Healthcare Final

7/29/2019 Healthcare Final

1/38

Healthcare Sector Analysis

Prepared by

Ariel ImasRobert Candella

Nanda Win

Student Managed Investment Portfolio ClassProf. P.V. Viswanath

Spring 2002


2/38

Objective

To research, evaluate, and present potential equity-investment

opportunities in the U.S. healthcare sector.


3/38

ResearchMethodology4-fold approach:

1) Industry analysis

2) Quantitative analysis

3) Corporate analysis

4) Recommendation


4/38

1) Industry Analysis

Total universe identified

Elimination criteria applied

Financial ratios vs. industry benchmarks evaluated

Industry analysis performed


5/38

Total Universe Identified

U.S. Healthcare stocks isolated using StockVal:724 stocks in population


6/38

Elimination Criteria Applied

Stocks remaining after elimination criteria applied:

246 stocks - Total assets > 200M

41 stocksLeverage regression

18 stocks - Price/Free cash flow


7/38

Financial Ratio vs. Industry Benchmarks

Evaluated The financial ratios were selected to complement the model inputs

later required for the quantitative analysis.

Financial ratios1) Financial Strength

2) Profitability & Effectiveness

3) Growth

4) Valuation

5 stocks remained after ratios were considered


8/38

Financial Ratios

1) Financial Strength Quick Ratio

Measures firms ability to generate free cash flows

LT Debt / Common Equity Measures effective use of long-term debt with respect to changes in

the shareholders equity

Total Debt / Equity

Measures effective use of total debt with respect to changes in theshareholders equity


9/38

Financial Ratios

2) Profitability & Effectiveness EBITDA Margin

measures profitability while eliminating effects of financing and

accounting methodologies between industries Return on Equity

measures effective use of shareholders equity to generate net income

Return on Capital

measures effective use of capital

Net Income per Employee measures managements ability to leverage their human resources togenerate net income


10/38

Financial Ratios

3) Growth

Revenue Growth LFY

measures firms ability to increase revenues

EPS Growth LFY measures firms ability to generate income (less dividends) per unit of

stock


11/38

Financial Ratios

4) Valuation Book Value / Price

measures the value of the balance sheet in the market

Price / Sales measures the price per unit of sales the market is willing to pay for the

company

Price / Free cash flow per share

measures price per unit of free cash the market will pay for thecompany

Price / Net Work Cap

measures price per unit of net working capital market will pay forcompany


12/38


Top 5 stocks (in order of ranking):

1. Polymedica CorporationMedical Products

2. Gentiva Health Services Inc.Home Healthcare

3. Datascope CorporationMedical Products4. Mentor CorporationMedical Products

5. Invitrogen CorporationBiotech


13/38


Philosophy: If Company A is more undervalued that Company B, butCompany B is in an industry with greater growth potential, CompanyB presents a better investment opportunity.


14/38


Industry view:

1. Biotech: will benefit greatly from genome research, but will notmature until patent suits and R&D investments are realized inanother 4-5 years. Unfavorable.

2. Home Healthcare: benefiting from aging U.S. demographics andlow-cost alternative to hospital care. Aggressive pricing willcontinue to drive current profitability. Favorable.

3. Medical Products & Equipment: benefiting from aggressivepricing and growing world market. Favorable.


15/38


Final 4 stocks (in order of rank):

1. Polymedica CorporationMedical Products & Equipment

2. Gentiva Health Services Inc.Home Healthcare

3. Datascope CorporationMedical Products & Equipment4. Mentor CorporationMedical Products & Equipment


16/38

2) Quantitative Analysis

1. Model selected:

Type:

Two-stage Free cash flow to equity discount model

Purpose:

To value the equity in a form with two stages of growthan initial periodof higher growth and subsequent period of stable growth

Structure:

1) Free cash flow to equity2) Weighted average growth rates for high-growth period

3) Discount factor

4) Stable growth period


17/38


Model Value vs. Market ValueCompany Polymedica Corp. Datascope Corp. Gentiva Health Services Inc. Mentor Corp.

Ticker PLMD DSCP GTIV MNTR

Model Value $47.55 $57.35 $23.94 $36.08

Market Value $36.50 $32.98 $25.78 $38.25Model vs. Market Differential 30% 74% -7% -6%

Status Undervalued Undervalued Overvalued Overvalued


18/38


Polymedica Corporation


19/38


Datascope Corporation


20/38


Gentiva Health Services Inc.


21/38


Mentor Corporation


22/38


Subjective variables considerations1. High-growth rate weights:

Historical growth rates

Outside prediction of growth rate

Fundamental prediction of growth rate

2. High-growth rate growth estimates: Growth rate in capital spending

Growth rate in depreciation

Growth rate in revenues

Outside estimates (5-yr growth rate)

3. Stable-growth estimates:

Stable growth rate

Stable growth beta


23/38


Subjective variables justifications1. High-growth rate weights:

Fundamental growth rates were more heavily weighted to the extent that themodel value was deemed reasonable. This was because greater historicaland outside weighting significantly inflated the models stock price andconcurrently diminished the significance of the groups fundamental

research.

2. High-growth rate growth estimates:

Parity was maintained between growth rates in capital spending anddepreciation and the growth rates that would be required to promotesignificant revenue growth rates in a high-growth period.

3. Stable-growth estimates:

Stable growth rates were kept within reasonable economic limits. Current, high-growth betas were applied in the stable-growth period to

encourage conservative model values. This is because industry averagebetas (the beta that a companys beta will approach in a stable-growthperiod) tend to fall below 1 in the healthcare sector, which significantlyoverstate prices in the FCFE model.


24/38

3) Corporate Analysis

Considerations:

Management review

Insider activity

Institutional activity

SWOT analysis

Corporate Overview


25/38

Management Review

Polymedica Corp. Datascope Corp. Gentiva Health Services Inc. Mentor Corp.

PLMD DSCP GTIV MNTR

Title CEO CEO CEO CEO

Age 54 73 48 62

Tenure (years) 12 N/A 3 34

Salary $397,460 $1,000,000 $458,654 $390,000

Bonus $1,160,000 $1,175,000 $650,000 $0

Other Compensation $0 $281,305 $7,777 $0

All Other Compensation $6,550 $17,590 $3,758,078 $4,552

Other Compensation $1,564,010 $2,473,895 $4,874,509 $394,552

Net Income $22,734,000 $34,243,000 $20,988,000 $32,078,000

Salary as a % of Net Income 7% 7% 23% 1%

Mean 10% 10% 10% 10%

% from average -29% -25% 141% -87%

Score 2 3 4 1

Exercised Stock Options 37,024 325,000 0 100,000

Exercisable Stock Options 347,881 215,000 727,073 260,500

Unexercised Stock Options 66,542 0 90,000 183,500

Total Stock Options 451,447 540,000 817,073 544,000

% Exercised 8% 60% 0% 18%

Mean 22% 22% 22% 22%

% from average -62% 177% -100% -15%

Score 2 4 1 3

Product 4 12 4 3

Rank 2 3 2 1

Of all stocks, Mentor Corp. ranked #1 Of undervalued stocks, Polymedica ranked #1


26/38

Insider Activity Of all stocks, Mentor Corp. exhibited an insider buying trend

Of undervalued stocks, Polymedica Corp. exhibited an insider buying trend


PLMD DSCP GTIV MNTR

Institutional Ownership 95.0% 71.6% 69.9% 82.1%

# of Institutions 283 238 168 285

Current Activity Buying Selling Selling Buying


27/38

Institutional Activity


PLMD DSCP GTIV MNTR

# Institutions 113 101 86 133

Total Shares Held 12,287,280 10,508,648 15,802,032 18,868,990

% Shares Owned 102% 71% 61% 81%

3 Mo. Shares Purchased 1,545,967 1,004,944 4,789,582 4,987,289

3 Mo. Shares Sold (1,817,093) (872,439) (5,053,975) (2,447,674)

3 Mo. Net Change (271,126) 132,505 (264,393) 2,539,615

% Change -8% 7% -3% 34%

# Buyers 50 39 53 67# Sellers 55 57 31 59

Total 105 96 84 126

# Net Buyers -5 -18 22 8

Trend Selling Buying Selling Buying

Of all stocks, Mentor Corp. exhibited the most significant positivechange in institutional ownership

Datascope Corp. exhibited the most significant positive change inownership amongst undervalued companies


28/38

Corporate Overview

Polymedica Corporation:With formidable growth for years to come, Polymedica Corp offers direct-to-customer relief

medical products and equipment to patients with diabetic, respiratory, urology, urinary tract,

and menopause problems. Their core business consists of diabetic and respiratory

products, both of which have shown significant growth. Currently, only consuming 8% of the

diabetic market, Polymedica has great potential to gain market share and achieve even

more growth. Favored by todays demographics, Polymedica Corp relies on governmentprograms to receive most of their profits.


29/38

Datascope Corporation:With over 6 long established product lines consisting of products for clinical health care

markets in interventional cardiology, critical care and cardiovascular and vascular surgery,

this company is here to stay for years to come. 2 new products shall propel growth rates

even higher. Their brand new launch of top-of-the-line next generation intra-aortic balloon

sets a new standard with the Fidelity 8 Fr. This product will propel their Cardiac Assist unit

to levels of great proportions. In the pipeline, upgraded VasoSeal (R) arterial puncturesealing devices shall reap positive rewards for theirCollagen Products / Vascular GraftSegment. Having undergone a big restructuring with in the company, DSCP looks to benefit

over 10 Million annually.

Corporate Overview


30/38

Corporate Overview

Gentiva Health Services:With a positive earnings surprise of 6 cents or 33% in the fourth quarter, and a positive

earnings surprise for the past four quarters, GTIV is doing something right. Currently, this

company provides specialty pharmaceutical services through 40 pharmacies across U.S.A.,

along with specialty home health care services. With their sale of the Specialty

Pharmaceutical assets to Accredo, GTIV is focusing on their Home Health Care Services.

Currently, GTIV holds the number one spot in Home Care with a 2-3% market share. Their275 locations enable delivery of wide range of services though their nursing and care

centers. GTIV is actively pursuing relationships with managed care organizations. Cigna

Health Care represents the largest managed care organization in which they have direct

business with; in 2001 Cigna represented 19% of revenues for GTIV. Recently, both Cigna

and GTIV renewed their contracts for the seventh consecutive time.


31/38

Corporate Overview

Mentor Corporation:

Mentor Corporation develops, manufactures, and markets a broad range of products for the

medical specialties of plastic, reconstructive, general surgery, and urology. The Company's

products include a line of implants, incontinence products, catheters, impotence products,

and cancer diagnosis and treatment products. Mentor markets its products in the United

States and in more than 60 companies. Mentor continues to post consistent revenue growth

earning it the distinction of being one of Forbes 200 Best Small Companies. Recentlydivesting its ophthalmology business, Mentor focus now is on its core businesses--urology

and cosmetic surgery markets. The urology segment of its core business addresses a large

underserved population with devices for the management and treatment of urologic

disorders common in the aging population. The cosmetic surgery segment, one of fastest

growing fields in medical practice today, experiences annual growth rate of 10-12 percent.

This well managed company will most definitely translate these market opportunities into

significant earnings growth.


32/38

SWOT AnalysisPolymedica Corporation:

Strengths: Have a good stranglehold of the Diabetic market

Direct mail delivery along with sophisticated software and advanced order fulfillment system provides products and support quickly andefficiently

Building brand name and loyalty with their customers due to customers recurring orders

Headed in the right direction with marketing to the right customers

Weaknesses:

A change in Medicare and governmental policies will severely alter PLMDs revenues

Revenues depend on recurring orders from customers; if customers do not place any extra orders other than their first, PLMD incurs aloss

Low-medium barriers of entry

Opportunities:

With an only 8% market share in Diabetic products and supplies, there is plenty of room to achieve greater success

Once business is completely established, PLMD can expand internationally

Can increase revenue growth by selling other products to existing patients in database

Increase relations with merchandisers to generate extra growth.

Threats:

With an advance in technology, elimination of consumable testing supplies for glucose monitoring is inevitable. This line consists of amajor portion of Chronic care sales

Reorders by patients are questionable due to customer preference, competitive pricing pressures, customer transitions to extended carefacilities and mortality rate

Competition with in this market is fierce. Price pressures and market share are difficult to achieve

Government controls companies destiny; limited budgeted expenses towards healthcare


33/38

SWOT AnalysisDatascope Corporation:

Strengths: Many lines of products that make money

Pioneer in development of Cardiac Assist products

Restructuring will save over $10 M year over year

Newly implemented direct sales strategy prove to be effective

Experiencing great growth in Patient Monitoring Labs

Weaknesses:

Experienced distribution problems Weak dollar hurts international sales

Involved in too many projects resulting in higher costs

Opportunities:

Potential to gain on the Inter Vascular market of $130 M in U.S.

New line of Fidelity 8 Fr. Can significantly increase growth

VasoSeal new pipelines can significantly increase growth

Expand to Asian and other European markets

Threats:

Foreign Rate Fluctuations can impact earnings

Costs with in company can increase

Lower R&D investment can weigh negatively on the company

Competition is strong, can force profits to dwindle


34/38

SWOT AnalysisGentiva Health Services:

Strengths: Home Care services prove to be effective and strong with 275 locations of deliveries of wide range of services

New trademarks are developing, making GTIV a known source

More focus on Home Care services with the sale of Specialty Pharmaceuticals

Weaknesses:

Due to the Budgeted Balance of 1997, there is a 15% reduction in home health care payout limit

Depended on Government regulations

Opportunities:

Actively pursuing relationships with managed care organization

With more focus paid on Home Care services GTIV can effectively distribute their products through nursing and care centers

Can gain market share through brand name and various projects

Threats:

Outside competition can hurt earnings with price pressures

Government regulations can hurt earnings


35/38

SWOT AnalysisMentor Corporation:

Strengths: 25-year track record in growing world breast augmentation market

Competes primarily with one other company in the domestic breast implant market, McGhan Medical Corporation

Competes with only one other company in the inflatable penile implant market, American Medical Systems, Inc

The Company believes that it has second largest market share for both Iodine and Palladium (brachytherapy seeds for the treatment ofprostate cancer) seeds, and its recent acquisition of South Bay Medical's automated workstation will provide the Company with a strongcompetitive advantage

Dominant catheters and other disposable incontinence products position in the European market

Weaknesses:

Limited global reach

Recently emerged from FDA consent decree

1,622 employees - 382 in sales and marketing

Opportunities:

Innovative ultrasound liposuction technique under FDA review

Clear exit strategyto be acquired

Viagra introduction and concurrent advertising campaign generated an unprecedented amount of interest in impotence causes andtreatments

Threats:

FDA regulation

Failure to develop existing distribution channels

Government and market cost containment measures

Strong dollar


36/38

SWOT Overview

Polymedica Corporation Potential for former venture capital fund manager CEO to further capitalize on diabetic and Senior

demographic trends outweigh price pressures and regulatory concerns.

Datascope Corporation Innovative, but aging management, recent restructuring enables company to have productive sales--no long-term debt and significant foreign currency exposure--make companys growth potential questionable but

reasonable. With two bran new products and international exposure company can see formidable growth foryears to come.

Gentiva Health Services Company dominates Home Care and will benefit from demographic trends and growth in industry, but insider

selling at $24, stock at 52-week high (as of April 22nd) confirms that stock is overvalued.

Mentor Corporation Company will benefit from favorable demographic changes and growth trends in core businesses, but 34-year

CEO tenure, recent emergence from FDA consent decree, and significant earnings increases realized throughcost savings and a recent acquisition leave make current management's ability to grow company questionable.


37/38

4) Recommendation (A)

Polymedica Corporation Access to capital:

CEO former venture capital fund manager

Solid technology investments:

Co. leverages database of over 5% of all diabetes patients in U.S., free shipping,

reoccurring order processing and automatic billing to retain customers and develop newproduct lines and services

Regulatory concerns marginal:

Emerged from SEC investigation unscathed

Strong market demographics

Market share growth initiatives will be complimented by favorable demographic trends


38/38

Recommendation (B)

Datascope Corporation Solid Future

With two bran new products Datacope will greatly increase their revenue stream.

Cost CuttingManagement is doing the right thing in curbing costs during recessionary times.

Strong Market Demographics

Just like Polymedica Corp, Datascope will accrue greater sales as the baby boom

population ages.

Good take-over candidate with only a $400 M market capital, while penetrating the

international markets.

Healthcare Final

Documents

Transcript of Healthcare Final