Healthcare 11-8-12

CLARITY IS CONFIDENCE HOLT

Table of Contents

2

Ticker Company NamePrice

12MPage

Equipment

BDX Becton Dickinson & Co

15.1 3

COV Covidien Plc

26.6 4

Providers & Services:

HSIC Schein (Henry) Inc

6.6 5

ESRX Express Scripts Holding Co

50.2 6

THC Tenet Healthcare Corp

2.6 7

HUM Humana Inc

12.2 8

Technology:

MDRX Allscripts Healthcare Soltns

2.3 9

Pharmaceut icals & Biotech:

MYGN Myriad Genetics Inc

2.2 10

ENDP Endo Health Solutions Inc

3.4 11

HSP Hospira Inc

5.0 12

PRGO Perrigo Co

10.8 13

SLXP Salix Pharmaceuticals Ltd

2.3 14

Li fe Sciences:

BIO Bio-Rad Laboratories Inc

2.9 15

CVD Covance Inc

2.7 16

CFROI®Mkt Cap

($B)

CFROI

Revision

CLARITY IS CONFIDENCE HOLT 3

BECTON DICKINSON & CO (BDX)

Priced for 8% sales growth with increasing margins

Price (USD): 75.67 (Nov 02, 2012)

Health Care Equipment

CFROI® levels have remained fairly stable since 2005 as margin expansion from SG&A leverage and lower raw

material costs offset slightly lower asset turns from slowing sales growth (due in part to FX headwinds). CFROI

levels increased slightly in 2011 with sales growth increasing from previous levels as volume increases (+4%)

offset continued price pressure (-1%).

Relying on consensus IBES estimates through 2013, thereafter BDX is priced for 8% long-term sales growth

and an increase in margins of 100 bps/yr from forecast CFROI levels in 2013. 20% upside is warranted if BDX

can increase operating margins 250bps/yr between 2014-2016 with 10% long-term sales growth. Equal

downside of 20% is warranted if long-term sales growth declines to 4% with flat margins.

BDX has among the highest exposure to int'l sales (55%) but BDX does not appear to have a natural FX hedge.

CLARITY IS CONFIDENCE HOLT 4

COVIDIEN PLC (COV)

Priced for 8% sales growth & improving margins

Price (USD): 55.45 (Nov 02, 2012)

Health Care Equipment

Since the spin-off from Tyco in 2007, COV's CFROI levels have remained relatively stable as increased margins

from a change in product mix (divested non-core assets such as the retail segment in 2008) have been offset by

declining asset efficiency from increased R&D investments and expanding cash balances. COV purchased EV3

acquisition in 2010.

Relying on IBES consensus estimates through 2013, thereafter COV is priced for 8% long-term sales growth, a

95 bps/yr increase in margins and return back to higher asset turns. To warrant 20% upside, long-term sales

growth must increase to 10% while margins expand by 220 bps/yr to 34% by 2016. Equal downside is

warranted if long-term sales growth totals 6% with flat asset turns and margins consistent with 2013 forecast

levels.

COV announced its intention to spin-off its pharma business which accounted for 19% of sales and 16% of

assets in 2011.

CLARITY IS CONFIDENCE HOLT 5

SCHEIN (HENRY) INC (HSIC)

Pricing in Improving CFROI Performance

Price (USD): 74.50 (Nov 02, 2012)

Health Care Distributors

HSIC's CFROI levels have trended higher as increasing sales growth has helped improve margins and asset

turns resulting in historically high CFROI levels. CFROI levels exceed the majority of its distribution peers as

performance has improved steadily over its history.

Relying on IBES consensus estimates through 2013, HSIC is priced for 7% sales growth and 35 bps/yr

increase in margins from 2014-2016. To warrant 20% upside, HSIC must achieve 9% sales growth and 70

bps/yr improvement in margins. To warrant similar downside, sales growth must decline to 3% with flat margins

consistent with 2013 forecast levels. Valuation for HSIC is highly dependent upon sales growth and

sustainability of CFROI levels (eCAP). HSIC is priced for 4% long-term sales growth if it can maintain

consistent CFROI levels over the next 10 years.

CLARITY IS CONFIDENCE HOLT 6

EXPRESS SCRIPTS INC- MEDCO HEALTH SOLUTIONS- PRO-FORMA (ESRX)

Priced for margin expansion and 7% sales growth

Price (USD): 62.02 (Nov 02, 2012) Health Care Services

For purposes of this pro-forma, the financial statements of ESRX and Medco were combined in 2011 and

forecasts are trending off of the combined operation. Co-payments are removed from sales and expenses,

resulting in a higher EBITDA margin. CFROI and asset growth rates have been variable over ESRX's history

due to aggressive acquisition activity. CFROI levels remain high reflecting the low asset intensity of a PBM

operation; however, its transaction CFROI performance fell below 10% in 2011 reflecting acquisition premiums.

Excess cash is removed from CFROI in 2011 consistent with ESRX's historic balances. Relying on IBES

estimates through 2013, thereafter it is priced for 25 bps/yr improvement in margins along with 7% sales growth

through 2022. 20% upside is warranted if sales growth increases to 9%. Similar downside is warranted if

margins remain at 2013 forecast levels.

CLARITY IS CONFIDENCE HOLT 7

TENET HEALTHCARE CORP (THC)

Priced for 4% sales growth and higher margins

Price (USD): 25.03 (Nov 02, 2012)

Health Care Facilities

THC has improved CFROI performance from earlier in the decade and has averaged approximately 6% since

2008. The company disposed of hospitals earlier in the decade and increased margins leading to improving

CFROI levels. However, at 5.5%, CFROI remains low relative to competitors as both margins and asset turns

trail peer medians.

Utilizing IBES consensus estimates through 2013; thereafter expectations embed 4% long-term sales growth

and margins increasing 25 bps/yr from 2014 to 2016. CFROI levels are close to its cost of capital; as a result,

valuation is more sensitive to CFROI changes than growth. 20% upside is warranted if THC can increase

margins 80bps/yr from 2014-2016. Alternatively, equal downside is warranted if post-2013 margins decline 20

bps/yr to 12.7% by 2016, returning back toward historical levels.

THC is highly levered with a credit rating below investment grade.

CLARITY IS CONFIDENCE HOLT 8

HUMANA INC (HUM)

Market implies slow growth and reduced margins

Price (USD): 75.21 (Nov 02, 2012)

Managed Health Care

After declining in 2008 due to a miscalculation in actuarial assumptions, both CFROI and margins recovered

back to 2007 levels of 14% and have remained stable as its benefit ratio has remained between 82-83%

compared to 85% in 2008.

Given a significant concentration of revenue from Medicare, HUM is exposed to changes in reimbursement but

may also be positioned to benefit from favorable demographic trends. Relying on IBES estimates through 2014,

current expectations imply 2% long-term sales growth and flat margins for 2015-2016. To warrant 20% upside,

HUM must increase margins 30 bps/yr to 6% with 5% long-term sales growth, implying HUM benefits from an

aging population. To warrant similar downside, margins must fall 90 bps/yr to 3.6% or CFROI levels of 6.7%

with 2% long-term sales growth, reflecting increased price pressure.

CLARITY IS CONFIDENCE HOLT 9

ALLSCRIPTS HEALTHCARE SOLTNS (MDRX)

Low expectations with considerable risk

Price (USD): 13.16 (Nov 02, 2012)

Health Care Technology

MDRX has increased size and capability within the competitive healthcare IT industry (through a series of

acquisitions including Eclipsys completed in August of 2010). CFROI levels increased in 2011 to 26.9%, as the

company changed its fiscal year end to December and incorporated the acquisition of Eclipsys.

Assuming consensus IBES estimates through 2013, the current price implies long-term 6% sales growth and

stable margins. Market expectations are low, implying considerable uncertainty in MDRX’s ability to effectively

integrate Eclipsys and its numerous acquisitions. 30% upside is warranted if sales growth accelerates to 9%

along with a rebound in margins to 20%. To warranted similar downside, 0% sales growth and margins falling

100 bps/yr to 13.2% is required.

Both CFROI revisions and price momentum are positive rebounding slightly from a significant drop post 2012

Q1 earnings Report and Chairman departure.

CLARITY IS CONFIDENCE HOLT 10

MYRIAD GENETICS INC (MYGN)

Priced for declining CFROI performance

Price (USD): 27.01 (Nov 02, 2012)

Biotechnology

Following the spin-off of Myriad Pharmaceuticals in 2009, MYGN focuses on oncology and women's health by

providing genetic tests to determine predisposition to developing disease. The change in CFROI levels and

operating drivers was due to the disposal of its development business. As a result, capitalized R&D has declined

to 16% of its investment from approximately 60% prior to the spin off. MYGN is focused on growth through

international expansion.

Relying on IBES consensus estimates through 2014, thereafter MYGN is priced for 3% long-term sales growth

and a 105 bps/yr decline in margins. 20% upside is warranted if MYGN achieves stable 8% sales growth with

only 50bps/yr of margin decline. Alternatively, equal downside is warranted if sales growth declines to 0% along

with a 400bps/yr reduction in margins from 2014-2016 to 26%.

Breast cancer diagnostic accounts for 82% of 2012 sales.

CLARITY IS CONFIDENCE HOLT 11

ENDO HEALTH SOLUTIONS INC (ENDP)

Priced for slowing growth and low CFROI levels

Price (USD): 29.23 (Nov 02, 2012)

Pharmaceuticals

ENDP's CFROI levels have trended downward over the last 7 years driven by a consistent decline in asset turns

related to declining plant and operating intangible intensity, while margins remained volatile. In 2011, CFROI

levels reversed trend and increased due to the lower asset intensity of American Medical Systems, which it

acquired in August, 2011 to grow its medical device segment.

Relying on IBES estimates through 2013, thereafter ENDP is priced for 2% long-term sales growth and a 355

bps/yr decrease in margins. 20% upside is warranted assuming margins only deteriorate 170 bps/yr from 2013

forecast levels. Similar downside of 20% is warranted if long-term sales growth drops to 0% with a continued

decline in asset turns to .46 x.

ENDP reached a settlement with WPI regarding Lidoderm drug with a generic launch, if approved by FDA,

scheduled for September 2013.

CLARITY IS CONFIDENCE HOLT 12

HOSPIRA INC (HSP)

Priced for continuing decline in CFROI levels

Price (USD): 30.45 (Nov 02, 2012)

Pharmaceuticals

Since the spin-off from ABT, margins improved while an increase in R&D investment contributed to lower asset

efficiency. Since the MYP acquisition in 2007, CFROI levels have trended higher driven by improved margins,

while asset turns have remained relatively stable. More recently, HSP has been adversely impacted by FDA

warnings about one of its facilities sighting inadequate manufacturing practices. Remediation efforts adversely

impacted 2011 margins and will suppress near term forecasts.

Assuming IBES consensus estimates through 2013, long-term expectations imply sales growth slowing to 1%

combined with a 70 bps/yr decline in margins from 2013 forecast levels. If margins rebound back to historical

levels of 20%, then 20% upside is warranted. Alternatively, if margins decline 300bps/yr from 2013 levels,

similar downside is warranted.

CLARITY IS CONFIDENCE HOLT 13

PERRIGO CO (PRGO)

Priced for record high CFROI levels

Price (USD): 115.00 (Nov 02, 2012)

Pharmaceuticals

PRGO's CFROI levels continue to increase as product launches and favorable product mix drives sales growth

and margins higher. Lower asset turns in 2012 offset some of the margin improvement as acquisitions and

higher working capital balances drove asset turns lower. The company continues to expand its position in the

OTC store-brand market with its private label business.

Using IBES consensus estimates through 2014, PRGO is priced for a continued acceleration in margins to

26.5% a return to historically high asset turns along with 12% long-term sales growth. If PRGO's long term

sales growth increases to 15% and margins improve at a rate of 120bps/yr to 27%, then 20% upside is

warranted. To warrant similar downside, sales growth must slow to 7% with 23.5% margins through 2017,

consistent with 2014 forecast levels.

CLARITY IS CONFIDENCE HOLT 14

SALIX PHARMACEUTICALS LTD (SLXP)

Priced for strong top-line growth

Price (USD): 38.99 (Nov 02, 2012)

Pharmaceuticals

SLXP's CFROI levels followed a typical early lifecycle path from 1998 to 2007 as the company achieved strong

sales growth and margin expansion due to the launch and progress of Colazal. However, Colazal lost patent

protection in 2008, causing the significant decline in CFROI levels and all operating drivers.

Label expansion and additional indications for Xifaxan is forecast to drive significant sales growth, margin

expansion and increased CFROI performance. Relying on IBES consensus estimates through 2013; thereafter

SLXP is priced for a long term decline in sales growth to 15% with 220bps/yr in margin improvement. To

warrant 25% upside, SLXP needs to achieve 20% long-term sales growth. Similar downside is warranted

assuming long-term sales growth slows to 8%.

Recent price performance has trailed the market as the FDA refused approval of its drug Relistor pending further

clinical data.

CLARITY IS CONFIDENCE HOLT 15

BIO-RAD LABORATORIES INC (BIO)

Priced for improving CFROI and growth

Price (USD): 102.04 (Nov 02, 2012)

Life Sciences Tools & Services

Following the DiaMed acquisition in 2007, CFROI levels have trended higher due to margin expansion as the

acquisition is integrated. However, asset turns have been trending lower as sale growth slows and BIO

continues to grow assets. Lower asset turns and higher tax rates contributed to a steep decline in CFROI in

2011.

Relying on IBES consensus estimates through 2013, the market is paying for long-term sales growth of 4% with

a return toward peak margins and asset turns. To warrant 20% upside, BIO must achieve 8% sales growth and

100bps/yr of margin improvement. Similar downside is warranted with 2% long-term sales growth and margins

falling 100bps/yr.

A potential risk is BIO's international exposure, US sales represent only 30% of total sales. Meanwhile, 55% of

PPE is included in the US, BIO does not appear to have a natural FX hedge.

CLARITY IS CONFIDENCE HOLT 16

COVANCE INC (CVD)

Priced for lower CFROI performance

Price (USD): 49.78 (Nov 02, 2012)

Life Sciences Tools & Services

Similar to peers, CVD's 2009 CFROI level declined due to economic conditions, pharma/biotech consolidation,

and lower R&D spending by pharma/biotech companies. Margins have continued to decline over the last 2 years

contributing to further reduction in CFROI performance, as reinvestment in the business has slowed.

Using IBES consensus estimates through 2013, thereafter CVD is priced for 4% sales growth and a 30 bps/yr

increase from 2013 forecasted margin levels. CVD is priced to remain at low CFROI levels relative to history.

To warrant 20% upside margins must improve 100bps/yr with 8% long-term sales growth. Similar downside is

warranted assuming 0% long-term sales growth and margins declining 100bps/yr to 11% long term.

CLARITY IS CONFIDENCE HOLT 17

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