Healthcare Investment Opportunities Daniel, Eric, Grace, Rebecca, Sunny, Xianming, Natnael, Ryan, Thomas, Zach, Betty, Ariana
Healthcare Agenda 1 1. Government Policies a. b. Affordable Care Act Government Spending 2. Industry Activities 2 a. b. c. d. Consolidation Re-domiciles Niche Drugs Recent M&As 3. Investment Opportunities 3 4. Sector Performance 4
1 Healthcare Government Policies Affordable Care Act • Implications 11 M no longer uninsured (-25%), expected to grow • Expected increase in revenue paid due to decrease in uninsured - 67%: newly insured with Medicaid • Pressure for M&A: - Diversify as ACA squeezes Medicare reimbursements (outpatient services, etc. ) - Increase in scale lowers administrative & other costs (IT) • Decreased profit margins from increased number of enrollees - 33%: insured via state public insurance exchanges • Tax penalties for citizens without insurance • Insurance companies must pay rebates to consumers if nonmedical spending is above 1520% Hospitals • • Exchanges and Medicaid expansion take effect starting 2014 Life of Medicare trust fund expanded from 2024 to 2026 - General New industry taxes to pay for ACA Pharmas New enrollees utilize higher levels of care - Insurance Companies Rebates • Increased demand for prescription drugs for newly insured • Innovate to economize on costs
1 Healthcare Government Policies Government Spending 5. 7% expected overall increase from 2013 to 2023 - Retirement of baby boomers 7% increase in Medicaid enrollment to 6. 1 B people $11 B reduction on Medicare spending$14 M reduction for academic medical centers $1. 54 B reduction for National Institute of Health (NIH) $209 M cut in FDA budget $168 M cut for mental health and substance abuse services Implications • Lower federal deficits • Increased hospitalization • Reductions and delays in drug approvals
2 Healthcare Industry Activities – Consolidation What is Consolidation? • Mergers of hospitals/health care systems • Acquisitions of physician group by a hospital Why is it Important? • Consolidation among hospitals + doctors -> rising health care costs • Payments to hospitals +3% due to consolidation What are the Incentives? Current Consolidation News • Economies of scale • Hospitals increase prices almost 50% • ACA’s emphasis on care coordination >> consolidation • Anthem Blue Cross Vivity
2 Healthcare Industry Activities – Re-domiciles Tax Inversion • Companies shift their incorporation abroad to avoid US tax rates • Taking advantage of lower foreign tax rates • 9 out of 13 deals relating to tax inversion are in health care • US: 35%; Ireland: 12. 5% • Injected Value • September 2014: U. S. Treasury curtail tax breaks from international deals Related Deals 2010: Valeant’s merge with Biovail in Canada (+700%) 2013: Endo buys Paladin($1. 6 B) to save >$50 M/year in tax 2014: Pfizer buys Astra. Zeneca ($112. 6 B) to reduce tax rate from 28% to 22% 2014: Medtronic buys Covidien ($42. 9 B) to move tax base to Ireland
2 Healthcare Industry Activities – Niche Drugs The Orphan Drug Act of 1983 provides financial incentive for investigating rare disease treatments Larger companies like Pfizer have been acquiring these startups to move into niche markets Blockbuster drugs are more difficult to develop Pharma startups can’t compete on common diseases, so easier to move to “orphans” Creating drugs for rare diseases provides potential for (temporary) small-market monopolies Trending towards “nichebuster” rather than “blockbuster” drugs
2 Healthcare Industry Activities – Recent M&As Drivers of M&As • • • ACA Rising demand for facility and equipment improvement Increased need for IT support / capabilities Increased compliance costs Pharmaceuticals’ reliance on M&As to stay competitive Recent Deals 09/2014: Merck buys Sigma Aldrich ($17 B) to reduce reliance on blockbuster drugs and consolidate supply chain 11/2014: Perrigo buys Omega Pharma ($4. 5 B) to work around regulatory hurdles in Europe 11/2014: Lab. Corp buys Covance ($6. 1 B) to increase presence in research and new technology / drugs Ongoing: Actavis buys Allergan (~$66 B) to prevent Allergan’s hostile takeover by Valeant
3 Healthcare Investment Opportunities Life Sciences Medical Technology Services
3 Healthcare ACADIA Pharmaceuticals (ACAD) Company Overview Products • Focused on development and commercialization of small molecule drugs dealing with neurological and central nervous system disorders • Market Cap: $2. 78 B • Founded: 1993; HQ: San Diego, CA • Pimavanserin (aka Nuplazaid) - Potentially first drug approved for Parkinson’s disease psychosis (P 3) - Also applicable for Alzheimer’s disease psychosis (P 2) • Clinical stage for chronic pain/glaucoma LTM Performance Strengths $40. 00 $30. 00 $27. 83 $20. 00 $10. 00 $0. 00 11/18/1 3/18/1 5/18/1 7/18/1 9/18/1 11/18/ 13 4 4 4 14 Note: Price as of 11/17/2014 • Strong 3 rd stage drug in the pipeline to treat Parkinson’s related psychosis - If approved by FDA, drug would be first in its kind - Could reach market by Q 2 2015 - Potential to be $5 B/year product - Could get acquired by bigger pharmaceutical company
3 Healthcare Gilead (GILD) Company Overview Strengths • Develops and commercializes medicines for treatment of HIV, liver diseases, oncology/inflammation, and cardiovascular/respiratory conditions • Market Cap: $153 B • Founded: 1987; HQ: Foster City, CA • Working capital up from $1 B to $6. 5 B • Large market (130 M for Hep. C) – still growing - Sovaldi distribution pending in the European Union, Japan and New Zealand. • Potential M&A with Achillion LTM Performance $120. 00 $100. 44 $100. 00 $80. 00 $60. 00 $40. 00 $20. 00 $0. 00 11/18/1 3/18/1 5/18/1 7/18/1 9/18/1 11/18/ 13 4 4 4 14 Note: Price as of 11/17/2014 Products • Treatment of liver diseases: - Harvoni: FDA approved 10/2014 as 1 -pill treatment for Hep. C - Sovaldi: FDA approved in 2013 to treat Hep. C as component of antiviral treatment regimen
3 Healthcare Verisante Technology (VRS) Company Overview ● 5 th largest medical device company in Canada ● Possesses exclusive rights to technology developed by the BC Cancer Agency for the early detection of cancer ● Market Cap: $10. 79 M ● Founded: 2006; HQ: Vancouver, Canada LTM Performance $0. 40 $0. 35 $0. 30 $0. 25 $0. 20 $0. 15 $0. 13 $0. 10 $0. 05 $0. 00 11/18/14 3/18/14 5/18/14 7/18/14 9/18/14 11/18/1 3 4 Note: Price as of 11/17/2014 Strengths ● Novel technology with continuous revenue stream model ● Works closely with BC Cancer Agency, hospitals, and universities ● Operates by founding members ● Projected revenue for 2015 is $15. 14 M Products ● Verisante Aura - only one in the market, continuous revenue stream ● Verisante Core - early diagnosis and treatment
Healthcare Brookdale Senior Living (BKD) Company Overview • Strengths 1, 100+ independent or assisted living centers, 46 states, 110, 000+ senior citizens • Management services for other communities, therapy, home health, memory care • Market cap: $6. 1 B • • 3 x larger than next largest competitor - Aims to be only national senior living brand • Stands to benefit from aging baby boomers (predicted to grow 3 x faster than general population) • LTM Performance $40. 00 $35. 00 $30. 00 $25. 00 $20. 00 $15. 00 $10. 00 $5. 00 $0. 00 Largest diversified senior community operator - Founded: 1978; HQ: Brentwood, TN Variety of services & centers: keep customers as their needs change Recent News $33. 82 /1 12 8/1 /1 3 8/ 1/ 13 18 / 2/ 14 18 3/ /14 18 / 4/ 14 18 5/ /14 18 / 6/ 14 18 7/ /14 18 / 8/ 14 18 / 9/ 14 18 10 /1 /1 4 8/ 14 • 11 3 Note: Price as of 11/17/2014 07/2014: $2. 8 B merger with Emeritus Senior Living to expand into nursing, dementia care, reaching more geographical areas (largest Services M&A in 2014 Q 3) • 09/2014: $1. 2 B joint venture with HCP real estate investment trust to expand continuing care retirement communities
3 4 Healthcare Sector Performance – 1 -year Benchmarks Note: Index level as of 11/14/2014
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