could
                                2014          2015        2016     2017     undertake a strategic event. Investors would need to get
HyQ (SCIG)                        10.0          45.0       110.0    165.0   comfortable with rVIII risk for Biosciences, the Gambro deal
FEIBA Prophylaxis                  4.0          16.0        28.0     40.0   would need to be integrated, and the pipeline must progress.
BAX-111 (rVWF)                       -          35.0        73.5    115.5
BAX-326 (rFIX)                    12.0          32.0        48.0     60.0   Plasma market risks remain to the upside. Accelerating
BAX-817 (rVIIa)                      -             -        28.0     91.0   plasma growth is beginning to drive pricing upside, and
OBI-1 (prFVIII)                      -           8.0        16.0     24.0   Baxter’s results should improve in 2013 as its capacity
Rigosertib (MDS)                     -          17.5        35.0     52.5   constraints resolve. On HyQ, positive tone suggests US
Total                             26.0         153.5       338.5    548.0
                                                                            approval is more likely following positive discussions with the
EPS                              $0.02         $0.12       $0.27    $0.45   FDA, and we believe the product could launch as soon as
%EPS                              0.4%          2.1%        4.3%     6.6%   mid 2014. Meanwhile, the company recently launched its
Source: Company Data, Morgan Stanley Research estimates                     rFIX product, and its pivotal trial for BAX 855 (its competitive
                                                                            response to Biogen’s long-acting FVIII) is well under way.
Importantly, key negatives are already in our numbers, but
positive offsets are not. Our model already assumes Baxter




                                                                                                                                           10
HIGHLIGHTS OF 2013 GLOBAL HEALTH CARE CONFERENCE

September 11, 2013




Risk-Reward Snapshot: Baxter (BAX, $71.43, OW, PT $81.00)
Pipeline, Plasma Recovery, and Strategic Action Drive Value
    $100                                                                                                                                      Investment Thesis

      90                                                                                             $91.00 (+27%)                             Plasma market risks remain to the
                                                                                                                                                upside. Accelerating plasma growth
      80                                                                                           $81.00 (+13%)
                                                                             $ 71.43                                                            is beginning to drive pricing upside,
      70                                                                                                                                        and Baxter’s results will improve in
      60                                                                                             $60.00 (-16%)                              2013 as its capacity constraints
                                                                                                                                                resolve.
      50
                                                                                                                                               Broader pipeline momentum is
      40                                                                                                                                        improving, and upcoming product
      30                                                                                                                                        launches and label expansions over
                                                                                                                                                2013-14 in recombinant clotting
      20
                                                                                                                                                factors may drive revenue
      10
                                                                                                                                                acceleration.
       0                                                                                                                                       Baxter’s two segments, Biosciences
       Sep-11             Mar-12         Sep-12             Mar-13           Sep-13         Mar-14                        Sep-14
                                                                                                                                                and Medical Products, may be worth
           Price Target (Sep-14)              Historical Stock Performance             Current Stock Price
                                                                                                                                                more separately than together; we
                                                                                                             WARNINGDONOTEDIT_RRS4RL~BAX.N~




Source: Morgan Stanley Research estimates, Thomson Reuters
                                                                                                                                                estimate a separation could drive
 Price                                  Based on base case scenario. Assumes 16x multiple on 2014e
                                                                                                                                                ~15% upside
 Target $81                              EPS, in line with peers in the hospital supply group. Our sum of
                                         the parts analysis also yields an $81 value and assumes 2014                                         Catalysts
                                         EV/EBITDA multiples of 12x for Biosciences and 9x for Medical                                         Additional clarity on HyQ data
                                         Products.                                                                                               requirements or approval timeline
                                                                                                                                                 could improve pipeline sentiment
 Bull               17x Bull Case       IVIG pricing increases slightly as accelerating demand growth
 Case               14e                  drives a tighter market. Rapid resolution of HyQ data request                                           [2H13]
 $91                EPS of $5.40         leads to approval in early 2014, and Baxter gains IVIG share with                                     US rFVIII prophylaxis indication could
                                         a successful sub-q launch.                                                                              drive share gains and usage increase
                                                                                                                                                 and may drive upside [2013]
                                        Expectations for Biogen’s rFVIII-Fc become more muted as the
                                                                                                                                               Gambro acquisition close increases
                                         challenges of switching patients to a new product become clear
                                                                                                                                                 visibility on up to $0.15 of accretion
                                        Increasing visibility on key pipeline projects.                                                         by 2015 [2Q13]
                                        Gambro accretion surprises to upside, reaches $0.25+ by 2015                                          rVWF launch [2014]

 Base               16x Base            Plasma growth accelerates into 2013 as capacity constraints are                                      Risks to price target
 Case               Case 14e             alleviated and pricing is roughly flat. HyQ visibility remains limited
                                                                                                                                               Next-generation rFVIII therapies
 $81                EPS of $5.11
                                        Biogen launches on schedule in early 2014 and gains modest                                             under development at competitors
                                         share in line with our expectation for ~20% erosion over five                                          threaten Baxter’s leading franchise,
                                         years.                                                                                                 which accounts for 30-35% of EBIT
                                        Gambro contributes $0.15 in EPS by 2015.
                                                                                                                                              .
 Bear               12x Bear            Biogen rFVIII risk becomes a key investor concern and overhang
 Case               Case 13e             on the stock.
 $60                EPS of $4.96
                                        Baxter’s capacity constraints take longer to resolve, dragging
                                         IVIG growth headwinds into late 2013. FDA requires lengthy new
                                         clinical trials for HyQ. Pipeline clotting factor launches fizzle.

                                        3% dividend yield at $60 provides downside support




                                                                                                                                                                                    11
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September 11, 2013




Health Care Technology and Distribution, US                         Reported bookings point to a turnaround. Management
Ricky Goldwasser                                                    actions over the last six months are gaining traction,
Ricky.Goldwasser@morganstanley.com                                  highlighted by reported bookings in 2Q13. Up 10% y/y,
+1 212 761-4097                                                     bookings are swinging back to growth for the first time since
                                                                    4Q11.
Top Pick: AllScripts Health Solutions (MDRX)
                                                                    Exhibit 31
Industry View: In-Line                                              Bookings are trending up

Investment Thesis: Allscripts is a diversified healthcare IT                              $350
                                                                                                        26%
company that develops and sells software and services such                                $300




                                                                     Bookings ($ millio
                                                                                                                                                                      10%
as electronic health records and revenue cycle management                                 $250

software to health care providers from large hospital systems                             $200                  -8%                                          -9%
to small physician groups. The combination of a new                                       $150
                                                                                                                             -21%
management team, accelerated focus on new product                                         $100

development, a leadership position in the growing area of                                 $50                                            -39%
                                                                                                                                                   -45%
population health, and disciplined cost control should drive                               $0
                                                                                                 4Q11     1Q12        2Q12       3Q12          4Q12     1Q13       2Q13
accelerated revenue growth and margin expansion over the
next 12 to 18 months. With MDRX shares trading at a steep                                                                    Bookings          y/y Growth
discount to HCIT peers, we think the opportunity is still
                                                                    Source: Company Data, Morgan Stanley Research
underappreciated by the market.

New management team led by a CEO with a strong track
                                                                    Improvement in bookings provides us with increased
record. CEO Paul Black joined MDRX in May 2012 as a
                                                                    confidence in accelerating revenue trajectory. We
board member, taking on the CEO role in December 2012.
                                                                    estimate bookings have a lead time of ~18 to 24 months and
Black's 12 years tenure with HCIT bellwether Cerner, strong
                                                                    expect bookings to translate to a pickup in revenues in 2014.
understanding of the market, and an orientation towards
                                                                    Accordingly, we model average revenue growth of ~7% in
customer service should help reestablish AllScripts’
                                                                    2014, offsetting the negative trends the company
credibility among its customer base. Since Black took on the
                                                                    experienced in 2013 year to date.
role of CEO, client feedback that we solicited through our
channel checks has been incrementally positive, with                Exhibit 32
building momentum visible at MDRX’s user conference we              We expect a return to revenue growth in 2014
attended last month.
                                                                                          $400
                                                                                                                                                      8%
Commitment to invest in R&D to develop new products                                       $390
                                                                                                                                            7%
                                                                                          $380                                                                 6%         6%
and services to meet client needs. A key driver behind
                                                                                          $370
MDRX’s turnaround story is a strong commitment to develop
                                                                                          $360                                      1%
new products and services to meet client demands. This is                                 $350                          -1%
reflected in the recent investment in R&D dollars, going from                             $340
                                                                                                    -5%
$155M or 11% of revenues in 2012 to an estimated $200M                                    $330                -6%

or 14% of revenues in 2014.                                                               $320
                                                                                                 1Q13    2Q13    3Q13        4Q13       1Q14     2Q14     3Q14     4Q14

Leadership position in the growing area of Population                                                                    Revenues               y/y Growth
Health. The strategic acquisition of dbMotion for $235M in
                                                                    Source: Company Data, Morgan Stanley Research
March 2013 has positioned MDRX as a leader in the
emerging area of Population Health. Allscripts’ Population
Health Management solutions, primarily representing
                                                                    The combination of disciplined cost controls and
dbMotion, accounted for 33% of 2Q13 bookings (of $214M)
                                                                    favorable mix shift should translate into a margin
and is likely to be an important revenue driver for Allscripts in
                                                                    expansion opportunity over the next 12 to 18 months.
the future.
                                                                    We estimate 600bps operating margin expansion over the




                                                                                                                                                                               12
HIGHLIGHTS OF 2013 GLOBAL HEALTH CARE CONFERENCE

September 11, 2013




next six quarters with margins reaching close to 11.7% by
the end of 2014, up from the 1Q13 trough of ~5.1%.

Exhibit 33
EBIT margin expansion of > 600 bps by end of ‘14

                    19.4%
    20.0%

                                        13.8%
                                    13.7%
    15.0%
                                11.2%                                                  11.4%11.7%
                                                                             10.4% 10.6%
    10.0%                                             8.3%            8.1%8.2%
                                                              5.1%5.4%
          5.0%

          0.0%
                         4Q11

                                 1Q12

                                        2Q12

                                               3Q12

                                                       4Q12

                                                               1Q13

                                                                        2Q13

                                                                               3Q13

                                                                                       4Q13

                                                                                              1Q14

                                                                                                     2Q14

                                                                                                            3Q14

                                                                                                                   4Q14




                                                               BIT argin (N
                                                              E M          on-GAAP)


Source: Company Data, Morgan Stanley Research




Compelling valuation that embeds a steep discount to
HCIT peers. MDRX valuation, currently trading at 2.1x
EV/Revenues versus peer group trading at 2.4x to 6.0x,
reflects skepticism embedded in the stock regarding growth
trajectory. Our price target of $17 assumes only modest
multiple expansion and is based on 2.3x EV/Revenue
multiple applied to our base case CY14 revenue estimate of
$1.52 billion.

Exhibit 34
MDRX trades at a steep discount to HCIT peers

                   7.0           6.3
                   6.0                           5.3
                   5.0
    EV / FY1 Sal




                   4.0                                                3.3
                                                                                      2.8
                   3.0                                                                               2.4
                                                                                                                   2.1
                   2.0

                   1.0

                   0.0
                                  H
                                AT N            EN
                                               CR                D
                                                                M AS              G AY
                                                                                   W                 QSII           DX
                                                                                                                   MR


Source: Company Data, Morgan Stanley Research




                                                                                                                          13
HIGHLIGHTS OF 2013 GLOBAL HEALTH CARE CONFERENCE

September 11, 2013




Reward Snapshot: Allscripts Healthcare (MDRX, $14.86, OW, PT $17)
Risk-Reward View: Refocus on Company Fundamentals                                                                                                             Investment Thesis
    $25                                                                                                                                                        Allscripts is a diversified HCIT vendor
                                                                                                                                                                for hospitals, physician practices, and
                                                                                                                        $22.00 (+48%)
                                                                                                                                                                other healthcare providers
     20                                                                                                                                                        New leadership has solidified the
                                                                                                                                                                existing customer base with increased
                                                                                                                       $17.00 (+14%)
                                                                                           $ 14.86                                                              product quality, investment in R&D,
     15
                                                                                                                                                                and product roadmap, which should
                                                                                                                        $12.50 (-16%)
                                                                                                                                                                reduce future contract losses
     10                                                                                                                                                        Leadership position in growing area of
                                                                                                                                                                Population Health through strategic
                                                                                                                                                                acquisition of dbMotion
      5
                                                                                                                                                               Replacement of EHR systems ahead
                                                                                                                                                                of Meaningful Use Stage 2 provides
      0
                                                                                                                                                                an opportunity from both legacy
      Sep-11               Mar-12               Sep-12             Mar-13                  Sep-13              Mar-14                      Sep-14               MDRX and implementation of
             Price Target (Sep-14)                   Historical Stock Performance                        Current Stock PriceWARNINGDONOTEDIT_RRS4RL~MDRX.O~     dbMotion
Source: Company Data, Morgan Stanley Research                                                                                                                  Compelling valuation – trades at a
                                                                                                                                                                steep discount to HCIT peers

                                                                                                                                                              Key Levers in Our Model
 Bull                  2.7x Bull           Revenue growth accelerates to 10.4% in CY14. System sales                                                           A Sunrise Clinical Manager deal can
 Case                  Case CY14           margin improve to 65% from ~58% in CY13E, as mix shifts to                                                           equate to ~$10+ million of license and
 $22.00                Revenue             higher margin software upgrades in CY14.
                                                                                                                                                                professional services fees and ~$1
 Base                  2.3x Base           Revenue growth of 6.9% in CY14, following new product                                                                million of annual maintenance fees
 Case                  Case CY14           releases and a focused new management effort. System sales                                                          Each 100 basis points in system sales
 $17.00                Revenue             margins (60%) improve as software mix returns to normalized                                                          gross margin is worth ~$0.01 to EPS
                                           levels in CY14.

 Bear                  1.8x Bear           Revenue growth of 4.9% in CY14, while system sales margins                                                         Key Catalysts
 Case                  Case CY14           continue to reflect a weak software mix (50%).                                                                      Quarterly results with focus on
 $12.50                Revenue                                                                                                                                  revenue growth, margins and
                                                                                                                                                                bookings
                                                                                                                                                               New deal wins
Bear to Bull: Investor Confidence in Long-Term Outlook Is Key
                                                        Transaction
                                     System Sales    Processing & Other                                                                                       Risks to Price Target
                                                                                                                                                               Turnaround may take longer resulting
                                        Growth            Growth                Multiple


                                                                                                                                                                in customer attrition
                                                                                                                                                               Hospital consolidation favoring Cerner
                                                                                    3.50
          Bull 22.00

                                                                                                                                                                and Epic Systems
                                         0.50
                                                           1.00
                                                                                                                                                               Aggressive pricing behavior from
      Target 17.00
                                        -0.25
                                                                                                                                                                smaller ambulatory HCIT vendor
                                                           -0.25
                                                                                                             Current
                                                                                                              14.59

          Bear 12.50
                                                                                 -4.00


                                                                            All values are in U.S. Dollars

Source: Company Data, Morgan Stanley Research




                                                                                                                                                                                                    14
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Life Science Tools & Diagnostics, US                             1) creating a higher-margin, more recurring revenue mix of
Daniel Brennan                                                   business, 2) further increasing Thermo’s scale advantage,
Daniel.Brennan@morganstanley.com                                 which in turn should help drive revenue synergies, 3) yielding
+1 212 761-5578                                                  significant cost synergies, forecasts of which we feel are
                                                                 conservative.
Top Pick: Thermo Fisher Scientific is our top pick in the life
science tools & diagnostics space as well as a Morgan
                                                                 Despite these attributes, the stock’s P/E, adjusted for the
Stanley Vintage Values pick. We believe Thermo offers a
                                                                 LIFE acquisition, is at the bottom of the peer group. We
compelling long-term opportunity, with significant scale
                                                                 believe the market is questioning Thermo’s ability to deliver
advantages over competitors and superior earnings growth.
                                                                 on the transaction or is taking issue with a growth-through-
The pending acquisition of LIFE (closing early 2014) is a
                                                                 acquisition strategy, thus creating an opportunity for
transformative transaction which should create significant
                                                                 investors.
shareholder value. Our YE 2013 price target is $97, offering
6% appreciation from current levels, with greater than 20%       Exhibit 36
upside looking out to the end of 2014 based on rolling           Strong growth with attractive valuation
forward pro forma NTM P/E multiples.
                                                                                                    2014 P/E                 3 Yr CAGR
                                                                 Illumina                              39.1x                     17.4%
Industry View: In Line view, given in line valuations (on a
                                                                 Sigma Ald                             19.0x                      5.2%
relative P/E basis) and mixed end-market dynamics –
                                                                 Qiagen                                18.7x                      7.0%
headwinds from academic funding pressure, most notably in
                                                                 Waters                                18.1x                      6.2%
the US and to a lesser extent in Europe, along with weaker
                                                                 PerkinElmer                           15.5x                     13.0%
industrial-related trends vs. several areas of strength
                                                                 Agilent                               15.2x                      2.8%
including China life sciences, applied markets such as
                                                                 Thermo PF                             12.9x                     19.7%
clinical and food testing.
                                                                 Source: Company Data, Thomson Reuters, Morgan Stanley Research estimates

Investment Thesis: We are attracted to Thermo’s business         Additional details on the LIFE transaction benefits:
model, consisting of mid-single-digit revenue growth, 50-
100bp of annual EBIT expansion & consistent share                Higher margin, more recurring mix of business:
buybacks generating 10-15% EPS growth. In addition,              The addition of LIFE’s higher mix of high margin
management execution has been strong, particularly during        consumables (80% of revenues) would further enhance
more recent challenging conditions.                              Thermo’s margins and recurring business mix.

Exhibit 35                                                       Exhibit 37
TMO’s attractive financial model (2007-2012 CAGR)                TMO/LIFE: Accretive to ’14 margins, recurring revs
 16%                                                              80%                                                                 73%
                                                      13.9%                                                                    70%
 14%                                                              70%

                                                                  60%
 12%
                                                                                      49%
                                                                  50%          45%
 10%
                                         8.3%                     40%
  8%
                                                                  30%                                         23%
  6%             5.5%                                                                                  20%
                                                                  20%
  4%
                                                                  10%
  2%                                                               0%
                                                                              Gross Margins         Operating Margins      Recurring Revenues
  0%
              Revenues             Operating Profit   EPS                             Thermo                        Thermo Pro Forma

Source: Company Data, Morgan Stanley Research                    Source: Company Data, Morgan Stanley Research estimates

The acquisition of Life Tech would represent a transformative    2) Scale aids revenue synergy capture:
transaction on several fronts, significantly enhancing           Thermo would further expand its scale advantage over life
Thermo’s competitive profile. We see the acquisition of LIFE:    science tools peers with the acquisition of LIFE, with a pro-




                                                                                                                                            15
HIGHLIGHTS OF 2013 GLOBAL HEALTH CARE CONFERENCE

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forma revenue base that is larger than the revenues of our                    Exhibit 39

entire tools coverage universe.                                               Sensitivity of EPS accretion to LIFE OpEx
                                                                              synergies…we see upside to $250m forecast
We see such scale (and diversity of products, geographies,                    (which is our base case)
channels) creating ample room to drive revenue synergies.                        OpEx Synergies
Guidance of $75M in year 3 revenue synergies from LIFE                              ($MM)                  % of LIFE's OpEx            EPS Accretion
equates to <2% of LIFE’s NTM revenues, which is low vs.                              $250.0                       17.4%                     22.4%
previous tools / med tech M&A transactions. Thus, we see                             $350.0                       24.3%                     23.7%
potential upside.                                                                    $450.0                       31.3%                     25.0%
                                                                                     $550.0                       38.2%                     26.3%
Looking back at the original Thermo Electron/Fisher merger,                   Source: Company Data, Morgan Stanley Research

5+ years post the merger, Thermo management claims today                      In total, our forecast EPS CAGR improves from 10% up to
to be reaping the rewards of scale/bundling/cross selling to                  17%+ during the next 4 years given the benefits of the LIFE
generate share gains with large pharma customers, as is                       transaction, benefits which we do not feel are captured at the
exhibited by the company’s strong pharma-related revenue                      current discounted P/E.
results.
                                                                              Exhibit 40
Exhibit 38
                                                                              LIFE 700bp+ accretive to TMO’s EPS CAGR
Thermo / Fisher scale and breadth drives revenue
                                                                               $12.00                                                               0.2
synergies…suggesting what may come with LIFE                                                                                                17.2%
                                                                                                                                $10.13              0.18
  9%                                                                           $10.00                                 $9.24
                  8.0%                                   8.0%                                                                                       0.16
  8%                                                                                                      $8.11               $7.85                 0.14
                                                                                $8.00         $7.09                $7.09
  7%                                                                                                  $6.36                                         0.12
                                                                                           $5.80                                         10.0%
  6%                                                                            $6.00                                                               0.1
  5%                                                                                                                                                0.08
  4%                                                                            $4.00
                                                                                                                                                    0.06
  3%                                                                                                                                                0.04
                                                                                $2.00
  2%                                                                   1.5%                                                                         0.02
  1%                                                                            $0.00                                                               0
  0%                                                                                         2014        2015        2016       2017       CAGR
 -1%                         -0.5%                                                             Thermo                             Thermo PF
                         2012                                   2013

        Thermo's Pharma Business                 Overall Pharma R&D Growth    Source: Company Data, Morgan Stanley Research




Source: Company Data, Morgan Stanley Research
Note: Blue bars reflect TMO’s revenue growth with key pharma customers

3) Cost synergy benefits
Cost synergies should be significant with this transaction, in
turn creating strong bottom line growth during the multi-year
integration phase. We see upside to management’s
guidance of $250MM in cost synergies. This level equates to
17% of LIFE’s NTM total OpEx, which is in line with the
median tools/med tech M&A transaction (whereas we see
this deal having more potential synergies as shown in the
sensitivity table below.




                                                                                                                                                        16
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Risk-Reward Snapshot: Thermo Fisher (TMO, $91.11, OW, PT $97)
Risk-Reward View: Leverage and Capital Deployment drive value                                                                                 Overweight Thesis
                                                                                                                                               LIFE transaction increases
    $120

                                                                                                  $110.00 (+21%)
                                                                                                                                                visibility towards multi-year
     100                                                                     $ 91.11                 $97.00 (+6%)                               double-digit EPS growth. LIFE
                                                                                                                                                synergies combined with Thermo’s
      80
                                                                                                                                                operational leverage, diversity and
                                                                                                     $70.00 (-23%)                              improving business mix provide
      60                                                                                                                                        superior EPS insulation. We see
                                                                                                                                                potential for upper teens % EPS
      40                                                                                                                                        CAGR with LIFE.
                                                                                                                                               With LIFE, see greater potential
      20                                                                                                                                        for return of capital: with $2.5bn of
                                                                                                                                                annual FCF pro forma, TMO
       0                                                                                                                                        management discussing potential for
       Sep-11             Mar-12        Sep-12              Mar-13           Sep-13         Mar-14                         Sep-14
                                                                                                                                                increased dividend yield, combined
           Price Target (Sep-14)              Historical Stock Performance             Current Stock Price
                                                                                                                                                with steady share buybacks. ROIC
                                                                                                             WARNINGDONOTEDIT_RRS4RL~TMO.N~




Source: Morgan Stanley Research estimates, Thomson Reuters
                                                                                                                                                while negatively impacted should
                                                                                                                                                start growing again and pro-forma
                                                                                                                                                still reaches nearly 12% by 2016.
 Price Target $97                   Our price target assumes a 13.6x multiple based upon our pro-
                                                                                                                                               EPS protected even with
                                    forma combined entity 2014 EPS forecast of $7.12. Our 13.6x
                                                                                                                                                Sequestration: Despite
                                    NTM multiple is consistent with prior PT multiple, which seems
                                    reasonable given transaction attributes of improving EPS growth                                             sequestration embedded in
                                    rate, margins and recurring business mix to offset dilutive short                                           management’s guidance, we still see
                                    term ROIC impact.                                                                                           over 10% EPS growth in ’13.

 Bull              15.0x Bull       LIFE synergies amplified by operating leverage: Our bull case                                             Value Drivers
 Case              Case 2014e       2014 EPS of $7.31 implies first year synergies of $179M, and
                                                                                                                                               Visibility towards LIFE closing and
 $110              EPS              EPS accretion of 26% as OpEx synergies exceed expectations
                                    and TMO is able to deliver on revenue synergies and growth
                                                                                                                                                increasing confidence in synergy and
                                    greater than expected 3%.                                                                                   growth targets (watch Ion Proton).
                                                                                                                                               Ongoing focus on productivity
 Base              13.6x Pro-       LIFE delivers: Our base case assumes TMO captures $86M in                                                   and additional cost cutting actions
 Case              forma 2014       first year synergies (in 2014), driving >22.7% EPS accretion in
                                                                                                                                                to drive significant bottom line
 $97               EPS              2014, which investors will increasingly focus upon as we get
                                                                                                                                                leverage.
                                    closer to year end ‘13.
                                                                                                                                               Continued build out of emerging
 Bear              10.0x Bear       Academic pressures and LIFE integration difficulties: Our                                                   markets business, where the
 Case              Case 2014e       bear case places Adj. EBIT growth at only 2% in 2014, as LIFE                                               company is currently undersized vs.
 $70               EPS              integration efforts falter, leading to slower ramp in OpEx synergies                                        peers. LIFE acquisition would help.
                                    than expected and EPS of $6.95.
                                                                                                                                              Risks to price target
                                                                                                                                               LIFE transaction mis-steps: failure to
                                                                                                                                                close on time; antitrust issues;
                                                                                                                                                shortfalls in key LIFE businesses
                                                                                                                                                during 2013 (watch Ion Proton).
                                                                                                                                               Worse than expected contraction in
                                                                                                                                                US / EU academic & government
                                                                                                                                                spending.
                                                                                                                                               Pharma spending slowdown.




                                                                                                                                                                                   17
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Specialty and Major Pharmaceuticals, US                         “Purest” of the large-cap plays on Global Generics. We
David Risinger                                                  estimate Mylan will generate revenues of $7B in 2013,
David.Risinger@morganstanley.com                                including $6B in generics and $1B in brands (primarily
+1 212 761-6494                                                 EpiPen for severe allergic reactions). While other large-cap
                                                                peers (e.g., Teva and Actavis) have diversified more
Top Pick: Mylan (MYL), $14B market cap
                                                                aggressively into branded pharmaceuticals, Mylan remains
                                                                primarily focused on generics, which we believe should play
Industry View: We have an in-line industry view on US
                                                                well to portfolio managers looking for generic drug exposure.
Specialty and Major Pharmaceuticals, but we anticipate
                                                                The company currently has 1,218 products in its pipeline, up
greater upside potential among Specialty Pharma stocks. In
                                                                dramatically from 125 in 2007. In the US, Mylan’s generics
Specialty, we believe select companies have fundamental
                                                                pipeline of 325 applications pending FDA approval (pro
positives that should drive strong revenue and earnings
                                                                forma for the Agila injectables acquisition) is meaningfully
growth. A key theme is strategic M&A, driven by new
                                                                above those of Actavis (190), Sandoz (172), and Teva (143).
products and geographies (e.g., Mylan-Agila generic
                                                                In EMEA, MYL is accelerating as it benefits from government
injectables) as well as cost savings and tax synergies (e.g.,
                                                                initiatives to drive generic uptake and as it wins share.
Actavis-Warner Chilcott, Valeant-Bausch & Lomb). In US
Major Pharmaceuticals, improving pipeline prospects are key     Exhibit 42
drivers of stock performance. Revenue and earnings growth       Mylan has executed and the outlook remains
should accelerate in the second half of the decade.             robust

Investment Thesis. We believe Mylan’s track record and                                                                    $5.37
robust growth outlook are underappreciated by investors.
Mylan is a leading global generics company that we believe
is poised to capture outsized growth on high-value US                                                 13% EPS CAGR
generics pipeline opportunities and increased generic
utilization in Europe and Asia. We project low double-digit
earnings CAGR through 2018, and we believe valuation is
                                                                                                              $2.89
attractive at 10x 2015e earnings.
                                                                                           $2.58
                                                                  13% EPS CAGR
Exhibit 41
2013e $7B revenue snapshot: We see Mylan as the
“purest” of the large-cap plays on Global Generics                     $1.40




                           U.S.
                         Specialty
                          $1.0B
                                                                       2007A              2012A               2013E       2018E*

                                                                *Management targets >$6.00/share in 2018E
                                                 North          Source: Company Data, Morgan Stanley Research estimates

                Asia-Pac                        America
                 $1.5B                           $3.0B          Management has delivered strong financial
                                                                performance. Management has met or exceeded all annual
                                                                and 3-year financial targets since 2008, and we believe the
                                                                company’s reputation for quality and reliability is unrivaled.
                                EMEA                            Specifically, we note 13% CAGR in earnings per share since
                                $1.5B                           2007.

                                                                We see a robust outlook. We project 13% EPS CAGR in
                                                                2013-2018. Management is more bullish, targeting 2018 EPS
Source: Company Data, Morgan Stanley Research                   of over $6.00 (vs. our $5.37). Although fewer blockbuster
                                                                pills are set to go generic in the future, we anticipate positive




                                                                                                                                   18
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offsets including injectable drug launches (from proposed                                  Finally, we believe that recent FDA draft guidance on Advair
acquisition of Agila) and stronger generic drug adoption in                                published on Sep. 9 lowers the barrier for generics. Mylan
Europe. In France (Mylan’s largest market in Europe),                                      targets filing its generic application with FDA in 1H:15 and
generic conversion is up 12% since the Pharma Convention                                   expects to launch in 2H:16 after the Advair device patents
in 2012.                                                                                   expire. We believe Mylan is the furthest along in developing
                                                                                           a generic Advair and, if successful, could enjoy limited
Pipeline enthusiasm should build. Key high-value, limited                                  competition for an extended period.
competition US generics opportunities are Lidoderm ($1.3B
brand pain patch), Copaxone ($3B brand multiple sclerosis                                  Bolt-on M&A and strategic partnerships should be
therapy), and Advair ($5B inhaled asthma device).                                          accretive. Mylan currently represents 12% of the generics
                                                                                           market and has room to consolidate. We also believe
We believe Mylan could launch generic Lidoderm in late                                     strategic partnerships in emerging generics markets could
March 2014 after Actavis’ 180-day exclusivity period expires.                              unlock value. For example, sales in Japan have accelerated
Mylan remains confident in FDA approval, and the company                                   since Mylan and Pfizer formed a joint venture in 2012 to
recently announced the completion of an 85,000 square foot                                 develop, manufacture, distribute and market generic drugs in
expansion project at its transdermal patch facility in St.                                 Japan. The collaboration leverages Mylan’s manufacturing
Albans, VT.                                                                                capabilities with Pfizer’s sales and marketing prowess.

Mylan is also bullish on launching generic Copaxone when                                   We believe valuation is attractive. Mylan offers higher
patents expire in May 2014. At the company’s August 1                                      growth and lower P/E than global major pharmaceutical
Investor Day, Mylan management said that FDA dialogue                                      companies. We project 13% EPS CAGR in 2013-2018 vs.
has accelerated since Copaxone’s September 2015 patents                                    +7% for top 12 global pharma companies. Mylan currently
were overturned on appeal, paving the way for generics                                     trades around 10x our 2015e EPS of $3.75 vs. global
earlier than previously anticipated.                                                       pharma at 15x. Valuation is even more attractive on out-
                                                                                           years; Mylan currently trades around 7x our 2018e EPS of
                                                                                           $5.37 vs. global pharma at 11x.

                                                                                           Exhibit 44
Exhibit 43                                                                                 …as well as a lower P/E
Mylan offers higher growth than large pharma…
                                                                                              16x                            15x
2013-2018E 5-year EPS CAGR

                     0%      2%      4%       6%       8%      10%      12%      14%
                                                                                              12x                                                                11x
                                                                                                               10x
             Mylan                                                              13%
                                                                                                8x                                                  7x



 Large Pharma*                                       7%                                         4x


*Simple numerical average of the top 12 global pharma companies by market cap, including
ABBV, BMY, JNJ, LLY, MRK, PFE, AZN, GSK, NOVO, NVS, ROG, and SNY                                0x
Source: Thomson Reuters, Morgan Stanley Research estimates
                                                                                                                    2015E                               2018E

                                                                                                                        Mylan           Large Pharma*
                                                                                           *Simple numerical average of the top 12 global pharma companies by market cap, including
                                                                                           ABBV, BMY, JNJ, LLY, MRK, PFE, AZN, GSK, NOVO, NVS, ROG, and SNY
                                                                                           Source: Thomson Reuters, Morgan Stanley Research estimates




                                                                                                                                                                               19
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Risk- Reward Snapshot: Mylan, Inc. (MYL), Overweight, PT $41
Long-term growth outlook encouraging                                                                                                          Investment Thesis
    $60                                                                                                                                        We view MYL as an attractive GARP
                                                                                                                                                (growth at a reasonable price) stock.
     50
                                                                                                                                               Core generics ex-US growth
                                                                                                     $48.00 (+26%)
                                                                                                                                                prospects have improved due to
                                                                             $ 38.24                 $41.00 (+7%)
                                                                                                                                                governments pushing for generic
     40
                                                                                                                                                adoption.
                                                                                                                                               Visibility on long-term drivers is
     30                                                                                              $30.00 (-22%)
                                                                                                                                                improving.

     20                                                                                                                                       Key Value Drivers
                                                                                                                                               Generics industry and MYL generic
     10                                                                                                                                         trends
                                                                                                                                               Major new product visibility (generic
      0
                                                                                                                                                versions of Copaxone, Lidoderm,
      Sep-11             Mar-12         Sep-12             Mar-13            Sep-13         Mar-14                        Sep-14                Seretide, and Advair).
           Price Target (Sep-14)              Historical Stock Performance             Current Stock Price   WARNINGDONOTEDIT_RRS4RL~MYL.O~
                                                                                                                                               EpiPen trends
Source: Thomson Reuters, Morgan Stanley Research estimates                                                                                     Bolt-on M&A to expand into new
                                                                                                                                                therapeutics categories in Global
 Price Target $41                   DCF-based; 8% WACC, 0.5% terminal growth after 2018E                                                        Generics and diversify the Specialty
 Bull              12x 2015E    Mgmt. far exceeds LT growth targets. Greater-than-expected                                                      segment beyond EpiPen
 Case              EPS of $4.00 pipeline success (we risk adjust Lidoderm, Copaxone, and
 $48                            Advair), bolt-on M&A, biosimilars, no EpiPen generics are key                                                 Potential Catalysts/ Launches
                                sources of upside not factored into our base case.                                                             Ex-US volume and pricing evolution
                                                                                                                                               EpiPen volume and pricing trends
 Base              11x 2015E    Growth at a reasonable price. 2013E P/E is 12x and 5-year
                                                                                                                                               Generic Copaxone FDA approval in
 Case              EPS of $3.75 EPS CAGR is 13% yielding PEG <1x. Mgmt. targets minimum
 $41                            2018E EPS of $6.00. If investors have confidence in $6.00 in                                                    May 2014
                                2017 and MYL trades at 10x, the stock could almost double over                                                 Generic Lidoderm FDA approval in
                                4 yrs.                                                                                                          March 2014
                                                                                                                                               Generic Advair filing in 1H:15
                                    Key Assumptions: 66% odds of generic Lidoderm in March 2014
                                    (our previous model assumed launch in early 2015); 50% odds of
                                    generic Copaxone in May 2014 (our previous model assumed                                                  Risks to Price Target
                                    33% odds of launch in Sep. 2015); AB-rated generic EpiPen in                                               Greater than expected generic
                                    June 2015 (no change vs. previous model); 66% odds of generic                                               pricing pressure
                                    Advair in 2H:16E (our previous model excluded Advair).
                                                                                                                                               New generic product approval delays
 Bear              10x 2014E    Major growth drivers fail and P/E contracts. Proposed Agila                                                    EpiPen revenue slowdown
 Case              EPS of $3.00 transaction is not consummated as planned and MYL fails to                                                     Pharmacist-substitutable generic
 $30                            launch generic versions of Copaxone and Lidoderm in 2014 and                                                    launch by Teva/Antares in 2015
                                Advair in 2016.                                                                                                Disappointing or dilutive strategic
                                                                                                                                                development
                                                                                                                                               FTC challenges to patent settlements
                                                                                                                                               Legal/litigation liabilities



Morgan Stanley is acting as financial advisor to Mylan Inc.                                      announced on 27 February 2013. Mylan has agreed to pay
("Mylan") in relation to the proposed acquisition of Agila                                       fees to Morgan Stanley for its financial services. Please refer
Specialties Private Limited from Strides Arcolab Limited, as                                     to the notes at the end of the report.




                                                                                                                                                                                   20
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                                                       Disclosure Section
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                          Coverage Universe    Investment Banking Clients (IBC)
                                         % of                   % of % of Rating
Stock Rating Category        Count       Total     Count Total IBC Category
Overweight/Buy                978        34%         400        38%         41%
Equal-weight/Hold            1280        44%         491        46%         38%
Not-Rated/Hold                114         4%          28         3%         25%
Underweight/Sell              510        18%         137        13%         27%
Total                       2,882                   1056




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Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual
circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan
Stanley received investment banking compensation in the last 12 months.
Analyst Stock Ratings
Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage
universe, on a risk-adjusted basis, over the next 12-18 months.
Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage
universe, on a risk-adjusted basis, over the next 12-18 months.
Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the
analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.
Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage
universe, on a risk-adjusted basis, over the next 12-18 months.
Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.
Analyst Industry Views
Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the
relevant broad market benchmark, as indicated below.
In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant
broad market benchmark, as indicated below.
Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant
broad market benchmark, as indicated below.
Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index;
Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index.
.
Stock Price, Price Target and Rating History (See Rating Definitions)




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