HEALTHCARE SECTOR UPDATE

MARCH 12TH, 2014

Allergan, Inc. (AGN): Bought: $89.03, Target: $133.28, Last: $114.24

Overview Earnings: AGN reported 4Q2013 and FY 2013 earnings on February 5th, 2014. The report showed that AGN experienced double digit YOY growth in sales and earnings in 2013. Most notably, total specialty pharmaceuticals grew by 14% and total core medical device grew by 17%. This growth was driven by double digit sales growth in all of AGNs business units, and these results were well in line with managements and censuses expectations. Consensus estimates state that investors can expect double digit sales growth up until 2018. Recently AGN entered an exclusive R&D Collaboration Agreement with Voyant Bio therapeutics. The agreement will focus on the development of age related macular degeneration which is a lead cause of irreversible vision loss. Next earnings release is scheduled to be sometime between April 28th to May 2nd. Outlook: AGNs earnings and guidance provided a wealth of positive information that caused the stock to reach historical highs. AGNs capital appreciation can also be attributed to the increased protection for its two largest drugs (Restasis and Lumigan). Although AGNs current multiple has exceeded its three year average, AGN is still undervalued when benchmarked against the S&P Pharmaceutical index and its peers. Some risks include pipeline failures, and uncertainty surrounding generic approvals for Restasis. However, events and catalysts that are expected include: the further development of facial fillers and therapeutic Botox products, and the development of Restasis X. These developments along with a strong balance sheet will allow AGN to protect and expand market share to realize its double digit sales growth expectations.

P/E 3 Years

P/E 3 Year Benchmarked vs S&P 500 Pharma Index

THE WILLIAM C. DUNKELBERGS OWL FUND

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HEALTHCARE SECTOR UPDATE

MARCH 12TH, 2014

Johnson & Johnson (JNJ) Bought: $92.14, Target: $101.69, Last: $88.90
Overview: JNJ continues to remain relatively flat with no price-moving development in the past month. Some notable events include JNJs divestiture of the K-Y brand of lubricants for an undisclosed amount to Reckitt Benckiser. Sales for K-Y equate to around $100 million for FY2013. JNJ is expecting to begin testing an experimental AIDS drug that was develop with GlaxoSmith. For the pipeline, JNJ is expected to file for 7 key drugs from 2014 to 2017 for treatments such as myeloma, prostate cancer, hepatitis C, and arthritis. JNJ will have 4 patents expiring in 2014 and 7 in 2015 in areas of pain relief, migraine control, and antibiotics. In terms of litigation related activity, there have been no significant new cases and no significant increases in cash reserves. JNJ is expected to release 1Q2014 earnings in April 14th to April 18th. Outlook: With no price moving development in the past month, the investment thesis is still intact. JNJ is a blue chip company with a healthy pipeline, proven products, and a commitment to shedding lower growing businesses. JNJ should continue its strong performance in 2014 as they continue to divest its slower growing business units, grow its major business segments, and further develop its pipeline drugs. With regards to the patent expirations, many of the drugs already face heavy competition and will be offset by the new drugs in the pipeline. Some risks include disruptions in any pipeline products, any lag on global consumption, international risk exposures, and any large litigation related costs. Events that are under watch include any pipeline development, and any M&A activity.

**Price Earnings vs Weighted Comps

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HEALTHCARE SECTOR UPDATE

MARCH 12TH, 2014

Express Script Holding (ESRX) Bought: $64.692, Target: $80.32, Last: $73.71
Overview ESRX reported 4Q2013 and FY2013 earnings on February 20th at its first investor conference in seven years. The reported earnings were in line with consensus estimate, and provided favorable where expectations for annual earnings growth can grow by as high as 20%. However ESRX reported an expected drop in adjusted claim numbers of 2% to 6% due to a lower than expected retention rate, risk associated with the ACA implementations, and lower utilization rates. Recently, ESRX announced that it has increased its repurchase authorization by an additional 65 million share or roughly $5 billion or 10% of its market cap. Earnings for Q1 2014 will be released sometime between April 28th and May 2nd. Outlook After reporting earnings ESRX experienced a 4% drop due to the short term concerns surrounding the projected decrease of 2%-6% in adjust claims. Although the initial reaction suggests a few short term hurdles, the companys growth projections still make ESRX a fundamentally strong company. Since the announcement, ESRX has rebounded and is within 3% of its price target. There are concerns that the growth in EPS maybe artificially created due to the increase in the company stock repurchases program. However ESRX is in a favorable situation with strong financials, a steady growing cash flow, and a favorable industry. Some risk include any increase regulations, larger decrease in adjusted claims, or any unsuccessful acquisition. Events in consideration include higher shareholder return, an attractive acquisition, and the increase attractiveness of mail order services.

**EV/EBITDA benchmarked vs Comps

**P/E benchmarked vs Comps

THE WILLIAM C. DUNKELBERGS OWL FUND

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HEALTHCARE SECTOR UPDATE

MARCH 12TH, 2014

United Health Group (UNH): Bought: $73.14, Target: $83.83, Last: $

Overview ACA: Before the purchase of UNH, Obama announced that the employer mandate for employers with 50 to 99 employee would be extended until 2016, while business with 100 or more employees are required to cover at least 70% of full time employees in 2015. UNH dropped 3% in response to the news. Medicare Rates: Humana provided a forecast on the effect of the 2015 proposed Medicare Advantage cuts suggesting that the funding will be lower than originally forecasted. Specifically, the expectation is that the potential impact of the propose cuts will be between 3.5% and 4% versus the previously forecasted 6% to 7%. UNHs price appreciated over 3% in response to the news. Optum Development: At the end of February, UNH reported that its online payment services (myClaims Manager) reported a growth of 50,000 participants that accounted for $20 million in payment processing. UNH is the only national insurance carrier to enable consumers to pay their medical bills online. Optum also acquired a majority interest in Audax health solution, a multichannel digital platform, and added seven leading health organizations for its labs research department. Overview In the few weeks of holding UNH, the company has been able to outperform the general market primarily due to a better than expected forecast on the Medicare cuts. Moving forward there will be many short term headwinds associated with the ACA, the Medicare fund rates, and even the political environment. However, UNHs diversification in its membership premiums and in its business segments will help UNH against these headwinds, allowing the company to outperform its peers. The largest risk associated with UNH includes any negative changes to the ACA that affects margins or enrollment expectations, and funding rate cuts that are higher than expected. Important events to be aware of include the any further development of the Optum platform, the official funding rate cuts announcement in April, and the individual mandate at the end of March. Earnings are expected to be released sometime between April 14th and April 18th.

P/E benchmarked vs. Comps

THE WILLIAM C. DUNKELBERGS OWL FUND

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