By: Jacob Allen; Nick Pascoe; Trevor Boren; Garrett Lachney; Joe Brendel.

Mid-Year Sector Review:Healthcare

By: Jacob Allen; Nick Pascoe; Trevor Boren;

Garrett Lachney; Joe Brendel

Companies that cater to the needs of people

through pharmaceuticals, hospitals, doctors’ offices, nursing homes, and other health-related facilities

Demand: demographics & advances in technology

Segments Drug manufacturers, biotechnology, medical

supplies/equipment

Overview

Professional Viewpoint: Slightly Bullish

Baby Boomer Population Life expectancy approaching 80 in the US

Political Viewpoint: Uncertain Affordable Care Act Politics in Healthcare

Current State of Sector

Bright Horizons & LipoScience IPO expected

this week Brean analyst Jon Aschoff downgraded Celsion

shares last Thursday – shares dropped 32% that day (ended with a 13% loss on the day)

Obama’s 2nd inaugural address and healthcare

Recent Headline News

Healthcare sector is usually described as

defensive Demand for health services and products are

essential and relatively constant across different economic expansions and contractions

Not affected by cyclical forces or monetary policy as much as others

Healthcare is, however, influenced by government regulation

Macroeconomics

Though the health care sector is very diverse in

terms of the industries within it, there are some key drivers that apply to nearly all of them.

Governmental Regulation: - Vast sums of money hinge on the acceptance of federal regulatory institutions.

- The patent industry. Ageing Population:

- This driver is very universal in its effects in the industry.- In general, any sharp increase in the population of

unhealthy people will result in the healthcare industry seeing more business.

Key Drivers

R&D:

- R&D easily reaches into the billions on an annual basis.- Inability to innovate and come out with new and successful products, many times is attributed to shortfalls in research and design.

The Economy: - Boils down to employment and government spending.

- When the un-employment levels are high, the level of uninsured Americans increases.

- When the economy starts to tumble government spending comes under increased scrutiny. Things like government subsidies for R&D, or grants for medical research are all at risk of being downsized.

Key Drivers

As with the key drivers, some valuation matrices are more applicable

to one industry than another within the healthcare sector. Though for the healthcare sector, there are some specific ratios that must be taken into consideration before actively investing.

P/E and Forward P/E:- Though some industries within this sector can have

slightly volatile earnings, the P/E ratio is still important to the more stable and mature companies in the sector. P/CF:

- Many of the companies in the healthcare sector are very large, and have large portfolios of assets. This can lead to P/E ratio not showing a clear enough picture. So the P/CF ratio can give a more accurate picture of the value that a firm can return to shareholders.

Relevant Valuation Matrices

PEG ratio:

- This ratio is good for companies with high growth prospects, such as startup Pharmaceutical firms. The PEG ratio takes into account the potential for high relative growth, and therefore the comparison of PEG ratios must be between companies with above average growth prospects. Debt/equity:

- Many companies in the sector, such as hospitals, have high amounts of debt. And due to various factors in the healthcare system, they are often left with a fair amount of uncollectible accounts. The ability to meet debt obligations is something that investors must examine thoroughly before taking a position in this sector.

Relevant Valuation Matrices

Healthcare Sector (XLV)

UnitedHealth Group Inc. (UNH) - 10/11/12 Cardinal Health Inc. (CAH) - 10/16/12 DaVita (DVA) - 10/18/12 Johnson & Johnson (JNJ) - 10/23/12 WellPoint Inc. (WLP) - 10/30/12 Pfizer Inc. (PFE) - 11/8/12 Baxter (BAX) - 11/15/12 Eli Lilly (LLY) - 11/29/12 Stryker Corporation (SYK) - 11/29/12

HC – Stock Recommendations

Date Presented: Oct. 11 Recommendation: No Vote: N/A Price Then: $57.66 Price Now: $55.74

United Health Group (UNH)

United Health Group

Date Presented: Oct. 16 Recommendation: Buy Vote: No Price Then: $42.05 Price Now: $44.61

Cardinal Health Inc. (CAH)

Cardinal Health Inc.

Date Presented: Oct. 18 Recommendation: Buy Vote: No Price Then: $109.87 Price Now: $114.68

DaVita (DVA)

DaVita

Date Presented: Oct. 18 Recommendation: No Vote: No Price: $71.86 Price Now: $72.70

Johnson & Johnson (JNJ)

Johnson & Johnson

Date Presented: Oct. 30 Recommendation: Buy Vote: Yes Price Then: $61.01 Price Now: $63.60 Earnings released today:

Profits surge, beat estimates

WellPoint Inc. (WLP)

WellPoint Inc.

Date Presented: Nov. 8 Recommendation: Yes Vote: No Price: $24.71 Price Now: $26.65

Pfizer (PFE)

Pfizer

Date Presented: Nov. 15 Recommendation: No Vote: No Price: $65.95 Price Now: $66.95

Baxter International (BAX)

Baxter International

Date Presented: Nov. 29 Recommendation: No Vote: N/A Price Then: $48.58 Price Now: $53.29

Eli Lilly (LLY)

Eli Lilly

Date Presented: Nov. 29 Recommendation: No Vote: N/A Price Then: $54.05 Price Now: $61.56

Stryker Corporation (SYK)

Stryker Corporation

The Health Care Sector (XLV) is very non-

cyclical. Defensive stock

Low beta: 0.66 Health is always a top priority

Not affected much during weakened economy

Cyclicality

Most of the Health Care sectors are non-

cyclical. The biotechnology industry is the most

cyclical. Due to being heavily tied in with technology

Industry Cyclicality

Reuters.com Finance.Yahoo.com http://www.rttnews.com/2041816/wellpoint-

q4-profit-surges-beats-view-sees-lower-fy13-earnings.aspx?type=corp

Sources