Alexander Bishop Justin Gibbs Bethaditya Winarno Jie Zhang Healthcare Sector Recommendation
Jan 22, 2016
Alexander Bishop
Justin Gibbs
Bethaditya Winarno
Jie Zhang
Healthcare Sector Recommendation
AgendaHealthcare Sector
RecapRecommendationQ&A
Sector S&P 500 Weight SIM Weight +/-
Consumer Discretionary 9.83% 6.69% -3.14%Consumer Staples 11.58% 12.11% 0.53%Energy 11.14% 11.48% 0.33%Financials 16.00% 8.98% -7.01%Health Care 12.65% 13.99% 1.35%Industrials 10.28% 12.76% 2.48%Information Technology 18.77% 19.67% 0.90%Materials 3.42% 3.29% -0.12%Telecommunication Services 2.82% 3.48% 0.65%Utilities 3.51% 2.72% -0.79%Cash 0.00% 4.63% 4.63%Dividend Receivables 0.00% 0.20% 0.20%
Health Care Recap
SIM Holdings
Security Ticker %age Assets Eq shares outAmgen Inc. AMGN 2.50% 995.000
CareFusion Corp. CFN 0.84% 221.645
Gilead Sciences Inc. GILD 3.22% 899.925
Johnson & Johnson Co. JNJ 3.68% 2,759.100
Teva Pharmaceutical Industries Ltd. TEVA 3.75% 923.960
Buy 72 bp of GileadBuy 100 bp of TevaSell 84 bp of Care FusionReduce 50 bp of Amgen
Recommendation
Gilead SciencesFounded in 1987Biopharmaceutical company that discovers,
develops and commercializes therapeuticsSpecializes in HIV/AIDS therapies and
Hepatitis B therapiesDerives the majority of revenues through
product sales
Gilead AdvantagesHIV Franchise
Atripla and Truvada account for nearly 70% of patients on HIV therapy
Patients on antiretroviral therapy has grown by 4% on an annual moving total basis
Truvada and Atripla sales have increased 30%Gilead captures 85% treatment naïve patients
Hepatitis B FranchineCV TherapeuticsCayston approval
Gilead- AdvantagesGovernment Action
Veterans AdministrationMedicareCaliforniaRyan White Healthcare ActUS Dept. of Health and Human ServicesNon-retail sales
Gilead- AdvantagesPatent Expiration
Product US Patent Expiration European Patent Expiration Vistide 2010 2012 Hepsera 2014 2011 Letairis 2015 2015
AmBisome 2016 2008 Tamiflu 2016 2016
Macugen 2017 2017 Viread 2017 2018 Ranexa 2019 2019
Lexiscan 2019 2020 Emtriva 2021 2016 Truvada 2021 2018 Atripla 2021 2018
Cayston 2021 2021
Gilead- AdvantagesPipeline
Ambrisentan- Phase 3
Potential Indication: Idiopathic Pulmonary Fibrosis
Truvada/TMC 278 Fixed-dose Regimen- Phase 3
Potential Indication: HIV/AIDS
Elvitegravir- Phase 3
Potential Indication: HIV/AIDS
Integrase Fixed-dose Regimen "Quad" – Phase 2
Potential Indication: HIV/AIDS
Gilead- RisksTruvada and Atripla account for 70% total
revenuesRoyalty revenue and TamifluPipelineFX ExchangeHealthcare reform and reimbursementsCompetition
Gilead- Revenue Growth31% between 08 and 09, topped $7 billion
Gilead- Valuation AnalysisRelative to S&P 500 High Low Median Current
P/Trailing E 13.9 .86 2.0 .89
P/Forward E 5.8 .82 1.7 .90
P/B 7.9 1.6 4.4 3.6
P/S 34.1 5.1 9.3 5.1
P/CF 12.7 1.3 3.2 1.4
Relative to Industry High Low Median Current
P/Trailing E 7.4 1.0 1.3 1.0
P/Forward E 3.4 .97 1.3 .97
P/B 5.2 .3 2.4 2.2
P/S 3.4 .7 1.9 1.3
P/CF 5.2 1.2 1.9 1.2
Gilead- Valuation AnalysisAbsolute
ValuationHigh Low Median Current Target
MultipleTargetValue/share
Your Target Price
(F x G)
A. B. C. D. E. F. G. H.
P/Forward E 94.4 13.2 26.7 13/2 18 3.91 70.38
P/S 71.3 6.1 13.9 6.1 9 7.76 69.84
P/B 23.6 6.8 12.4 7.6 11 6.26 68.86
P/EBITDA 131.04 10.37 23.6 11.15 16 4.25 68
P/CF 135.5 14.6 33.4 14.6 21 3.26 68.46
Current Price: $47.10
Target Price: $69.11
Implied Upside: 46%
DCF Target Price: $68.36
DCF Upside: 45%
Weighted Average Upside: $68.74, 45.5%
Gilead- DCFGilead Sciences
Analyst: Alex Bishop Terminal Discount Rate = 10.5%3/7/2010 Terminal FCF Growth = 5.0%(000s)Year 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E
Revenue 7,011,383 7,723,307 8,721,962 9,506,939 10,267,494 10,986,219 11,755,254 12,460,569 % Grow th 10.2% 12.9% 9.0% 8.0% 7.0% 7.0% 6.0%
Operating Income 3,501,956 3,795,797 4,653,099 5,228,816 5,647,122 6,042,420 6,465,390 6,853,313 Operating Margin 49.9% 49.1% 53.3% 55.0% 55.0% 55.0% 55.0% 55.0%
Interest Income 42,397 92,680 95,942 104,576 112,942 120,848 129,308 137,066 Interest % of Sales 0.6% 1.2% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1%
Taxes 876,364 1,062,823 1,302,868 1,281,060 1,438,887 1,539,609 1,647,381 1,746,224 Tax Rate 28.0% 28.0% 28.0% 25.0% 26.0% 26.0% 26.0% 26.0%
25% based on 1/26/10 guidance
Net Income 2,625,592 2,732,974 3,350,231 3,843,180 4,095,293 4,381,963 4,688,701 4,970,023 % Grow th 4.1% 22.6% 14.7% 6.6% 7.0% 7.0% 6.0%
Add Depreciation/Amort 117,145 135,158 152,634 190,139 205,350 219,724 235,105 249,211 % of Sales 1.7% 1.8% 1.8% 2.0% 2.0% 2.0% 2.0% 2.0%
Plus/(minus) Changes WC (280,696) (300,066) (249,664) (294,715) (318,292) (340,573) (364,413) (386,278) % of Sales -4.0% -3.9% -2.9% -3.1% -3.1% -3.1% -3.1% -3.1%
Subtract Cap Ex (230,057) (193,083) (218,049) 237,673 256,687 274,655 293,881 311,514 Capex % of sales 3.3% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%
Free Cash Flow 2,692,098 2,761,148 3,471,251 3,500,930 3,725,663 3,986,459 4,265,511 4,521,442 % Grow th 2.6% 25.7% 0.9% 6.4% 7.0% 7.0% 6.0%
NPV of Cash Flows 23,691,545 38%NPV of terminal value 38,038,669 62%Projected Equity Value 61,730,214 100%Free Cash Flow Yield 6.33%
Current P/E 16.2 15.6 12.7 Projected P/E 23.5 22.6 18.4 Current EV/EBITDA 11.7 10.8 8.8 Projected EV/EBITDA 17.0 15.7 12.8
Shares Outstanding 903,038
Current Price 47.10$ Implied equity value/share 68.36$ Upside/(Downside) to DCF 45.1%
Debt 1,161,030 Cash 1,272,958 Cash/share 1.41
Gilead- Sensitivity Matrix
Terminal FCF Growth (%) 47.10 3.5 4 4.5 5 5.5 6
10 63.63 66.89 70.73 75.35 81 88.05 10.2 61.64 64.64 68.18 72.39 77.5 83.83 10.4 59.76 62.54 65.81 69.65 74.3 80 10.5 58.86 61.54 64.66 68.36 72.79 78.21 10.6 57.99 60.57 63.57 67.11 71.34 76.5 10.8 56.31 58.71 61.49 64.74 68.61 73.29 11 54.73 56.96 59.53 62.53 66.08 70.34
Term
inal
Dis
coun
t Rat
e (%
)
12 47.94 49.53 51.33 53.39 55.76 58.53
Gilead- Performance YTD
Gilead- Performance 1yr
Gilead- Performance 3yr
Gilead- Performance 10yr
Lines of businessAPI- Active Pharmaceutical Ingredients.
Vertical integrationHigher operating marginsCore competency
operating marginsTeva 24.23%
MRK 17.70%
MYL 16.32%
NVS 22.80%
RDY 18.42%
Generic drugs75% of salesMust be bioequivalent of their predecessors.Can’t be marketed until patents are expired
or proven illegitimate.
Branded drugsIncreased investment, expected output to be
doubled between 2007 and 2012Risky
Macro drivers in Teva’s favorAging of the population
Increasing health concerns
Increased government spending leads to cost cutting efforts=generic drugs have an advantage
Teva
Analyst: Justin Gibbs Terminal Discount Rate = 13.0%
1/24/2010 Terminal FCF Growth = 3.0%
Millions
Year 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenue 16,860 19,727 22,291 24,966 26,838 28,583 29,440 30,324 31,233 32,170 33,135
% Grow th 17.0% 13.0% 12.0% 7.5% 6.5% 3.0% 3.0% 3.0% 3.0% 3.0%
Operating Income 4,552 5,326 6,019 6,741 7,246 7,717 7,949 8,187 8,433 8,686 8,947
Operating Margin 27.0% 27.0% 27.0% 27.0% 27.0% 27.0% 27.0% 27.0% 27.0% 27.0% 27.0%
Financial exp. Net 169 197 223 250 268 286 294 303 312 322 331
Interest % of Sales 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%
Taxes 1,082 1,266 1,431 1,603 1,723 1,835 1,890 1,947 2,005 2,065 2,127
Tax Rate 24.7% 24.7% 24.7% 24.7% 24.7% 24.7% 24.7% 24.7% 24.7% 24.7% 24.7%
Net Income 3,306 3,869 4,365 4,889 5,255 5,597 5,765 5,938 6,116 6,299 6,488
% Grow th 17.0% 12.8% 12.0% 7.5% 6.5% 3.0% 3.0% 3.0% 3.0% 3.0%
Add Depreciation/Amort 515 593 669 749 805 857 883 910 937 965 994
% of Sales 3.1% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Plus/(minus) Changes WC 4,469 2,356 3,344 3,745 4,026 4,287 4,416 4,549 4,685 4,826 4,970
% of Sales 26.5% 11.9% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0%
Subtract Cap Ex 820 906 1,115 1,248 1,342 1,429 883 910 937 965 994
Capex % of sales 4.9% 4.6% 5.0% 5.0% 5.0% 5.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Free Cash Flow 7,471 5,911 7,263 8,134 8,744 9,313 10,181 10,486 10,801 11,125 11,458
% Grow th -20.9% 22.9% 12.0% 7.5% 6.5% 9.3% 3.0% 3.0% 3.0% 3.0%
NPV of Cash Flows 47,462 58%
NPV of terminal value 34,768 42% Terminal Value 118,022
Projected Equity Value 82,231 100%
Free Cash Flow Yield 16.07% Free Cash Yield 9.71%
Current P/E 14.1 12.0 10.6 Terminal P/E 18.2
Projected P/E 24.9 21.3 18.8
Current EV/EBITDA 11.6 9.9 8.8 Terminal EV/EBITDA 13.1
Projected EV/EBITDA 18.7 16.0 14.2
Shares Outstanding 820 14.0% 13.0% 12.0% 11.0% 10.0%
1.0% 49% 63% 80% 100% 124%
Current Price 56.68$ 2.0% 54% 70% 88% 110% 139%
Implied equity value/share 100.28$ 3.0% 60% 77% 98% 124% 157%
Upside/(Downside) to DCF 76.9% 4.0% 67% 86% 110% 141% 182%
5.0% 75% 97% 126% 164% 217%
Debt 13,994
Cash 1,598
Cash/share 1.95
Sensitivity
•Global medical technology company providing healthcare products and services
• Offer products in areas of intravenous, infusion, medication and supply dispensing, respiratory care, infection prevision, and surgical instruments. •2 main lines of business:
Critical Care Technologies Medical Technologies and Services
Company Overview (CFN)
CFN Status Quo
Market Cap: 5.75 BSIM Weight: 0.84%Current Price: $29.7Target Price: $27.8Upside:6.81%
Market Performance (6 months)
Terminal Discount Rate = 9.85%Terminal FCF Growth = 5.10%
Year FY 2010 E FY 2011 E FY 2012 E FY 2013 E FY 2014 E FY 2015 E FY 2016 E FY 2017 E FY 2018 E FY 2019 E FY 2020
Revenue 4,162.52 4,209.80 4,368.80 4,539.19 4,720.76 4,914.31 5,125.62 5,346.02 5,570.56 5,793.38 6,025.11 % Growth 1.14% 3.78% 3.90% 4.00% 4.10% 4.30% 4.30% 4.20% 4.00% 4.00%
Operating Income 424.77 453.71 517.08 522.01 542.89 565.15 589.45 614.79 640.61 666.24 692.89 Operating Margin 10.20% 10.78% 11.84% 11.50% 11.50% 11.50% 11.50% 11.50% 11.50% 11.50% 11.50%
Interest and Other -45.79 -46.31 -48.06 -56.74 -59.01 -61.43 -64.07 -66.83 -69.63 -72.42 -75.31 % of Sales -1.10% -1.10% -1.10% -1.25% -1.25% -1.25% -1.25% -1.25% -1.25% -1.25% -1.25%
Taxes 135.05 142.51 159.93 166.68 173.35 180.45 188.21 196.31 204.55 212.73 221.24 Tax Rate 28.70% 28.50% 28.30% 28.80% 28.80% 28.80% 28.80% 28.80% 28.80% 28.80% 28.80%
Net Income 335.50 357.51 405.20 412.07 428.55 446.12 465.30 485.31 505.70 525.92 546.96 % Growth 6.56% 13.34% 1.69% 4.00% 4.10% 4.30% 4.30% 4.20% 4.00% 4.00%
Add Depreciation/Amort 200.00 193.65 192.23 195.19 193.55 201.49 205.02 208.49 211.68 214.35 216.90 % of Sales 4.80% 4.60% 4.40% 4.30% 4.10% 4.10% 4.00% 3.90% 3.80% 3.70% 3.60%Plus/(minus) Changes WC 74.38 -18.49 -69.14 -83.97 -87.33 -90.91 -94.82 -98.90 -103.06 -107.18 -111.46 % of Sales 1.79% -0.44% -1.58% -1.85% -1.85% -1.85% -1.85% -1.85% -1.85% -1.85% -1.85%Subtract Cap Ex 158.18 143.13 161.65 172.49 174.67 181.83 184.52 187.11 189.40 191.18 198.83 Capex % of sales 3.80% 3.40% 3.70% 3.80% 3.70% 3.70% 3.60% 3.50% 3.40% 3.30% 3.30%
Free Cash Flow 451.71 389.54 366.65 350.79 360.10 374.86 390.98 407.79 424.92 441.92 453.57 % Grow th -13.76% -5.88% -4.33% 2.65% 4.10% 4.30% 4.30% 4.20% 4.00% 2.64%
NPV of Cash Flows 2,405.94 38.02%NPV of terminal value 3,922.41 61.98% 10,035.84Projected Equity Value 6,328.35 100.00%Free Cash Flow Yield 4.52%
Current P/E 17.66 16.57 14.62 18.35 Projected P/E 18.86 17.70 15.62Current EV/EBITDA 10.43 10.07 9.19 11.68 Projected EV/EBITDA 11.08 10.69 9.76
Shares Outstanding 213.12
Current Price $27.80Implied equity value/share $29.69Upside/(Downside) to DCF 6.81%
Debt 1,390.00Cash 797.00 Cash/share 3.74
Terminal EV/EBITDA
Carefusion(CFN)
Terminal Value =
Free Cash Yield =
Terminal P/E =
Valuation
Absolute Valuation
High Low Median Current #Your Target Multiple
*Your Target E, S, B, etc/Share
Your Target Price (F x G)
A. B. C. D. E. F. G. H.
P/Forward E 15.3 12.6 14.4 15.2 15.57 1.57 24.49
P/S 18.6 16.3 17.6 17.6 1.58 16.28 25.72
P/B 1.2 0.8 1.1 1.2 1.23 20.94 25.75
P/EBITDA 1.5 0.0 1.1 1.5 9.06 3.29 29.8
P/CF 1.0 0.6 0.7 1.0 7.9 3.81 30.06
Target Price = $ 28.16
Relative to Industry High Low Median Current
P/Trailing E 0.97 0.82 0.92 0.94
P/Forward E 1.4 1.1 1.2 1.2
P/B 0.4 0.3 0.4 0.4
P/S 0.6 0.0 0.4 0.6
P/CF 0.8 0.1 0.1 0.8
Leverage:Demographic factorsTechnology leadership and innovationFavorable valuation
Risks:Inability to enhance existing products or
introduce new productsSubject to complex and costly regulation2nd Quarter earnings drop & below expectationUncertainty after the spinoff from Cardinal HealthSignificant amount of indebtedness
Decrease Amgen Inc. (AMGN) by 50 bpsCurrent Weight: 250 bps Price: $57.24 12 Month Target Price: $77Open: $56.75 % Change: 35%High: $57.26 52 Week High: $64.76Low: $56.21 52 Week Low: $44.96Market Capitalization: $56.88B Yield: N/AShares Outstanding: 995M Average Daily Volume: 6.3M
• Prolia (Osteoporosis drug) likely to be approved by FDA• Decrease weight to avoid loss due to failure to secure Prolia, maintain
significant weight to maintain exposure to future revenue growth• No near future patent expiration• Favorable tax incentives due to increased profits and operations in
international locations (Puerto Rico) tax rate dropped to 11.5% from 20%
• Advancing pipeline, long term potential growth, wide variety of drugs in various phases in the pipeline
Questions?