Table of Contents

Ti cker

Company Name

CFROI

Mkt Cap
($B)

Pri ce
12M

CFROI
Revi si on

Page

Equi pment
BDX

Becton Dickinson & Co

15.1

COV

Covidien Plc

26.6

6.6

50.2

2.6

12.2

2.3

MYGN Myriad Genetics Inc

2.2

10

ENDP

Endo Health Solutions Inc

3.4

11

HSP

Hospira Inc

5.0

12

PRGO Perrigo Co

10.8

13

2.3

14

Provi ders & Servi ces:

HSIC

Schein (Henry) Inc

ESRX

Express Scripts Holding Co

THC

Tenet Healthcare Corp

HUM

Humana Inc

Technology:
MDRX

Allscripts Healthcare Soltns

Pharmaceut i cals & Bi ot ech:

SLXP

Salix Pharmaceuticals Ltd

Li fe Sci ences:
BIO

Bio-Rad Laboratories Inc

2.9

15

CVD

Covance Inc

2.7

16

CLARITY IS CONFIDENCE

HOLT

Price (USD): 75.67 (Nov 02, 2012)

BECTON DICKINSON & CO (BDX)

Priced for 8% sales growth with increasing m argins

Health Care Equipment

CFROI levels have remained fairly stable since 2005 as margin expansion from SG&A leverage and lower raw
material costs offset slightly lower asset turns from slowing sales growth (due in part to FX headwinds). CFROI
levels increased slightly in 2011 with sales growth increasing from previous levels as volume increases (+4%)
offset continued price pressure (-1%).
Relying on consensus IBES estimates through 2013, thereafter BDX is priced for 8% long-term sales growth
and an increase in margins of 100 bps/yr from forecast CFROI levels in 2013. 20% upside is warranted if BDX
can increase operating margins 250bps/yr between 2014-2016 with 10% long-term sales growth. Equal
downside of 20% is warranted if long-term sales growth declines to 4% with flat margins.
BDX has among the highest exposure to int'l sales (55%) but BDX does not appear to have a natural FX hedge.

CLARITY IS CONFIDENCE

HOLT

Price (USD): 55.45 (Nov 02, 2012)

COVIDIEN PLC (COV)

Priced for 8% sales growth & im proving m argins

Health Care Equipment

Since the spin-off from Tyco in 2007, COV's CFROI levels have remained relatively stable as increased margins
from a change in product mix (divested non-core assets such as the retail segment in 2008) have been offset by
declining asset efficiency from increased R&D investments and expanding cash balances. COV purchased EV3
acquisition in 2010.
Relying on IBES consensus estimates through 2013, thereafter COV is priced for 8% long-term sales growth, a
95 bps/yr increase in margins and return back to higher asset turns. To warrant 20% upside, long-term sales
growth must increase to 10% while margins expand by 220 bps/yr to 34% by 2016. Equal downside is
warranted if long-term sales growth totals 6% with flat asset turns and margins consistent with 2013 forecast
levels.
COV announced its intention to spin-off its pharma business which accounted for 19% of sales and 16% of
assets in 2011.
CLARITY IS CONFIDENCE

HOLT

SCHEIN (HENRY) INC (HSIC)

Price (USD): 74.50 (Nov 02, 2012)

Health Care Distributors

Pricing in Im proving CFROI Perform ance

HSIC's CFROI levels have trended higher as increasing sales growth has helped improve margins and asset
turns resulting in historically high CFROI levels. CFROI levels exceed the majority of its distribution peers as
performance has improved steadily over its history.
Relying on IBES consensus estimates through 2013, HSIC is priced for 7% sales growth and 35 bps/yr
increase in margins from 2014-2016. To warrant 20% upside, HSIC must achieve 9% sales growth and 70
bps/yr improvement in margins. To warrant similar downside, sales growth must decline to 3% with flat margins
consistent with 2013 forecast levels. Valuation for HSIC is highly dependent upon sales growth and
sustainability of CFROI levels (eCAP). HSIC is priced for 4% long-term sales growth if it can maintain
consistent CFROI levels over the next 10 years.

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EXPRESS SCRIPTS INC- MEDCO HEALTH SOLUTIONS- PRO-FORMA (ESRX)

Priced for m argin expansion and 7% sales growth

Price (USD): 62.02 (Nov 02, 2012)

Health Care Services

For purposes of this pro-forma, the financial statements of ESRX and Medco were combined in 2011 and
forecasts are trending off of the combined operation. Co-payments are removed from sales and expenses,
resulting in a higher EBITDA margin. CFROI and asset growth rates have been variable over ESRX's history
due to aggressive acquisition activity. CFROI levels remain high reflecting the low asset intensity of a PBM
operation; however, its transaction CFROI performance fell below 10% in 2011 reflecting acquisition premiums.

Excess cash is removed from CFROI in 2011 consistent with ESRX's historic balances. Relying on IBES
estimates through 2013, thereafter it is priced for 25 bps/yr improvement in margins along with 7% sales growth
through 2022. 20% upside is warranted if sales growth increases to 9%. Similar downside is warranted if
margins remain at 2013 forecast levels.

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TENET HEALTHCARE CORP (THC)

Price (USD): 25.03 (Nov 02, 2012)

Health Care Facilities

Priced for 4% sales growth and higher m argins

THC has improved CFROI performance from earlier in the decade and has averaged approximately 6% since
2008. The company disposed of hospitals earlier in the decade and increased margins leading to improving
CFROI levels. However, at 5.5%, CFROI remains low relative to competitors as both margins and asset turns
trail peer medians.
Utilizing IBES consensus estimates through 2013; thereafter expectations embed 4% long-term sales growth
and margins increasing 25 bps/yr from 2014 to 2016. CFROI levels are close to its cost of capital; as a result,
valuation is more sensitive to CFROI changes than growth. 20% upside is warranted if THC can increase
margins 80bps/yr from 2014-2016. Alternatively, equal downside is warranted if post-2013 margins decline 20
bps/yr to 12.7% by 2016, returning back toward historical levels.
THC is highly levered with a credit rating below investment grade.
CLARITY IS CONFIDENCE

HOLT

Price (USD): 75.21 (Nov 02, 2012)

HUMANA INC (HUM)

Market im plies slow growth and reduced m argins

Managed Health Care

After declining in 2008 due to a miscalculation in actuarial assumptions, both CFROI and margins recovered
back to 2007 levels of 14% and have remained stable as its benefit ratio has remained between 82-83%
compared to 85% in 2008.
Given a significant concentration of revenue from Medicare, HUM is exposed to changes in reimbursement but
may also be positioned to benefit from favorable demographic trends. Relying on IBES estimates through 2014,
current expectations imply 2% long-term sales growth and flat margins for 2015-2016. To warrant 20% upside,
HUM must increase margins 30 bps/yr to 6% with 5% long-term sales growth, implying HUM benefits from an
aging population. To warrant similar downside, margins must fall 90 bps/yr to 3.6% or CFROI levels of 6.7%
with 2% long-term sales growth, reflecting increased price pressure.

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ALLSCRIPTS HEALTHCARE SOLTNS (MDRX)

Price (USD): 13.16 (Nov 02, 2012)

Health Care Technology

Low expectations with considerable risk

MDRX has increased size and capability within the competitive healthcare IT industry (through a series of
acquisitions including Eclipsys completed in August of 2010). CFROI levels increased in 2011 to 26.9%, as the
company changed its fiscal year end to December and incorporated the acquisition of Eclipsys.
Assuming consensus IBES estimates through 2013, the current price implies long-term 6% sales growth and
stable margins. Market expectations are low, implying considerable uncertainty in MDRXs ability to effectively
integrate Eclipsys and its numerous acquisitions. 30% upside is warranted if sales growth accelerates to 9%
along with a rebound in margins to 20%. To warranted similar downside, 0% sales growth and margins falling
100 bps/yr to 13.2% is required.
Both CFROI revisions and price momentum are positive rebounding slightly from a significant drop post 2012
Q1 earnings Report and Chairman departure.
CLARITY IS CONFIDENCE

HOLT

MYRIAD GENETICS INC (MYGN)

Price (USD): 27.01 (Nov 02, 2012)

Biotechnology

Priced for declining CFROI perform ance

Following the spin-off of Myriad Pharmaceuticals in 2009, MYGN focuses on oncology and women's health by
providing genetic tests to determine predisposition to developing disease. The change in CFROI levels and
operating drivers was due to the disposal of its development business. As a result, capitalized R&D has declined
to 16% of its investment from approximately 60% prior to the spin off. MYGN is focused on growth through
international expansion.
Relying on IBES consensus estimates through 2014, thereafter MYGN is priced for 3% long-term sales growth
and a 105 bps/yr decline in margins. 20% upside is warranted if MYGN achieves stable 8% sales growth with
only 50bps/yr of margin decline. Alternatively, equal downside is warranted if sales growth declines to 0% along
with a 400bps/yr reduction in margins from 2014-2016 to 26%.
Breast cancer diagnostic accounts for 82% of 2012 sales.
CLARITY IS CONFIDENCE

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Price (USD): 29.23 (Nov 02, 2012)

ENDO HEALTH SOLUTIONS INC (ENDP)

Pharmaceuticals

Priced for slowing growth and low CFROI levels

ENDP's CFROI levels have trended downward over the last 7 years driven by a consistent decline in asset turns
related to declining plant and operating intangible intensity, while margins remained volatile. In 2011, CFROI
levels reversed trend and increased due to the lower asset intensity of American Medical Systems, which it
acquired in August, 2011 to grow its medical device segment.
Relying on IBES estimates through 2013, thereafter ENDP is priced for 2% long-term sales growth and a 355
bps/yr decrease in margins. 20% upside is warranted assuming margins only deteriorate 170 bps/yr from 2013
forecast levels. Similar downside of 20% is warranted if long-term sales growth drops to 0% with a continued
decline in asset turns to .46 x.
ENDP reached a settlement with WPI regarding Lidoderm drug with a generic launch, if approved by FDA,
scheduled for September 2013.
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Price (USD): 30.45 (Nov 02, 2012)

HOSPIRA INC (HSP)

Pharmaceuticals

Priced for continuing decline in CFROI levels

Since the spin-off from ABT, margins improved while an increase in R&D investment contributed to lower asset
efficiency. Since the MYP acquisition in 2007, CFROI levels have trended higher driven by improved margins,
while asset turns have remained relatively stable. More recently, HSP has been adversely impacted by FDA
warnings about one of its facilities sighting inadequate manufacturing practices. Remediation efforts adversely
impacted 2011 margins and will suppress near term forecasts.
Assuming IBES consensus estimates through 2013, long-term expectations imply sales growth slowing to 1%
combined with a 70 bps/yr decline in margins from 2013 forecast levels. If margins rebound back to historical
levels of 20%, then 20% upside is warranted. Alternatively, if margins decline 300bps/yr from 2013 levels,
similar downside is warranted.

CLARITY IS CONFIDENCE

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HOLT

Price (USD): 115.00 (Nov 02, 2012)

PERRIGO CO (PRGO)

Pharmaceuticals

Priced for record high CFROI levels

PRGO's CFROI levels continue to increase as product launches and favorable product mix drives sales growth
and margins higher. Lower asset turns in 2012 offset some of the margin improvement as acquisitions and
higher working capital balances drove asset turns lower. The company continues to expand its position in the
OTC store-brand market with its private label business.
Using IBES consensus estimates through 2014, PRGO is priced for a continued acceleration in margins to
26.5% a return to historically high asset turns along with 12% long-term sales growth. If PRGO's long term
sales growth increases to 15% and margins improve at a rate of 120bps/yr to 27%, then 20% upside is
warranted. To warrant similar downside, sales growth must slow to 7% with 23.5% margins through 2017,
consistent with 2014 forecast levels.

CLARITY IS CONFIDENCE

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SALIX PHARMACEUTICALS LTD (SLXP)

Price (USD): 38.99 (Nov 02, 2012)

Pharmaceuticals

Priced for strong top-line growth

SLXP's CFROI levels followed a typical early lifecycle path from 1998 to 2007 as the company achieved strong
sales growth and margin expansion due to the launch and progress of Colazal. However, Colazal lost patent
protection in 2008, causing the significant decline in CFROI levels and all operating drivers.
Label expansion and additional indications for Xifaxan is forecast to drive significant sales growth, margin
expansion and increased CFROI performance. Relying on IBES consensus estimates through 2013; thereafter
SLXP is priced for a long term decline in sales growth to 15% with 220bps/yr in margin improvement. To
warrant 25% upside, SLXP needs to achieve 20% long-term sales growth. Similar downside is warranted
assuming long-term sales growth slows to 8%.
Recent price performance has trailed the market as the FDA refused approval of its drug Relistor pending further
clinical data.
CLARITY IS CONFIDENCE

14

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BIO-RAD LABORATORIES INC (BIO)

Price (USD): 102.04 (Nov 02, 2012)

Priced for im proving CFROI and growth

Life Sciences Tools & Services

Following the DiaMed acquisition in 2007, CFROI levels have trended higher due to margin expansion as the
acquisition is integrated. However, asset turns have been trending lower as sale growth slows and BIO
continues to grow assets. Lower asset turns and higher tax rates contributed to a steep decline in CFROI in
2011.
Relying on IBES consensus estimates through 2013, the market is paying for long-term sales growth of 4% with
a return toward peak margins and asset turns. To warrant 20% upside, BIO must achieve 8% sales growth and
100bps/yr of margin improvement. Similar downside is warranted with 2% long-term sales growth and margins
falling 100bps/yr.
A potential risk is BIO's international exposure, US sales represent only 30% of total sales. Meanwhile, 55% of
PPE is included in the US, BIO does not appear to have a natural FX hedge.
CLARITY IS CONFIDENCE

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Price (USD): 49.78 (Nov 02, 2012)

COVANCE INC (CVD)

Life Sciences Tools & Services

Priced for lower CFROI perform ance

Similar to peers, CVD's 2009 CFROI level declined due to economic conditions, pharma/biotech consolidation,
and lower R&D spending by pharma/biotech companies. Margins have continued to decline over the last 2 years
contributing to further reduction in CFROI performance, as reinvestment in the business has slowed.
Using IBES consensus estimates through 2013, thereafter CVD is priced for 4% sales growth and a 30 bps/yr
increase from 2013 forecasted margin levels. CVD is priced to remain at low CFROI levels relative to history.
To warrant 20% upside margins must improve 100bps/yr with 8% long-term sales growth. Similar downside is
warranted assuming 0% long-term sales growth and margins declining 100bps/yr to 11% long term.

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