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DB HS&T Survival Guide
2009 Outlook - A Tale of Two
Halves
Ross Muken
Research Analyst
(1) 212 250 7547
ross.muken@db.com
Michael Cherny
Associate Analyst
(1) 212 250 8665
michael.cherny@db.com
Remain defensive in 1H; Prepare for tepid up-tick in 2H; MHS = 'Top Pick'
We contend that the global economic landscape is likely to deteriorate further in
1H'09, pressuring operating results and share performance across much of the
HS&T universe. Furthermore, we look for a sluggish recovery late in FY09 that
allows for a return to tepid growth in FY10. Based on these views, we recommend
investors stay defensive, focusing on less economically sensitive sub-sectors, and
industry leaders with visible or recurring revenue streams, flexible cost structures,
superior mgmt., and clean balance sheets. We cite MHS as our 'Top Pick'.
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Industry Update
Top picks
Medco Health Solutions (MHS.N),USD44.13 Buy
Express Scripts (ESRX.OQ),USD57.33 Buy
MedAssets (MDAS.OQ),USD14.09 Buy
Thermo Fisher (TMO.N),USD35.30 Buy
Illumina (ILMN.OQ),USD27.00 Buy
Companies featured
Affymetrix (AFFX.OQ),USD3.41 Sell
Allscripts-Misys (MDRX.OQ),USD9.16 Hold
AmerisourceBergen (ABC.N),USD36.11 Hold
Cardinal Health (CAH.N),USD35.63 Buy
Cerner (CERN.OQ),USD37.57 Buy
Express Scripts (ESRX.OQ),USD57.33 Buy
Illumina (ILMN.OQ),USD27.00 Buy
Life Technologies Corp. (LIFE.OQ),USD25.29 Buy
McKesson (MCK.N),USD39.53 Hold
Medco Health Solutions (MHS.N),USD44.13 Buy
Millipore (MIL.N),USD52.84 Hold
PerkinElmer (PKI.N),USD14.94 Sell
Quality Systems Inc (QSII.OQ),USD39.27 Hold
Thermo Fisher (TMO.N),USD35.30 Buy
Vital Images (VTAL.OQ),USD13.70 Hold
Waters (WAT.N),USD39.02 Hold
Eclipsys (ECLP.OQ),USD13.40 Buy
Global Markets Research Company
Three prominent questions emerge in the HS&T universe as we enter 2009…
#1) What is the length and depth of this current recession and how much impact
will it have on healthcare / drug utilization trends? (Is this time different?) #2) How
transformative and far-reaching will Healthcare Reform prove to be and when is it
most likely to be enacted? (We estimate CY09) #3) Will we see a rash of M&A
transactions (both friendly and hostile) given depressed valuations and is the credit
crisis likely to intensify (driven by the consumer) or abate (due to fiscal and
monetary easing by governments worldwide)? We attempt to tackle these
complex questions in the body of our outlook, recognizing that the underlying
issues are dynamic and thus our views are likely to be fluid as well (so we hope).
We rate MHS our ‘Top Pick’ for 2009; Recommend Overweight PBMs
The PBM industry presents a unique mix of economic insensitivity (profit growth
aligned with customer savings on drug utilization via generics and mail), attractive
valuation relative to highly visible growth (15x FY09 EPS vs. 18-20% earnings
growth) and the potential for upside based on proposed healthcare reform
(increased healthcare coverage, biosimilars and E-prescribing). Given on our
positive sector outlook for the PBM industry, we cite Buy-rated shares of MHS as
our ‘Top Pick’ for 2009 and reiterate our PT of $55.00. MHS’ clinical differentiation
strategy (TRCs and PGx) continues to drive new business wins (share gain),
resulting in superior financial performance and stellar shareholder value creation
(ROIC to increase by 200 bps / CFO up 2x to $2B in FY09).
Retain cautious stance on Life Science Tools; Recommend underweight 1H
We cite persistent macroeconomic weakness (particularly around capital
equipment), volatility in Fx markets and a difficult credit environment as key
reasons for concern. We continue to prefer companies with high consumable
exposure (TMO and LIFE), adjustable cost bases and strong cash generation and
would avoid companies with significant high-end instrumentation exposure (PKI).
Valuation and Risks
We base valuation on a confluence of methodologies which include: DCF, public
comps and acquisition comps. The key risks to the PBMs center primarily on the
perceived lack of differentiation in the competitive environment and pricing
pressures affecting growth and margins. The key risks to HIT players include
continued weakness in the capital spending environment (hospitals / physicians)
as well as changes in legislation. The key risks to the Rx distributors include the
potential for further pressure on generic pricing and weak Rx trends. The key risks
to companies in life science tools include continued macro weakness and
increased competitive pressures causing a need for continued innovation.
Table of Contents
2009 HS&T Outlook ........................................................................... 3
It was the worst of times; it was the ‘best’ of times? ..............................................................3
PBM - Overweight ............................................................................. 7
When will the next great bull-run in PBMs begin? ....................................................................7
Health IT – Market weight* .............................................................. 9
The yin and the yang – will federal funding offset credit woes? ...............................................9
Pharma Dist. – Market weight ........................................................ 11
How defensive will Rx distribution prove to be?.....................................................................11
LS Tools – Underweight.................................................................. 13
Will LST players face significant headwinds for much of 2009? .............................................13
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