Healthcare

Investment Opportunities
Daniel, Eric, Grace, Rebecca, Sunny, Xianming, Natnael, Ryan, Thomas, Zach, Betty, Ariana
Healthcare
Agenda

1.
1 Government Policies
a. Affordable Care Act
b. Government Spending
2.
2 Industry Activities
a. Consolidation
b. Re-domiciles
c. Niche Drugs
d. Recent M&As
3.
3 Investment Opportunities
4.
4 Sector Performance
1 Healthcare
Government Policies
Affordable Care Act Implications
• 11M no longer uninsured (-25%), • Expected increase in revenue paid due
expected to grow to decrease in uninsured
- 67%: newly insured with • Pressure for M&A:
Medicaid
Hospitals - Diversify as ACA squeezes Medicare
- 33%: insured via state public reimbursements (outpatient services,
insurance exchanges etc.)
• Tax penalties for citizens without - Increase in scale lowers administrative
insurance & other costs (IT)
• Insurance companies must pay • Decreased profit margins from increased
rebates to consumers if non- number of enrollees
medical spending is above 15-
Insurance - New enrollees utilize higher levels of
20%
Companies care
• Exchanges and Medicaid
- New industry taxes to pay for ACA
expansion take effect starting
2014 - Rebates
• Life of Medicare trust fund • Increased demand for prescription drugs
Pharmas
expanded from 2024 to 2026 for newly insured
General • Innovate to economize on costs
1 Healthcare
Government Policies
Government Spending Implications
• Lower federal deficits
 5.7% expected overall increase • Increased hospitalization
from 2013 to 2023 • Reductions and delays in drug
- Retirement of baby boomers approvals
 7% increase in Medicaid enrollment
to 6.1B people

 $11B reduction on Medicare

spending$14M reduction for
academic medical centers
 $1.54B reduction for National
Institute of Health (NIH)
 $209M cut in FDA budget
 $168M cut for mental health and
substance abuse services
2 Healthcare
Industry Activities – Consolidation
• Mergers of hospitals/health care systems
What is Consolidation?
• Acquisitions of physician group by a hospital
• Consolidation among hospitals + doctors ->
rising health care costs
Why is it Important?
• Payments to hospitals +3% due to
consolidation
• Economies of scale
• Hospitals increase prices almost 50%
What are the Incentives?
• ACA’s emphasis on care coordination >>
consolidation
Current Consolidation
• Anthem Blue Cross Vivity
News
2 Healthcare
Industry Activities – Re-domiciles
Tax Inversion Related Deals
• Companies shift their 2010: Valeant’s 2013: Endo buys
incorporation abroad to avoid merge with Biovail Paladin($1.6B) to
US tax rates in Canada save >$50M/year
(+700%) in tax
• 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% 2014: Pfizer buys 2014: Medtronic
• Injected Value AstraZeneca buys Covidien
($112.6B) to ($42.9B) to move
• September 2014: U.S. Treasury reduce tax rate tax base to Ireland
curtail tax breaks from from 28% to 22%
international deals
2 Healthcare
Industry Activities – Niche Drugs
The Orphan Drug Act of
1983 provides financial
incentive for investigating
rare disease treatments
Blockbuster drugs are more
difficult to develop
Creating drugs for rare
diseases provides potential
for (temporary) small-market
monopolies
Larger companies like Pfizer
have been acquiring these
startups to move into niche
markets
Pharma startups can’t
compete on common diseases,
so easier to move to
“orphans”
Trending towards
“nichebuster” rather than
“blockbuster” drugs
2 Healthcare
Industry Activities – Recent M&As
Drivers of M&As Recent Deals
• ACA 09/2014: Merck buys 11/2014: Perrigo buys
• Rising demand for Sigma Aldrich ($17B) to Omega Pharma ($4.5B) to
facility and reduce reliance on work around regulatory
equipment blockbuster drugs and hurdles in Europe
improvement consolidate supply chain
• Increased need
for IT support /
capabilities
• Increased 11/2014: LabCorp buys Ongoing: Actavis buys
compliance costs Covance ($6.1B) to increase Allergan (~$66B) to
• Pharmaceuticals’ presence in research and prevent Allergan’s hostile
reliance on M&As new technology / drugs takeover by Valeant
to stay
competitive
3 Healthcare
Investment Opportunities
Life Sciences

Medical Technology Services

3 Healthcare
ACADIA Pharmaceuticals (ACAD)
Company Overview
• Focused on development and
commercialization of small molecule
drugs dealing with neurological and
central nervous system disorders
• Market Cap: $2.78B
• Founded: 1993; HQ: San Diego, CA
Products
• Pimavanserin (aka Nuplazaid)
- Potentially first drug approved for
Parkinson’s disease psychosis (P3)
- Also applicable for Alzheimer’s disease
psychosis (P2)
• Clinical stage for chronic pain/glaucoma

LTM Performance Strengths

$40.00
• Strong 3rd stage drug in the pipeline to
$30.00
$27.83 treat Parkinson’s related psychosis
$20.00 - If approved by FDA, drug would be
first in its kind
$10.00
- Could reach market by Q2 2015
$0.00 - Potential to be $5B/year product
- Could get acquired by bigger
pharmaceutical company
Note: Price as of 11/17/2014
3 Healthcare
Gilead (GILD)
Company Overview Strengths
• Develops and commercializes • Working capital up from $1B to
medicines for treatment of HIV, liver $6.5B
diseases, oncology/inflammation, and • Large market (130M for HepC) –
cardiovascular/respiratory conditions still growing
• Market Cap: $153B - Sovaldi distribution pending in the
• Founded: 1987; HQ: Foster City, CA European Union, Japan and New
Zealand.
LTM Performance • Potential M&A with Achillion
$120.00
$100.00 $100.44 Products
$80.00
• Treatment of liver diseases:
$60.00
- Harvoni: FDA approved 10/2014
$40.00
as 1-pill treatment for HepC
$20.00
- Sovaldi: FDA approved in 2013
$0.00
to treat HepC as component of
antiviral treatment regimen
Note: Price as of 11/17/2014
3 Healthcare
Verisante Technology (VRS)
Company Overview Strengths
● 5th largest medical device company in ● Novel technology with continuous
Canada revenue stream model
● Possesses exclusive rights to technology ● Works closely with BC Cancer
developed by the BC Cancer Agency for Agency, hospitals, and
the early detection of cancer universities
● Operates by founding members
● Market Cap: $10.79M
● Projected revenue for 2015 is
● Founded: 2006; HQ: Vancouver,
$15.14M
Canada
LTM Performance Products
$0.40
$0.35
$0.30
● Verisante Aura - only one in
$0.25 the market, continuous revenue
$0.20
$0.15
stream
$0.13
$0.10 ● Verisante Core - early
$0.05
$0.00
diagnosis and treatment

Note: Price as of 11/17/2014

3 Healthcare
Brookdale Senior Living (BKD)
Company Overview Strengths
• 1,100+ independent or assisted living • Largest diversified senior community
centers, 46 states, 110,000+ senior operator
citizens - 3x larger than next largest competitor
• Management services for other - Aims to be only national senior living
communities, therapy, home health, memory brand
care
• Stands to benefit from aging baby boomers
• Market cap: $6.1B (predicted to grow 3x faster than general
• Founded: 1978; HQ: Brentwood, TN population)
LTM Performance
• Variety of services & centers: keep customers
$40.00
as their needs change
$35.00 $33.82 Recent News
$30.00
$25.00 • 07/2014: $2.8B merger with Emeritus Senior
$20.00 Living to expand into nursing, dementia care,
$15.00
$10.00
reaching more geographical areas (largest
$5.00 Services M&A in 2014 Q3)
$0.00
• 09/2014: $1.2B joint venture with HCP real
estate investment trust to expand continuing
care retirement communities
Note: Price as of 11/17/2014
3
4 Healthcare
Sector Performance – 1-year Benchmarks

Note: Index level as of 11/14/2014