tom demark indicators

Technical Analysis: The Health Care Industry

*See the last page for an important disclosure regarding these stocks and this report. Please do not forward of 14

Thu June 2 2011

John Mendelson 212-653-8995 [email protected]

Summary: Included in this report are 20 charts of various indices including 13 industry groups. Seven of the industry group charts are proprietary and are marked as ISI Group. As noted since my April 2009 report, the sector as a whole appeared to have formed an important bottom. I wrote that the correction in this sector of the market was completed in early July 2010. As discussed on the front page of my May 2, 2011 report, Biotech, Midcap Equipment, Big Pharma, Specialty Pharma, HMOs, Generic Drugs, Nursing Homes, Providers, and Health Care IT continue to strengthen, but these specific groups and most groups in this sector of the market appear extended to the upside suggesting a further near-term correction/consolidation ahead. NOTE: This is a monthly publication. The source of the charts is Bloomberg and ISI Group unless otherwise noted. For the convenience of our clients, the names in all but the largest groups are listed at the end of this report. Overview

Relative Strength of S&P Supercomposite Health Care Index to S&P 1500 Composite Index 01/03/06 – 06/01/11

Please do not forward of 14

Relative Strength of S&P Supercomposite Health Care Index to S&P 1500 Composite Index 03/01/10 – 06/01/11

The S&P Supercomposite Health Care Index, a capitalization-weighted composite of 161 members, underperformed the S&P Supercomposite Index, a broad-based index of 1500 members, by a significant margin from the summer of 2003 until the spring of 2006. From the spring of 2006 until early 2008, relative strength was essentially flat. In my April 2008 report, I looked for improved relative strength over the intermediate-term. This change in trend became quite noticeable and was followed by a correction in late February 2009 as the broad market rallied. The trend of relative strength has been inverse to the broad market from the spring of 2009 to the present (arrows). As seen above, relative strength improved in late April 2010 as the equity market declined, declined beginning in July 2010 as the stock market rallied, and rose until the mid-February 2011 high in the S&P 500…once again, an inverse relationship to the general market. S&P Supercomposite Health Care Index (S15HLTH) – a capitalization weighted composite of 161 members.

S&P Supercomposite Health Care Index (S15HLTH)

06/09/06 – 06/01/11

A “Double Top” was formed in May 2007 and January 2008. The index broke down from an eight month trading range in October 2008 and bottomed in March 2009. I have been writing that upside resistance is near the mid-2007 to early 2008 top with support near the late 2009 lows. The recent advance has moved the index up to slightly above its 2007-2008 top, a significant resistance area. I look for a correction/consolidation over the near-term.


S&P Mid-Cap Health Care Index (S4HLTH) 06/09/06 – 06/01/11

S&P Mid-Cap Health Care Index (S4HLTH) 06/02/10 – 06/01/11

Health Care was one of the strongest segments of the mid-cap market from early 2003 to September 2008. A top formed between October 2007 & August 2008. The index broke down in September 2008 from an eight month trading range and became quite extended to the downside. A base pattern formed from late November 2008. The index broke out above its tops from October 2008 and advanced above its downtrend line connecting the descending tops from late 2007, both positive developments. In late March 2010, the index became quite extended to the upside and a correction followed. The index broke out of its downward channel correction in mid-September, a positive, and rallied above its 2010 high in early 2011. The index became extended above its 200-day average in early May 2011 (arrow in chart) and remains well above its 200-day average. A further near-term correction/consolidation is expected.


Biotech

S&P Supercompsite Biotechnology Index (S15BIOTX) 06/09/06 – 06/01/11

S&P Supercompsite Biotechnology Index (S15BIOTX) 06/02/10 – 06/01/11

The S&P Supercomposite Biotechnology Index, a capitalization-weighted composite of 12 members, has been in a long trading range since late 2005. In late March 2011, the index broke out above its trading range since late 2008, a positive development. Currently, the index is extended above its 200-day average (arrow in chart) and likely to correct/consolidate over the near-term.


NASDAQ Biotechnology Index (NBI) – a capitalization-weighted composite of 125 Biotech stocks.

NASDAQ Biotechnology Index (NBI) 04/01/10 – 06/01/11

It has been my view that the Biotech’s will broaden out to Mid-Cap and smaller issues. I wrote in my March 2010 report that the index was once again extended to the upside or well above its 200-day average. The spring decline corrected the extended position. The index advanced above its April 2010 high and its 200-day average, positive developments. After reaching a new 52-week high in January 2011, the index traded sideways and then rallied. Since early May, the index has been extended or well above its 200-day average (arrow). A further near-term correction/consolidation is anticipated. Distributors S&P Supercomposite Health Care Distributors (S15HCDS) – a capitalization weighted composite of 9 members.

S&P Supercomposite Health Care Distributors (S15HCDS)

04/01/10 – 06/01/11

This group was in a steady uptrend since July 2009 with a series of small, short-term declines, a positive pattern. A near-term top began to form in April 2010. The group was featured on the front page of my August 2010 report for its strengthening trend. The rally since September 2010 moved the index to a new 52-week high, but the index became extended above its 200-day average, as noted in my May 2 report (arrow). A near-term correction/consolidation is anticipated over the next month or so.


Equipment/Medical Devices S&P Mid-Cap Health Care Equipment Index (S4HCEQ) – a capitalization weighted composite of 12 members.

S&P Mid-Cap Health Care Equipment Index (S4HCEQ) 06/09/06 – 06/01/11

I viewed the trading of 2006 as a consolidation pattern prior to further strength. A new high was attained in December 2007, but the group was extended to the upside. The summer 2007 low, an important support level, was broken in October 2008, a negative, and the index became extended to the downside. The index broke out above its base pattern from October 2008 and moved higher. The index remained relatively close to its highs during the spring 2010 market decline, a positive, while correcting in a downward price channel. The group was highlighted on the front page of my July – December 2010 reports. A decisive upside breakout from this channel was seen in December 2010. While extended on a near-term basis and thus likely to correct/consolidate over the near-term, the index appears to be headed higher. HMOs

Morgan Stanley Health Care Payer Index (HMO) 01/04/08 – 06/01/11

As noted in various reports in the summer of 2009, I expected an important upside breakout in the HMO group. The index moved above its 200-day average and then the downtrend line connecting the highs from May 2008, a bullish development. A near-term top formed in the winter of 2010. I regarded the sideways trend from early 2010 to be a consolidation near the highs, a positive trading pattern. The group was highlighted on the front page of my August 2010 – March 2011 reports. The index broke out of this sideways trend in late 2010. While extended above its 200-day average on a near-term basis (arrow), and a near-term correction/consolidation is expected, the basic trend appears to be higher.


Orthopedics

Orthopedic Companies Average – An Equal-Weighted Composite of 8 Issues (ISI Group) 06/09/06 – 06/01/11

The rally that began in June 2006 moved the index to a new high in late 2007. The index broke down from a large top in late September 2008 and became extended to the downside. A bottom pattern formed in early 2009 and the index advanced above its base pattern, a positive. Near-term upside resistance is estimated to be in the area of the April 2010 high which the index is now slightly above. A near-term correction/consolidation is anticipated over the next month or two. Pharmaceuticals – Big Cap

AMEX Equal Weighted Pharmaceutical Index (DGE)

The Same 14 Stocks in the DRG Index 01/05/07 – 06/01/11

I prefer the DGE equal-weighted index to the much more popular DRG index that is distorted by the large weights of Pfizer (PFE), Johnson & Johnson (JNJ), etc. A “triple bottom” was formed in early October, late November, and early March 2009. I have viewed the decisive advance above the early 2009 top and the move above the downtrend line from the early summer of 2007 as segments of a decisive breakout. A near-term top formed in January 2010 which was followed by a correction. The recent rally moved the index above its late 2010 high, a positive. Upside resistance is estimated to be near the 2007 top, an important resistance level.


Specialty Pharmaceuticals

Specialty Pharmaceuticals Average – An Equal-Weighted Composite of 14 Issues (ISI Group) 05/04/07 – 06/01/11

The group remained in a downward trend from the spring of 2007 until early 2009. A breakdown occurred in late September 2008 and this created an extended position to the downside. A base pattern formed and the index broke out above this pattern, a positive. The downtrend line connecting the descending tops from the summer of 2007 was broken in late 2009, a positive. The upside breakout above the late 2007 high in February 2010 was encouraging. This group was highlighted on the front page on my August 2010 – March 2011 reports. After a likely near-term correction/consolidation, a further advance is expected. Generic Drugs

Generic Drugs Average – An Equal-Weighted Composite of 8 Issues (ISI Group) 03/03/06 – 06/01/11

A large top pattern formed from late 2005 until late September 2008. After a sharp decline, a triple bottom formed and the advance above both its highs from late 2005 and the 200-day average was viewed as a significant upside breakout in my May and June 2009 monthly reports. In my April 7, 2010 report, I placed an arrow on the chart suggesting an extended position and a likely correction. I wrote in my August 11, 2010 report that I looked for a further advance to follow the correction and I expected a new high in this group. The group was one of those featured on the front page of my October 2010 – March 2011 reports. Once again, the index has become extended above its 200-day average (arrow), suggesting a near-term correction.


Providers/Facilities

Morgan Stanley Health Care Providers (RXH) An Equal-Weighted Group of 15 Stocks

06/09/06 – 06/01/11

As mentioned in my June 2007 report, the group had been forming what looked like a top since late February 2007. The index became extended to the downside in November 2008 and a “double bottom” was formed in March 2009. A strong advance followed into April 2010. While the index recently advanced to a five-year high, it appears extended on a near-term basis and a correction over the next month or so is likely. The group was highlighted on the front page of my January and March 2011 reports. Nursing Homes

Nursing Homes Average – An Equal-Weighted Composite of 4 Issues (ISI Group)

06/09/06 – 06/01/11

This group formed a top from late 2006 to September 2008 and broke down in September 2008. Since the spring of 2009, I had been expecting a period of base building. In late 2010, this group broke out above its long trading range, a positive. This group was featured on the front page of my January and March 2011 reports. After such a strong several month advance, a further near-term correction appears likely.


Pharmacy Benefit Managers

Pharmacy Benefit Managers Average – An Equal-Weighted Composite of 6 Issues (ISI Group) 03/02/07 – 06/01/11

A sharp rally beginning in early 2007 ended with a “triple top” in September 2008. The decline moved the index into an extended position to the downside or well below its 200-day average. A base pattern formed over five months. I wrote in my July 2009 report that the decisive move above both the highs from October 2008 and the 200-day average was viewed as an important upside breakout. In my April 2010 report I mentioned that the index appeared extended to the upside or well above its 200-day average (arrow). A near-term correction/consolidation followed. A new high was recently attained, but the index is once again extended (arrow), suggesting a near-term correction/consolidation. Contract Research Organization

Contract Research Organizations – An Equal-Weighted Composite of 9 Issues (ISI Group) 06/01/07 – 06/01/11

The move to the late December 2007 high was straight up and the index appeared extended to the upside making a correction likely. The March 2008 low was broken and this index declined sharply. A base pattern has been forming since late 2008 with a correction in April 2010. Support is estimated to be at the lows since late 2008 with upside resistance near the April 2010 highs.


Health Care Information Technology

Health Care Information Technology An Equal-Weighted Composite of 8 Issues (ISI Group)

05/05/06 – 06/01/11

A period of base building was in effect from November 2008 to March 2009. The index broke out above its September 2008 top in July 2009. The index also moved above upside resistance near the October 2007 top. I wrote in my January 2010 report that the group appeared extended and that I would be cautious on a near-term basis (arrow). A double top formed and the mid-2010 decline corrected the extended upside condition. The group was featured on the front page of my December 2010, January and March 2011 reports. A new high was recently reached, a positive, but the index is once again well above its 200-day average (arrow) suggesting a near-term correction.

***


Group Membership The stocks in the large indices such as the S&P Supercomposite Health Care Sector (S15HLTH) – 167 stocks, Morgan Stanley Biotech Index (MVBX) – 33 stocks, NASDAQ Biotechnology Index (NBI) – 168 stocks, S&P Midcap Health Care Index (S4HLTH) – 40 stocks, are not listed due to space considerations. Please consult a Bloomberg Terminal or the S&P website, www.SPGlobal.com. The other indices discussed in this report include the following issues.

S&P Supercompsite Biotechnology Index (S15BIOTX) – 12 Names Amgen Inc (AMGN) Emergent Biosolutions Inc (EBS) Arqule Inc (ARQL) Gilead Sciences Inc (GILD) Biogen Idec Inc (BIIB) Regeneron Pharmaceuticals Inc (REGN) Celgene Corp (CELG) Savient Pharmaceuticals Inc (SVNT) Cephalon Inc (CEPH) United Therapeutics Corp (UTHR) Cubist Pharmaceuticals Inc (CBST) Vertex Pharmaceuticals Inc (VRTX)

AMEX Equal-Weighted Pharmaceutical Index (DGE) – 14 Names Abbott Laboratories (ABT) Johnson & Johnson (JNJ) Amgen Inc. (AMGN) Merck & Co. Inc. (MRK) AstraZeneca (AZN) Novartis AG (NVS) Bristol-Myers Squibb Co. (BMY) Novo Nordisk A/S (NVO) Eli Lilly & Co. (LLY) Pfizer Inc. (PFE) Forest Laboratories Inc. (FRX) Sanofi-Aventis (SNY) GlaxoSmithKline PLC (GSK) Teva Pharmaceutical Industries Ltd. (TEVA)

Contract Research Organizations – 9 Names Albany Molecular Research Inc. (AMRI) Kendle International Inc.(KNDL) Charles River Labs International Inc.(CRL) Nordion Inc (NDZ) Covance Inc (CVD) Pharmaceutical Product Development Inc(PPDI) eResearch Technology Inc.(ERES) Parexel International Corp (PRXL) ICON PLC (ICLR)

Generic Drug Average – 8 Names Caraco Pharmaceutical Labs (CPD) Par Pharmaceutical (PRX) Dr. Reddy's Labs (RDY) Perrigo Co. (PRGO) Impax Laboratories Inc (IPXL) Teva Pharmaceutical (TEVA) Mylan Labs (MYL) Watson Pharmaceuticals (WPI)

Health Care Information Technology – 8 Names Allscripts HC Solutions, Inc. (MDRX) HMS Holdings Corp. (HMSY) Athenahealth, Inc. (ATHN) Omnicell, Inc. (OMCL) Cerner Corp. (CERN) Quality Systems, Inc. (QSII) Computer Programs and Systems, Inc. (CPSI) Vital Images, Inc. (VTAL)

MS Health Care Payer Index (HMO) – 11 Names Aetna (AET) Humana (HUM) AMERIGROUP Corp. (AGP) Molina Healthcare (MOH) Centene Corp. (CNC) UnitedHealth Group (UNH) Cigna Corp. (CI) WellCare Health Plans Inc (WCG) Coventry Health Care (CVH) WellPoint Inc (WLP) Health Net (HNT)


MS Health Care Providers (RXH) – 15 Names Amsurg Corp. (AMSG) Medcath Corp (MDTH) Community Health Systems (CYH) Omnicare Inc. (OCR) DaVita Inc (DVA) Quest Diagnostics Inc. (DGX) Health Management Assoc. (HMA) Sunrise Senior Living (SRZ) Kindred Healthcare Inc (KND) Tenet Healthcare Corp. (THC) Laboratory Corp. of America Hldg. (LH) PharMerica Corp (PMC) LifePoint Hospitals (LPNT) Universal Health Services (UHS) Lincare Holdings (LNCR)

Nursing Home Average – 4 Names

Kindred Healthcare Inc (KND) National Healthcare Corp. (NHC) Healthcare Services Group Inc (HCSG) Sabra Healthcare REIT Inc (SBRA)

Orthopedic Company Average – 8 Names

Arthrocare Corp. (ARTC) Smith & Nephew plc (SNN) NuVasive, Inc. (NUVA) Stryker Corp. (SYK) CONMED Corp. (CNMD) Wright Medical Group (WMGI) Orthofix International NV (OFIX) Zimmer Holdings (ZMH)

Pharmacy Benefit Manager Average – 6 Names

BioScrip Inc. (BIOS) Catalyst Health Solutions, Inc. (CHSI) Express Scripts (ESRX) Medco Health Solutions (MHS) CVS Caremark Corp. (CVS) SXC Health Solutions Corporation (SXCI)

S&P Midcap Health Care Equipment & Supplies Index (S4HCEQ) – 12 Names

Cooper Cos Inc (COO) Kinetic Concepts Inc (KCI) Gen-Probe Inc. (GPRO) ResMed Inc. (RMD) Hill-Rom Holdings Inc (HRC) STERIS Corp (STE) Hologic Inc (HOLX) Masimo Corp (MASI) Idexx Laboratories Inc (IDXX) Immucor Inc (BLUD)

Teleflex Inc (TFX) Thoratec Corp (THOR)

Specialty Pharmaceutical Average – 14 Names

Endo Pharmaceuticals (ENDP) Allergan, Inc. (AGN) Forest Laboratories, Inc. (FRX) AVANIR Pharmaceuticals (AVNR) Cephalon, Inc. (CEPH)

Medicis Pharmaceutical Corp. (MRX) Medicines Co. (MDCO)

Elan Corp. (ELN) Pain Therapeutics, Inc. (PTIE) NPS Pharmaceuticals Inc. (NPSP) QLT Inc. (QLTI) Shire PLC (SHPGY) Valeant Pharmaceuticals Intl. (VRX)

SuperGen Inc. (SUPG)

Supercomposite Health Care Distributors (S15HCDS) – 9 Names

AmerisourceBergen Corp. (ABC) Owens & Minor, Inc. (OMI) Cardinal Health, Inc. (CAH) Patterson Companies Inc. (PDCO) Henry Schein, Inc. (HSIC) McKesson Corp. (MCK)

MWI Veterinary Supply Inc (MWIV) PharMerica Corp (PMC) PSS World Medical Inc (PSSI)

* * *


ANALYST CERTIFICATION: The views expressed in this Report accurately reflect the personal views of those preparing the Report about any and all of the subjects or issuers referenced in this Report. No part of the compensation of any person involved in the preparation of this Report was, is, or will be directly or indirectly related to the specific recommendations or views expressed by research analysts in this Report. DISCLOSURE: Neither ISI nor its affiliates beneficially own 1% or more of any class of common equity securities of the subject companies referenced in this Report. No person(s) responsible for preparing this report or a member of his/her household serve as an officer, director or advisory board member of any of the subject companies. Neither ISI nor its affiliates have any investment banking or market making operations. At various times these reports mention clients of ISI from whom ISI has received non-investment banking securities related compensation in the past 12 months. DISCLAIMER: This material is based upon information that we consider to be reliable, but neither ISI nor its affiliates guarantee its completeness or accuracy. Assumptions, opinions and recommendations contained herein are subject to change without notice, and ISI is not obligated to update the information contained herein. Past performance is not necessarily indicative of future performance. This material is not intended as an offer or solicitation for the purchase or sale of any security.

tom demark indicators

Documents