alice avanian bsas presentation 9-15-15

FOR INSTITUTIONAL USE ONLY

2015 Healthcare Overview: Key Drivers of Strong Performance

Alice Avanian, CFA, Managing Director, Leerink Partners

Please refer to Disclosure Appendix for Analyst Certification and important disclosures. Price charts, disclosures specific to covered

companies and statements of valuation and risk are available on https://leerink.bluematrix.com/bluematrix/Disclosure2 or by contacting

Leerink Partners Publishing Department.

September 15, 2015

https://leerink.bluematrix.com/bluematrix/Disclosure2


• Alice Avanian, CFA, Managing Director

- Associate Director of Equity Research

- Past Chair and current Board member, Boston Security Analysts Society

- Board member, Boston Economic Club

• Leerink Partners

- Leading investment bank specializing in healthcare.

- Focus on companies that are developing and commercializing innovative

products and services that are defining the future of healthcare.

Source: Leerink Partners Equity Research, unless otherwise specified.

INTRODUCTION

2


• Healthcare shares are in 5th year of outperformance

• Historic look at recent years

• Framework for Healthcare Investing

• Secular Trends Positive

- Demand, Innovation

• Regulatory/Legal Positive

- Regulation, Public Policy

• Company-Specific Factors

- Binary Events, Valuation

• What to watch

• Description of each Sub-sector

- PM Profile, Metrics, Valuation, Catalysts, Sample Model

2015 HEALTHCARE OVERVIEW: AGENDA

3


Percentage point outperformance versus indicated index.

Source: FactSet, S&P Indices

IN OUR 5th YEAR OF HEALTHCARE OUTPERFORMANCE

4

-5%

0%

5%

10%

15%

20%

25%

2011 2012 2013 2014 YTD 2015(9/9/15)

Outperformance of Healthcare

Large Caps(v S&P 500)

Mid Caps(v S&P 400)

Small Caps(v S&P 600)


Percentage point outperformance versus indicated index.

Source: FactSet, S&P Indices

IN OUR 5th YEAR OF HEALTHCARE OUTPERFORMANCE

5

0%

5%

10%

15%

20%

25%

30%

35%

40%

2011 2012 2013 2014 YTD 2015(9/9/15)

Outperformance of Biotech (NBI)

Large Caps(v S&P 500)

Mid Caps(v S&P 400)

Small Caps(v S&P 600)


• The NASDAQ Biotechnology Index (NBI) contains securities of NASDAQ-listed

companies classified according to the Industry Classification Benchmark as

either Biotechnology or Pharmaceuticals which also meet other eligibility criteria.

The NASDAQ Biotechnology Index is calculated under a modified capitalization-

weighted methodology. The Index began on November 1, 1993, at a base value

of 200.00.

• 150 companies

• Source: http://www.investing.com/indices/nasdaq-biotechnology-components

DEFINITION OF NBI

6


• Companies can enjoy competitive advantages for years:

• Real Intellectual Property

- Product Patents run 20 years

- Orphan Diseases have 7 years of exclusivity (Orphan Drug Act of 1983)

- Biologic data exclusivity is 12 yrs., NCE (New Chemical Entity) is 5 yrs.

• Barriers to Entry

- FDA and EU regulatory authorities

• Once approved, products tend to have pricing power

• 10-Baggers not uncommon

- To minimize risk, investors can wait till after Ph III data to invest in biopharma

- Probability of success after Ph III is 62%

• Source: Tufts University Center for the Study of Drug Development, 11/18/14

PM PROFILE: HEALTHCARE IS INHERENTLY ATTRACTIVE

7


PROBABILITIES OF SUCCESS FOR PRODUCTS IN DEVELOPMENT

Permission for use of Cost of Developing a New Drug November 18, 2014, provided by Joseph A. DiMasi, Tufts Univ.

8


• Secular Trend #1 – Durable Demand: Demographics

- Aging population globally

- In a century (1950-2050), the number of senior citizens will grow over 10x

(from 124M to 1.4B)

- Older folks spend more on healthcare

- The most rapidly aging countries are wealthier

SECULAR TRENDS POSITIVE FOR HC OUTPERFORMANCE

9


Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, 2005

SECULAR TREND #1 DURABLE DEMAND: DEMOGRAPHICS

10


Source: NIHCM Foundation, 2009 Medical Expenditure Panel Survey

SECULAR TREND #1 DURABLE DEMAND: DEMOGRAPHICS

11


• Secular Trend #1 – Durable Demand: Growing Affluence

- Healthcare becomes a right not a privilege

- Chinese HC spending as a % of GDP is creeping up from 5% to 6%

- OECD countries now in the 8-10% range

- US the outlier at 17% (although more is not necessarily better!)

SECULAR TREND #1 DURABLE DEMAND: GROWING AFFLUENCE

12



13



14


• Secular Trend #1 – Durable Demand: Export of Western Diet and Diseases

- Looking at rates of obesity among children points to a ticking time bomb

- As formerly poor countries become richer, children may be stunted in height

from poor nutrition and yet obese (BMI)

Examples: Brazil, Vietnam, S. Africa, India, Mexico

• Source: ‘Child and adolescent obesity: part of a bigger picture‘, The Lancet 2015

SECULAR TREND #1 DURABLE DEMAND: EXPORTING OUR DIET

15


Source: The Lancet, World Obesity Federation


Prevalence trends for child overweight and obesity in the USA and with

low-income and middle-income countries.

16


Source: Immunological complications of obesity. TD Kanneganti, VD Dixit - Nature immunology, 2012 - nature.com


17

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://www.nature.com/ni/journal/v13/n8/abs/ni.2343.html&ei=uGT_VMj4HYydygTcoIDAAg&bvm=bv.87611401,d.aWw&psig=AFQjCNENIBbDbOKZpC53JxoUjulhRrni8A&ust=1426110004199274



18

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://www.cartoonstock.com/directory/w/western_diet.asp&ei=W0MDVb_aCZCAygTp-IL4BQ&bvm=bv.88198703,d.aWw&psig=AFQjCNHFXe4YHfZicCgxxTwUSiRAvlCC3g&ust=1426363600956148


• Secular Trend #1 – Durable Demand: Shift from Acute to Chronic Diseases

- Acute/infectious diseases (viruses, malaria) have shorter durations of therapy.

- Chronic diseases (diabetes, cancer) are treated for years.

SECULAR TREND #1 DURABLE DEMAND: SHIFT TO CHRONIC

19



Source: cms.gov

20



Source: cms.gov

21


• Genomic Revolution

- Human Genome first sequenced in 2003 by the Human Genome Project

- Personalized medicine is revolutionizing drug development and treatment

- BRCA1 and BRCA2 genes show a disposition to breast and ovarian cancer

- Three genes cause early onset Alzheimer’s before the age of 65 (5% of AD

patients)

• Drug Development cycle shortening

- Targeted Therapeutics – Higher likelihood of regulatory success

- With genomic info and diagnostic tests, cos. can “enrich” their studies to better

select patients who will benefit

Example: Orphan Diseases

• Source: http://www.mayoclinic.org/diseases-conditions/alzheimers-disease/in-depth/alzheimers/art-

20048356, Leerink Partners Equity Research

SECULAR TREND #2 PACE OF INNOVATION ACCELERATING

22

http://www.mayoclinic.org/diseases-conditions/alzheimers-disease/in-depth/alzheimers/art-20048356










6=Source: Drugs at FDA, Leerink Partners Equity Research

SECULAR TREND #2 PACE OF INNOVATION ACCELERATING:

TARGETED THERAPIES & ORPHAN DISEASES

23


8=Source: Drugs at FDA, Leerink Partners Equity Research

SECULAR TREND #2 PACE OF INNOVATION ACCELERATING:

TARGETED THERAPIES & ORPHAN DISEASES

• FDA has generally required less clinical evidence for orphan drugs than for

common drugs

24



• HC the last major economic sector to benefit from information technology

- Eroom’s Law (Moore’s Law spelled backwards)

- Health records used to be trapped on paper in manila folders, are now being born

digitally and shared

• Big Data

- Electronic Medical Records allow data mining for improving practices

UNH bought Humedica, a leading data analytics firm, in Jan. 2013

UNH’s Optum also is partnered with Mayo Clinic to mine clinical and claims data

to improve healthcare

- Smart phones are a new enabling technology

Example Parkinson’s Disease patients

• Source: Information Week 1/31/13 http://www.informationweek.com/healthcare/clinical-information-

systems/united-healthcares-humedica-buy-signals-analytics-clout/d/d-id/1108450

• Source: Economist 3/14/15 http://www.economist.com/news/science-and-technology/21646177-

how-volunteer-yourself-citizen-laboratory-rat-kitted-out

25

http://www.informationweek.com/healthcare/clinical-information-systems/united-healthcares-humedica-buy-signals-analytics-clout/d/d-id/1108450




















http://www.economist.com/news/science-and-technology/21646177-how-volunteer-yourself-citizen-laboratory-rat-kitted-out






















Source: Leerink Partners Equity Research


26


• More visible Regulation

- Greater transparency, communication

- FDA approvals have speeded up

- Four mechanisms:

Accelerated Approval

Priority Review

Fast Track

Breakthrough Therapy Designation (began 7/9/12)

REGULATORY TRENDS POSITIVE FOR HC OUTPERFORMANCE

27


10=Source: Drugs at FDA; 11=Source=FDA.gov, Breakthrough Therapy Approvals, Leerink Partners Research


28



29


• ARRA once-in-a-generation opportunity

- 2/17/09 American Recovery & Reinvestment Act

- Budgeted $36B to improve HCIT

- Peak spending years were 2012-13, but 2014 still robust (+12%)

• Affordable Care Act (ACA, Obamacare) leading to increased availability of

insurance

- 14.1M adults gained insurance since Oct. 2013

- Uninsured rate dropped from 20% to 13% (by 35%)

• Medicare Advantage rates improving under Republican Congress

- Market penetration rising

• Source: Leerink Partners Equity Research, HHS,

http://aspe.hhs.gov/health/reports/2015/uninsured_change/ib_uninsured_change.pdf

PUBLIC POLICY TRENDS POSITIVE FOR HC OUTPERFORMANCE

30



Source: HHS, http://aspe.hhs.gov/health/reports/2015/uninsured_change/ib_uninsured_change.pdf

PUBLIC POLICY TRENDS POSITIVE FOR HC OUTPERFORMANCE

31



• Supports Demand for HC shares

- 2014: $268B in Biopharma acquisitions, more than double 2013

- YTD 2015: $169B

• Positive for Acquirer and Acquired:

- Deal synergies

- Lower tax rates

• Source: Leerink Partners Equity Research

CONSOLIDATION TRENDS POSITIVE FOR HC OUTPERFORMANCE

32


• HC as % of GDP

• HC spending growth rate

• Market Forces driving Price Pressure

• At the margin, we expect reimbursement hurdles to rise

- Govt’s increasing role (pie chart approx. 40% of US HC spending = govt)

- MCO/PBM bargaining power

- Switch to value-based pricing vs. volume-based

WATCH REIMBURSEMENT OF HC PRODUCTS, DRUGS

33


Source: cms.gov

WATCH REIMBURSEMENT OF HC PRODUCTS, DRUGS

12%

33%

20%

15%

2%

4% 6%

8%

National Health Expenditures by Source of Funds and Type of Expenditures 2007-2013

Out of Pocket

Private Health Insurance

Medicare

Medicaid

Public Health Activity

Other Government Programs

Investment

Other Third Party Payers

34


Source: S&P Healthcare Cost Indices, Leerink Partners Equity Research

HC SPENDING GROWTH RATE REMAINS HIGH

0%

2%

4%

6%

8%

10%

No

v-1

0

Jan-1

1

Mar-

11

May-1

1

Jul-11

Sep

-11

No

v-1

1

Jan-1

2

Mar-

12

May-1

2

Jul-12

Sep

-12

No

v-1

2

Jan-1

3

Mar-

13

May-1

3

Jul-13

Sep

-13

No

v-1

3

Jan-1

4

Mar-

14

May-1

4

Jul-14

Sep

-14

No

v-1

4

% C

han

ge,

Yo

Y

S&P Commercial Healthcare Economic Commercial Indices (12 mo. MA)

S&P Healthcare Economic Hospital Commercial 12 Month MA - Seasonally Adjusted

S&P Healthcare Economic Commercial 12 Month MA - Seasonally Adjusted

S&P Healthcare Economic Professional Services Commercial 12 Month MA - Seasonally Adjusted

35


• Initial price $84,000 for 12 wks. spurring investigations, protests

• As soon as there was competition, PBMs started negotiating discounts

- 12/22/14 ESRX struck a multi-year deal with ABBV, making the new Viekira

Pak the exclusive option for G1 Hep C pts., which we est. was a 30% discount

- 2/3/15 GILD mgt. indicated its average discount ~46%, skewed by public

payers (Medicaid, VA) whose discounts are >50%. Compares to 22% discount

before competition

• But competitive advantages still matter

- Our checks show many ESRX clients are still using GILD’s products

- GILD mgt. estimates 9 out of 10 major PBMs provide access to GILD

- We est. 74%/26% market share split between GILD/ABBV

• The key will be if discounting leads to broader access, expanding the market


PRICE PRESSURE: SOVALDI CASE STUDY

36


• PCSK9 antibodies dramatically lower LDL cholesterol

• Updated guidelines (Nov. 2013) recommended even lower cholesterol levels

• Summer FDA approvals of Praluent (REGN/SNY) and Repatha (AMGN)

- Broad labels encompass 8-10M US pts.

- Price ~$14k/yr., higher than expected

- Taken for years

• With both drugs having similar efficacy, safety, label and pricing, contract

negotiations will be intense. Payers will seek substantial discounts

• Next up: Outcomes study data, Praluent late 2016, Repatha late 2017

• Source: http://www.heart.org/HEARTORG/Conditions/Understanding-the-New-

Guidelines_UCM_458155_Article.jsp, NY Times Editorial, “Price for Lowering Cholesterol”, 9/8/15

PRICE PRESSURE: WATCH PCSK9 ANTIBODIES (AMGN, REGN/SNY)

37

http://www.heart.org/HEARTORG/Conditions/Understanding-the-New-Guidelines_UCM_458155_Article.jsp









• Healthcare investing is uniquely characterized by Binary Events

• Investors can take positions and/or hedge ahead of time

• Data releases, particularly at medical meetings

Example: Intra-Cellular Therapies (ITCI) Ph III schizophrenia data late 3Q/early

4Q. Up/down: +$15-20/-$10-15. Model assumes 70% POS (probability of

success) in schizophrenia, 50% POS in bipolar, 40% in bipolar depressions and

25% in MDD. Dementia not in our model would add $20-30 upside

• FDA approvals open the door to commercialization, watch launch trajectory

PDUFA dates: ENDP’s Belbuca (chronic pain) 10/24/15, SHPG lifitegrast (dry

eye) 10/25/15

• Legal decisions

• Reimbursement decisions

• Source: Leerink Partners Equity Research, Catalyst Tracker

WATCH BINARY EVENTS: CATALYST TRACKER

38


• Novartis recently launched its version of AMGN’s blockbuster Neupogen (price

$3,500 for 30 days), first lower-cost copy of a biotech drug in the US

• In EU, generic biologics have been available since 2006 and average pricing is

20-30% below the original

• We est. biosimilar growth from $1B to $15-20B over the next 5 years

• Key issues are interchangeability and naming of products

• Small caps levered to biosimilar growth: Coherus (CHRS), Epirus (EPRS),

Momenta (MNTA) and Pfenex (PFNX)


WATCH BIOSIMILARS

39


Source: Leerink Partners, Dealogic

WATCH FINANCINGS

40

11

32

71

31

17

56

116

53

0

20

40

60

80

100

120

140

2012 2013 2014 2015 YTD (as of 9.9.15)

Number of Total Healthcare IPOs

IPO Total Biotech

IPO Total Global HC


WATCH FINANCINGS: M&A IN 2014 AND 2015 DWARF IPO’S

Source: Leerink Partners, Dealogic

41

$795.6

$2,807.1

$5,706.8

$3,463.1 $1,873.7

$10,236.6

$12,576.0

$6,827.1

2012 2013 2014 2015 YTD (as of 9.9.15)

IPO Deal Value - In US $ Millions

Internal Deal Value - Biotech Dealogic Deal Value - Global HC


WATCH VALUATION

Source: FactSet, 9/9/15

• 5-year Absolute NTM P/E rising, recent correction healthy

42

'11 '12 '13 '14 '15

5

10

15

20

25

30

35

15.71

19.89

28.52

High: 18.30 Low: 9.87 Chg: 49.33%

S&P 500 / Health Care - SEC - PE - NTM S&P Mid Cap 400 / Health Care - SEC - PE - NTM S&P Small Cap 600 / Health Care - SEC - PE - NTM


WATCH VALUATION


• 5-year Relative NTM P/E Large Cap at low end of recent range

43

'11 '12 '13 '14 '15

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.04

S&P 500 / Health Care - SEC - PE - NTM Relative to S&P 500


WATCH VALUATION


• 5-year Relative NTM P/E Mid Cap rising, recent correction healthy

44

'11 '12 '13 '14 '15

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.22

S&P Mid Cap 400 / Health Care - SEC - PE - NTM Relative to S&P Mid Cap 400


WATCH VALUATION


• 5-year Relative NTM P/E Small Cap up sharply, recent correction healthy

45

'11 '12 '13 '14 '15

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.66S&P Small Cap 600 / Health Care - SEC - PE - NTM Relative to S&P Small Cap 600


• Major Pharma

• Biotech

• Specialty Pharma

• Life Science Tools & Diagnostics

• Medical Technology

• Managed Care

• Facilities

• HCIT (Healthcare Information Technology)

• PBMs & Distributors

• Digital Health

INDUSTRY SECTORS

46


• Description of Sector:

- Emerging from patent cliffs, in transition from small molecule drugs to biologics

with more innovation and faster growth. Attractive dividends.

• Investment Characteristics:

- Suitable for Growth & Value & Income portfolios.

Examples: Value/Income: MRK, PFE, SNY, GSK; Growth: BMY, LLY, NVO

Growth/Income: NVS; Value/Special Situation: AZN.

Smid caps: Speculative growth.

• Themes:

- Tailwinds from ACA & higher utilization of drugs.

- Lots of P&A (Partnerships & Acquisitions).

- Pharma & Biotech are melding as new therapeutic categories emerge:

Examples: Immuno-Oncology (I-O), Gene Therapy.

MAJOR PHARMA: PM Profile

47


• Key Industry Metrics to Watch:

- IMS or Wolters Kluwer Rx data (Source: IMS, Bloomberg).

- Speak to/Survey KOLs (Key Opinion Leaders).

- Market models for disease categories (prevalence, pts., price, competitors).

- Reimbursement/price pressure (Source: PriceRx, MCOs, PBMs).

• Co. Financial Metrics to Watch:

- Revenue growth rate, margin expansion.

- New product pipeline – Success in Ph II is the valuation “sweet spot”.

- Financial flexibility for capital allocation.

• Other: Currency fluctuations, dividend policy, shr. buybacks, patent expirations.

MAJOR PHARMA: Industry & Co. Metrics

48


• Valuation:

- Based on P/E and DCF. Group average is ~18x 2016E EPS.

Example: LLY trades at ~23x 2016E EPS. DCF forecasts sales & NI through

2026 using Major Pharma disc. rate of 8.25% and 2% terminal growth rate.

• Catalysts to Watch:

- Binary events can have significant impact on stock px & co. outlook.

- Medical meetings/data releases/stat. significance.

Example: LLY data showing a cardiovascular benefit, first-time ever for a

diabetes drug. Top-line data released 8/20/15, stk +4.1% with SPX -2%. Full

data at EASD (EU Diabetes mtg.) on 9/17/15.

- FDA clearances, reimbursement decisions.

MAJOR PHARMA: Valuation & Catalysts

49


Sample Major Pharma Model: LLY

50

LLY Standalone Product Summary

(figures in $MM, except per share data) CAGR CAGR CAGR

2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 14-18E 18-22E 22-26E

Prozac Family (fluoxetine; depression) 170 140 100 70 60 50 40 30 20 10 - - - -23% -24% -100%

Zyprexa (olanzapine; schizophrenia) 1,037 920 760 630 555 485 445 415 395 365 335 305 280 -14% -8% -8%

Symbyax (olanzapine/fluoxetine; bipolar) - - - - - - - - - - - - - na na na

Permax (pergolide; Parkinson's) - - - - - - - - - - - - - na na na

Amyvid (imaging agent; Alzheimer's) 3 5 10 10 15 15 20 20 20 20 20 20 20

Strattera (atomoxetine; ADHD) 739 740 760 310 165 110 80 65 50 35 20 5 - -31% -26% -100%

Cymbalta (duloxetine;depression) 1,615 1,000 700 595 520 430 380 330 280 250 235 215 205 -25% -14% -7%

Yentreve (stress urinary incontinence) - - - - - - - - - - - - - na na na

Other neuroscience 32 25 25 25 25 25 25 25 25 25 25 25 25 -6% 0% 0%

Total Neuroscience 3,596 2,830 2,355 1,640 1,340 1,115 990 885 790 705 635 570 530 -22% -12% -9%

Humulin (human insulin) 1,400 1,355 1,390 1,460 1,525 1,570 1,610 1,650 1,690 1,730 1,765 1,805 1,840 2% 3% 2%

Humalog (insulin lispro) 2,785 2,804 3,005 3,195 3,365 3,510 3,635 3,735 3,835 3,930 4,030 4,125 4,225 5% 3% 2%

Byetta/Bydureon (GLP-1 analogue; type 2 diab.) - - - - - - - - - - - - - na na na

Actos (pioglitazone; type 2 diabetes) 42 26 25 20 15 10 5 - - - - - - -22% -100% na

Other diabetes 125 120 125 125 125 125 125 125 125 125 125 125 125 0% 0% 0%

Tradjenta (DPP4; shared with BI) 328 365 470 590 690 810 895 945 980 1,005 835 605 325 20% 9% -24%

Jardiance (Empagliflozin, SGLT-2; ~55% of sales to BI) 10 80 140 210 290 360 440 485 525 555 585 625 645 131% 16% 5%

Evista (raloxifene; osteoporosis) 420 215 155 120 90 60 30 10 - - - - - -32% -100% na

Forteo (teriparatide; osteoporosis) 1,322 1,315 1,400 1,450 1,400 1,350 1,210 1,110 1,010 915 845 795 770 1% -8% -7%

Axiron (testosterone topical product) 171 135 125 70 50 35 20 10 - - - - - -26% -100% na

Humatrope (somatropin) 325 310 325 325 325 325 325 325 325 325 325 325 325 0% 0% 0%

Total Endocrinology 6,928 6,725 7,160 7,565 7,875 8,155 8,295 8,395 8,490 8,585 8,510 8,405 8,255 3% 2% -1%

Gemzar (gemcitabine; cancer) 153 105 75 50 30 20 10 - - - - - - -33% -100% na

Cyramza (Ramucirumab; VEGF antibody; cancer) 76 380 650 875 1,040 1,195 1,365 1,460 1,560 1,575 1,585 1,595 1,605 93% 11% 1%

Alimta (pemetrexed; mesothelioma) 2,792 2,565 2,675 2,600 2,525 2,425 2,195 1,725 965 365 215 140 75 -2% -21% -47%

Erbitux Royalty/Sales 327 470 860 885 785 785 785 735 685 635 610 585 560

Erbitux manufacturing revenues 46 55 40 40 - - - - - - - - - -100% na na

Total Oncology 3,394 3,575 4,300 4,450 4,380 4,425 4,355 3,920 3,210 2,575 2,410 2,320 2,240 7% -7% -9%

ReoPro (abciximab; anti-clot for ACS; PCI) 111 90 95 95 95 95 95 95 95 95 95 95 95 -4% 0% 0%

Xigris (drotrecogin alfa; sepsis) - - - - - - - - - - - - - na na na

Cialis (tadalafil; impotence) 2,291 2,335 2,520 1,995 1,130 735 520 410 355 305 255 215 165 -16% -25% -17%

Effient (anticoag. for ACS) 522 525 545 505 415 320 215 125 75 35 10 - - -6% -35% -100%

Adcirca (taldalafil; PAH) - - - - - - - - - - - - - na na na

Other cardiovascular 130 140 120 120 75 75 75 75 75 75 75 75 75 -13% 0% 0%

Total Cardiovascular 3,054 3,090 3,280 2,715 1,715 1,225 905 705 600 510 435 385 335 -13% -23% -14%na na na

Ceclor (cefaclor; antibiotic) - - - - - - - - - - - - - na na na

Vancocin (vancocin; antibiotic) 99 80 80 80 80 80 80 80 80 80 80 80 80 -5% 0% 0%

Other anti-infectives - - - - - - - - - - - - - na na na

Total Anti-Infectives 99 80 80 80 80 80 80 80 80 80 80 80 80 -5% 0% 0%na na na

Other Pharma 188 165 165 165 165 165 165 165 165 165 165 165 165 -3% 0% 0%

Total Other 188 165 165 165 165 165 165 165 165 165 165 165 165 -3% 0% 0%na na na

Pipeline/New Products na na na

PEG-lispro (novel basal insulin) - - - - - - - - - - - - - na na na

Basaglar (insulin glargine; ~45% of gross pft to BI) - 15 115 280 390 465 540 615 690 765 840 915 990 na 15% 9%

BC lispro (fast-acting analog; royalty to ADOC) - - - - - - - - - - - - - na na na

Solanezumab (Aβ antibody; Alzheimer's) - - - 30 270 540 745 880 1,015 1,150 1,285 1,385 1,485 na 39% 10%

Olaratumab (PDGFRα; soft tissue sarcoma) - - - - 85 275 400 475 520 550 570 590 615 na 57% 4%

Trulicity (Dula; GLP-1 fusion protein; type 2 diabetes) 10 185 345 540 720 915 1,100 1,250 1,385 1,510 1,605 1,705 1,800 190% 18% 7%

Necitumumab (IMC-11F8; human EGFR antibody; cancer) - - 150 350 475 550 625 660 695 715 735 755 775 na 10% 3%

Tasisulam (apoptosis activator; melanoma) - - - - - - - - - - - - - na na na

Ixekizumab (LY2439821, IL-17 antibody; RA) - - 80 358 577 786 905 1,025 1,124 1,214 1,313 1,403 1,492 na 18% 7%

Pomaglumetad Methionil (mGlu 2/3 prodrug, schizophrenia) - - - - - - - - - - - - - na na na

Evacetrapib (CETP inhibitor) - - - - 150 405 735 1,125 1,425 1,680 1,935 2,190 2,445 na 76% 14%

Baricitinib (jak 1/2 kinase inhibitor; RA) - - 65 200 375 525 650 825 925 1,000 1,075 1,150 1,225 na 25% 7%

LY2835219 (CDK 4/6 dual inhibitor; solid tumors) - - - - 100 200 300 400 450 500 550 600 650

CGRP Mab (CGRP antibody; migraine prevention) - - - - 57 147 285 460 565 630 680 750 800

Other pipeline (anti-IL1β, sclerostin, PCSK9, etc.) - - - - 50 100 200 300 400 500 600 650 700 na 68% 15%

Pipeline Subtotal 10 200 755 1,758 3,249 4,908 6,485 8,015 9,194 10,214 11,188 12,093 12,977 na 30% 9%na na na

Total Pharma Sales 17,269 16,665 18,095 18,373 18,804 20,073 21,275 22,165 22,529 22,834 23,423 24,018 24,582 2% 5% 2%na na na

Total collaboration & other revenue - - - - - - - - - - - - -

Animal Health (Include NVS AH) 2,347 3,305 3,624 3,863 4,100 4,347 4,583 4,775 4,981 5,180 5,388 5,601 5,787 15% 5% 4%

Net Sales 19,616 19,970 21,719 22,236 22,904 24,420 25,858 26,940 27,510 28,014 28,811 29,619 30,369 4% 5% 3%

% Growth -15% 2% 9% 2% 3% 7% 6% 4% 2% 2% 3% 3% 3%

Source: Company information, Leerink Partners LLC estimates.


Sample Major Pharma Model: LLY

LLY Standalone P&L Summary

(figures in $MM, except per share data) CAGR CAGR CAGR

2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 14-18E 18-22E 22-26E

Net Sales 19,616 19,970 21,719 22,236 22,904 24,420 25,858 26,940 27,510 28,014 28,811 29,619 30,369 4% 5% 3%

% Growth -15% 2% 9% 2% 3% 7% 6% 4% 2% 2% 3% 3% 3%

COGS 4,933 4,383 5,267 5,502 5,573 5,911 6,270 6,546 6,699 6,807 6,972 7,227 7,441 3% 5% 3%

% of sales 25.5% 22.0% 24.3% 24.7% 24.3% 24.2% 24.2% 24.3% 24.4% 24.3% 24.2% 24.4% 24.5% -1% 0% 0%

Gross Margin 14,683 15,587 16,452 16,733 17,331 18,509 19,588 20,394 20,811 21,207 21,839 22,392 22,929 4% 5% 2%

% of sales 74.9% 78.0% 75.8% 75.3% 75.7% 75.8% 75.8% 75.7% 75.7% 75.7% 75.8% 75.6% 75.5% 0% 0% 0%

R&D 4,734 4,813 4,915 4,884 4,904 4,940 4,936 4,944 4,974 5,043 5,042 5,065 5,193 1% 0% 1%

% of sales 24.3% 24.1% 22.6% 22.0% 21.4% 20.2% 19.1% 18.4% 18.1% 18.0% 17.5% 17.1% 17.1% -3% -4% -1%

Total SG&A including excise tax impact 6,502 6,547 6,769 6,765 6,810 6,909 7,129 7,347 7,510 7,648 7,865 8,086 8,200

% of sales 33.1% 32.8% 31.2% 30.4% 29.7% 28.3% 27.6% 27.3% 27.3% 27.3% 27.3% 27.3% 27.0%

Operating Income 3,448 4,227 4,767 5,084 5,617 6,660 7,522 8,104 8,327 8,516 8,931 9,241 9,536 13% 10% 3%

% of sales 17.6% 21.2% 22.0% 22.9% 24.5% 27.3% 29.1% 30.1% 30.3% 30.4% 31.0% 31.2% 31.4%

Total Other Income/(Expense) 249 215 5 5 170 185 205 230 250 270 285 295 310

Pretax Income 3,696 4,442 4,772 5,089 5,787 6,845 7,727 8,334 8,577 8,786 9,216 9,536 9,846 12% 10% 4%

% of sales 18.8% 22.2% 22.0% 22.9% 25.3% 28.0% 29.9% 30.9% 31.2% 31.4% 32.0% 32.2% 32.4%

Tax (Benefit)/Expense including excise tax impact 709 955 1,052 1,135 1,306 1,536 1,793 1,930 1,991 2,038 2,132 2,205 2,266 17% 11% 3%

% tax rate 19.2% 21.5% 22.0% 22.3% 22.6% 22.4% 23.2% 23.2% 23.2% 23.2% 23.1% 23.1% 23.0%

Net Income 2,988 3,487 3,720 3,954 4,482 5,309 5,934 6,403 6,586 6,749 7,084 7,331 7,580 11% 10% 4%

% of sales 15.2% 17.5% 17.1% 17.8% 19.6% 21.7% 22.9% 23.8% 23.9% 24.1% 24.6% 24.8% 25.0%

Adj. EPS (ex. one-time items; incl. options) 2.78 3.27 3.53 3.75 4.25 5.04 5.63 6.08 6.25 6.40 6.72 6.96 7.19 11% 10% 4%

% growth -33% 18% 8% 6% 13% 18% 12% 8% 3% 2% 5% 3% 3%

Diluted Shares Outstanding 1,074 1,067 1,054 1,054 1,054 1,054 1,054 1,054 1,054 1,054 1,054 1,054 1,054 0% 0% 0%

% growth -1% -1% -1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Dividend 1.96 1.96 1.96 1.96 1.96 1.96 1.96 1.96 1.96 1.96 1.96 1.96 1.96

Dividend payout ratio 70% 60% 56% 52% 46% 39% 35% 32% 31% 31% 29% 28% 27%

Source: Company information, Leerink Partners LLC estimates.

51


Sample Major Pharma Model: LLY Scenario Analysis: We Analyzed Three Sets Of Scenarios On Jardiance CV Outcome Study Result

Source: MEDACorp, Leerink Partners

Incorporating this survey data and our recent physician survey result [LINK], we analyzed these

scenarios and their impact on the entire SGLT-2 drug class market opportunity and Jardiance sales

CV study outcome Key model

assumptions

Bear

• Jardiance study barely makes statistical significance (eg.

0.045 for p<0.05)

• Risk reduction =<~10%

• Miss secondary outcome of onset of albuminuria

Or

• Class safety signal (eg. bone fracture) observed

• Modest SGLT-2 volume

growth (high/mid single digit)

from 2017 to 2022

• Jardiance peak US SGLT2

market share ~25%

Base

• Risk reduction =12-15%; Robust statistical significance; but

miss albuminuria secondary endpoint

Or

• Risk reduction =<~10%, but stats. Sig. in albuminuria

secondary endpoint

• Low double digit /high single

digit volume growth from

2017 to 2022


market share ~36%

Bull

• >=15% risk reduction

• Hit secondary albuminuria onset endpoint

• Clean safety profile

• Double digit SGLT-2 volume

growth to 2022


market share ~64%

Our current LLY model

reflects the BEAR case (pre-

EMPA-Reg trial data

announcement)

https://portal.leerink.com/IRP/Portal/Web/Non-Authenticated/DocumentViewer.aspx?docPath=354F736B4641376255594134317737544B58516D4361647636527848515A6B6F4E35454D39523742536C3876356C6E39454B7161784D766C73354D4B793871484F30506F3241545335357A6B4745777471745A4E58546F73706F663963414D74&pad=504B726E37542B42367A5A4D32526C7541534A467449346869313831584F4835754F63647561634C646C593D&docId=45624437446248773747303D&userId=5879636B6B7879503669493D


Sample Major Pharma Model: LLY Scenario Analysis: Suggests $700M to $2.1B Upside for LLY; Current Model Reflects Pre-EMPA-REG

Assumptions (Bear Case)

Note:*Shared with Boehringer Ingelheim (~50/50 split)


Forecasted WW SGLT-2 class sales and Jardiance franchise (including

combinations) sales attributed to LLY (2015E-26E)

Bull Base Bear

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

20

26

Total SGLT-2/Combomarkets

End userJardiance sales(LLY & BI)

LLY-bookedJardiancesales*

Current forecastin LLY model

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

20

26

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

20

26


Sample Major Pharma Model: LLY Scenario Analysis:

EMPA-REG Could Add $3.5 to $11/shr to LLY’s Valuation


2018-22 2022-26

Bear Case - $ millions 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E CAGR CAGR

Jardiance 91 116 230 312 363 404 450 501 553 594 637 684 13% 8%

EPS ($) 3.27 3.53 3.75 4.25 5.04 5.63 6.08 6.25 6.40 6.72 6.96 7.19

DCF PT $92.70

Base Case - $ millions 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E CAGR CAGR

Jardiance 91 155 312 441 542 656 791 934 1,069 1,199 1,312 1,435 21% 11%

Incremental revenue - 39 82 129 180 252 341 433 516 606 675 752

Net margin on incremental revenue - 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 TV

Operating Cash Flow - 19 41 65 90 126 170 216 258 303 338 376 6,508

Present Value of Incremental OCFs - 19 37 54 69 90 112 132 145 157 162 167 1.07

EPS upside ($) - 0.02 0.04 0.06 0.08 0.12 0.16 0.20 0.24 0.28 0.32 0.35

DCF PT $96.49

Bull Case - $ millions 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E CAGR CAGR

Jardiance 91 224 472 699 974 1,202 1,476 1,757 2,081 2,363 2,611 2,878 26% 13%

Incremental revenue - 108 242 387 611 797 1,026 1,256 1,528 1,769 1,974 2,194

Net margin on incremental revenue - 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 TV

Operating Cash Flow - 54 121 194 306 399 513 628 764 885 987 1,097 #####

Present Value of Incremental OCFs - 53 110 162 236 285 338 383 430 460 474 487 3.21

EPS upside ($) - 0.05 0.11 0.18 0.29 0.37 0.48 0.59 0.72 0.83 0.93 1.03

DCF PT $103.8

Discounted TV

2,888

Discounted TV

8,432

7.91

2.71

54



- Biotech is the provider of innovation in therapeutics.

- Investment Characteristics:

- Suitable for Growth (lg. cap) and Speculative Growth (smid cap) portfolios.

- Lg. Cap universe: ALXN, BIIB, BMRN, CELG, GILD, INCY, REGN, VRTX.

• Themes:

- Tailwinds from ACA & higher utilization of drugs.

- More R&D efficiency with exponential advances in scientific understanding.

- New therapeutic categories emerging such as I-O, gene therapy.

- Favorable regulatory environment with more transparent & collaborative FDA.

- Oncology & orphan drugs still have strong pricing power but need to watch.

- Lots of P&A (Partnerships & Acquisitions).

BIOTECH: PM Profile

55








- New product pipeline.

- Assess probability of success of products in each phase of development.

- Cash position & burn rate: Does co. have enough cash to reach the market?

• Other: Patent life, non-GAAP results.

BIOTECH: Industry & Co. Metrics

56


• Valuation:

- Based on EV/Sales and DCF. SOP = Sum of the Parts used for DCF.

Example: BMRN uses 10% disc. rate on existing products, 15% disc. rate for

pipeline (probability-wtd.) and 5% terminal growth rate.





Example: BMRN FDA AdCom (Advisory Comm.) for drisapersen (DMD). We

est. a 60% probability of approval. Stock Up/down: +30%/-10%.

- Drug Launch trajectories.

BIOTECH: Valuation & Catalysts

57


Sample Biotech Model: BMRN

Biomarin Pharmaceuticals P&LIncome Statement - GAAP ($MM) 2012 2013 1Q14 2Q14 3Q14 4Q14 2014 1Q15 2Q15 3Q15E 4Q15E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E

Milestones, Collaboration and Royalties 4.2 10.2 2.5 3.5 3.4 3.1 12.5 2.0 1.5 3.0 3.0 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.5

Naglazyme (MPS VI) 257.0 271.2 80.1 98.3 67.5 88.5 334.4 78.2 111.1 83.0 85.0 357.3 328.7 337.5 346.3 350.7 355.1 357.1 359.1 287.3

Kuvan (PKU) 143.1 167.4 45.2 46.9 53.4 57.4 202.9 50.2 60.1 55.0 57.0 222.3 166.7 175.1 183.8 193.0 202.7 212.8 223.4 234.6

Aldurazyme (MPS I Royalty Revenues) 82.2 83.5 18.1 24.1 22.6 40.9 105.7 18.2 20.2 23.5 25.0 86.9 94.7 96.2 97.7 98.7 99.7 100.7 101.7 102.7

Vimizim/GALNS - - 0.9 14.3 25.2 36.9 77.4 50.6 53.9 57.0 57.4 218.9 333.8 463.7 553.0 635.6 692.7 698.6 704.5 739.8

Firdapse (LEMS) 14.2 16.1 4.7 4.6 4.7 4.1 18.1 4.1 3.7 4.0 4.0 15.8 35.0 40.0 45.0 50.0 55.0 60.0 30.0 15.0

PEG-PAL - - - - - - - - - - - - - 18.4 31.3 44.3 62.9 89.9 104.8 113.6

BMN-701 - - - - - - - - - - - - 33.2 67.1 223.8 311.5 352.1 396.3 444.2 496.1

BMN-673 PARP - - - - - - - - - - - - - 28.8 78.4 123.0 159.6 197.8 237.2 253.9

BMN111 (pw 25%) - - - - - - - - - - - - - - 50.7 82.8 126.6 193.8 296.5 336.0

Drisapersen/Exon Skippers - - - - - - - - - - - - 62.1 127.5 237.3 392.9 482.2 569.0 636.0 668.4

Total Revenue 500.7 548.5 151.6 191.7 176.8 230.9 750.9 203.3 250.5 225.5 231.4 910.7 1,063.8 1,363.8 1,856.9 2,291.9 2,598.1 2,885.4 3,146.9 3,256.8

COGS 91.8 95.7 22.8 31.2 29.9 45.8 129.8 32.8 39.9 38.3 39.3 150.4 180.8 231.8 315.7 389.6 441.7 490.5 535.0 553.7

R&D 302.2 354.8 86.2 107.7 125.7 142.1 461.6 142.1 157.9 160.0 168.0 628.0 605.9 597.2 580.0 609.0 642.0 689.4 741.6 784.0

SG&A 198.2 235.4 60.1 68.1 74.6 99.8 302.5 92.8 101.5 95.0 100.0 389.3 414.9 491.0 649.9 756.3 779.4 807.9 786.7 814.2

Other 18.7 18.6 9.0 3.7 (64.6) 2.0 (50.0) 1.4 15.5 15.0 20.0 51.9 - - - - - - - -

Total Operating Expenses 610.9 704.5 178.0 210.7 165.6 289.6 843.9 269.1 314.8 270.0 288.0 1,141.9 1,201.7 1,320.0 1,545.6 1,755.0 1,863.1 1,987.8 2,063.3 2,151.8

Operating Income (110.3) (156.0) (26.5) (19.0) 11.2 (58.8) (93.0) (65.8) (64.3) (77.3) (89.4) (296.8) (137.9) 43.8 311.3 537.0 735.0 897.6 1,083.6 1,104.9

Loss on equity investments - (0.1) - - - - - - - - - - - - - - - - - -

Interest Income 2.6 3.1 1.1 1.7 1.4 1.6 5.9 0.7 1.0 1.0 1.0 3.7 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0

Interest Expense (7.6) (10.4) (9.1) (9.2) (9.1) (9.2) (36.6) (9.5) (10.0) (9.3) (9.3) (38.1) (37.2) - - - - - - -

Biomarin/Genzyme LLC (MPS I) (1.4) (1.1) (0.3) (0.5) (0.2) 0.2 (0.9) (0.2) (0.2) (0.2) (0.3) (0.9) (0.9) (0.9) (0.9) (0.9) (0.9) (0.9) (0.9) (0.9)

Other (1.5) (12.0) 0.2 (0.8) (0.1) 0.3 (0.4) 0.1 (9.1) (9.0) - - - - - - - -

Total other (8.0) (20.6) (8.2) (8.8) (8.0) (7.0) (32.0) (8.8) (18.3) (8.5) (8.6) (44.3) (34.1) 3.1 3.1 3.1 3.1 3.1 3.1 3.1

Pretax income (118.3) (176.6) (34.6) (27.8) 3.2 (65.7) (125.0) (74.7) (82.6) (85.8) (98.0) (341.1) (171.9) 46.9 314.4 540.1 738.1 900.7 1,086.8 1,108.1

Income taxes (3.5) (0.2) 3.5 5.8 (4.2) 4.1 9.1 (7.2) (0.6) 5.0 5.0 2.2 20.0 7.0 47.2 108.0 162.4 225.2 271.7 277.0

Net Loss Before Extraordinary Items (114.7) (176.5) (38.1) (33.6) 7.4 (69.8) (134.1) (67.5) (82.0) (90.8) (103.0) (343.3) (191.9) 39.9 267.3 432.1 575.7 675.5 815.1 831.1

Extraordinary Items - - - - - - - - - - - - - - - -

GAAP Net Income (Loss) (114.7) (176.5) (38.1) (33.6) 7.4 (69.8) (134.1) (67.5) (82.0) (90.8) (103.0) (343.3) (191.9) 39.9 267.3 432.1 575.7 675.5 815.1 831.1

GAAP EPS ($0.95) ($1.28) ($0.26) ($0.23) $0.05 ($0.47) ($0.92) ($0.43) ($0.51) ($0.57) ($0.64) ($2.15) ($1.15) $0.24 $1.65 $2.65 $3.52 $4.11 $4.93 $5.01

Wtd. Avg. Shares Outstanding 120.3 137.8 144.0 146.4 159.3 148.2 149.5 157.6 160.4 160.5 160.6 159.8 167.0 167.0 162.0 162.8 163.6 164.4 165.2 166.0

Source: Company reports and Leerink Partners estimates

58



DCF Model

Diluted shares out 2Q15 160.4 DCF Valuation Per share Val. ($MM) Proportion

Net Cash 2Q15 18.1 Total 167$ 26,861 100%

Discount rate products 10% Naglazyme 18$ 2,809 10%

Discount rate pipeline 15% Kuvan 13$ 2,029 8%

Terminal grow th rate 5% Aldurazyme 6$ 920 3%

Vimizim 37$ 5,872 22%

Firdapse 1$ 208 1%

PEG-PAL (60% p/w ) 5$ 722 3%

BMN-701 (60% p/w ) 22$ 3,485 13%

BMN-673 (p/w ) 10$ 1,599 6%

BMN-111 (50% p/w ) 16$ 2,569 10%

Drisapersen/exons p/w 30$ 4,825 18%

Early Pipeline/Platform 11$ 1,805 7%

Net Cash 0$ 18 0%

Source: Company reports and Leerink Partners estimates

59



Drisapersen Revenue Model 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E

DMD Patients in the US 12,000 12,108 12,217 12,327 12,438 12,550 12,663 12,777 12,892 13,008

% amenable to exon 51 skipping 13% 13% 13% 13% 13% 13% 13% 13% 13% 13%

Drisapersen US Candidates 1560 1574 1588 1603 1617 1631 1646 1661 1676 1691

% treated with drisapersen 0% 0% 12% 20% 32% 45% 50% 53% 55% 55%

Patients on drisapersen 0 0 191 321 517 734 823 880 922 930

Annual Cost $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000

Drisapersen Gross US Revenues ($MM) $0.0 $0.0 $57.2 $96.2 $155.2 $220.2 $246.9 $264.1 $276.5 $279.0

Accelerated Approval Probability 60% 60% 60% 60% 60% 60% 60% 60% 60% 60%

Drisapersen P(w) US Revenues ($MM) $0.0 $0.0 $34.3 $57.7 $93.1 $132.1 $148.2 $158.5 $165.9 $167.4

DMD Patients in EU 20,000 20180 20362 20545 20730 20916 21105 21295 21486 21680

% amenable to exon 51 skipping 13% 13% 13% 13% 13% 13% 13% 13% 13% 13%

Drisapersen EU Candidates 2600 2623 2647 2671 2695 2719 2744 2768 2793 2818

% treated with drisapersen 0% 0% 5% 12% 20% 26% 32% 38% 44% 47%

Patients on drisapersen 0 0 132 321 539 707 878 1052 1229 1325

Annual Cost $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000

Drisapersen Gross EU Revenues ($MM) $0.0 $0.0 $39.7 $96.2 $161.7 $212.1 $263.4 $315.6 $368.7 $397.4

Accelerated Approval Probability 70% 70% 70% 70% 70% 70% 70% 70% 70% 70%

Drisapersen P(w) EU Revenues ($MM) $0.0 $0.0 $27.8 $67.3 $113.2 $148.5 $184.4 $220.9 $258.1 $278.2

WW Gross Drisapersen Revenues $0.0 $0.0 $96.9 $192.3 $316.9 $432.3 $510.3 $579.7 $645.2 $676.4

WW P(w) Drisapersen Revenues ($MM) $0.0 $0.0 $62.1 $125.0 $206.3 $280.6 $332.5 $379.4 $424.0 $445.6

Other Skippers; % of Drisa 0% 0% 0% 2% 15% 40% 45% 50% 50% 50%

WW P(w) Platform Revs ($MM) $0.0 $0.0 $0.0 $2.5 $30.9 $112.2 $149.6 $189.7 $212.0 $222.8

WW Exon Skipping Revs to P&L ($MM) $0.0 $0.0 $62.1 $127.5 $237.3 $392.9 $482.2 $569.0 $636.0 $668.4

Drisapersen Assumptions

US Approval Probability 60%

EU Approval Probability 70%

WW Annual Cost $300,000

Source: Company Reports and Leerink Partners Estimates

60



- Less innovative cos. focused on drug delivery & generics. Now moving to a

hybrid model including brands. Not the same as “specialty drugs”.


- Suitable for Growth (lg. cap) and Speculative Growth (smid cap) portfolios.

- Lg. Cap universe: AGN, ENDP, JAZZ, MNK, MYL, PRGO, SHPG, TEVA, VRX.

• Themes:

- Tailwinds: ACA & higher utilization of drugs.

- Headwinds: fewer simple generics, development timelines for biosimilars

(complex generics) highly unpredictable, price pressure with sales into highly

genericized categories.

- Lots of P&A (Partnerships & Acquisitions) driven by: patent cliffs, numerous

sub-scale targets with inefficient cost & tax structures.

SPECIALTY PHARMA & GENERICS: PM Profile

61








- New product pipeline.

- Assess probability of success of products in each phase of development.

- Legal issues: Paragraph 4 filings, patent challenges, IPR (Inter Partes Review)

• Other: Tax rate, non-GAAP results.

SPECIALTY PHARMA & GENERICS: Industry & Co. Metrics

62


• Valuation:

- Based on P/E or DCF (10% WACC and probability-wtd. revenues).

Example: TEVA trades at ~13x 2016E non-GAAP EPS.




- FDA clearances, reimbursement decisions, drug launch trajectories.

- Legal events.

TEVA Catalysts:

2016: SD-809 (deuterated tetrabenazine) approval for Huntington’s Disease.

PDUFA (deadline for FDA response) mid-2016.

1H16: Close purchase of AGN’s generic business.

SPECIALTY PHARMA & GENERICS: Valuation & Catalysts

63


Sample Spec Pharma Model: TEVA

TEVA Annual Product Summary

(f igures in $m, except per share data) CAGR CAGR CAGR

2012 2013 2014 1Q15 2Q15 3Q15E 4Q15E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 15-17E 15-20E 18-23E

US Copaxone 20 mg (Glatiramer acetate; MS) 3,001 3,226 1,682 256 274 140 70 740 208 159 141 121 56 50 25 25 -54% -40% -29%

US Copaxone 40 mg (Glatiramer acetate; MS) - - 1,431 476 596 480 448 2,000 1,874 1,750 1,200 1,165 901 800 700 550 -6% -15% -14%

Int'l Copaxone (Glatiramer acetate; MS) 989 1,102 1,124 192 184 210 214 800 725 650 630 620 615 590 525 465 -10% -5% -6%na

Global Copaxone 3,990 4,328 4,237 924 1,054 830 732 3,540 2,807 2,560 1,971 1,906 1,572 1,440 1,250 1,040 -15% -15% -12%

ProAir (albuterol Sulfate; SABA; bronchial spasms) 406 429 478 124 128 128 130 510 535 400 350 350 350 350 350 350 -11% -7% 0%

Qvar (beclomethasone; steroid; asthma) 297 328 287 98 83 78 80 339 365 385 400 410 420 425 430 430 7% 4% 1%

Other respiratory 138 135 131 25 20 20 25 90 132 133 135 136 137 138 139 140 22% 9% 1%

Azilect (rasagiline; Parkinson's Disease) 330 371 428 107 105 100 98 410 370 185 75 50 50 45 40 40 -33% -34% -12%

Women's Health 448 463 504 129 110 110 96 445 565 590 605 620 630 635 640 645 15% 7% 1%

Provigil (modafinil; excessive sleepiness) 417 91 45 4 5 5 4 18 10 - - - - - - - -100% -100% na

Nuvigil (armodafinil; excessive sleepiness) 347 320 388 85 91 94 94 364 250 50 25 10 10 10 10 10 -63% -51% -17%

Treanda (bendamustine; CLL, NHL) 608 709 767 157 180 200 218 755 500 375 350 350 350 325 300 300 -30% -14% -3%

Other brands 1,155 1,193 1,165 265 249 245 261 1,020 1,239 1,301 1,366 1,434 1,506 1,520 1,540 1,550 13% 8% 3%

Total in-line brand subtotal 8,136 8,367 8,430 1,918 2,025 1,810 1,738 7,491 6,773 5,979 5,276 5,266 5,026 4,888 4,699 4,505 -11% -8% -3%

Qnasl (beclomethasone; allergic rhinitis) 15 30 60 18 20 22 25 85 120 140 148 155 170 175 180 185 28% 15% 5%

DuoResp (Symbicort-similar) - - 10 - 10 15 15 40 120 180 240 320 375 400 425 450 112% 56% 13%

EU Seretide-similar - - - - - - - - 50 75 125 170 210 250 275 300 na na 19%

US AB-rated Advair - - - - - - - - - - - - - - - - na na na

US non-substitutable Advair - - - - - - - - - 50 85 150 200 240 270 310 na na 30%

Reslizumab (IL-5 mAb; severe asthma) - - - - - - - - - - - - - - - - na na na

TEV-48125 (anti-CGRP; high freq migraine) - - - - - - - - - - 50 100 200 375 490 600 na na 64%

SD-809 (vmat-2 inhib; huntington's) - - - - - - - - 18 135 201 383 611 897 1,204 1,324 na na 46%

Zecuity (sumatriptan iontophoretic TDS) - - - - 2 8 20 30 60 100 120 150 175 185 200 210 83% 42% 12%

US Granix (tbo-filgrastim; neutropenia) - 5 60 20 25 28 27 100 130 175 185 195 225 230 235 240 32% 18% 5%

EU Lonquex (LA G-CSF; neutropenia) - - - - 8 5 2 15 25 30 35 40 45 50 50 50 41% 25% 7%

US balugrastim (LA G-CSF; neutropenia) - - - - - - - - - - - - - - - - na na na

New therapeutic entities - - - - - - - - 20 100 100 200 275 300 325 350 na na 28%

Total brand pipeline subtotal 15 35 130 38 65 78 89 270 543 985 1,289 1,863 2,486 3,102 3,654 4,019 91% 56% 26%

Total Brand Product Sales 8,151 8,402 8,560 1,956 2,090 1,888 1,827 7,761 7,316 6,964 6,565 7,130 7,512 7,990 8,353 8,524 -5% -1% 5%

US Generics 4,381 4,181 4,418 1,439 1,326 1,330 1,335 5,430 4,625 4,522 4,575 4,533 4,483 4,411 4,417 4,296 -9% -4% -1%

European Generics 3,387 3,485 3,148 680 665 650 645 2,640 2,800 3,000 3,100 3,150 3,200 3,264 3,329 3,396 7% 4% 2%

ROW Generics 2,617 2,240 2,248 502 475 455 428 1,860 2,100 2,300 2,475 2,600 2,700 2,754 2,809 2,865 11% 8% 3%

Total Generics (including API) 10,385 9,906 9,814 2,621 2,466 2,435 2,408 9,930 9,525 9,822 10,150 10,283 10,383 10,429 10,555 10,557 -1% 1% 1%

OTC 935 1,165 996 212 210 200 188 810 1,150 1,250 1,350 1,450 1,550 1,581 1,613 1,645 24% 14% 4%

Other (mainly distribution) 846 841 902 192 200 208 220 820 940 960 980 1,000 1,020 1,040 1,061 1,082 8% 4% 2%

Total OTC + Other 1,781 2006 1898 404 410 408 408 1630 2090 2210 2330 2450 2570 2621 2674 2727 16% 10% 3%

Total Revenue 20,316 20,314 20,272 4,981 4,966 4,731 4,643 19,321 18,931 18,997 19,044 19,863 20,465 21,041 21,582 21,808 -1% 1% 3%

% Grow th 11% 0% 0% 0% -2% -6% -10% -5% -2% 0% 0% 4% 3% 3% 3% 1%

Source: Company info., Leerink LLC est.

64


Sample Spec Pharma Model: TEVA

TEVA Annual P&L Summary (Adj. Basis)

(f igures in $m, except per share data) CAGR CAGR CAGR

2012 2013 2014 1Q15 2Q15 3Q15E 4Q15E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 15-17E 15-20E 18-23E

Total Revenue 20,316 20,314 20,272 4,981 4,966 4,731 4,643 19,321 18,931 18,997 19,044 19,863 20,465 21,041 21,582 21,808 -1% 1% 3%

% Grow th 11% 0% 0% 0% -2% -6% -10% -5% -2% 0% 0% 4% 3% 3% 3% 1%

COGS (non-GAAP) 8,244 8,419 8,129 1,919 1,846 1,858 1,860 7,483 7,571 7,674 7,791 7,914 8,015 8,048 8,154 8,171 1% 1% 1%

% of total revenue 40.6% 41.4% 40.1% 38.5% 37.2% 39.3% 40.1% 38.7% 40.0% 40.4% 40.9% 39.8% 39.2% 38.2% 37.8% 37.5%

Gross profit, Non-GAAP 12,072 11,895 12,143 3,062 3,120 2,873 2,783 11,838 11,360 11,322 11,253 11,949 12,450 12,993 13,428 13,638 -2% 1% 4%

% Non-GAAP Gross Margin 59.4% 58.6% 59.9% 61.5% 62.8% 60.7% 59.9% 61.3% 60.0% 59.6% 59.1% 60.2% 60.8% 61.8% 62.2% 62.5%

Research and development 1,283 1,422 1,409 328 357 340 330 1,355 1,350 1,360 1,385 1,385 1,380 1,408 1,436 1,464 0% 0% 1%

% of total revenue 6.3% 7.0% 7.0% 6.6% 7.2% 7.2% 7.1% 7.0% 7.1% 7.2% 7.3% 7.0% 6.7% 6.7% 6.7% 6.7%

Sales and marketing 3,835 4,036 3,785 908 846 825 821 3,400 3,385 3,500 3,505 3,525 3,575 3,400 3,650 3,675 1% 1% 1%

% of total revenue 18.9% 19.9% 18.7% 18.2% 17.0% 17.4% 17.7% 17.6% 17.9% 18.4% 18.4% 17.7% 17.5% 16.2% 16.9% 16.9%

General & Administrative 1,238 1,239 1,217 293 307 270 250 1,120 1,100 1,025 1,025 1,025 1,030 1,040 1,050 1,060 -4% -2% 1%

% of total revenue 6.1% 6.1% 6.0% 5.9% 6.2% 5.7% 5.4% 5.8% 5.8% 5.4% 5.4% 5.2% 5.0% 4.9% 4.9% 4.9%

Operating Income 5,716 5,198 5,732 1,533 1,610 1,438 1,382 5,963 5,525 5,437 5,338 6,014 6,465 7,145 7,292 7,438 -5% 2% 7%

% Operating Margin 28.1% 25.6% 28.3% 30.8% 32.4% 30.4% 29.8% 30.9% 29.2% 28.6% 28.0% 30.3% 31.6% 34.0% 33.8% 34.1%

Financial Expenses (income), net 354 289 306 49 41 75 75 240 230 200 180 100 60 50 40 35 -9% -24% -28%

Pretax Income 5362 4909 5426 1484 1569 1363 1307 5723 5295 5237 5158 5914 6405 7095 7252 7403 -4% 2% 7%

% of total revenue 26.4% 24.2% 26.8% 29.8% 31.6% 28.8% 28.2% 29.6% 28.0% 27.6% 27.1% 29.8% 31.3% 33.7% 33.6% 33.9%

Taxes 662 630 1083 312 345 273 301 1231 1059 1047 1032 1183 1281 1419 1450 1481 -8% 1% 7%

Tax Rate 12.3% 14.8% 20.0% 21.0% 19.5% 20.0% 23.0% 21.5% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%

Share of profit/(loss) of associates 46 40 5 9 3 5 3 20 18 18 18 18 18 18 18 18 -6% -3% 0%

Minority Interest (benefit) -17 -16 -13 -2 -9 -3 3 -11 -15 -13 -13 -13 -13 -13 -13 -13

Net Income Attributable to shareholders, Non-GAAP 4,671 4,255 4,351 1,165 1,230 1,088 1,001 4,484 4,233 4,220 4,157 4,761 5,154 5,706 5,832 5,953 0% 3%

% of total revenue 23.0% 20.9% 21.5% 23.4% 24.8% 23.0% 21.6% 23.2% 22.4% 22.2% 21.8% 24.0% 25.2% 27.1% 27.0% 27.3%

Convert add-back - - - - - - - - - - - - - na na

Non-GAAP Net Income 4,671 4255 4,351 1,165 1,230 1,088 1,001 4,484 4,233 4,220 4,157 4,761 5,154 5,706 5,832 5,953 -3% 3% 7%

% of total revenue 23.0% 20.9% 21.5% 23.4% 24.8% 23.0% 21.6% 23.2% 22.4% 22.2% 21.8% 24.0% 25.2% 27.1% 27.0% 27.3%

Non-GAAP EPS 5.35 5.01 5.07 1.36 1.43 1.27 1.16 5.21 5.04 5.05 5.04 5.77 6.25 6.92 7.07 7.22 -2% 4% 7%

% grow th 8% -6% 1% 11% 16% -4% -11% 3% -3% 0% 0% 15% 8% 11% 2% 2%

GAAP EPS 2.25 1.49 3.56 0.52 0.63 0.90 0.80 2.84 4.48 4.46 4.46 5.31 5.79 6.53 6.69 6.85 25% 15% 9%

% grow th -27% -34% 139% -40.3% -28.2% -11.4% -0.7% -20% 58% 0% 0% 19% 9% 13% 3% 2%

Average Diluted Shares (MM) 873 850 858 859 859 860 862 860 840 835 825 825 825 825 825 825 -1% -1% 0%

% grow th -2% -3% 1% 1% 0% 0% 0% 0% -2% -1% -1% 0% 0% 0% 0% 0%

Source: Company info., Leerink Research est.

65


Sample Spec Pharma Model: TEVA pro forma model with AGN

2016E 2017E 2018E 2019E 2020E

Sales TEVA 18,931 18,997 19,044 19,863 20,465

AGN Gx 7,350 7,644 7,950 8,268 8,598

Total 26,281 26,641 26,994 28,130 29,063

Adj. COGS TEVA 7,571 7,674 7,791 7,914 8,015

AGN Gx 3,308 3,440 3,577 3,720 3,869

Est. Synergies (248) (464) (537) (558) (580)

Total COGS 10,631 10,650 10,832 11,077 11,304

Combined Gross Profit 15,651 15,991 16,162 17,054 17,760

Combined GM as % of sales 60% 60% 60% 61% 61%

R&D TEVA 1350 1360 1385 1385 1380

AGN Gx 450 473 496 521 547

Est. Synergies (152) (213) (223) (223) (223)

New R&D 1,648 1,620 1,658 1,683 1,704

SG&A TEVA 4,485 4,525 4,530 4,550 4,605

AGN Gx 1,180 1,204 1,228 1,252 1,277

Est. Synergies (487) (662) (675) (675) (675)

New SG&A 5,178 5,067 5,082 5,127 5,207

Combined Operating Profit 8,824 9,304 9,422 10,244 10,849

Combined OM as % of sales 34% 35% 35% 36% 37%

Net interest income/(expense), net TEVA (230) (200) (180) (100) (60)

AGN Gx - - - - -

Total (230) (200) (180) (100) (60)

Debt (Interest Paid) Acq Debt interest ow ed (936) (936) (796) (656) (516)

Cash (Interest Lost) (120) (180) (240) (300) (360)

Total Interest Paid (lost CF) - per qtr (1,056) (1,116) (1,036) (956) (876)

Pre-tax income TEVA 5,295 5,237 5,158 5,914 6,405

AGN Gx 2,413 2,528 2,649 2,774 2,905

Incremental EBIT (Synergies minus f inance costs) (170) 223 399 500 603

Total 7,538 7,988 8,206 9,188 9,913

Tax Expense TEVA 1,059 1,047 1,032 1,183 1,281

AGN Gx 559 573 589 605 606

Tax synergies/f inancing benefit - - - - -

Total 1,618 1,621 1,620 1,787 1,887

Blended tax rate 21% 20% 20% 19% 19%

Net Income TEVA 4,236 4,190 4,127 4,731 5,124

AGN Gx 1,854 1,954 2,060 2,170 2,299

Income benefit/loss from debt/synergies (170) 223 399 500 603

Combined Net Income 5,920 6,367 6,585 7,401 8,026

% of net sales 23% 24% 24% 26% 28%

Combined TEVA-AGN Gx EPS 5.70$ 6.16$ 6.43$ 7.23$ 7.84$

TEVA Share Count 840 835 825 825 825

Shares issued at $65.50/share 199 199 199 199 199

New TEVA sharecount 1,039 1,034 1,024 1,024 1,024

Deal Summary:

TEVA Stand-alone EPS 5.04$ 5.05$ 5.04$ 5.77$ 6.25$

Accretion/(dilution) 0.66$ 1.10$ 1.39$ 1.45$ 1.59$

Source: Company info., Leerink LLC est. % accretion/(dilution) 13% 22% 28% 25% 25%

AGN ow nership 9.4% 9.5% 9.6% 9.6% 9.6%

Combined Theoretical TEVA-AGN Gx P&L

66



- Providing the tools for the genomic revolution or “precision medicine”. To help

with risk assessment, diagnosis, to guide therapy and measure progression.


- Suitable for GARP & High Growth portfolios.

- $100B+ revenues, mid-single-digit growth.

- Typical universe: Tools: A, ILMN, LMNX, PKI, QGEN, SIAL, TECH, TMO,

WAT; Diagnostics: AFFX, ALR, BIO, BRKR, CDNA, CPHD, FLDM, FMI,

GHDX, HTGM, MYGN, NSTG, NVTA, TROV, TTOO, VCYT.

• Themes:

- Genomics becoming prevalent throughout Healthcare.

- Many new product cycles in diagnostics; but reimbursement pressure growing.

- Industry consolidation/M&A ever-present.

- Wildcard: Growth in China – testing for environment, food safety, HC.


LS TOOLS & DIAGNOSTICS: PM Profile

67



- Biomedical research funding, incl. NIH budget and co. R&D.

- Biotech IPO fundraising (Source: Biocentury).

- Oncology and Infectious Disease testing trends.

- TAM (Total Addressable Market) growing.


- Revenue growth rate, margin expansion.

- Razor/razor blade model for instruments/ reagents (consumables).

• Other: Emerging cos. are CF negative, must adjust for stk. options.

LS TOOLS & DIAGNOSTICS: Industry & Co. Metrics

68


• Valuation:

- Based on EV/Rev. or EV/EBITDA. Group average is ~4x rev. & 13x EBITDA.

Example: Industry leader ILMN trades at ~11x 2016E rev. Est. 20% organic

revenue growth, deserving a premium. GHDX (early stage cancer testing)

sells at ~2.5x 2016E rev.


- Improving macro environment in North America.

- Newly insured patients from HC reform bode well for utilization.

- New product cycles provide a tailwind for organic growth.

- Underleveraged balance sheets and asset scarcity.


LS TOOLS & DIAGNOSTICS: Valuation & Catalysts

69


Sample LST&D Model: GHDX

Income statement [email protected]

Period Ended ($ thousands) 2013 Mar-14 Jun-14 Sep-14 Dec-14 2014 Mar-15 Jun-15 Sep-15e Dec-15e 2015e 2016e 2017e

Revenues

Product revenues $259,192 $67,002 $70,477 $69,101 $69,126 $275,706 $68,152 $70,619 $71,202 $77,034 $287,007 $322,722 $347,039

Contract revenues 2,402 0 0 0 0 0 0 0 0 0 0 0 0

Total revenues 261,594 67,002 70,477 69,101 69,126 275,706 68,152 70,619 71,202 77,034 287,007 322,722 347,039

Cost of product sales 42,099 12,055 12,207 11,979 12,501 48,742 12,762 13,033 13,172 12,325 51,293 51,636 55,526

Gross profit 219,495 54,947 58,270 57,122 56,625 226,964 55,390 57,586 58,029 64,709 235,714 271,087 291,513

SG&A 164,995 47,460 49,586 48,215 49,266 194,527 50,941 53,823 52,333 51,613 208,710 216,224 218,635

R&D 57,333 14,681 13,295 14,742 13,346 56,064 13,618 14,595 14,596 15,022 57,831 61,317 64,202

Operating income (loss) (2,833) (7,194) (4,611) (5,835) (5,987) (23,627) (9,169) (10,832) (8,900) (1,926) (30,827) (6,454) 8,676

Interest expense (income) and other, net (64) 176 (81) 298 179 572 320 (380) (29) (29) (118) (131) (131)

Pretax income (2,769) (7,370) (4,530) (6,133) (6,166) (24,199) (9,489) (10,452) (8,871) (1,897) (30,709) (6,324) 8,807

Taxes 346 75 88 129 101 393 4 (1,215) 100 100 (1,011) 400 400

Equity loss/(earnings) in unconsolidated 0 0 0 0 0 0 0 0 0 0 0 0 0

Net income ($3,115) ($7,445) ($4,618) ($6,262) ($6,267) ($24,592) ($9,493) ($9,237) ($8,971) ($1,997) ($29,698) ($6,724) $8,407

Basic shares outstanding 30,493 31,087 31,333 31,590 31,791 31,450 32,055 32,324 32,524 32,724 32,407 33,224 34,024

Diluted shares outstanding 30,908 31,087 31,333 31,590 31,791 31,450 32,055 32,324 32,524 32,724 32,407 33,224 35,424

EPS diluted ($0.10) ($0.24) ($0.15) ($0.20) ($0.20) ($0.78) (0.30) (2)$ ($0.29) ($0.28) ($0.06) ($0.92) ($0.20) $0.24

EPS growth

Product sales growth 11.0% 6.8% 10.7% 5.1% 3.1% 6.4% 1.7% 0.2% 3.0% 11.4% 4.1% 12.4% 7.5%

Test volume 85,500 23,080 24,050 23,700 24,770 95,600 25,430 26,060 26,544 27,742 105,776 116,354 124,499

Gross margin (product sales) 83.8% 82.0% 82.7% 82.7% 81.9% 82.3% 81.3% 81.5% 81.5% 84.0% 82.1% 84.0% 84.0%

Gross margin 83.9% 82.0% 82.7% 82.7% 81.9% 82.3% 81.3% 81.5% 81.5% 84.0% 82.1% 84.0% 84.0%

SG&A % of revenue 63.1% 70.8% 70.4% 69.8% 71.3% 70.6% 74.7% 76.2% 73.5% 67.0% 72.7% 67.0% 63.0%

R&D % of revenue 21.9% 21.9% 18.9% 21.3% 19.3% 20.3% 20.0% 20.7% 20.5% 19.5% 20.1% 19.0% 18.5%

Operating margin (1.1%) (10.7%) (6.5%) (8.4%) (8.7%) (8.6%) (13.5%) (15.3%) (12.5%) (2.5%) (10.7%) (2.0%) 2.5%

Tax rate (12.5%) (1.0%) (1.9%) (2.1%) (1.6%) (1.6%) (0.0%) 11.6% (1.1%) (5.3%) 3.3% (6.3%) 4.5%

D&A expense $6,324 $1,757 $1,733 $1,707 $1,673 $6,870 $1,728 $1,674 $1,638 $1,611 $6,650 $10,220 $10,144

EBITDA $3,491 ($5,437) ($2,878) ($4,128) ($4,314) ($16,757) ($7,441) ($9,158) ($7,263) ($315) ($24,177) $3,765 $18,820

70



- Med Tech cos. develop and manufacture devices and supplies sold to

hospitals, physician groups or patients (example of latter: insulin pumps).

- Many small innovative cos., which are frequently acquired by large caps.


- Suitable for GARP & High Growth portfolios.

- Typical universe: Diversified: ABT, BAX, BCR, BDX, JNJ, TFX; Lg. Cap

Cardio: BSX, MDT, STJ; Smid Cap Cardio: ABMD, ATRC, CSII, EW, HTWR;

Diabetes: DXCM, PODD; Orthopedics: CNMD, GMED, NUVA, SYK, WMGI,

ZMH; Aesthetics: CYNO, ELOS, SIEN, ZLTQ.

• Themes:

- Pricing/Volume/Reimbursement pressures are the new normal.

- Accretive M&A by cash-rich cos. drive rev., EPS growth.

- Emerging mkts. exposure.


MEDICAL TECHNOLOGY: PM Profile

71



- Clinical data releases, regulatory approvals, penetration of new technologies,

reimbursement.

- Lg. caps: Foreign exchange rates.


- Rev. growth, margin expansion – reported quarterly.

Example: HTWR 2Q15: Sales beat, showing faster than expected market

growth. Stock +8% on 7/30/15 with SPX unchanged.

• Other:

Lg. caps: Cash Flow positive, OM expansion, share buybacks.

Smid caps: CF negative, must adjust for stk. options, expect capital raises to

further fund growth.

MEDICAL TECHNOLOGY: Industry & Co. Metrics

72


• Valuation:

- Based on P/E (lg. caps) or EV/2016E Sales (smid caps).

Example: HTWR’s EV/Sales average multiple is 5x 2016E. Use EV/Sales

because co. not yet profitable.


- Medical meetings, data releases.

Example: HTWR’s full EU data likely available at ISHLT (Heart & Lung

Transplant mtg.) in 1H16.

- New product approvals.

- Changes in gov’t reimbursement – CMS specific releases, mainly IPPS

(Inpatient Prospective Payment System) and OPPS (Outpatient PPS) that are

released mid-year.

MEDICAL TECHNOLOGY: Valuation & Catalysts

73


Sample Med Tech Model: HTWR HeartWare International- Income StatementDollars in thousands, except per share data

Fiscal year ends Dec. 31

2010 2011 2012 2013 1Q14 2Q14 3Q14 4Q14 2014 1Q15 2Q15 3Q15 4Q15 2015 2016 2017 2018

A= Actual, E=Estimate A A A A A A A A A A A E E E E E E

Dec-10 Dec-11 Dec-12 Dec-13 M ar-14 Jun-14 Sep-14 Dec-14 Dec-14 M ar-15 Jun-15 Sep-15 Dec-15 Dec-15 Dec-16 Dec-17 Dec-18

Revenue $55,164.1 $82,763.7 $110,923.0 $207,929.0 $66,472.0 $70,131.0 $68,608.0 $73,209.0 $278,420.0 $70,021.0 $73,569.0 $62,072.7 $74,561.6 $280,224.3 $299,690.4 $357,595.2 $409,707.7

Cost of Goods Sold $24,441.5 $32,933.0 $51,024.0 $76,468.0 $22,915.0 $22,955.0 $22,977.0 $23,349.0 $92,196.0 $22,040.0 $25,228.0 $20,794.4 $24,232.5 $92,294.9 $97,184.3 $104,075.8 $105,754.7

Gross Profit $30,722.6 $49,830.7 $59,899.0 $131,461.0 $43,557.0 $47,176.0 $45,631.0 $49,860.0 $186,224.0 $47,981.0 $48,341.0 $41,278.3 $50,329.1 $187,929.4 $202,506.0 $253,519.4 $303,953.1

Operating Expenses

SG&A $26,642.4 $42,313.0 $53,945.0 $73,527.0 $20,875.0 $20,826.0 $20,579.0 $21,350.0 $83,630.0 $21,378.0 $22,207.0 $18,621.8 $22,368.5 $84,575.3 $90,112.2 $107,173.9 $122,362.1

R&D $33,107.7 $50,150.0 $83,548.0 $98,794.0 $31,564.0 $26,594.0 $29,296.0 $30,453.0 $117,907.0 $28,776.0 $31,326.0 $25,139.4 $29,824.6 $115,066.1 $123,436.0 $136,163.0 $145,732.6

Total Operating Expenses $59,750.1 $92,463.0 $137,493.0 $172,321.0 $52,439.0 $47,420.0 $49,875.0 $51,803.0 $201,537.0 $50,154.0 $53,533.0 $43,761.3 $52,193.1 $199,641.4 $213,548.2 $243,336.9 $268,094.7

EBIT ($29,027.5) ($42,632.3) ($77,594.0) ($40,860.0) ($8,882.0) ($244.0) ($4,244.0) ($1,943.0) ($15,313.0) ($2,173.0) ($5,192.0) ($2,482.9) ($1,864.0) ($11,711.9) ($11,042.2) $10,182.5 $35,858.4

Interest (Expense)/Income, net $132.7 ($11,822.2) ($11,300.0) ($9,228.0) ($3,039.0) ($4,651.0) ($6,472.0) ($5,096.0) ($19,258.0) ($6,988.0) ($2,651.0) ($2,651.0) ($2,651.0) ($14,941.0) ($10,604.0) ($10,604.0) ($10,604.0)

Net FX gain/(loss) ($502.3) ($707.4) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Other (Expense)/Income, net $0.0 $105.8 $38.0 $26.0 $0.0 $0.0 ($145.0) $0.0 ($145.0) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Pretax Income ($29,397.2) ($55,056.1) ($87,718.0) ($51,941.0) ($11,921.0) ($4,895.0) ($10,861.0) ($7,039.0) ($34,716.0) ($9,161.0) ($7,843.0) ($5,133.9) ($4,515.0) ($26,652.9) ($21,646.2) ($421.5) $25,254.4

Income Taxes $0.0 $0.0 $0.0 $626.0 $0.0 $0.0 ($57.0) ($103.0) ($160.0) $232.0 $306.0 $0.0 $0.0 $538.0 $0.0 $0.0 $7,120.4

Net Income (cont. operations) ($29,397.2) ($55,056.1) ($87,718.0) ($52,567.0) ($11,921.0) ($4,895.0) ($10,804.0) ($6,936.0) ($34,556.0) ($9,393.0) ($8,149.0) ($5,133.9) ($4,515.0) ($27,190.9) ($21,646.2) ($421.5) $18,133.9

Diluted Average Shares in Thousands 13,567 13,959 14,252 16,061 16,934 16,989 17,007 17,037 16,992 17,193 17,269 17,369 17,469 17,325 17,719 18,119 18,519

Diluted Pro Forma EPS ($2.16) ($3.94) ($6.15) ($3.28) ($0.70) ($0.29) ($0.64) ($0.41) ($2.03) ($0.55) ($0.47) ($0.30) ($0.26) ($1.57) ($1.22) ($0.02) $0.98

EBITDA ($26,814) ($33,379) ($72,564) ($34,409) ($8,639) ($4,537) ($3,330) $18,474 $44,771

MARGINS

Gross 55.7% 60.2% 54.0% 63.2% 65.5% 67.3% 66.5% 68.1% 66.9% 68.5% 65.7% 66.5% 67.5% 67.1% 67.6% 70.9% 74.2%

SG&A as a % of Sales 48.3% 51.1% 48.6% 35.4% 31.4% 29.7% 30.0% 29.2% 30.0% 30.5% 30.2% 30.0% 30.0% 30.2% 30.1% 30.0% 29.9%

R&D as a % of Sales 60.0% 60.6% 75.3% 47.5% 47.5% 37.9% 42.7% 41.6% 42.3% 41.1% 42.6% 40.5% 40.0% 41.1% 41.2% 38.1% 35.6%

Operating Expense as % of Sales 108.3% 111.7% 124.0% 82.9% 78.9% 67.6% 72.7% 70.8% 72.4% 71.6% 72.8% 70.5% 70.0% 71.2% 71.3% 68.0% 65.4%

EBITDA na na na (16.5% ) (3.1% ) (1.6% ) (1.1% ) 5.2% 10.9%

EBIT na na na na na na na na (5.5% ) (3.1% ) na (4.0% ) (2.5% ) (4.2% ) (3.7% ) 2.8% 8.8%

Pretax Income na na na na na na na na (12.5% ) na na na na (9.5% ) (7.2% ) (0.1% ) 6.2%

Net Income na na na na na na na na (12.4% ) na na na na (9.7% ) (7.2% ) (0.1% ) 4.4%

Effective Tax Rate 0.0% 0.0% 0.0% (1.2% ) 0.0% 0.0% 0.5% 1.5% 0.5% 0.0% 0.0% 0.0% 0.0% (2.0% ) 0.0% 0.0% 28.2%

GROWTH RATE: % CHANGE

Sales: Reported 128.2% 50.0% 34.0% 87.5% 35.0% 38.0% 25.2% 38.0% 33.9% 5.3% 4.9% (9.5% ) 1.8% 0.6% 6.9% 19.3% 14.6%

Currency Effect (7.8% ) (6.0% ) (8.0% )

Sales ex. FX 136.0% 40.0% 13.3% (9.5% ) 1.8% 0.6% 6.9% 19.3% 14.6%

Gross profit 180.3% 62.2% 20.2% 119.5% 43.0% 47.6% 29.4% 47.7% 41.7% 10.2% 2.5% (9.5% ) 0.9% 0.9% 7.8% 25.2% 19.9%

SG&A 62.0% 58.8% 27.5% 36.3% 26.6% 21.0% 3.7% 6.9% 13.7% 2.4% 6.6% (9.5% ) 4.8% 1.1% 6.5% 18.9% 14.2%

R&D 119.7% 51.5% 66.6% 18.2% 42.6% 9.9% 13.0% 14.8% 19.3% (8.8% ) 17.8% (14.2% ) (2.1% ) (2.4% ) 7.3% 10.3% 7.0%

Total Operating Expenses 89.6% 54.7% 48.7% 25.3% 35.7% 14.5% 9.0% 11.4% 17.0% (4.4% ) 12.9% (12.3% ) 0.8% (0.9% ) 7.0% 13.9% 10.2%

EBITDA 41.8% 24.5% 117.4% (52.6% ) (74.9% ) (47.5% ) (26.6% ) (654.8% ) 142.4%

EBIT 41.3% 46.9% 82.0% (47.3% ) 8.7% (97.4% ) (59.6% ) (84.8% ) (62.5% ) (75.5% ) 2027.9% (41.5% ) (4.1% ) (23.5% ) (5.7% ) (192.2% ) 252.2%

Pretax Income 40.6% 87.3% 59.3% (40.8% ) (8.0% ) (62.2% ) (4.5% ) (52.0% ) (33.2% ) (23.2% ) 60.2% (52.7% ) (35.9% ) (23.2% ) (18.8% ) (98.1% ) (6091.7% )

Net Income from Cont. Ops 40.6% 87.3% 59.3% (40.1% ) (8.0% ) (62.2% ) (5.0% ) (54.7% ) (34.3% ) (21.2% ) 66.5% (52.5% ) (34.9% ) (21.3% ) (20.4% ) (98.1% ) (4402.3% )

Shares 39.8% 2.9% 2.1% 12.7% 14.0% 3.8% 3.5% 2.8% 5.8% 1.5% 1.6% 2.1% 2.5% 2.0% 2.3% 2.3% 2.2%

EPS (pro forma) 0.1% 82.6% 56.3% (46.8% ) (19.3% ) (63.5% ) (8.2% ) (55.9% ) (37.9% ) (22.4% ) 63.8% (53.5% ) (36.5% ) (22.7% ) (22.3% ) (98.0% ) (4113.9% )

Source: Company Reports and Leerink Partners estimates.

74


Sample Med Tech Model: WW Market Model for HTWR

Worldwide LVAD Market Model

Dollars in millions

Fiscal year ends December

2008 2009 2010 2011 2012 2013 1Q14 2Q14 3Q14 4Q14 2014 1Q15 2Q15 3Q15 4Q15 2015 2016 2017

A= Actual, E=Estimate A A A A A A A A A A A A A E E E E E

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Dec-15 Dec-16 Dec-16

Worldwide LVAD Unit Volume

Thoratec Corp. (HeartMate I I & XVE) 1,704 2,175 2,889 3,218 3,858 3,846 964 863 825 1,034 3,686 933 1,035 928 1,127 4,023 4,592 4,835

Y/Y Growth 46% 28% 33% 11% 20% 0% 8% -16% -14% 6% -4% -3% 20% 12% 9% 9% 14% 5%

HeartWare International (HVAD) 31 245 612 932 1,217 2,078 665 674 675 737 2,751 713 773 646 784 2,916 2,984 3,438

Y/Y Growth 82% 692% 149% 52% 31% 71% 38% 29% 23% 41% 32% 7% 15% -4% 6% 6% 2% 15%

Other 162 92 73 49 30 36 9 11 9 9 38 9 10 10 8 37 44 46

Y/Y Growth 315% -43% -21% 8% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2%

Total Worldwide LVAD Units 1,897 2,512 3,574 4,237 5,105 5,960 1,638 1,548 1,509 1,780 6,475 1,655 1,818 1,583 1,919 6,975 7,621 8,318

Y/Y Growth 55% 32% 42% 19% 20% 17% 18% -1% 0% 18% 9% 1% 17% 5% 8% 8% 9% 9%

Worldwide LVAD Unit Market Share

Thoratec Corp. (HeartMate II & XVE) 90% 87% 81% 76% 76% 65% 59% 56% 55% 58% 57% 56% 57% 59% 59% 58% 60% 58%

HeartWare International (HVAD) 2% 10% 17% 22% 24% 35% 41% 44% 45% 41% 42% 43% 43% 41% 41% 42% 39% 41%

Other (incl. Terumo, Jarvik, WorldHeart, Ventracor) 9% 4% 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 0% 1% 1% 1%

Source: Company Reports and Leerink Partners Estimates.

75



- MCOs are insurance cos. that manage healthcare costs, & provide and

finance these services to patients.


- Suitable for Growth & Value portfolios.

- Medium-term (3-5 yr.) rev. growth 4%, earnings growth rates range 5-25%.

- Typical universe: AET, ANTM, CI, CNC, HNT, HUM, MGLN, MOH, UAM, UNH,

WCG.

• Themes:

- Obamacare headwinds subsiding (increased utilization, adverse selection).

- Medicare Adv., Medicaid & Public Exchange enrollment increasing, rates up.

- Growth in High-Deductible Plans helping to control costs.

- Large M&A Deals are strategically and financially positive.


MANAGED CARE (MCO or HMO): PM Profile

76



- Interest rate leverage to the upside with rising interest rates.

- FCF yields on average for the group = 9%.

- Average debt to cap for 2Q15 ~35%.

- Market Share shifts to Exchanges, Self-Insured, Not-for-Profit (NFP) Blues

(Source: HHS, Individual Sate Insurance Bureau websites).


- Driven by enrollment, rates and cost trend.

- Commercial, Medicare and Medicaid looked at separately.

- MLR = Medical Loss Ratio. Equivalent to Gross Margin.

- EBIDTA margin expansion.

- Strength of Reserves = As a % of Medical Claims (Range 0.3-1.4%) or Days.

• Other: CFO/NI, share buybacks, balance sheet leverage.

MANAGED CARE: Industry & Co. Metrics

77


• Valuation:

- Based on EV/EBITA and P/E. Average EV/EBITA ratio 8.2x.

Example: AET currently at 8.5x EV/EBITA. Approx. 14x P/E on 2016E EPS

on a standalone basis, acq. of HUM adds 8% in 2017E and 12% in 2018E.

Post-deal discount is substantial.


- Q Earnings.

- Oct. – Nov.: Medicare Advantage (MA) Open enrollment.

- Nov.: Public Exchange Open Enrollment season begins.

- Dec.: Investor Days for AET, CNC, HUM, UNH.

- Feb.: 2016 MA Preliminary rate outlook.

- Early 2016: CNC-HNT acq. should close.

- 2H2016: AET-HUM acq. should close with minimal divestitures.

MANAGED CARE: Valuation & Catalysts

78


Sample MCO Model: AET

79


Sample MCO Model: AET

80



- Hospitals, mental health facilities.


- Suitable for Value portfolios.

- EBITDA growth of 5% for 2016E-2019E, vs. 2014A-2016E average of 10%.

- Typical universe: CYH, HCA, LPNT, THC, UHS.

• Themes:

- Influx of insured lives & demographics has increased utilization N-T.

- Medium-term pressure from Medicare privatization & value-based care.

- Behavioral care growth faster with unmet need for mental health treatment.

- Fragmented markets consolidating.


HEALTHCARE FACILITIES: PM Profile

81



- Driven by volume, comm’l & gov’t reimbursement, cyclicality (employment).

- Open enrollment season for comm’l and exchanges (Source: CBO, HHS).

- Reimbursement via Medicare and private payers (Source: CBO, CMS, cos.).

Examples: Readmissions, hospital acquired infections (Source: CBO), use

of Electronic Health Records (Source: AHA, HIMSS)

- Growth in Accountable Care Organizations (Source: AHA).


- SS (same-store) admits & revenues, LOS (length of stay), comm’l vs. gov’t

mix, bad debt, EBITDA margins – reported quarterly.

• Other: Cash Flow positive, share buybacks, balance sheet leverage.

HEALTHCARE FACILITIES: Industry & Co. Metrics

82


• Valuation:

- Based on relative EV/EBITDA (to SPX).

Example UHS: Current EV/EBITDA is 9x 2016E, FCF yield 5%E. Also look

at DCF with WACC of 7.5% and terminal growth rate of 1%.


- Q Earnings.

- ACA Open Enrollment 4Q15.

- IPPS (in-patient) and OPPS (out-patient) reimbursement rates Aug./Nov.

HEALTHCARE FACILITIES: Valuation & Catalysts

83


Sample Facilities Model: UHS

84


Sample Facilities Model: UHS

85



- HCIT is hospital-based (in-patient) and office-based (ambulatory) systems.


- Suitable for Growth portfolios, although growth has slowed.

- We est. 10% revenue and 10-15% EPS CAGR (over the next 3-5 years).

- HCIT 5-year Historical NTM P/E Group Average: 29.3x.

- Typical universe: ATHN, CERN, CPSI, IMS, MDAS, MDRX, QSII.

• Themes:

- Federal gov’t provided stimulus spending 2012-13 – now flattening out.

- Industry is consolidating – many oppty’s for mkt. share gains by top vendors.

- Shift toward value-based HC leading to adoption of Population Health Mgt.

HCIT (Healthcare Information Technology): PM Profile

86



- Penetration rate, replacement mkt. (Source: HIMSS Analytics).

- Capital budget and spending intentions (Source: surveys).

- Shift to cloud-based solutions adds to recurring revenue base.


- Bookings growth, backlog, drs. added, rev. per claim – reported quarterly.

Example: ATHN 2Q15: Excellent Bookings +40% Y/Y. Revs. $225M were

1% shy of estimates. Stock +5% on 7/24/15 with SPX -1%.

• Other: Cash Flow positive, healthy OM, must adjust for stk. options, high

recurring revs., int’l opportunity, acquisitions carry integration risk.

HCIT (Healthcare Information Technology): Industry & Co. Metrics

87


• Valuation:

- Based on P/E (CERN) or EV/2016E Sales (ATHN).

Example: ATHN’s 5-year EV/Sales average multiple is 7.2x. Use EV/Sales

because Sales & Mktg. and R&D at elevated levels.


- Large Contract Wins.

- Gov’t funding mandates (ex. ICD-10 deadline pushing to 10/1/15).

HCIT (Healthcare Information Technology): Valuation & Catalysts

88


Sample HCIT Model: ATHN AthenahealthIncome Statement ($MM)

($MM) 2013A Q1A Q2A Q3A Q4A 2014A Q1A Q2A Q3E Q4E 2015E 2016E

Revenue

ATHN business services 510.9 143.9 164.6 169.9 188.3 666.7 187.0 203.8 212.6 233.8 837.2 1,040.1

growth y/y 25.1% 24.1% 33.5% 32.8% 31.1% 30.5% 29.9% 23.8% 25.1% 24.2% 25.6% 24.2%

EPOC business services $52.4 $10.6 $11.3 $9.8 $12.8 $44.5 $10.8 $11.6 $11.5 $11.5 $45.4 $46.8

growth y/y NM 92.1% -22.4% -26.8% -32.3% -15.0% 1.9% 2.7% 17.3% -10.2% 2.0% 3.0%

Arsenal Mall (Other) $9.7 $4.2 $4.3 $5.0 $4.5 $18.0 $3.5 $4.0 $4.0 $4.0 $15.5 $16.0

growth y/y NM NM 92.9% 29.4% 23.5% 84.8% -16.7% -7.0% -20.0% -11.1% -13.9% 3.2%

ATHN / EPOC / Arsenal 573.0 158.7 180.2 184.7 205.6 729.2 201.3 219.4 228.1 249.3 898.1 1,102.9

growth y/y 40.3% 30.7% 28.6% 27.2% 23.7% 27.3% 26.8% 21.7% 23.5% 21.3% 23.2% 22.8%

Implementation 22.0 4.3 5.7 5.7 7.6 23.4 5.2 5.3 5.6 5.9 21.9 28.0

growth y/y 59.9% 4.8% -7.8% -9.8% 41.4% 6.1% 19.3% -6.7% -2.2% -23.4% -6.2% 27.9%

Total Revenue $595.0 $163.0 $185.9 $190.4 $213.2 $752.6 $206.4 $224.7 $233.6 $255.2 $920.0 $1,130.9

growth y/y 40.9% 29.8% 27.1% 25.7% 24.3% 26.5% 26.6% 20.9% 22.7% 19.7% 22.2% 22.9%

Operating expenses:

Non GAAP Direct Operating 220.3 65.6 68.8 73.8 70.1 278.4 77.1 82.6 84.1 88.0 331.8 409.9

% of revenue 37.0% 40.2% 37.0% 38.8% 32.9% 37.0% 37.3% 36.7% 36.0% 34.5% 36.1% 36.3%

Non GAAP Gross Profit 374.7 97.4 117.1 116.6 143.1 474.2 129.4 142.1 149.5 167.2 588.2 720.9

growth y/y 41.7% 28.4% 28.2% 24.3% 25.9% 26.6% 32.8% 21.4% 28.2% 16.8% 24.0% 22.6%

% of revenue 63.0% 59.8% 63.0% 61.2% 67.1% 63.0% 62.7% 63.3% 64.0% 65.5% 63.9% 63.8%

Selling and marketing 130.2 37.1 40.7 37.3 43.6 158.7 46.1 47.3 49.2 53.7 196.4 254.4

growth y/y 34.8% 23.3% 15.2% 16.3% 33.5% 21.9% 24.5% 16.3% 31.7% 23.2% 23.7% 29.6%

% of revenue 21.9% 22.7% 21.9% 19.6% 20.5% 21.1% 22.3% 21.1% 21.1% 21.1% 21.3% 22.5%

Research & development 53.4 13.5 14.3 16.6 17.9 62.2 21.5 22.1 21.5 23.2 88.3 106.3

growth y/y 74.6% 27.0% 7.4% 17.3% 16.6% 16.6% 59.2% 54.7% 29.6% 29.9% 41.9% 20.4%

% of revenue 9.0% 8.3% 7.7% 8.7% 8.4% 8.3% 10.4% 9.8% 9.2% 9.1% 9.6% 9.4%

General & administrative 74.6 24.3 25.8 27.5 25.8 103.4 26.1 29.3 35.0 38.3 128.7 171.9

growth y/y 61.1% 37.8% 24.8% 58.6% 35.9% 38.6% 7.4% 13.6% 27.4% 48.1% 24.4% 33.6%

% of revenue 12.5% 14.9% 13.9% 14.5% 12.1% 13.7% 12.6% 13.0% 15.0% 15.0% 14.0% 15.2%

Depreciation & amort 42.5 13.9 14.7 16.6 17.3 62.5 19.4 21.3 21.3 21.3 83.2 80.0

% of revenue 7.2% 8.5% 7.9% 8.7% 8.1% 8.3% 9.4% 9.5% 9.1% 8.3% 9.0% 7.1%

Adjusted Operating Exp 521.0 154.3 164.3 171.9 174.8 665.3 190.2 202.5 211.1 224.6 828.4 1,022.6

Adjusted EBITDA 116.5 22.6 36.3 35.2 55.8 149.8 35.7 43.4 43.8 51.9 174.8 188.3

growth y/y 28.2% 28.5% 64.6% 16.3% 19.6% 28.6% 57.9% 19.6% 24.6% -7.0% 16.7% 7.7%

EBITDA Margin 19.6% 13.9% 19.5% 18.5% 26.2% 19.9% 17.3% 19.3% 18.7% 20.3% 19.0% 16.7%

Adj Operating Income 74.0 8.7 21.6 18.5 38.5 87.3 16.3 22.2 22.5 30.6 91.6 108.3

growth y/y 13.0% -6.9% 93.3% -3.9% 12.7% 18.1% 86.0% 2.6% 21.5% -20.3% 4.9% 18.3%

Adj Operating income margin 12.4% 5.4% 11.6% 9.7% 18.0% 11.6% 7.9% 9.9% 9.6% 12.0% 10.0% 9.6%

Interest income 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Interest (expense) (3.7) (1.3) (1.3) (1.2) (0.9) (4.7) (1.1) (1.5) (1.5) (1.5) (5.6) (6.1)

Other inc/(exp) 0.1 (0.2) (0.0) 0.0 0.0 (0.1) 0.0 0.0 0.0 0.0 0.1 0.0

Adjusted Pretax income 70.3 7.3 20.3 17.3 37.6 82.5 15.2 20.7 21.0 29.1 86.0 102.2

Adjusted (tax) benefit (26.0) (2.9) (8.1) (6.9) (15.0) (33.0) (6.1) (8.3) (8.4) (11.7) (34.4) (40.9)

Tax rate (benefit) 37.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0%

Adjusted Net Income $44.3 $4.4 $12.2 $10.4 $22.5 $49.5 $9.1 $12.4 $12.6 $17.5 $51.6 $61.3

Adjusted EPS $1.16 $0.12 $0.32 $0.27 $0.58 $1.31 $0.24 $0.32 $0.31 $0.43 $1.30 $1.50

y/y growth (non-GAAP EPS) 15.5% -69.0% -480.2% -6.0% 1.2% 12.7% 104.3% -0.2% 14.4% -25.3% -0.2% 14.7%

Adjustments $41.7 $12.4 $14.4 $12.0 $13.8 $52.6 $18.0 $3.0 $2.0 $2.0 $25.0 $61.2

GAAP Net Income $2.6 ($8.1) ($2.2) ($1.6) $8.7 ($3.1) ($8.8) $9.3 $10.6 $15.5 $26.6 $0.1

GAAP EPS $0.07 ($0.21) ($0.06) ($0.04) $0.22 ($0.08) ($0.23) $0.24 $0.26 $0.38 $0.66 $0.00

Diluted shares outstanding 37.9 37.5 37.9 38.0 39.0 37.9 38.3 38.6 40.3 40.5 39.4 41.0

Basic Shares 36.9 37.5 37.9 38.0 38.0 37.8 38.3 39.3 39.3 39.5 39.1 40.0

Source: Company reports and Leerink Partners LLC estimates

89


Sample HCIT Model: ATHN AthenahealthIncome Statement cont'd ($MM)

Revenue Build ($MM) 2013A Q1A Q2A Q3A Q4A 2014A Q1A Q2A Q3E Q4E 2015E 2016E

Collections ($MM) $11,663 $3,172 $3,679 $3,843 $4,263 $14,958 $4,111 $4,633 $4,820 $5,291 $18,855 $23,113

growth y/y 27.0% 23.6% 29.7% 29.2% 29.8% 28.2% 29.6% 25.9% 25.4% 24.1% 26.1% 22.6%

% of collections charged 4.38% 4.54% 4.47% 4.42% 4.42% 4.46% 4.55% 4.40% 4.41% 4.42% 4.44% 4.50%

Revenue from collections 510.9 143.9 164.6 169.9 188.3 666.7 187.0 203.8 212.6 233.8 837.2 1,040.1

% change 25.1% 24.1% 33.5% 32.8% 31.1% 30.5% 29.9% 23.8% 25.1% 24.2% 25.6% 24.2%

Collections per avg Phys Equiv. $308,080 $71,841 $81,231 $77,789 $81,092 $311,953 $74,922 $81,140 $80,286 $83,695 $320,043 $329,644

% change 3.0% -3.8% 3.6% 1.9% 3.1% 1.3% 4.3% -0.1% 3.2% 3.2% 2.6% 3.0%

Total Physician Equivalents 43,035 45,275 47,556 51,261 53,886 53,886 55,855 58,353 61,715 64,713 64,713 76,468

Avg Phys Equiv 37,821 44,155 45,295 49,408 52,573 47,858 54,871 57,104 60,034 63,214 58,806 69,998

% change 23.3% 28.4% 25.2% 26.8% 25.9% 26.5% 24.3% 26.1% 21.5% 20.2% 22.9% 19.0%

Collections per avg doc $360,056 $84,224 $92,712 $89,161 $93,857 $359,954 $87,353 $94,221 $92,535 $96,754 $370,863 $381,230

% change 2.1% -5.3% 1.5% 1.2% 2.5% 0.0% 3.7% 1.6% 3.8% 3.1% 3.0% 2.8%

Provider Assumptions

Total providers using service 50,212 52,886 55,425 59,415 62,349 62,349 64,648 67,530 71,343 74,743 74,743 88,076

Incremental providers 10,460 2,674 2,539 3,990 2,934 12,137 2,299 2,882 3,813 3,400 12,394 13,333

growth y/y 26.3% 29.2% 26.4% 25.9% 24.2% 24.2% 22.2% 21.8% 20.1% 19.9% 19.9% 17.8%

Avg. providers 51,549 54,156 57,420 60,882 63,499 66,089 69,437 73,043

Physicians using service 35,858 37,663 39,686 43,106 45,423 45,423 47,062 49,176 52,087 54,682 54,682 64,860

growth y/y 28.0% 30.5% 27.8% 27.7% 26.7% 26.7% 25.0% 23.9% 20.8% 20.4% 20.4% 18.6%

Incremental physicians 7,847 1,805 2,023 3,420 2,317 9,565 1,639 2,114 2,911 2,595 9,259 10,178

growth y/y 63% 115% -8% 26% 11% 22% -9% 4% -15% 12% -3% 10%

Average physicians 32,380 36,761 38,675 41,396 44,265 41,470 46,243 48,119 50,632 53,385 50,752 60,531

Non physicians using the service 14,354 15,223 15,739 16,309 16,926 16,926 17,586 18,354 19,256 20,061 20,061 23,216

Incremental providers 2,613 869 516 570 617 2,572 660 768 902 804 3,135 3,155

growth y/y 18.2% 151% -29% -8% -33% -1.6% -24% 49% 58% 30% 21.9% 0.6%

Average non physicians 14,789 15,481 16,024 16,618 17,256 17,970 18,805 19,659

Doc to non-doc ratio 2.50x 2.47x 2.52x 2.64x 2.68x 2.68x 2.68x 2.68x 2.70x 2.73x 2.73x 2.79x

Physican equiv ratio 2.0x 2.0x 2.0x 2.0x 2.0x 2.0x 2.0x 2.0x 2.0x 2.0x 2.0x 2.0x

Revenue per Provider 11,850 3,083 3,354 3,205 3,420 12,071 3,193 3,327 3,275 3,414 12,309 12,840

Revenue per Physician 16,593 4,329 4,685 4,418 4,694 16,569 4,386 4,569 4,486 4,667 16,824 17,436

Implementation Revenue

Providers 50,212 52,886 55,425 59,415 62,349 62,349 64,648 67,530 71,343 74,743 74,743 88,076Implem. & Other Rev / Provider $439 $82 $102 $96 $123 $375 $80 $78 $78 $78 $293 $318

Implementation Revenue Est. (MM) 22.0 $4.3 $5.7 $5.7 $7.6 23.4 $5.2 $5.3 5.6 5.9 21.9 28.0

Source: Company reports and Leerink Partners LLC estimates

90


Sample HCIT Model: ATHN athenaClinicals Metrics 2014Q1A 2014Q2A 2014Q3A 2014Q4A 2015Q1A 2015Q2A

Clinicals total provider users 18,343 19,733 23,053 24,804 26,166 27,641

% growth 51% 43% 49% 48% 43% 40%

Provider % penetration 34.7% 35.6% 38.8% 39.8% 40.5% 40.9%

Clinicals physician users 13,521 14,672 17,458 18,811 19,796 20,923

adds in qtr 1,133 14,672 3,937 4,139 985 1,127

% growth 54% 46% 53% 52% 46% 43%

Physician % penetration 35.9% 37.0% 40.5% 41.4% 42.1% 42.5%

Clinicals non-physician users 4,822 5,061 5,595 5,993 6,370 6,718

% growth 43% 35% 37% 36% 32% 33%

Non-physician % penetration 31.7% 32.2% 34.3% 35.4% 36.2% 36.6%

athenaCommunicator Metrics 2014Q1A 2014Q2A 2014Q3A 2014Q4A 2015Q1A 2015Q2A

Commun. total provider users 31,707 33,976 38,699 41,777 43,770 45,902

% growth 95% 81% 68% 47% 38% 35%

Provider % penetration 60.0% 61.3% 65.1% 67.0% 67.7% 68.0%

Commun. physician users 24,030 25,837 29,683 32,163 33,578 35,248

adds in qtr 2,514 25,837 5,653 6,326 1,415 35,248

% growth 103% 87% 71% 49% 40% 36%

Physician % penetration 63.8% 65.1% 68.9% 70.8% 71.3% 71.7%

Commun. non-physician users 7,677 8,139 9,016 9,614 10,192 10,654

% growth 72% 65% 58% 40% 33% 31%

Client Performance 2014 Q1A 2014 Q2A 2014 Q3A 2014 Q4A 2015 Q1A 2015 Q2A

Net Promoter Score 44.7 41.2 47.5 42.0 42.3 40.5

Client Days in AR 41.1 39.0 39.2 38.8 41.2 40.8

First Pass Resolution Rate 93.5% 93.7% 93.7% 94.3% 93.7% 94.0%

Electronic Remit Advice Rate (ERA) 82.3% 82.6% 82.8% 84.6% 83.2% 82.9%

Total Claims Submitted (MM) 25.8 28.1 29.2 33 33 35

Claims / Account

Total Client Collections ($MM) 3,172 3,679 3,843 4,263 4,111 4,633

Total Working Days 61 64 64 62 61 64

Employees

Direct 1573 1633 1698 1797 1914 2123

Sales & Marketing 509 556 569 582 602 649

R&D 717 812 918 952 1010 1172

G&A 289 311 340 345 351 380

Total employees 3088 3312 3525 3677 3877 4324

seq increase 122 224 213 152 200 447

Quota-carrying Sales force E

Total quota carrying reps 133 140 142 153 150 151

growth y/y % 17% 18% 18% 21% 13% 8%

Collections per claim 123 131 132 130 125 132

Collections per Physician 84,224 92,712 89,161 93,851 87,353 94,222

Rev / Claim 5.581 5.856 5.825 5.730 5.698 5.823

Sales & Mrkt Costs / Doc $984 $1,026 $866 $960 $980 $962

source: company documents, Leerink Partners estimates

91



- Supply chain for drugs. Distributors sell to hospitals, retail. PBM (Pharmacy

Benefit Managers) process and pay Rx claims, manage formularies, negotiate

discounts & rebates (Source: wikipedia).


- Suitable for Growth portfolios.

- We est. 5% revenue and 15% EPS CAGR (over the next 3-5 years).

- 5-year Historical NTM P/E Group Average: 16.1x.

- Typical universe: Distributors: ABC, CAH, MCK, OMI. PBMs: CVS, ESRX.

• Themes:

- Generic drugs have higher margins.

- Influx of insured lives & demographics driving increased utilization.

- Specialty Drug spend growing 15%+ Y/Y. Positive for distributors.

PBMs & DRUG DISTRIBUTORS: PM Profile

92



- Driven by volume and price.

- Generic drug launches, Biosimilars in the future (Source: ESRX, IMS Health).

- Price Discounting positive (Source: Takeda Rx Cost report).

- Mgd. Care Consolidation affects contracts (ANTM/CI, AET/HUM).


- Rev. growth, OM expansion, contract renewals – reported quarterly.

Example: CVS unique business model as both a retail pharmacy and PBM.

• Other: Cash Flow positive, low OM, share buybacks, tuck-in acquisitions,

acquisition integration activity, retail vs. mail Rx, inflation, scale, foreign

exchange.

PBMs & DRUG DISTRIBUTORS: Industry & Co. Metrics

93


• Valuation:

- Based on P/E.

Example Historic: CVS 5-year historical NTM P/E average of 13.9x.


- PBMs: Selling season & market share shifts in 1H.

- Distributors: Generic launches = $10B in 4Q15 & 1Q16, incl. Neulasta ($3.6B).

Total $39B in both 2015 and 2016.

PBMs & DRUG DISTRIBUTORS: Valuation & Catalysts

94


Sample PBM Model: CVS CVS CAREMARK CORPORATIONIncome Statement Model for Fiscal years ending December ($MM)

2013R Q1A Q2A Q3A Q4A 2014A Q1A Q2A Q3E Q4E 2015E 2016E

Pharmacy Services 76,208.1 20,195.1 21,836.3 22,534.1 23,874.2 88,439.7 23,878.9 24,441.5 24,988.5 25,531.7 98,840.6 110,662.7

Growth y/y 3.8% 10.3% 16.2% 15.7% 21.7% 16.1% 18.2% 11.9% 10.9% 6.9% 11.8% 12.0%

% Total 60% 62% 63% 64% 64% 63% 66% 66% 66% 65% 66% 68%

Retail Pharmacy 65,618.2 16,479.8 16,870.6 16,749.5 17,698.0 67,797.9 16,950.8 17,242.1 17,356.7 18,184.3 69,733.8 72,251.2

Growth y/y 3.1% 2.7% 4.5% 3.1% 2.9% 3.3% 2.9% 2.2% 3.6% 2.7% 2.9% 3.6%

% Total 52% 50% 49% 48% 48% 49% 47% 46% 46% 47% 46% 44%

Intersegment eliminations (15,066) (3,986) (4,105) (4,262) (4,517) (16,871) (4,498) (4,515) (4,586) (4,735) (18,334) (19,572)

% Pharmacy and Retail 10.6% 10.9% 10.6% 10.9% 10.9% 10.8% 11.0% 10.8% 10.8% 10.8% 10.9% 10.7%

% Total -12% -12% -12% -12% -12% -12% -12% -12% -12% -12% -12% -12%

Net Revenue 126,760.8 32,688.9 34,601.8 35,021.2 37,055.3 139,367.2 36,331.6 37,169.0 37,758.8 38,981.2 150,240.6 163,342.1

Growth y/y 3.0% 6.3% 10.7% 9.7% 12.9% 9.9% 11.1% 7.4% 7.8% 5.2% 7.8% 8.7%

Cost of Goods Sold 102,978.3 26,746.5 28,278.2 28,553.6 30,421.5 113,999.8 30,167.7 30,766.6 31,049.3 31,871.0 123,854.6 135,213.2

% of revenue 81.2% 81.8% 81.7% 81.5% 82.1% 81.8% 83.0% 82.8% 82.2% 81.8% 82.4% 82.8%

Gross Profit 23,782.5 5,942.4 6,323.6 6,467.6 6,633.8 25,367.4 6,163.9 6,402.4 6,709.5 7,110.1 26,385.9 28,128.9

Gross Margin 18.8% 18.2% 18.3% 18.5% 17.9% 18.2% 17.0% 17.2% 17.8% 18.2% 17.6% 17.2% bps y/y 50 4 (42) (41) (140) (56) (121) (105) (70) 34 (64) (34)

Growth y/y 5.8% 6.5% 8.3% 7.3% 4.7% 6.7% 3.7% 1.2% 3.7% 7.2% 4.0% 6.6%

Operating expenses (ex D&A) 13,948 3,440 3,628 3,745 3,824 14,637 3,541 3,632 3,814 3,872 14,860 15,486

% of revenue 11.0% 10.5% 10.5% 10.7% 10.3% 10.5% 9.7% 9.8% 10.1% 9.9% 9.9% 9.5%

Growth y/y 3.1% 1.8% 6.1% 7.5% 4.4% 4.9% 2.9% 0.1% 1.9% 1.3% 1.5% 4.2%

Adjusted EBITDA 9,834.5 2,502.1 2,695.4 2,723.0 2,809.6 10,730.1 2,622.5 2,770.2 2,895.5 3,238.0 11,526.2 12,643.1

EBITDA Margin 7.76% 7.65% 7.79% 7.78% 7.58% 7.70% 7.22% 7.45% 7.67% 8.31% 7.67% 7.74% bps y/y 48 51 4 (19) (56) (6) (44) (34) (11) 72 (3) 7

Depreciation 1,375.8 346.8 354.1 350.7 360.8 1,412.4 361.1 356.7 357.7 358.7 1,434.2 1,447.6

Amortization 493.7 130.6 133.6 126.4 127.9 518.5 129.2 130.7 130.7 130.7 521.3 520.0

Subtot D&A 1,869.6 477.4 487.7 477.1 488.7 1,930.9 490.4 487.4 488.4 489.4 1,955.6 1,967.6

Adjusted EBIT 7,964.9 2,024.7 2,207.7 2,245.8 2,320.9 8,799.1 2,132.1 2,282.8 2,407.1 2,748.6 9,570.6 10,675.5

EBIT Margin 6.3% 6.2% 6.4% 6.4% 6.3% 6.3% 5.9% 6.1% 6.4% 7.1% 6.4% 6.5% bps y/y 43 68 7 (11) (49) 3 (33) (24) (4) 79 6 17

Growth y/y 10.5% 19.5% 11.9% 7.9% 4.7% 10.5% 5.3% 3.4% 7.2% 18.4% 8.8% 11.5%

Interest Expense, net (509.5) (158.4) (157.5) (153.5) (131.3) (600.7) (134.1) (129.7) (129.7) (129.7) (523.2) (536.0)

Pretax Income (ex. Items) 7,455.4 1,866.3 2,050.2 2,092.3 2,189.6 8,198.4 1,998.0 2,153.1 2,277.4 2,618.9 9,047.4 10,139.5

Pretax Margin 5.88% 5.71% 5.93% 5.97% 5.91% 5.88% 5.50% 5.79% 6.03% 6.72% 6.02% 6.21%

Plus Amortization 493.8 130.6 133.6 126.4 127.9 518.5 129.2 130.7 130.7 130.7 521.3 520.0

Adjusted Pretax Income (ex. Amort & items) 7,949.2 1,996.9 2,183.8 2,218.7 2,317.5 8,716.9 2,127.2 2,283.8 2,408.1 2,749.6 9,568.7 10,659.5

Adjusted Income Taxes 3,092.6 788.8 856.1 880.9 918.6 3,444.4 827.5 897.5 946.3 1,080.5 3,751.9 4,189.0

Tax Rate 38.9% 39.5% 39.2% 39.7% 39.6% 39.5% 38.9% 39.3% 39.3% 39.3% 39.2% 39.3%

Earnings allocated to participating securities 0.0 0.0 0.0 0.0 0.0 0.0 5.5 (6.7) 0.0 0.0 (1.2) 0.0

Adjusted Income from continuing ops 4,856.6 1,208.1 1,327.7 1,337.8 1,398.9 5,272.5 1,294.2 1,386.3 1,461.7 1,669.0 5,816.8 6,470.4

Net loss attributable to non-controlling interest 0 (0) (0) (0) (0) (1) (0) (0) 0 0 (0) 0

Dilutive income adjustment 0 0 0 0 0 0 0 0 0 0 0 0

Adjusted Income from Continuing Operations $4,856.6 $1,208.0 $1,327.3 $1,337.7 $1,398.6 $5,271.6 $1,294.1 $1,386.0 $1,461.7 $1,669.0 $5,816.4 $6,470.4

Adjusted EPS (Ex. Amort & Items) $3.96 $1.02 $1.13 $1.15 $1.21 $4.50 $1.14 $1.22 $1.30 $1.49 $5.15 $5.90

Growth y/y 15.8% 22.4% 16.4% 9.2% 8.9% 13.7% 12.2% 8.3% 13.0% 22.5% 14.3% 14.5%

Adjusted EPS (ex. Amort) $4.00 $1.02 $1.13 $0.88 $1.21 $4.24 $1.14 $1.19 $1.30 $1.49 $5.11 $5.90Growth y/y 22.7% 22.4% 16.4% -19.2% 8.9% 6.0% 12.2% 5.0% 47.7% 22.5% 20.6% 15.4%

GAAP EPS $3.75 $0.95 $1.06 $0.81 $1.14 $3.96 $1.07 $1.12 $1.23 $1.42 $4.84 $5.61Growth y/y 23.4% 23.3% 16.7% -20.6% 8.2% 5.7% 13.2% 5.9% 50.9% 24.3% 22.2% 15.9%

Basic Shares 1,217 1,180 1,165 1,157 1,143 1,161 1,128 1,124 1,112 1,107 1,118 1,090

Diluted Shares 1,226 1,190 1,174 1,166 1,152 1,170 1,136 1,132 1,127 1,122 1,129 1,097

Source: Company documents; Leerink Partners LLC estimates

95


Pharmacy Services Segment (PBM) 2013R Q1A Q2A Q3A Q4A 2014A Q1A Q2A Q3E Q4E 2015E 2016E

Net revenues 76,208.1 20,195.1 21,836.3 22,534.1 23,874.2 88,439.7 23,878.9 24,441.5 24,988.5 25,531.7 98,840.6 110,662.7

growth y/y 3.8% 10.3% 16.2% 15.7% 21.7% 16.1% 18.2% 11.9% 10.9% 6.9% 11.8% 12.0%

COGS 71,971.1 19,260.4 20,641.3 21,131.3 22,636.0 83,669.0 22,853.0 23,200.9 23,514.2 23,999.8 93,567.9 104,598.4

COGS % of net revenues 94.4% 95.4% 94.5% 93.8% 94.8% 94.6% 95.7% 94.9% 94.1% 94.0% 94.7% 94.5%

Gross profit 4,237.0 934.7 1,195.0 1,402.8 1,238.2 4,770.7 1,025.9 1,240.6 1,474.3 1,531.9 5,272.7 6,064.3

Gross margin % 5.6% 4.6% 5.5% 6.2% 5.2% 5.4% 4.3% 5.1% 5.9% 6.0% 5.3% 5.5% bps y/y 37 44 35 (42) (99) (17) (33) (40) (33) 81 (6) 15

Growth y/y 11.3% 21.8% 24.0% 8.4% 2.2% 12.6% 9.8% 3.8% 5.1% 23.7% 10.5% 15.0%

Operating expenses 1,161.7 294.1 316.7 316.4 329.5 1,256.7 291.9 300.2 319.9 380.4 1,292.4 1,460.7

Operating expense % of net revenues 1.52% 1.46% 1.45% 1.40% 1.38% 1.42% 1.22% 1.23% 1.28% 1.49% 1.31% 1.32%

Operating profit 3,075.3 640.6 878.3 1,086.4 908.7 3,514.0 734.0 940.4 1,154.5 1,151.5 3,980.4 4,603.6

Growth y/y 14.8% 28.5% 30.0% 8.5% 0.9% 14.3% 14.6% 7.1% 6.3% 26.7% 13.3% 15.7%

Operating margin % 4.04% 3.17% 4.02% 4.82% 3.81% 3.97% 3.07% 3.85% 4.62% 4.51% 4.03% 4.16%

bps y/y 39 45 43 (32) (78) (6) (10) (17) (20) 70 5 13

Depreciation and amortization 559.7 155.5 156.7 156.2 161.4 629.8 160.1 159.6 158.7 159.1 637.5 639.5

EBITDA 3,635.0 796.1 1,035.0 1,242.6 1,070.1 4,143.8 894.1 1,100.0 1,313.2 1,310.5 4,617.8 5,243.0

margin 4.8% 3.9% 4.7% 5.5% 4.5% 4.7% 3.7% 4.5% 5.3% 5.1% 4.7% 4.7%

Adjusted claims 1,057 264 268 268 282 1,081 288 288 292 297 1,165 1,276

EBITDA per adjusted claim (calc) $3.44 $3.02 $3.86 $4.64 $3.80 $3.83 $3.11 $3.81 $4.50 $4.41 $3.96 $4.11

D&A as % of total D&A 29.9% 32.6% 32.1% 32.7% 33.0% 32.6% 32.6% 32.7% 32.5% 32.5% 32.6% 32.5%

PBM

Net revenues:

Mail choice $24,790 $6,834 $7,753 $8,054 $8,441 $31,081 $8,750 $9,107 $9,246 $9,292 $36,395 $41,636

Pharmacy network $51,211 $13,302 $14,025 $14,420 $15,374 $57,122 $15,059 $15,267 $15,677 $16,175 $62,179 $68,739

Other $207 $59 $58 $60 $60 $236 $70 $67 $65 $64 $267 $288

Pharmacy claims processed:

Total 902.0 227.8 230.9 230.3 242.9 931.9 251.2 250.1 248.9 254.2 1,004.3 1,099.7 Growth y/y 2.4% 0.1% 1.9% 3.8% 7.5% 3.3% 10.3% 8.3% 8.1% 4.6% 7.8% 9.5%

Mail choice 83.2 19.8 20.5 20.7 21.3 82.3 20.3 21.3 21.5 21.5 84.6 88.0 Growth y/y 1.9% -3.6% -1.0% -1.4% 1.4% -1.1% 2.5% 3.9% 3.9% 1.0% 2.8% 4.0%

Pharmacy network 818.8 208.0 210.4 209.6 221.6 849.6 230.8 228.8 227.4 232.7 919.7 1,011.7 Growth y/y 2.5% 0.4% 2.2% 4.3% 8.2% 3.8% 11.0% 8.7% 8.5% 5.0% 8.3% 10.0%

Total adj. Rx 1,057.4 263.9 268.2 267.8 281.5 1,081.4 287.8 288.4 291.9 297.2 1,165.4 1,275.7 Growth y/y 2.4% -0.8% 1.1% 2.6% 6.2% 2.3% 9.1% 7.5% 9.0% 5.6% 7.8% 9.5%


Sample PBM Model: CVS

96


Retail Pharmacy Segment 2013R Q1A Q2A Q3A Q4A 2014A Q1A Q2A Q3E Q4E 2015E 2016E

Net revenues $65,618.2 $16,479.8 $16,870.6 $16,749.5 $17,698.0 $67,797.9 $16,950.8 $17,242.1 $17,356.7 $18,184.3 $69,733.8 $72,251.2

growth y/y 3.1% 2.7% 4.5% 3.1% 2.9% 3.3% 2.9% 2.2% 3.6% 2.7% 2.9% 3.6%

COGS $45,506.3 $11,296.0 $11,571.8 $11,513.0 $12,139.8 $46,520.6 $11,656.2 $11,920.2 $11,958.7 $12,438.0 $47,973.2 $49,492.1

COGS % of net revenues 69.4% 68.5% 68.6% 68.7% 68.6% 68.6% 68.8% 69.1% 68.9% 68.4% 68.8% 68.5%

Gross profit $20,111.9 $5,183.8 $5,298.8 $5,236.5 $5,558.2 $21,277.3 $5,294.6 $5,321.9 $5,397.9 $5,746.2 $21,760.7 $22,759.1

Gross margin % 30.6% 31.5% 31.4% 31.3% 31.4% 31.4% 31.2% 30.9% 31.1% 31.6% 31.2% 31.5% bps y/y 65 61 40 125 67 73 (22) (54) (16) 19 (18) 29

Growth y/y 5.3% 4.8% 5.9% 7.4% 5.2% 5.8% 2.1% 0.4% 3.1% 3.4% 2.3% 4.6%

Operating expenses $13,904.6 $3,433.6 $3,593.7 $3,709.5 $3,778.4 $14,515.2 $3,567.9 $3,641.2 $3,783.8 $3,782.3 $14,775.2 $15,172.7

Operating expense % of net revenues 21.2% 20.8% 21.3% 22.1% 21.3% 21.4% 21.0% 21.1% 21.8% 20.8% 21.2% 21.0%

Operating profit $6,207.3 $1,750.2 $1,705.1 $1,527.0 $1,779.8 $6,762.1 $1,726.7 $1,680.7 $1,614.2 $1,963.9 $6,985.5 $7,586.4

growth y/y 10.1% 14.2% 6.5% 8.8% 6.5% 8.9% -1.3% -1.4% 5.7% 10.3% 3.3% 8.6%

Operating margin % 9.46% 10.62% 10.11% 9.12% 10.06% 9.97% 10.19% 9.75% 9.30% 10.80% 10.02% 10.50%

bps y/y 60 107 19 48 33 51 (43) (36) 18 74 4 48

Depreciation and amortization $1,217.3 $298.4 $306.7 $296.7 $303.1 $1,204.9 $304.8 $303.6 $305.6 $306.2 $1,220.2 $1,228.1

EBITDA $7,424.6 $2,048.6 $2,011.8 $1,823.7 $2,082.9 $7,967.0 $2,031.5 $1,984.3 $1,919.7 $2,270.1 $8,205.7 $8,814.5

margin 11.3% 12.4% 11.9% 10.9% 11.8% 11.8% 12.0% 11.5% 11.1% 12.5% 11.8% 12.2%

bps y/y 65 74 23 43 35 44 (45) (42) 17 71 2 43

Net revenue growth y/y:

Total 3.1% 2.7% 4.5% 3.1% 2.9% 3.3% 2.9% 2.2% 3.6% 2.7% 2.9% 3.6%

Pharmacy 4.1% 5.1% 5.4% 5.2% 5.5% 5.9% 5.3% 5.2% 5.4% 3.9% 5.2% 4.2%

Front store 1.0% -2.4% 1.1% -3.7% -4.9% -2.5% -3.6% -5.1% -1.1% -0.1% -2.9% 1.9%

Retail Same Store sales increase:

Total 1.7% 1.4% 3.3% 2.0% 1.6% 2.1% 1.2% 0.5% 2.4% 1.6% 1.5% 2.2%

SS Pharmacy 2.6% 3.8% 5.0% 4.8% 5.5% 4.8% 4.2% 4.1% 4.1% 2.6% 3.7% 2.8%

SS Front store -0.5% -3.8% -0.4% -4.5% -7.2% -4.0% -6.1% -7.8% -2.0% -1.0% -4.3% 0.5% y/y increase (bps) (390)

SS Rx Volume 1.6% -0.5% 2.1% 3.3% 3.2% 2.0% 3.0% 3.0% 3.0% 2.0% 2.8% 2.0% y/y increase (bps) (660)

SS Adjusted Rx Volume 4.4% 2.1% 3.9% 5.1% 5.3% 4.1% 5.1% 4.8% 5.0% 5.0% 5.0% 4.0% y/y increase (bps) (670)

Retail Generic Dispensing Rate 81.4% 82.9% 83.5% 83.3% 82.4% 83.0% 84.4% 85.0% 85.3% 84.4% 84.8% 86.8% y/y increase (bps) 220

Pharmacy % of total revenues 69.5% 70.5% 69.6% 71.8% 71.2% 71.2% 71.7% 71.6% 73.6% 72.6% 72.6% 73.0% y/y increase (bps) 70

Third party % of pharmacy revenue 97.9% 98.3% 98.7% 98.7% 98.7% 98.6% 98.5% 98.8% 98.0% 98.0% 98.3% 98.0% y/y increase (bps) 40

Total Retail prescriptions filled 734.3 185.4 186.3 187.7 196.5 755.9 193.1 193.1 195.0 202.1 783.3 806.9

Growth y/y 2.4% 0.4% 2.9% 4.2% 4.2% 2.9% 4.2% 3.7% 3.9% 2.9% 3.6% 3.0%

Total Adj. Retail Rx filled 890.1 227.1 230.3 233.7 244.8 933.5 241.3 244.1 243.3 255.8 984.5 1,033.8

Growth y/y 5.2% 2.7% 4.8% 6.4% 6.6% 4.9% 6.3% 6.0% 4.1% 4.5% 5.5% 5.0%


Corporate Segment 2013R Q1A Q2A Q3A Q4A 2014A Q1A Q2A Q3E Q4E 2015E 2016E

Operating expenses 751 190 206 196 205 797 189 215 215 215 834 820

Depreciation and amortization 93 24 24 24 24 96 26 24 24 24 98 100

EBITDA (658) (167) (181) (172) (181) (700) (163) (191) (191) (191) (736) (720)

Eliminations

Net Revenue (15,065) (3,986) (4,105) (4,262) (4,517) (16,871) (4,498) (4,515) (4,586) (4,735) (18,334) (19,572)

% of combined revenue -10.6% -10.9% -10.6% -10.9% -10.9% -10.8% -11.0% -10.8% -10.8% -10.8% -10.9% -10.7%

COGS (14,499) (3,810) (3,935) (4,091) (4,354) (16,190) (4,342) (4,355) (4,424) (4,567) (17,686) (18,877)

Gross profit (566) (176) (170) (172) (163) (680) (157) (160) (163) (168) (648) (694)

Gross Margin % 3.8% 4.4% 4.1% 4.0% 3.6% 4.0% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%

Operating expenses 0 0 0 0 0 0 (17) (16) (16) (16) (65) 0

Depreciation and amortization 0 0 0 0 0 0 0 0 0 0 0 0

EBITDA (566) (176) (170) (172) (163) (680) (140) (144) (147) (152) (582) (694)



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CVS CAREMARK CORPORATIONRevenue Build ($MM)

2013R Q1A Q2A Q3A Q4A 2014A Q1A Q2A Q3E Q4E 2015E 2016E

Pharamacy Services ($MM)

Mail Choice $24,790 $6,834 $7,753 $8,054 $8,441 $31,081 $8,750 $9,107 $9,246 $9,292 $36,395 $41,636

y/y change 8.5% 16.4% 28.5% 26.4% 29.5% 25.4% 28.0% 17.5% 14.8% 10.1% 17.1% 14.4%

Pharmacy Network 51,211 13,302 14,025 14,420 15,374 57,122 15,059 15,267 15,677 16,175 62,179 68,739

y/y change 1.6% 7.4% 10.4% 10.4% 17.8% 11.5% 13.2% 8.9% 8.7% 5.2% 8.9% 10.6%

Other 207 59 58 60 60 236 70 67 65 64 267 288

y/y change 9.0% 17.4% 5.3% 18.5% 16.4% 14.2% 19.6% 16.2% 8.0% 8.0% 12.9% 8.0%

Total Pharmacy Services Revenue $76,208 $20,195 $21,836 $22,534 $23,874 $88,440 $23,879 $24,441 $24,989 $25,532 $98,841 $110,663

y/y change 3.8% 10.3% 16.2% 15.7% 21.7% 16.1% 18.2% 11.9% 10.9% 6.9% 11.8% 12.0%

Retail Pharmacy ($MM)

Pharmacy (E) 45,583 11,628 11,820 12,111 12,706 48,265 12,274 12,531 12,770 13,200 50,774 52,930

y/y change 4.1% 5.1% 6.0% 5.9% 6.4% 5.9% 5.3% 6.0% 5.4% 3.9% 5.2% 4.2%

Front Store (E) 20,035 4,852 5,051 4,639 4,992 19,533 4,677 4,711 4,587 4,984 18,960 19,321

y/y change 1.0% -2.5% 1.1% -3.7% -4.9% -2.5% -3.6% -6.7% -1.1% -0.1% -2.9% 1.9%

Total Retail Pharmacy Revenue 65,618 16,480 16,871 16,750 17,698 67,798 16,951 17,242 17,357 18,184 69,734 72,251

y/y change 3.1% 2.7% 4.5% 3.1% 2.9% 3.3% 2.9% 2.2% 3.6% 2.7% 2.9% 3.6%

Total Revenue 141,826 36,675 38,707 39,284 41,572 156,238 40,830 41,684 42,345 43,716 168,574 182,914

y/y change 3.5% 6.8% 10.8% 9.9% 12.9% 10.2% 11.3% 7.7% 7.8% 5.2% 7.9% 8.5%

Intersegment Eliminations (15,066) (3,986) (4,105) (4,262) (4,517) (16,871) (4,498) (4,515) (4,586) (4,735) (18,334) (19,572)

% of combined segment revenue 10.6% 10.9% 10.6% 10.9% 10.9% 10.8% 11.0% 10.8% 10.8% 10.8% 10.9% 10.7%

Total Net Revenue $126,761 $32,689 $34,602 $35,021 $37,055 $139,367 $36,332 $37,169 $37,759 $38,981 $150,240 $163,342

y/y change 3.0% 6.3% 10.7% 9.7% 12.9% 9.9% 11.1% 7.4% 7.8% 5.2% 7.8% 8.7%


Pharmacy Services Claims 2013A Q1A Q2A Q3A Q4A 2014A Q1A Q2A Q3E Q4E 2015E 2016E

Pharmacy claims processed

Mail Choice Claims 83.2 19.8 20.5 20.7 21.3 82.3 20.3 21.3 21.5 21.5 84.6 88.0

y/y change 1.9% -3.6% -1.0% -1.4% 1.4% -1.1% 2.5% 3.9% 3.9% 1.0% 2.8% 4.0%

Pharmacy Network Claims 818.8 208.0 210.4 209.6 221.6 849.6 230.8 228.8 227.4 232.7 919.7 1,011.7

y/y change 2.5% 0.4% 2.2% 4.3% 8.2% 3.8% 11.0% 8.7% 8.5% 5.0% 8.3% 10.0%

Total 902.0 227.8 230.9 230.3 242.9 931.9 251.2 250.1 248.9 254.2 1,004.3 1,099.7

y/y change 2.4% 0.1% 1.9% 3.8% 7.5% 3.3% 10.3% 8.3% 8.1% 4.6% 7.8% 9.5%

Adjusted claims 1,057.4 263.9 268.2 267.8 281.5 1,081.4 287.8 288.4 291.9 297.2 1,165.4 1,275.7

y/y change 2.4% -0.8% 1.1% 2.6% 6.2% 2.3% 9.1% 7.5% 9.0% 5.6% 7.8% 9.5%

Revenue per Claim

Mail Choice $298 $345 $378 $389 $396 $378 $431 $428 $430 $432 $430 $473

y/y change 6.5% 20.7% 29.7% 28.3% 27.7% 26.8% 24.9% 13.0% 10.5% 9.0% 13.9% 10.0%

Pharmacy Network $63 $64 $67 $69 $69 $67 $65 $67 $69 $70 $68 $68

y/y change -0.9% 6.9% 8.0% 5.8% 8.9% 7.5% 2.0% 0.1% 0.2% 0.2% 0.6% 0.5%

Total Rev per Adjusted Claim $72 $77 $81 $84 $85 $82 $83 $85 $86 $86 $85 $87

y/y change 1.4% 11.2% 14.9% 12.7% 14.6% 13.5% 8.4% 4.1% 1.7% 1.3% 3.7% 2.3%

Generic Dispensing Rate

Mail Choice 76.0% 73.9% 74.6% 75.0% 75.1% 74.7% 76.1% 76.3% 76.7% 76.8% 76.5% 78.5%

y/y change bps 400 (150) (120) (120) (150) (135) 220 170 170 170 183 200

Pharmacy Network 81.3% 82.8% 83.2% 83.2% 82.7% 83.0% 84.1% 84.6% 85.2% 84.7% 84.7% 86.7%

y/y change bps 220 180 210 170 110 168 130 140 200 200 167 200

Total 80.8% 82.0% 82.4% 82.5% 82.1% 82.3% 83.5% 83.9% 84.0% 83.6% 83.8% 85.3%

y/y change bps 230 150 180 150 125 145 150 150 150 150 150 150

Mail choice penetration rate 22.6% 21.2% 21.6% 21.7% 21.3% 21.5% 19.8% 20.7% 21.8% 21.4% 20.9% 21.0%

y/y change (15) (90) (80) (130) (140) (110) (140) (90) 5 5 (55) 5

Retail Pharmacy Segment 2013A Q1A Q2A Q3A Q4A 2014A Q1A Q2A Q3E Q4E 2015E 2016E

Same Store Sales Increase (% y/y)

SS Total Sales 1.7% 1.4% 3.3% 2.0% 1.6% 2.1% 1.2% 0.9% 2.4% 1.6% 1.5% 2.2%

SS Pharmacy Sales 2.6% 3.8% 5.0% 4.8% 5.5% 4.8% 4.2% 4.1% 4.1% 2.6% 3.7% 2.8%

SS Front Store Sales -0.5% -3.8% -0.4% -4.5% -7.2% -4.0% -6.1% -7.8% -2.0% -1.0% -4.3% 0.5%

Same Store Rx volume 1.6% -0.5% 2.10% 3.30% 3.20% 2.0% 3.0% 3.0% 3.0% 2.0% 2.8% 2.0%

Same Store Total adj. Rx volume 4.4% 2.1% 3.90% 5.10% 5.30% 4.10% 5.1% 4.8% 5.0% 5.0% 5.0% 4.0%

Total Volumes

Tot Retail Rx Filled (90-day=1 Rx) 734 185 186 188 197 756 193 193 195 202 783 807

Growth y/y % 2.4% 0.5% 3.1% 4.4% 4.5% 2.9% 4.6% 4.1% 3.9% 2.9% 3.6% 3.0%

Tot Retail Revenue per Rx $62.1 $62.7 $63.4 $64.5 $64.7 $63.9 $63.6 $64.9 $65.5 $65.3 $64.8 $65.6

growth y/y % 1.7% 4.7% 3.0% 1.7% 2.1% 2.9% 1.3% 2.3% 1.5% 1.0% 1.5% 1.2%

Tot Retail Adj. Rx Filled (90-day=3 Rx) 890 227 230 231 245 934 241 244 243 256 985 1,034

Growth y/y % 5.2% 2.7% 4.8% 5.3% 6.6% 4.9% 6.3% 6.0% 5.2% 4.5% 5.5% 5.0%

Tot Retail Revenue per Adj Rx $51.2 $51.2 $51.3 $52.4 $51.9 $51.7 $50.9 $51.3 $52.5 $51.6 $51.6 $51.2

growth y/y % -1.1% 2.3% 1.2% 0.6% -0.2% 1.0% -0.7% 0.0% 0.2% -0.6% -0.3% -0.7%



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- The convergence of the healthcare system with digital technology.


- Suitable for Emerging Growth portfolios.

- We est. 40% revenue growth (2015E for universe, covered companies = 42%.

2016E = 25%, 26%, respectively).

- Consensus EV/Sales (covered companies, ’16E, range = 1.3-10.7x).

- Typical universe: CSLT, EVDY, FIT, HQY, IMPR, NUAN, TDOC, VEEV, WAGE,

WBMD.

• Themes:

- Demand-pull: Consumer Empowerment drives need for cost tools, connected

health.

- Supply-push: As consumers & drs. have shifted time on-line; ads will follow.


DIGITAL HEALTH: PM Profile

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DIGITAL HEALTH: Industry & Co. Metrics


- Earnings are “report cards” on usage and rev. growth (press releases, 10-Qs).

- On-line ad spending (Source: eMarketer, Cegedim, Interactive Advertising

Bureau).

- Hospital technology spending (Source: KLAS).

- Employer benefit spend (Source: National Business Group on Health, Kaiser

Family Foundation)

• Financial Metrics to Watch:

- Rev. growth, backlog, units, ASP, GM & OM – reported quarterly.

- FIT search trends and AMZN rankings (Source: Google Trends, AMZN,

Compete Pro, App Annie).

Example: FIT stk. -13% on 8/6/15 with SPX -1% due to GM concerns.

• Other: Cash flow negative, must adjust for stk. options, high multiple stocks

sensitive to mkt sentiment.

100


• Valuation:

- Based on EV/Adj. EBITDA, EV/Sales, due to early stage of growth.

- Example: FIT at 4.9x EV/15E Sales, doesn’t include upside from corp.

wellness, social network.


- Cadillac Tax effective 1/1/18: Drives employer cost shifting, consumerism.

- 2016 employee benefits season.

- ICD-10 deadline October 1, 2015: new diagnosis and procedure coding set

will increase complexity for US hospitals.

DIGITAL HEALTH: Valuation & Catalysts

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Sample Digital Health Model: FIT Fitbit, Inc. (FIT)

Income Statement for FYE Dec. 31, GAAP Mar-15 Jun-15 Sep-15 Dec-15

$ in Thousands FY2013A FY2014A 1Q:15A 2Q:15A 3Q:15E 4Q:15E FY2015E FY2016E Revenue: 0

Total revenue 271,087 745,433 336,754 400,412 360,377 622,108 1,719,651 2,498,128 Growth % y/y 175.0% 209.5% 252.6% 135.8% 68.1% 130.7% 45.3%

Cost of revenue: 210,836 387,776 167,545 212,870 189,558 326,607 896,580 1,274,178 % of revenue 77.8% 52.0% 49.8% 53.2% 52.6% 52.5% 52.1% 51.0%

Gross profit 60,251 357,657 169,209 187,542 170,819 295,501 823,071 1,223,950

% margin 22.2% 48.0% 50.2% 46.8% 47.4% 47.5% 47.9% 49.0%

Operating expenses:

Research and development 27,873 54,167 22,426 30,492 43,245 68,432 164,595 243,481 % of revenue 10.3% 7.3% 6.7% 7.6% 12.0% 11.0% 9.6% 9.7% y/y 72% 94% 204% 48%

Sales and marketing 26,847 112,005 43,867 69,690 82,887 99,537 295,981 398,529 % of revenue 9.9% 15.0% 13.0% 17.4% 23.0% 16.0% 17.2% 16.0% y/y 162% 317% 164% 35%

General and administrative 14,485 33,556 12,981 14,648 14,415 16,797 58,841 80,139 % of revenue 5.3% 4.5% 3.9% 3.7% 4.0% 2.7% 3.4% 3.2% y/y 265% 132% 75% 36%

Change in contingent consideration (7,704) Total operating expenses 69,205 199,728 79,274 107,126 140,547 184,766 519,417 722,149

Income from operations (8,954) 157,929 89,935 80,416 30,272 110,735 303,654 501,801

% margin -3.3% 21.2% 26.7% 20.1% 8.4% 17.8% 17.7% 20.1% y/y 92.3% 65.3%

Total other expense (4,731) (18,156) (13,544) (45,687) (3,380) (3,380)

(65,991) (13,520)

Pre-tax Income (loss) (13,685) 139,773

76,391 34,729 26,892 107,355

237,663 488,281

Income tax expense (benefit) 37,937 7,996 28,394 17,048 13,177 52,604 111,223 219,727 Tax rate (277.2%) 5.7% 37.2% 49.1% 49.0% 49.0% 46.8% 45.0%

GAAP net income (loss) (51,622) 131,777 47,997 17,681 13,715 54,751 126,440 268,555

% margin (19.0%) 17.7% 14.3% 4.4% 3.8% 8.8% 7.4% 10.8%

Diluted EPS - GAAP ($1.32) $0.63 $0.22 $0.07 $0.14 $0.56 $0.93 $2.70

Diluted EPS - Adjusted - 0.56 0.27 0.21 0.09 0.27 0.83 1.16

Net income and comprehensive income reconciliation to

Adjusted EBITDA FY2013A FY2014A 1Q:15A 2Q:15A 3Q:15E 4Q:15E FY2015E FY2016E GAAP net income (51,622) 131,777 47,997 17,681 13,715 54,751 126,440 268,555

Impact of Fitbit Force recall 84,650 22,840 (2,182) 69 - - (2,113) -

Stock-based compensation expense 620 6,804 4,903 7,747 16,000 23,000 51,650 52,000

Revaluation of redeemable convertible preferred stock warrant

liability

3,370 13,272 10,335 46,320 - - 56,655 -

Depreciation and amortization 3,012 6,131 3,469 4,705 4,000 4,000 16,174 16,000

Change in contingent consideration - - - (7,704) - - (7,704) -

Interest expense, net 1,082 2,222 467 379 380 380 1,606 1,520

Income tax expense (benefit) 37,937 7,996 28,394 17,048 13,177 52,604 111,223 219,727

Total adjustments 130,671 59,265 45,386 68,564 33,557 79,984 227,491 289,247

Adjusted EBITDA 79,049 191,042 93,383 86,245 47,272 134,735 353,931 557,801

Margin % 29.2% 25.6% 20.6% 22.3%

y/y NM 141.7% 85.3% 57.6%

Source: Company reports, Leerink Partners LLC estimates

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Disclosure Appendix

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Disclosure Appendix

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alice avanian bsas presentation 9-15-15

Documents