Student Investment Management Healthcare Sector Overview
S
t
u
d
e
n
t
I
n
v
e
s
t
m
e
n
t
M
a
n
a
g
e
m
e
n
t
–
H
e
a
l
t
h
c
a
r
e
S
e
c
t
o
r
F
i
n
a
l
P
r
e
s
e
n
t
a
t
i
o
n
S T U D E N T I N V E S T M E N T M A N A G E M E N T - H E A L T H C A R E
12/29/2016
Zach Janszen
Andrew Jasen
John Laliberte
Agenda
HCA Holdings
5
McKesson
8
Gilead Sciences
Industry Overview & Current Performance
2
11
Investment Conclusion
17
S T U D E N T I N V E S T M E N T M A N A G E M E N T - P R E S E N T A T I 0 N O U T L I N E
1
Appendix
18
Medtronic
14
Industry Overview and Update
2
S T U D E N T I N V E S T M E N T M A N A G E M E N T - I N D U S T R Y O V E R V I E W
•
3
rd
largest sector in the S&P
•
$1.7Tn revenues annually
•
Over 13mm employees in the US
•
11.4% of SIM portfolio as of 11/22/2016
•
14% of S&P as of 11/22/2016
•
Healthcare verticals:
•
Pharmaceuticals
•
Biotechnology
•
Supplies & Equipment
•
Providers & Services
•
Life Sciences
•
Technology
Sources: Kaiser Family Foundation; Bloomberg;
Industry Overview and Update
3
S T U D E N T I N V E S T M E N T M A N A G E M E N T - I N D U S T R Y O V E R V I E W
Favorable Demographics
SIM Portfolio Healthcare Exposure
4
S T U D E N T I N V E S T M E N T M A N A G E M E N T - C U R R E N T P O R T F O L I O
HCA Overview
5
S T U D E N T I N V E S T M E N T M A N A G E M E N T - H C A
•
The Hospital Corporation of America is a holdings company whose affiliates own and operate
hospitals and related healthcare entities
•
Headquartered in Nashville, Tennessee, HCA operates in 20 states in the United States and in
England
•
Uncertainty regarding healthcare reform
•
Volatility of uninsured patients
•
Intense competition
•
Defensive company
•
Strong demographics
•
Strong performance relative to S&P and
Healthcare Sector
HCA Valuation
S T U D E N T I N V E S T M E N T M A N A G E M E N T - H C A
6
HCA Recommendation
•
We are issuing a HOLD rating on HCA Holdings
•
Positive DCF valuation shows an 18.3% upside
•
Defensive company in the current business cycle shows positive valuation
•
Uncertainty of healthcare future, specifically the ACA, has huge risks when analyzing the possible rise
of uninsured patients
•
Hold with a SIM weight of 4.77%
H
O
L
D
7
McKesson Overview
8
S T U D E N T I N V E S T M E N T M A N A G E M E N T - M C K
•
Distribution solutions distributes drugs, surgical supplies, and a wide variety of other medical equipment to pharmacies,
hospitals, and other medical businesses.
•
Technology solutions offers information systems services to healthcare providers to organize and securely exchange information
between consumers, providers, payers, regulators, and other interested parties
•
P/E: 16.94
•
Market Cap: $31.95 Billion
•
Revenue: $194.27 Billion
•
EBITDA: $4.33 Billion
•
P/B: 3.38
•
Operating Margin: 1.79%
•
Dividend Yield: .78%
•
Beta: .94
•
52 Week High: $202.20
•
52 Week Low: $114.53
•
Current Price: $141.33
•
MCK -25.54% 1 Year
•
S&P Healthcare Sector -3.66%
McKesson Valuation
9
S T U D E N T I N V E S T M E N T M A N A G E M E N T - M C K
•
Conservative DCF assumptions still suggest upside of 13.7%
McKesson Recommendation
1
0
S T U D E N T I N V E S T M E N T M A N A G E M E N T - M C K
•
B
U
Y
•
Strong demographic trends spurring demand
•
Defensive industry
•
International growth
•
Technology solutions growing rapidly
•
Favorable valuation
•
Strong YoY revenue growth
•
Very conservative DCF 14% upside
•
Political and regulatory uncertainty
•
Obamacare implementation
•
Price competition squeezing margins
Gilead Overview
O
p
e
r
a
t
i
o
n
s
&
I
n
d
i
c
a
t
i
o
n
M
a
r
k
e
t
K
e
y
O
p
e
r
a
t
i
n
g
a
n
d
F
i
n
a
n
c
i
a
l
M
e
t
r
i
c
s
R
e
c
e
n
t
N
e
w
s
/
Q
3
U
p
d
a
t
e
•
Research-based biopharmaceutical company that discovers,
develops and commercializes innovative medicines in areas of
unmet medical need
•
Indications and major products
•
H
I
V
/
A
I
D
S
:
A
t
r
i
p
l
a
,
S
t
r
i
b
i
l
d
,
O
d
e
f
s
e
y
,
C
o
m
p
l
e
r
a
•
L
i
v
e
r
D
i
s
e
a
s
e
s
:
H
a
r
v
o
n
i
,
S
o
v
a
l
d
i
•
H
e
m
a
t
o
l
o
g
y
/
O
n
c
o
l
o
g
y
:
Z
y
d
e
l
i
g
•
C
a
r
d
i
o
v
a
s
c
u
l
a
r
:
L
e
t
a
i
r
i
s
•
I
n
f
l
a
m
m
a
t
i
o
n
/
R
e
s
p
i
r
a
t
o
r
y
:
T
a
m
i
f
l
u
•
O
t
h
e
r
:
A
m
B
i
s
o
m
e
1
1
S T U D E N T I N V E S T M E N T M A N A G E M E N T - G I L D
Sources: Gilead.com; Bloomberg
•
Increasing number of healthy HCV patients entering the
treatment pool, but neglecting full drug prescriptions until they
become sicker
•
The “patient journey” is becoming longer
•
Conservative M&A outlook
•
Confidence surrounding HIV portfolio and outlook
•
Optimistic payor discussions and contracts for 2017
•
NASH and PSC drug discontinued
•
New NASH drug entered into Phase III trials
R
i
s
k
s
•
HIV generics entrance in 2018
•
Slowing HCV product revenue and lack of visibility beyond HCV
•
Pricing pressure in the EU
•
Meaningful progress and development in HBV and NASH will
need to have significant upside
•
Payor dynamic uncertainty
C
a
t
a
l
y
s
t
s
•
HCV upside levers – visibility beyond 2017 will be extremely
favored by investors
•
Positive pipeline developments surrounding NASH and NPB and
continued innovation in HCV and HIV
•
TAF-based regiments for HIV
•
Increasing global access
Gilead Valuation
1
2
S T U D E N T I N V E S T M E N T M A N A G E M E N T - G I L D
Sources: SIM projections
Gilead Portfolio Recommendation
I
n
v
e
s
t
m
e
n
t
C
o
n
c
l
u
s
i
o
n
1
3
S T U D E N T I N V E S T M E N T M A N A G E M E N T - G I L D
Sources: Bloomberg
I
n
v
e
s
t
m
e
n
t
r
e
c
o
m
m
e
n
d
a
t
i
o
n
:
H
O
L
D
•
The market has unfairly punished Gilead for lack of HCV visibility
•
Continual innovation and expansion beyond HCV and HIV, significant near term cash generation, aggressive capital return programs
for shareholders, and large M&A potential leaves long-term value opportunity in Gilead
•
Gilead is fundamentally undervalued
•
V
e
r
y
c
o
n
s
e
r
v
a
t
i
v
e
g
r
o
w
t
h
a
n
d
o
p
e
r
a
t
i
n
g
a
s
s
u
m
p
t
i
o
n
s
i
m
p
l
y
a
2
2
%
u
p
s
i
d
e
a
t
a
p
r
i
c
e
t
a
r
g
e
t
o
f
$
9
2
G
I
L
D
e
q
u
i
t
y
p
e
r
f
o
r
m
a
n
c
e
Y
T
D
(30.1%)
6.7x
9.8x
Medtronic Overview
O
p
e
r
a
t
i
o
n
s
&
I
n
d
i
c
a
t
i
o
n
M
a
r
k
e
t
K
e
y
O
p
e
r
a
t
i
n
g
a
n
d
F
i
n
a
n
c
i
a
l
M
e
t
r
i
c
s
R
e
c
e
n
t
N
e
w
s
/
Q
3
U
p
d
a
t
e
•
One of the largest medical device companies
•
Focuses on the manufacture and development of therapeutic
medical devices with a focus on chronic diseases.
•
Major areas of focus:
•
D
i
a
b
e
t
e
s
•
H
e
a
r
t
D
i
s
e
a
s
e
•
L
u
n
g
C
o
n
d
i
t
i
o
n
s
•
G
a
s
t
r
o
i
n
t
e
s
t
i
n
a
l
•
S
p
i
n
a
l
1
4
S T U D E N T I N V E S T M E N T M A N A G E M E N T - G I L D
•
Price beaten down on weak revenue from diabetes and
cardiovascular therapies – only 3% growth
•
Purchased Covidien mid-year, further diversifying their product
line
•
Expanding their presence in the Chinese hospital market by
purchasing Chinese companies
R
i
s
k
s
•
Drug pricing scrutiny
•
Realizing efficiencies on Covidien acquisition
•
Margins have dropped slightly since acquiring Covidien
•
Obamacare/Medicare cuts
C
a
t
a
l
y
s
t
s
•
Diversified across product lines and geography
•
High barriers to entry
•
Strong, defensible intellectual property
•
Focus on chronic illnesses provides long term cash flows
•
Relationships with surgeons and hospitals make switching
providers difficult
•
Recent drop in price could signal buying opportunity
•
P/E: 29.4x
•
Market Cap: $102.25 Billion
•
Revenue: $28.73 Billion
•
EBITDA: $8.76 Billion
•
Operating Margin: 20.54%
•
Dividend Yield: 2.28%
•
Beta: 0.93
•
52 Week High: $89.27
•
52 Week Low: $71.03
•
Current Price: $73.99
Medtronic Valuation
1
5
S T U D E N T I N V E S T M E N T M A N A G E M E N T - M D T
•
Discount Rate: 8.5%
•
Terminal FCF Growth Rate: 4.25%
Sources: Morningstar, Investor Relations
•
R
e
c
o
m
m
e
n
d
a
t
i
o
n
:
B
U
Y
•
Revenue Growth: Unmatched pipeline and attractive, diversified markets lead to consistent, sustainable mid-single digit
constant currency revenue growth.
•
Margin Expansion: Utilizing systems and structure at scale across the enterprise to drive margin expansion.
•
Free Cash Flow: Strong revenue growth and high profitability generates significant and increasingly accessible free
cash flow.
•
Total Shareholder Return: Overall performance results in low-double digit to mid-teens total shareholder return.
1
6
Medtronic Valuation
S T U D E N T I N V E S T M E N T M A N A G E M E N T - M D T
SIM Portfolio Recommendation and Conclusion
1
7
S T U D E N T I N V E S T M E N T M A N A G E M E N T - G I L D
S T U D E N T I N V E S T M E N T M A N A G E M E N T - P R E S E N T A T I 0 N O U T L I N E
1
8
A
p
p
e
n
d
i
x
HCA Projected Income Statement
1
9
S T U D E N T I N V E S T M E N T M A N A G E M E N T - G I L E A D
Gilead Projected Income Statement
2
0
S T U D E N T I N V E S T M E N T M A N A G E M E N T - G I L E A D
McKesson Projected Income Statement
2
1
S T U D E N T I N V E S T M E N T M A N A G E M E N T - G I L E A D
This presentation covers the student investment management final presentation on the healthcare sector, including industry overview, current performance, investment thesis, portfolio holdings, and analysis of key companies like HCA Holdings, McKesson, and Gilead Sciences.
Download Presentation
Please find below an Image/Link to download the presentation.
The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author. Download presentation by click this link. If you encounter any issues during the download, it is possible that the publisher has removed the file from their server.
E N D
Presentation Transcript
Student Investment Management Healthcare Sector Final Presentation S T U D E N T I N V E S T M E N T M A N A G E M E N T - H E A L T H C A R E 12/29/2016 Zach Janszen Andrew Jasen John Laliberte
Agenda Industry Overview & Current Performance 2 5 HCA Holdings S T U D E N T I N V E S T M E N T M A N A G E M E N T - P R E S E N T A T I 0 N O U T L I N E 8 McKesson 11 Gilead Sciences 14 Medtronic 17 Investment Conclusion 18 Appendix 1
Industry Overview and Update Sector overview and performance 3rd largest sector in the S&P $1.7Tn revenues annually Over 13mm employees in the US 11.4% of SIM portfolio as of 11/22/2016 14% of S&P as of 11/22/2016 Healthcare verticals: Pharmaceuticals Biotechnology Supplies & Equipment Providers & Services Life Sciences Technology 2.97% 1.98% S T U D E N T I N V E S T M E N T M A N A G E M E N T - I N D U S T R Y O V E R V I E W S&P Industry Breakdown: Technology Interesting buying opportunity 3.36% Recent underperformance + Long-term outperformance + Depressed valuations due to uncertainty + Defensive fundamentals = Investment opportunities 4.10% Financial Services Healthcare 17.72% Industrials 9.82% Energy 14.74% Consumer Cyclical 10.35% Consumer Defensive Telecommunication 10.61% Basic Materials 13.40% 10.94% Utilities Real Estate Sources: Kaiser Family Foundation; Bloomberg; 2
Industry Overview and Update Industry investment thesis The two largest generations ever are the Baby Boomers (74.9 million) and the Millennials (75.4 million) Baby Boomers approaching peak healthcare consumption ages Millennials reaching childbearing years Favorable Demographics S T U D E N T I N V E S T M E N T M A N A G E M E N T - I N D U S T R Y O V E R V I E W Natural low beta will protect against political uncertainty During economic downturns, people will still require medical aid and medicine to overcome illness Warranted valuation premium over time Defensive, Inelastic Demand 2015A 21.8x 3.9x 2.0x 19.2x 14.2x 1.60% 2016E 15.5x 3.4x 1.8x 2017E 14.1x 3.1x 1.7x Industry is undervalued relative to the S&P on an earnings and enterprise basis Price/Earnings Price/Book Value EV/Sales EV/EBIT EV/EBITDA Dividend Yield Favorable Valuations 10.8x 1.80% 10.1x 1.90% 3
SIM Portfolio Healthcare Exposure Portfolio holdings and performance 3-Month YTD 1 Year 3 Year (Annualized) 5 Year (Annualized) 21.0% 27.5% 56.2% (14.8%) 1.3% S&P 500 S&P 500 Healthcare HCA Holdings McKesson Gilead Sciences (1.1%) (5.8%) (6.6%) (23.1%) (3.5%) 5.7% (2.3%) 5.9% (28.3%) (25.4%) 6.8% 1.4% 7.9% (25.4%) (28.8%) 69.6% 100.5% 170.0% 75.6% 282.9% S T U D E N T I N V E S T M E N T M A N A G E M E N T - C U R R E N T P O R T F O L I O HCA: P/ E analysis GILD: P/E analysis MCK: P/E analysis 7.4x 14.0x 19.5x 7.3x 13.5x 18.5x 7.2x 13.0x 17.5x 7.1x 12.5x 7.0x 12.0x 16.5x 6.9x 11.5x 15.5x 6.8x 11.0x 14.5x 6.7x 10.5x 6.6x 13.5x 10.0x 4
HCA Overview Business Overview The Hospital Corporation of America is a holdings company whose affiliates own and operate hospitals and related healthcare entities Headquartered in Nashville, Tennessee, HCA operates in 20 states in the United States and in England Risks Drivers Uncertainty regarding healthcare reform Volatility of uninsured patients Intense competition Defensive company Strong demographics Strong performance relative to S&P and Healthcare Sector S T U D E N T I N V E S T M E N T M A N A G E M E N T - H C A 5
HCA Valuation DCF Valuation and Sensitivity Analysis HCA Holdings (HCA) 42% 58% 100% NPV of Cash Flows NPV of terminal value Projected Equity Value Free Cash Flow Yield 15,180 20,867 36,047 2.53% Terminal Discount Rate = 10.00% Assumes the company has the same volatility as the market Terminal FCF Growth = 3.00% Assumes a conservative growth rate Analyst: Zach Janszen Date: 11/28/16 (millions) Year FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E 34,182 36,918 8.0% 39,678 7.5% 41,464 4.5% 43,371 45,388 4.7% 47,521 4.7% 49,659 4.5% 51,795 4.3% 53,866 4.0% 55,806 3.6% 57,647 3.3% 59,377 3.0% Revenue % Growth Current P/E Projected P/E Current EV/EBITDA Projected EV/EBITDA 19.6 23.2 7.4 8.1 16.2 19.2 6.6 7.2 14.3 16.9 6.2 6.8 4.6% Operating Income Operating Margin 6,329 18.5% 7,260 19.7% 7,822 19.7% 8,811 21.3% 9,021 20.8% 9,350 20.6% 9,789 20.6% 10,230 20.6% 10,670 20.6% 11,096 20.6% 11,496 20.6% 11,875 20.6% 12,232 20.6% 1,848 1,743 1,665 1,599 1,554 1,585 1,659 1,734 1,808 1,881 1,948 2,013 2,073 Interest Shares Outstanding 426.7 Interest % of Sales 5.4% 4.7% 4.2% 3.9% 3.6% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% Current Price Implied equity value/share Upside/(Downside) to DCF 71.39 $ 84.47 $ 18.3% 2,946 3,481 3,957 5,051 5,325 5,603 5,988 6,257 6,526 6,787 7,031 7,264 7,481 Income before taxes % of sales 8.6% 9.4% 10.0% 12.2% 12.3% 12.3% 12.6% 12.6% 12.6% 12.6% 12.6% 12.6% 12.6% 950 1,108 1,261 1,610 1,697 1,786 1,908 1,994 2,080 2,163 2,241 2,315 2,384 Taxes Debt Cash Cash/share 30,488 1.74 S T U D E N T I N V E S T M E N T M A N A G E M E N T - H C A Tax Rate 32.2% 31.8% 31.9% 31.9% 31.9% 31.9% 31.9% 31.9% 31.9% 31.9% 31.9% 31.9% 31.9% 741 % earnings attributable to noncontrolling interests 22% 21% 21% 21% 21% 21% 21% 21% 21% 21% 21% 21% 21% Net Income % Growth 1,556 1,875 20.5% 2,129 13.5% 2,724 27.9% 2,872 3,022 5.2% 3,229 6.9% 3,374 4.5% 3,519 4.3% 3,660 4.0% 3,792 3.6% 3,917 3.3% 4,035 3.0% 5.4% 1,753 5.1% (594) -1.7% 1,943 5.7% 1,820 4.9% (354) -1.0% 2,176 5.9% 1,904 4.8% (220) -0.6% 2,375 6.0% 1,949 4.7% (166) -0.4% 2,529 6.1% 1,995 4.6% (173) -0.4% 2,689 6.2% 2,042 4.5% (182) -0.4% 2,859 6.3% 2,186 4.6% (190) -0.4% 2,946 6.2% 2,334 4.7% (199) -0.4% 2,930 5.9% 2,486 4.8% (207) -0.4% 3,004 5.8% 2,639 4.9% (215) -0.4% 3,070 5.7% 2,790 5.0% (223) -0.4% 3,125 5.6% 2,940 5.1% (231) -0.4% 3,171 5.5% 3,088 5.2% (238) -0.4% 3,206 5.4% Add Depreciation/Amort % of Sales Plus/(minus) Changes WC % of Sales Subtract Cap Ex Capex % of sales Free Cash Flow % Growth 772 1,165 50.9% 1,438 23.4% 1,978 37.5% 2,004 1.4% 2,023 0.9% 2,279 12.6% 2,580 13.2% 2,794 8.3% 3,014 7.9% 3,234 7.3% 3,456 6.9% 3,678 6.4% Implied Share Price Sensativity Analysis Terminal Growth Rate Terminal Discount Rate 9.25% 89.18 $ 91.24 $ 93.45 $ 95.84 $ 98.44 $ 101.25 $ 104.33 $ 9.50% 85.70 $ 87.58 $ 89.59 $ 91.76 $ 94.10 $ 96.64 $ 99.40 $ 9.75% 82.45 $ 84.17 $ 86.01 $ 87.98 $ 90.11 $ 94.20 $ 94.89 $ 10.00% 79.42 $ 80.99 $ 82.67 $ 84.47 $ 86.41 $ 88.49 $ 90.74 $ 10.25% 76.58 $ 78.02 $ 79.56 $ 81.21 $ 82.97 $ 84.87 $ 86.91 $ 10.50% 73.91 $ 75.24 $ 76.65 $ 78.16 $ 79.78 $ 81.51 $ 83.36 $ 10.75% 71.40 $ 72.63 $ 73.93 $ 75.32 $ 76.79 $ 78.38 $ 80.07 $ 2.25% 2.50% 2.75% 3.00% 3.25% 3.50% 3.75% 6
HCA Recommendation Recommendation We are issuing a HOLD rating on HCA Holdings Positive DCF valuation shows an 18.3% upside Defensive company in the current business cycle shows positive valuation Uncertainty of healthcare future, specifically the ACA, has huge risks when analyzing the possible rise of uninsured patients Hold with a SIM weight of 4.77% HOLD 7
McKesson Overview Business Overview Distribution solutions distributes drugs, surgical supplies, and a wide variety of other medical equipment to pharmacies, hospitals, and other medical businesses. Technology solutions offers information systems services to healthcare providers to organize and securely exchange information between consumers, providers, payers, regulators, and other interested parties Key Statistics Performance MCK -25.54% 1 Year P/E: 16.94 Market Cap: $31.95 Billion Revenue: $194.27 Billion EBITDA: $4.33 Billion P/B: 3.38 Operating Margin: 1.79% Dividend Yield: .78% Beta: .94 52 Week High: $202.20 52 Week Low: $114.53 Current Price: $141.33 S&P Healthcare Sector -3.66% S T U D E N T I N V E S T M E N T M A N A G E M E N T - M C K 8
McKesson Valuation DCF and Ratio Analysis Conservative DCF assumptions still suggest upside of 13.7% S T U D E N T I N V E S T M E N T M A N A G E M E N T - M C K 9
McKesson Recommendation Recommendation BUY Catalysts Risks Strong demographic trends spurring demand Defensive industry International growth Technology solutions growing rapidly Favorable valuation Strong YoY revenue growth Very conservative DCF 14% upside Political and regulatory uncertainty Obamacare implementation Price competition squeezing margins S T U D E N T I N V E S T M E N T M A N A G E M E N T - M C K 10
Gilead Overview Key Operating and Financial Metrics Operations & Indication Market (Figures in $bn, unless otherwise stated) Price / Earnings Market Cap Revenue EBITDA P / B Operating Margin Dividend Yield Beta 52 Week High 52 Week Low Share Price Research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need 6.7x $100.50 $32.6 $23.3 Indications and major products 5.9x HIV / AIDS: Atripla, Stribild, Odefsey, Complera 68.0% 2.5% 1.2 $105.96 $71.76 $75.44 Liver Diseases: Harvoni, Sovaldi Hematology / Oncology: Zydelig Cardiovascular: Letairis Inflammation / Respiratory: Tamiflu Catalysts Other: AmBisome HCV upside levers visibility beyond 2017 will be extremely favored by investors S T U D E N T I N V E S T M E N T M A N A G E M E N T - G I L D Recent News / Q3 Update Positive pipeline developments surrounding NASH and NPB and continued innovation in HCV and HIV Increasing number of healthy HCV patients entering the treatment pool, but neglecting full drug prescriptions until they become sicker TAF-based regiments for HIV Increasing global access The patient journey is becoming longer Risks Conservative M&A outlook HIV generics entrance in 2018 Confidence surrounding HIV portfolio and outlook Slowing HCV product revenue and lack of visibility beyond HCV Optimistic payor discussions and contracts for 2017 Pricing pressure in the EU NASH and PSC drug discontinued Meaningful progress and development in HBV and NASH will need to have significant upside New NASH drug entered into Phase III trials Payor dynamic uncertainty Sources: Gilead.com; Bloomberg 11
Gilead Valuation Discounted cash flows analysis (in millions, except per share data) 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Total revemues % growth Operating income Operating margin Depreciation & amortization % of sales EBITDA EBITDA margin Taxes Tax rate EBIAT Plus: depreciation & amortization Less: capital expenditures % of sales Less: Inc./(Dec.) in NWC Unlevered free cash flow $ 30,179 -7.5% 19,533 64.7% 1,073 3.6% 19,987 66.2% 3,843 16.4% 15,690 1,073 555 1.8% 466 15,741 $ 28,309 -6.2% 17,701 62.5% 1,051 3.7% 18,439 65.1% 3,467 18.0% 14,234 1,051 552 2.0% 563 14,169 $ 26,456 -6.5% 15,957 60.3% 937 3.5% 16,773 63.4% 3,189 20.0% 12,768 937 545 2.1% 191 12,969 $ 26,074 -1.4% 15,110 58.0% 924 3.5% 15,878 60.9% 3,022 20.0% 12,088 924 466 1.8% 403 12,143 $ 25,903 -0.7% 14,647 56.5% 918 3.5% 14,782 57.1% 2,929 20.0% 11,718 918 476 1.8% 376 11,784 $ 26,214 1.2% 15,085 57.5% 903 3.4% 15,988 61.0% 3,017 20.0% 12,068 903 482 1.8% 189 12,300 $ 26,660 1.7% 15,475 58.0% 891 3.3% 16,366 61.4% 3,095 20.0% 12,380 891 490 1.8% 412 12,370 $ 27,140 1.8% 15,889 58.5% 880 3.2% 16,770 61.8% 3,178 20.0% 12,711 880 499 1.8% 393 12,699 $ 27,655 1.9% 16,191 58.5% 869 3.1% 17,061 61.7% 3,238 20.0% 12,953 869 509 1.8% 200 13,114 $ 28,208 2.0% 16,515 58.5% 859 3.0% 17,374 61.6% 3,303 20.0% 13,212 859 519 1.8% 436 13,116 S T U D E N T I N V E S T M E N T M A N A G E M E N T - G I L D Multiple Method Multiple 8.5x Terminal value Sum of PV of FCF Enterprise value Net debt Equity value Diluted shares outstanding (mm) Implied share price Current share price Implied upside / (downside) from current Implied upside / (downside) from 52-week high Implied share price sensitivity 0 2.00% Exit multiple 8.0x $103 $96 $90 $84 $78 9200.00% 8.0% 9.0% 10.0% 11.0% 12.0% 7.5x 8.5x 9.0x 9.5x 56,734 81,208 137,943 15,297 122,646 1,335 $92.00 $75.44 22.0% (17.1%) $100 $93 $87 $81 $76 $106 $99 $92 $86 $80 $109 $101 $95 $88 $82 $112 $104 $97 $90 $84 WACC Sources: SIM projections 12
Gilead Portfolio Recommendation GILD equity performance YTD 0.0% 12.0x Share Price performance Price to Earnings Ratio (5.0%) 10.0x (10.0%) 9.8x 8.0x 6.7x (15.0%) (20.0%) 6.0x (25.0%) 4.0x (30.0%) 2.0x (30.1%) (35.0%) (40.0%) 0.0x Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 S T U D E N T I N V E S T M E N T M A N A G E M E N T - G I L D Investment Conclusion Investment recommendation: HOLD The market has unfairly punished Gilead for lack of HCV visibility Continual innovation and expansion beyond HCV and HIV, significant near term cash generation, aggressive capital return programs for shareholders, and large M&A potential leaves long-term value opportunity in Gilead Gilead is fundamentally undervalued Very conservative growth and operating assumptions imply a 22% upside at a price target of $92 Sources: Bloomberg 13
Medtronic Overview Operations & Indication Market Key Operating and Financial Metrics One of the largest medical device companies P/E: 29.4x Market Cap: $102.25 Billion Revenue: $28.73 Billion EBITDA: $8.76 Billion Operating Margin: 20.54% Dividend Yield: 2.28% Beta: 0.93 52 Week High: $89.27 52 Week Low: $71.03 Current Price: $73.99 Focuses on the manufacture and development of therapeutic medical devices with a focus on chronic diseases. Major areas of focus: Diabetes Heart Disease Lung Conditions Gastrointestinal Spinal Catalysts Recent News / Q3 Update Diversified across product lines and geography Price beaten down on weak revenue from diabetes and cardiovascular therapies only 3% growth High barriers to entry S T U D E N T I N V E S T M E N T M A N A G E M E N T - G I L D Strong, defensible intellectual property Purchased Covidien mid-year, further diversifying their product line Focus on chronic illnesses provides long term cash flows Relationships with surgeons and hospitals make switching providers difficult Expanding their presence in the Chinese hospital market by purchasing Chinese companies Recent drop in price could signal buying opportunity Risks Drug pricing scrutiny Realizing efficiencies on Covidien acquisition Margins have dropped slightly since acquiring Covidien Obamacare/Medicare cuts 14
Medtronic Valuation Year FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E FY26E 17,005 20,261 19.1% 3,766 18.6% 280 3,486 811 2,675 1,306 (2,171) 3,463 (1,653) 28,833 42.3% 5,291 18.4% 955 4,336 798 3,538 2,820 (361) 1,046 4,951 29,698 3.0% 6,738 22.7% 984 5,104 939 4,165 2,925 (386) 1,114 5,591 31,183 32,742 34,543 5.5% 7,599 22.0% 1,105 6,494 1,195 5,299 3,316 (415) 1,451 6,750 36,443 5.5% 8,054 22.1% 1,130 6,924 1,274 5,650 3,207 (437) 1,603 6,816 38,356 5.3% 8,515 22.2% 1,151 7,364 1,355 6,009 3,222 (460) 1,764 7,006 40,274 5.0% 8,981 22.3% 1,208 7,773 1,431 6,342 3,222 (483) 1,973 7,108 42,187 4.8% 9,408 22.3% 1,266 8,142 1,498 6,644 3,248 (506) 2,236 7,150 44,085 4.5% 9,831 22.3% 1,323 8,508 1,566 6,943 3,262 (529) 2,513 7,163 45,959 4.3% 10,249 22.3% 1,379 8,870 1,632 7,238 3,217 (529) 2,758 7,169 Revenue % Growth Operating Income Operating Margin Interest Income before taxes Taxes Net Income Add Depreciation/Amort Plus/(minus) Changes WC Subtract Cap Ex Free Cash Flow 5.0% 6,989 22.4% 1,033 5,756 1,059 4,697 3,025 (405) 1,185 6,131 5.0% 7,170 21.9% 1,084 6,085 1,120 4,965 3,143 (426) 1,261 6,422 3,813 22.4% 3,705 3,065 108 640 850 0 396 3,519 S T U D E N T I N V E S T M E N T M A N A G E M E N T - M D T 36% 64% 100% NPV of Cash Flows NPV of terminal value Projected Equity Value Free Cash Flow Yield 43,432 77,773 121,205 3.34% Discount Rate: 8.5% Terminal FCF Growth Rate: 4.25% Current P/E Projected P/E Current EV/EBITDA Projected EV/EBITDA 34.4 39.5 28.7 32.1 39.4 45.3 26.4 29.5 29.8 34.3 16.5 18.4 Shares Outstanding 1,425.9 Current Price Implied equity value/share Upside/(Downside) to DCF 73.99 $ 85.00 $ 14.9% 15
Medtronic Valuation Public comparables analysis (Figures in millions, except per share data) Name Abbott Stryker Boston Scientific Intuitive Surgical St. Jude Medical Zimmer Biomet Edwards Life Sciences EW Smith & Nephew 5-YR Revenue Operating Margin 10.8% 18.7% (4.1%) 37.6% 19.9% 23.0% 25.5% 18.6% Ticker ABT SYK BSX ISRG STJ ZBH Mkt Cap 57,655 $ 42,253 28,799 25,437 22,940 20,502 18,345 12,912 Dividend Yield P/E 59.3x 25.7x 423.0x 35.4x 35.2x 55.9x 33.9x 35.5x P/S P/B CAGR (10.3%) 6.3% (.9%) 11.0% 1.4% 7.3% 11.5% 3.2% 2.7% 1.4% 2.8x 3.9x 3.5x 9.7x 3.9x 2.7x 6.5x 2.7x 2.8x 4.5x 4.4x 4.6x 5.1x 2.1x 6.8x 3.3x 1.5% 0.9% SNN 2.2% Mean Median 1.7% 1.5% 88.0x 35.5x 4.5x 3.7x 4.2x 4.5x 3.7% 4.8% 18.8% 19.3% Medtronic MDT 105,238 2.2% 29.4x 3.7x 2.1x 13.2% 20.5% Recommendation: BUY S T U D E N T I N V E S T M E N T M A N A G E M E N T - M D T Revenue Growth: Unmatched pipeline and attractive, diversified markets lead to consistent, sustainable mid-single digit constant currency revenue growth. Margin Expansion: Utilizing systems and structure at scale across the enterprise to drive margin expansion. Free Cash Flow: Strong revenue growth and high profitability generates significant and increasingly accessible free cash flow. Total Shareholder Return: Overall performance results in low-double digit to mid-teens total shareholder return. Sources: Morningstar, Investor Relations 16
SIM Portfolio Recommendation and Conclusion Proposed Weight 4.00% 2.00% 3.99% 4.06% 14.05% 14.00% 0.05% Change in Weight Company McKesson Medtronic Gilead HCA Holdings Total S&P 500 Healthcare Difference Ticker MCK MDT GILD HCA Current Weight Current Price 3.33% 0.00% 3.99% 4.06% 11.38% 14.00% -2.62% Target Price % Upside Recommendation 161.00 $ 14% 85.00 $ 15% 92.00 $ 23% 85.00 $ 20% $ $ $ $ 141.33 73.99 74.50 70.70 BUY BUY HOLD HOLD 0.67% 2.00% 0.00% 0.00% 2.67% S T U D E N T I N V E S T M E N T M A N A G E M E N T - G I L D 17
S T U D E N T I N V E S T M E N T M A N A G E M E N T - P R E S E N T A T I 0 N O U T L I N E Appendix 18
HCA Projected Income Statement Cap Ex Cap Ex % of Sales Deprec & Amort Deprec % of Sales D&A growth 2,859 6.30% 2,042 4.50% 2,689 6.20% 1,995 4.60% 2,529 6.10% 1,949 4.70% 2,375 5.99% 1,904 4.80% 4.62% 2,176 5.89% 1,820 4.93% 3.82% 1,943 5.68% 1,753 5.13% 4.41% 1,862 5.64% 1,679 5.09% 14.61% 1,679 5.66% 1,465 4.94% HCA Holdings (HCA) 45,350 43,320 41,530 (millions) Revenues before the provision for doubtful accounts Provision for doubtful accounts Revenues FY18 FY17 FY16 FY15 43,591 3,913 39,678 FY14 40,087 3,169 36,918 FY13 38,040 3,858 34,182 FY12 36,783 3,770 33,013 FY11 32,506 2,824 29,682 Inventories % change Inventory-to-sales Accounts Receivable 1,634 1,561 1,534 1,439 12.51% 3.63% 5,889 1,279 8.48% 3.46% 5,694 15.42% 15.24% 2,035 5.51% (354) -40.40% #DIV/0! -100.00% 1,179 8.56% 3.45% 5,208 1,086 3.04% 3.29% 4,672 14.15% 15.27% 1,768 5.36% - 1,054 3.60% 6,581 14.50% 14.50% 2,496 5.50% 3.60% 6,289 3.70% 6,074 14.65% 14.84% 2,280 5.50% 3.55% 4,533 45,388 43,371 41,464 Salaries and benefits Supplies Other operating expenses Total operating expenses 20,424 7,580 8,034 36,038 19,517 7,243 7,590 34,350 18,451 6,945 7,256 32,653 18,115 6,638 7,103 31,856 16,641 6,262 6,755 29,658 15,646 5,970 6,237 27,853 15,089 5,717 6,048 26,854 13,440 5,179 5,470 24,089 Accounts Payable 2,385 5.50% 2,170 5.47% (220) -37.85% 1,803 5.27% (594) 1,597 5.38% (3,990) Working Capital % change Operating Income Electronic health record incentive income Equity in earnings of affiliates Depreciation and amortization2,042 Interest expense Losses (gains) on sales of facilities 5 Losses on retirement of debt Legal claim costs Gain on acquisition of controlling interest in equity investment Termination of management agreement 9,350 1,585 9,021 1,995 1,554 140 8,811 (14) 1,949 1,599 7,822 1,904 1,665 135 249 7,260 (125) 1,820 1,743 6,329 (216) 1,753 1,848 6,159 (336) 1,679 1,798 5,593 (210) (258) 1,465 2,037 (142) 481 (1,522) 181 Change In Sales Op Exp to Sales % change Salaries and benefits to sales 45.00% 45.00% Supplies to sales Other operating expenses to sales Operating Income % change Gen & Admin to Sales % change Tax Rate 4.65% 79.40% 79.20% 0.20% 4.60% 4.50% 78.75% 80.29% -1.54% 44.50% 45.66% 16.75% 16.73% 17.50% 17.90% 21.25% 19.71% 1.54% 78.75% 80.29% -1.54% 31.87% 31.87% 7.48% 8.00% 80.33% 81.48% -1.15% 45.08% 45.77% 16.96% 17.47% 18.30% 18.25% 19.67% 18.52% 1.15% 80.33% 81.48% -1.15% 31.83% 32.25% 3.54% 11.22% 81.34% 81.16% 0.19% 45.71% 45.28% 17.32% 17.45% 18.32% 18.43% 18.66% 18.84% -0.19% 81.34% 81.16% 0.19% 30.68% 20.19% (0) (40) (3) (40) (47) (46) (40) (43) (29) (36) 0.45% -0.05% 0.14% 16.70% 16.70% 17.70% 17.50% 20.60% 20.80% -0.20% 79.40% 79.20% 0.20% 31.87% 31.87% - (5) 5 (29) 335 78 - - 10 17 - - - (15) - 175 - - 130 25 - - 162 109 - - S T U D E N T I N V E S T M E N T M A N A G E M E N T - G I L E A D 50 - - - -0.45% 0.05% -0.14% - - 0.45% -0.05% 0.14% Income before income taxes Provision for income taxes Net Income Net income attributable to noncontrolling interests Net income attributable to HCA 3,022 5,603 1,786 3,818 5,325 1,697 3,628 757 2,872 5,051 1,610 3,441 718 2,724 3,957 1,261 2,696 567 2,129 3,481 1,108 2,373 1,875 2,946 950 1,996 440 1,556 2,894 2,006 1,605 3,561 719 2,842 377 2,465 888 Interest Expense Average debt balance % change Interest Rate Interest % of sales 1,585 31,692 2.00% 5.00% 3.49% 1,554 31,070 2.00% 5.00% 3.58% 1,599 30,461 2.50% 5.25% 3.86% 1,665 29,718 4.17% 5.60% 4.20% 1,743 28,529 1.48% 6.11% 4.72% 1,848 28,113 2.61% 6.57% 5.41% 1,798 27,397 3.04% 6.56% 5.45% 2,037 26,588 796 498 401 7.66% 6.86% Basic EPS Wtd Avg Comm Shs Outst 7.30 414 6.93 414 6.58 414 5.14 414 4.30 436 3.50 445 3.65 440 5.17 477 # of hospitals at end of period % change Occupancy rate 168 1.20% 58% 166 0.61% 55% 165 1.85% 54% -0.61% 162 163 54% 53% Consensus Diluted EPS Wtd Avg Diluted Shs Outst 7.77 7.08 427 7.00 6.73 427 6.40 6.38 427 4.99 427 4.16 450 3.37 462 3.49 459 4.97 496 Electronic health record incentive income % change yoy (0) (3) (14) -70% (47) -62% (125) -42% (216) -36% (336) 60% (210) -90% -80% Net income attributable to controlling interest % of earnings 796 21% 757 21% 718 21% 567 21% 498 21% 440 22% 401 20% 377 13% 19
Gilead Projected Income Statement S T U D E N T I N V E S T M E N T M A N A G E M E N T - G I L E A D 20
McKesson Projected Income Statement S T U D E N T I N V E S T M E N T M A N A G E M E N T - G I L E A D 21
