2016 Healthcare Outlook

December
December 17,
17, 2015
2015
Americas: Healthcare
2016 Healthcare Outlook: Shifting

Sands
Equity Research
Becoming more selective after five years of outperformance

Getting more selective
Drug pricing debate to intensify
As a confluence of macro, micro and political

vectors shifts the sands under the investment
case for HC after an unprecedented five-year bout
of outperformance, we see the need to get more
selective. Specifically, we see (1) a tougher
backdrop for sector level multiple expansion into
both the election and a rising rates cycle, and as
the sectors relative growth vs. the S&P moderates,
and (2) an increased need to focus on single stock
selection rather than overarching sector themes
(product cycles, utilization, ACA and M&A).
We do not expect Congressional action on drug

pricing but headline risk will persist. Hence, we
prefer a barbell approach, recommending truly
innovative names (BMY, BMRN, REGN) and
generic drug companies which we view as more
defensive (MYL, TEVA, ENDP).
Whats changed?
Going into 2016 we (1) lower exposure to ACA
exchange verticals; we downgrade Providers to
Neutral (remove HCA from CL and downgrade to
Neutral); (2) shift allocations within the Supply
Chain to names with clearer earnings/balance
sheet support as industry tailwinds moderate we
upgrade CAH to Buy and downgrade CVS to
Neutral; (3) add Q to the CL and upgrade the CROs
to Attractive to leverage biopharma innovation;
(4) add MYL to CL as generics will be defensive.
Utilization now a mixed bag

While we expect core HC volumes to improve,
uncertainty over ACA will likely result in investors
paying a lower multiple across HC services
(hospitals, labs). Therefore, we prefer sectors with
more idiosyncratic growth drivers (i.e., product
cycles like MedTech (top-pick: MDT/CL-Buy).
Jami Rubin
(212) 357-7536 jami.rubin@gs.com
Goldman, Sachs & Co.
Asad Haider, CFA

(212) 902-0691 asad.haider@gs.com
David H. Roman
(212) 902-7839 david.roman@gs.com
Matthew Borsch, CFA

(212) 902-6784 matthew.borsch@gs.com
M&A less of a stock driver

Despite substantial firepower, we expect the pace
of M&A to slow after a record year in 2015. That
said, with ballooning cash stockpiles on
Biopharma balance sheets we expect more
strategic (over financial) deals. We update the GS
HC Strategic Assets Basket (GSGLGHSA) as a way
to monitor and implement the M&A theme.
Robert P. Jones
(212) 357-3336 robert.p.jones@gs.com
Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc.
Goldman Sachs Global Investment Research
Global Investment Research
December 17, 2015
Table of Contents
GIR Americas Healthcare Team
PM Summary: Shifting Sands
2016 View: Whats Changed
Highest Conviction Single Stock Ideas for 2016
GS Healthcare Team 2016 Subsector Coverage Views + Key Stock Picks
A View from Washington: Marking Time Until the Election
87
Emerging Uncertainties: Key Themes Facing New Challenges
10
Stress Testing the 2016 Pricing Overhang: 6 Key Variables
12
Biopharma Big Picture: 2016 Investable Themes
16
From Launch to Margin: Focus on Expanders
21
Utilization Tug of War: Need For A Product Cycle Overlay
23
The M&A March: Slower, Selective, More Strategic
26
Disclosure Appendix
35
December 17, 2015
GIR Americas Healthcare Team

Pharmaceuticals
Jami Rubin
1-212-357-7536
jami.rubin@gs.com
1-212-902-0691
asad.haider@gs.com
1-212-902-7839
david.roman@gs.com
1-212-357-3336
1-212-934-4218
robert.p.jones@gs.com
stephan.stewart@gs.com
1-212-902-6784
matthew.borsch@gs.com
Sector Specialist
Asad Haider, CFA
Medical Technology
David H. Roman
Healthcare Supply Chain

Robert P. Jones
Stephan Stewart, CFA
Managed Care & Facilities

Matthew Borsch, CFA
Life Science Tools & Diagnostics

Isaac Ro
1-212-902-6393
isaac.ro@gs.com
1-212-357-5057
1-212-934-4204
terence.flynn@gs.com
salveen.richter@gs.com
Biotechnology
Terence Flynn
Salveen Richter
Specialty & SMID Pharmaceuticals

Gary Nachman
1-212-855-7725
gary.nachman@gs.com
1-202-637-3746
alec.phillips@gs.com
Washington Research
Alec Phillips
December 17, 2015
PM Summary: Shifting Sands

While it may not feel like it given the recent rollover in the sector, HC is on track to clock its fifth consecutive year of outperformance
in 2015 (XLV +3% ytd vs. S&P down -2%; HC third best S&P sector ytd), a feat achieved for the first time in the last 25 years. In
subsectors, managed care fared best, partly on the M&A/consolidation theme, while laggards were spec pharma (on business
model risk) and hospitals (as ACA trades reversed, and the high leverage factor theme hurt). Five of the sectors 10 best performers
(BSX, REGN, EW, LLY and BMY) were product cycle / pipeline stories, an investable theme that we think will be increasingly
important for the forward outlook, irrespective of the direction of the overall HC tape. As we look toward 2016, we see a confluence
of macro, political and micro vectors shifting the sands beneath the bull case. On the macro, three factors will be top of mind.
1.
The election. Performance data going back to 1976 shows that, in election years, (i) HC has outperformed less than 40% of
the time and (ii) the median HC stock delivers 200 bp of underperformance. The overlay of the tough pricing rhetoric
coming out of DC could keep the bar high for multiple expansion.
2.
Interest rates. Analogs show HC lags with other defensive/dividend yielding areas a rising rates environment. While we
believe the yield component has been only a partial factor in HCs 5 year bout of outperformance micro themes have
mattered equally, if not more we see rotational risk as generalist PMs re-evaluate sector level allocations as we move into
an elongated period of potential interest rate hikes from the Fed for the first time in nearly a decade.
3.
Relative growth. Part of the bull angle on HC has been its superior sales growth relative to the S&P (11% in 2015 vs. S&P
3%) though it is worth noting that this gap narrows in 2016 to 7% for HC vs. 6% for the S&P, per GS equity strategy
which could make the sector relatively less compelling. FX is likely to also remain a key swing factor continuing USD
strength could be a headwind. GS currency strategists see USD/EUR rates of 0.95 by year-end 2016 (vs. current 1.1).
Further, the following sector-level/micro themes are likely to remain areas of debate.
4.
Drug pricing. The risk of legislative changes in 2016 is low, though our Washington DC strategist notes that at some point
down the road, discounts/rebates for Medicare (particularly Part B) could get traction even under a Republican Congress. As
we enter what could be a multi-year debate on branded pricing vulnerabilities, we believe that market should and will
place a premium on true innovation (cancer and orphan disease). With regards to generic pricing, we expect the
moderation in generic prices experienced in 2H15 could continue into next year, potentially driving a return to single-digit
price deflation, driven by a declining GRx FDA backlog and greater government scrutiny on select outsized price increases.
5.
Utilization. As the ACA-fueled components of recent utilization strength anniversary in 2016, the onus will be on macro /
cyclical factors to carry HC utilization higher. While we expect core HC volumes to improve in 2016, we believe uncertainty
over the outlook for ACA coverage will result in investors paying a lower multiple across HC services (hospitals, drugstores,
labs) for core utilization growth vs. the ACA bonanza of the last few years.
6.
M&A. Despite substantial balance sheet firepower across the sector, we expect the pace of M&A going forward to slow
after a record year in 2015. Notably, acquirer stocks have now started to underperform after deals are announced.
The net effect of these moving parts create a tougher backdrop for further sector level outperformance, in our view, and an
environment in which stock selection will become ever more important. With this outlook piece, we make several changes
that now reflect a more Neutral view on Healthcare.
December 17, 2015
2016 View: Whats Changed

We maintain our Attractive views on Medical Devices, Life Science Tools, Large Cap Pharma, Generics, Specialty pharma (due to
low valuations), but maintain Neutral views on Biotech (Large and Smid-cap), and Drug Chains. The following changes that drive
our views for 2016.
1.
2.
Lowering exposure to ACA exchange verticals, as we expect uncertainty to persist.
We lower our Providers coverage view to Neutral from Attractive, as we believe uncertainty over the sustainability of ACA
exchanges may persist through 2016. We remove HCA from the CL and downgrade it to Neutral. That being said, we favor
ambulatory surgery centers ASC`s as they have very low Medicaid/uninsured/self-pay exposure and are continuing to
benefit from secular trend of surgeries moving from inpatient to outpatient setting with that, we upgrade SCAI from
Neutral to Buy (AMSG already Buy rated) We also recently downgraded Labs to Neutral from Attractive, as we believe
consensus now captures a reasonable base case for underlying volumes and the negative shift in tone around ACA presents
an overhang that could weigh on multiples.
We maintain our Neutral coverage view of Managed Care, as we do not have a basis to predict the outcome of what we
think will be key sector catalysts in the outcomes for regulatory review of the pending mergers (i.e., Big 5 to Big 3) nor
how evolution of the Presidential election will influence the market view of health policy and regulation. Cigna and WellCare
remain our favorites within the managed care group.
Shifting allocations within the HC Supply Chain as industry tailwinds moderate.
3.
Gaining more exposure to verticals leveraged to accelerating biopharma R&D spend
4.
In the Supply Chain/Drug Retail, we upgrade CAH to Buy and downgrade CVS to Neutral. We believe recent Supply Chain
industry tailwinds are moderating (new generic launches, GRx inflation), reimbursement/margin pressure is becoming more
acute for the drug retailers, and though we expect a modest improvement in drug volumes off an easy compare, Rx volumes
will not in our opinion drive sector performance. Against this backdrop we prefer names with (1) idiosyncratic EPS upside, (2)
proven returns discipline, and (3) balance sheet flexibility. As a result, we upgrade CAH to Buy and remain Buy on MCK.
We raise our CRO coverage view to Attractive from Neutral as pharma pipeline growth and strong biotech funding have
driven above-trend bookings ytd, which we expect will drive accelerating sales growth across the group. Also, despite the solid
fundamental outlook, the group trades at an attractive relative valuation. In addition, we add Q to the CL given recent
underperformance since 3Q, and note its group leading 12-month book-to-bill and growing balance sheet flexibility. Our CRO
coverage view change comes on the back of our recent upgrade of Tools which was partly driven by our constructive view on
accelerating biopharma end markets, better outlook for NIH funding (TMO top pick).
Adding MYL to CL, as we see generic drug makers as more insulated from threats of pricing pressure.
We see generic drug makers as more insulated from threats of pricing pressure as their generic portfolios have been less
exposed to outsized price increases. We add MYL to the CL given its strong 2016-2018 outlook and dislocated share price in
the aftermath of the unsuccessful PRGO bid. Our view is that management is likely to be incentivized to repair its bruised
relationship with shareholders, creating a positive set up for the stock.
The following page summarizes our 2016 subsector coverage views and top stock picks.
December 17, 2015
Highest Conviction Single Stock Ideas for 2016

Exhibit 1: Our highest-conviction ideas for 2016
GS Healthcare stocks on the Americas Conviction Buy list, bolded companies are recent additions
Price
Target
Price
(12/15/15)
Upside
Major Pharmaceuticals
$80
$56.39
42%
Terence Flynn, PhD
Large-Cap Biotech
$213
$162.62
31%
BMY
Jami Rubin
$80
$70.22
14%
Bullish on BMY's positioning for Opdivo and larger I-O franchise
HOLX
Isaac Ro
Diagnostics
$49
$38.50
27%
Tomo product cycle underappreciated, with execution from management on de-leveraging

and operating improvements
MDT
David H. Roman
Medical Devices
$90
$77.10
17%
Strong organic growth with multiple growth drivers for future organic growth and cash
optionality
MYL
Jami Rubin
Generic Pharmaceuticals
$65
$53.99
20%
Robert P. Jones
CROs
$86
$68.93
25%
TMO
Isaac Ro
Life Science Tools
$158
$137.49
15%
ZLTQ
David H. Roman
Medical Devices
$44
$27.60
59%
Ticker
Analyst
Coverage Group
ABBV
Jami Rubin
AMGN
GS View
Bullish on stability and growth of Humira, growth from the pipeline, and the potential to
increase margins
New product cycles (PCSK9), pipeline readouts (Romo) and internal biosimilars will allow it
to replace the potential revenue that could be lost to competition and drive outer-year
growth
Strong 2016-2018 outlook, dislocated share price and insulation from pricing
pressure
Attractive entery point in light of: (1) Sector leading book-to-bill, supporting
accelerating revenue growth, (2) limited client concentration, and (3) growing balance
sheet flexibility.
Underappreciated growth story with an improving balance sheet which stands to benefit
from improving fundamentals in Tools' end markets
Differentiated asset avoiding negative controversies (i.e., drug pricing, utilization
uncertainty) with exposure to new product cycles and consumer spending patterns
Source: Factset, Goldman Sachs Global Investment Research.
December 17, 2015
GS Healthcare Team 2016 Subsector Coverage Views + Key Stock Picks

Exhibit 2: Key Themes Across our Coverages
Coverage Group
Analyst
Coverage View
Buys
Key Themes
Jami Rubin
Attractive
BMY (CL), ABBV (CL)
New product cycles, margin expansion, pricing dynamics, and capital allocation,
Generic Pharmaceuticals
Jami Rubin
Attractive
MYL (CL), TEVA
Specialty & SMID Pharmaceuticals
Gary Nachman
Attractive
ANAC, ENDP, SAGE, HZNP,

PCRX
Execution on recent deals, driving growth in niche specialty areas, new product
launches and data, selective and strategic consolidation
Medical Devices
David H. Roman
Attractive
MDT (CL), ZLTQ (CL), BSX,

EW, ISRG, SYK
New product cycles, margin expansion, stabilizing utilization
Tools
Isaac Ro
Attractive
TMO (CL), A, FEIC, VWR
CROs
Bob Jones
Attractive
Q (CL), INCR
Large Cap Biotech
Terence Flynn
Neutral
AMGN (CL), DMTX, FGEN,

REGN, VRTX
New product cycles, pricing dynamics, pipelines and capital allocation
SMID Biotech
Salveen Richter
Neutral
BMRN, BLUE, INCY, KITE
R&D innovation in key areas (e.g. oncology, gene therapy, rare disease),
Pipeline catalysts, M&A (acquisition targets for Pharma and Large-Cap Biotech)
Medical Supplies
David H. Roman
Neutral
BAX, BCR
Labs and Services
Isaac Ro
Neutral
Improving utlization, capital allocation, pricing pressure and reimbursement

reforms
Drug Chains
Robert P. Jones
Neutral
Reimbursement/margin pressures, solid Rx volumes, implications of

consolidation, remaining purchasing synergies
Supply Chain
Bob Jones
Neutral
BKD, MCK, CAH
HCIT
Bob Jones
Neutral
CERN, EVH
Diagnostics
Isaac Ro
Neutral
HOLX (CL), ALR
Facilities
Matt Borsch
Neutral
LPNT, AMSG, ADPT, SCAI,

EVHC
Healthcare reform impact on payer mix, volumes, bad debt reduction, industry
consolidation, outpatient vs. inpatient
Managed Care
Matt Borsch
Neutral
CI, WCG
Pace of cyclical utilization recovery, ACA exchange sustainability, final stages

in large-scale M&A, pricing, "margin over membership"
Dental
Bob Jones
Neutral
ALGN
Industry consolidation, specialty generics, defensive
Improving fundamentals across biopharma R&D and academic end markets,

muted implications from energy end market volality, consolidation
Solid bookings momentum, robust biotech funding trends. further margin
expansion potential, growing balance sheet flexibility
Leverage to macro healthcare growth and utilization, restructuring, capital

allocation
Moderating generic inflation and generic launch schedule, inorganic wholesaler

earnings support, PBM pricing, large MCO relationship overhangs
Duration of the EMR replacement cycle, accelerating Population Health
adoption, increasing outsourced services penetration
Reimbursement overhangs, product cycles, turn-around stories
Implications of proposed XRAY/SIRO merger on competitive landscape,

continued solid dental/vet consumables growth, uneven equipment growth
Source: Goldman Sachs Global Investment Research.
December 17, 2015
A View from Washington: Marking Time Until the Election

2016 election likely to overshadow near-term policy discussions
This section written
by GS Washington
analyst Alec Phillips
Health-related legislative activity in 2016 should be minimal. In our view, there is a low likelihood that significant changes to health
laws will be made in 2016, as the election campaign crowds out policy debates. That said, we will be following two sets of legislative
issues.
1.
Any further changes to the Affordable Care Act. Congressional Democrats have opposed efforts to make significant
changes to the ACA since it was enacted in 2010, but have now embraced changes to certain aspects of the law. The
recently announced omnibus spending and tax bill, which we expect to become law shortly, includes several notable
changes: (1) it delays implementation of the Cadillac tax from 2018 to 2020, suspends the 2.3% tax on medical device
sales for 2016 and 2017, and suspends the tax on health insurance premiums for 2017. That bill will also extend last years
requirement that CMS implement the risk corridor for plans in ACA exchanges on a budget-neutral basis, which will limit
CMSs ability to make the full payments. Since these changes look likely to be enacted in the near term, we would expect
little additional action on them over the coming year, though we would expect these and other ACA provisions to become a
focus again following the presidential election.
2.
Drug pricing-related policies. In the near-term, we do not envision Congress taking action on drug pricing-related issues,
mainly because there is little consensus on what should be done and because there is no clear catalyst/deadline for action.
That said, it seems likely that pressure can also be brought to bear by investigating specific practices deemed to be
problematic. Congressional committees have begun to hold hearings looking into drug pricing practices, and more are
likely. That said, the committees most focused on the issue thus far do not actually have jurisdiction over health laws and
such investigations are more likely to result in headlines than systematic reforms.
The major focus in 2016, however, is likely to be the presidential election. While former Secretary of State Hillary Clinton has a clear
lead for the Democratic nomination, we expect the outlook for the Republican nomination to be uncertain for at least several months,
and possibly all the way until the Republican convention in July. Control of Congress will be an important consideration, since
nearly all major health-related proposals would need to go through Congress to become law. In light of the seemingly high
probability that Republicans will maintain their House majority and a roughly evenly matched contest for Senate control, we are
focused primarily on general election outcomes involving a divided government similar to the current situation (though perhaps
with slightly greater influence via a slim Democratic majority in the Senate) or the possibility of an all-Republican government.
Pricing debate in focus low likelihood of changes without bipartisan support

The price of health care has become a more salient political issue, displacing Obamacare as the top health-related voter concern in
several recent public opinion polls. Recognizing this, the issue has become a focus on the campaign trail. A variety of proposals
have been discussed, which we think of in three categories.
1.
Regulatory efforts. Several Republican candidates have suggested that reforming the FDA approval process and reducing
regulatory burdens could lower drug prices. By contrast, Clinton has proposed to increase competition for specialty
biologics by lowering the exclusivity period from 12 years to 7 years and giving priority review to biosimilar applications.
8
December 17, 2015
While we would not expect congressional Republicans to support changes to exclusivity periods, it is possible that they
would support an incremental increase in funding to ease the approval process.
2.
Reforming public-sector purchasing. Clinton, like President Obama and most congressional Democrats, supports allowing
Medicare to negotiate prices for drugs and biologics and applying the Medicaid rebate to Medicare beneficiaries eligible for
both programs. Republicans generally oppose plans such as these that rely on the governments purchasing power to set
prices. That said, they have generally supported efforts to reduce Medicare spending, so incremental changes to Medicare
drug pricing that reduce federal spending cannot be ruled out over the longer run.
3.
Intervening in market pricing and practices. While Republicans have generally opposed intervening in private-sector pricing
decisions, Clinton has proposed capping out-of-pocket costs for drugs to treat chronic or serious health conditions to
$250/month. She has also proposed to spend a minimum level on R&D or pay tax penalties, essentially representing a
maximum allowable profit margin, similar to the minimum medical loss ratio established for health insurers under the ACA.
However, most of these changes would be impossible to implement without bipartisan support.
1.
Major policy changes generally require legislation. Nearly all of the changes discussed above would require legislative
approval in Congress. In some cases, the federal government lacks the authority to require the changes, while in other
cases (such as Medicare price negotiation) the law specifically prohibits the proposed policy and would need to be changed.
Most observers expect Republicans to maintain their control of the House of Representatives, so even in a scenario in which
Clinton wins the White House with a Democratic-majority Senate, the House would be likely to block most of her proposals.
2.
More incremental changes can be accomplished via regulation, which does not require congressional approval. The
candidates have not proposed much in this area, but there has nevertheless been some discussion among market
participants of what CMS could do unilaterally. While CMS is prohibited from interfering in prices for drugs covered under
Medicare Part D and drugs under Part B are paid based on average sales price (ASP), the Center for Medicare and Medicare
Innovation (CMMI) has authority to establish pilot projects to develop alternative reimbursement systems, and plans do so
for oncology drugs. If successful (measured in this case as generating savings without any deterioration in quality, or
increasing quality without increasing spending) CMMI could expand its system more broadly over time. While this could
over the long run create some pressure on high cost medications, this would probably take several years and the actual
savings could turn out to be modest.
December 17, 2015
Emerging Uncertainties: Key Themes Facing New Challenges

The healthcare sector has been a huge beneficiary of several important key drivers that have powered the groups upward and long
lasting momentum. Strong new product cycles, with higher quality products versus past cycles, volume tailwinds from healthcare
reform and strengthening utilization, and a favorable M&A environment have supported tremendous optimism among investors.
But headwinds are lurking in the distance, some more obvious than others that we think could represent new challenges.
1.
Pricing debate likely to grow during election year, taking some wind out of new product sails. Our expectation is that little
if anything will happen to branded drug pricing over the next couple of years, given that modifications for Medicare (dual
eligible) and other strategies that would curb drug pricing would require Congressional legislation, and even under a
potential Clinton administration, Congressional gridlock is the most likely outcome. But headline risk is likely to persist as
specialty drug pricing has led to higher co-pays where consumers bear a larger amount out of pocket and the cost of cancer
drugs and other specialty drugs (hepC) has garnered a lot of attention. Moreover, we see a potential black swan scenario
where the administration has the ability to enact broad restrictions on drug pricing through either the Independent Payment
Advisory Board (IPAB) and/or the Center for Medicare and Medicaid Innovation (CMMI). Offsetting the headline risk is
continued new product momentum, which remains very strong. We prefer a barbell approach, recommending truly
innovative companies that deliver drugs that justify their price tag (BMY, AMGN, ABBV, BMRN and REGN) and generic drug
companies which we view as more defensive (MYL, TEVA, ENDP).
2.
Utilization now more mixed; ACA has become a headwind. We expect further cyclical recovery in core (non-ACA)
utilization in 2016, consistent with our modeling of trend relative to the timing of prior economic cycles. We believe the
balance of 2014-2015 results show an upswing in utilization trend. While so far more gradual as compared to what we have
seen in prior economic cycles, our model favors some acceleration in 2016. At the same time, we are unsure if there will be
any meaningful contribution to volumes from the ACA next year, given the uncertainty over the outlook for and
sustainability of the ACA exchanges. Also, we do not have visibility on further ACA Medicaid expansion, which seems likely
to remain uncertain for most or all of next year. The implications of this mix of factors (cyclical recovery but without
contribution from the ACA) differ by sector. We think the net impact of this mix of factors will still be positive for most
volume-sensitive healthcare names (as cyclical recovery offsets lack of contribution from the ACA, at least relative to
expectations) but net negative for hospitals (given their bottom-line leverage to coverage expansion) unless and until
uncertainties on the outlook for ACA coverage are resolved. More immediately, we continue to expect strong volumes in
4Q2015 driven by an acceleration in the seasonal trend towards year-end loaded utilization that has come with the
increased penetration of high deductible plans), which we think bodes well for a number of sectors in 4Q earnings,
including Providers, MedTech, Diagnostics, and Labs.
For MedTech the presence of a stable macro backdrop should allow for new products to contribute incremental growth and
yield accelerating EPS growth in 2016. Specifically, we see the sector generating organic revenue growth in the 4%-7%
largely on the heels of new market growth with the biggest opportunities in cardiology and neurology. On the earnings line,
abating FX headwinds, improving price (i.e., less negative), and favorable mix should all contribute to better EPS growth in
2016 when compared to 2015. These factors combined with favorable valuation make the setup in MedTech compelling, in
our view.
3.
M&A: Waning appetite for deals (esp. financial), but companies still have firepower. We expect the pace of M&A going
forward to slow given that acquirers stocks have been starting to underperform again after deals are announced. Since
10
December 17, 2015
2012, we have seen acquirers across all sectors (except Energy) being rewarded for M&A with aggregate stock
outperformance post deal announcements. However, the magnitude of outperformance has steadily declined over the last
several years with 2015 just barely positive, and we are seeing a gradual reversion to the mean when considering that
acquirers stocks underperformed in almost every year in the period 1996-2011. Specifically in healthcare, when comparing
stock performance for acquirers in 2015 vs. 2014 it is clear that 2015 has been a lot more challenging (in biopharma and
managed care acquirers actually underperformed significantly this year).
When considering healthcare M&A overall, we believe investors have most soured on deals that have been primarily for
financial engineering purposes (e.g., acquiring mature assets and driving accretion largely through price increases and/or
cost synergies, tax inversions, etc.). Where we expect companies to be more focused with their M&A going forward is on
strategic deals that add new products or technologies that have very good durability, and that will be significant
contributors to long-term organic growth even if they are less accretive in the very near term.
Many companies within healthcare continue to have significant firepower on their balance sheets despite the substantial
amount of deal making over the last few years. Average net leverage ratios across all of healthcare have been continuing to
climb, but are still at a reasonable level in our view at roughly 1.4x. There are some concerns that a higher interest rate
environment may impede future deals, but what we have seen in the past is that higher rates are typically associated with a
growing economy and with higher consumer and business confidence that ultimately drives greater M&A activity. As such,
we do not believe a higher interest rate environment in and of itself would necessarily change the level of M&A in
healthcare. If borrowing costs do end up going higher, stock deals could also potentially be a trend that continues to
increase going forward.
11
December 17, 2015
Stress Testing the 2016 Pricing Overhang: 6 Key Variables

US drug prices have moved to the forefront as a result of political posturing ahead of elections. While we do not expect
broad changes to pricing dynamics in the US near-term, we wanted to use sensitivity analyses to gauge the impact of
several potential scenarios to provide a framework. The three scenarios we considered are (1) if rebates on dual eligibles
(beneficiaries eligible for both Medicare and Medicaid) are stepped up to Medicaids rebate (minimum rebate of 23.1%), (2) apply a
rebate across all Medicare drugs, which could start low and grow over time or (3) if the ability to take price increases in the US
became nearly impossible (similar to the current situation in Europe). We walk through each of these below.
Cancer drugs, orphan
disease, and generic
drugs are likely to be
more insulated from
political pressure
With pricing concerns as the backdrop for 2016 we identify a few areas we believe will be more insulated. First we expect less price
pushback on cancer drugs due to the recent innovation, life-saving technology and often favorable distribution channels through
hospitals. We believe BMY (CL-Buy) is well positioned to benefit from strong volume growth as its key drug Opdivo expands into
additional indications. Secondly, ALXN (Neutral), BMRN (Buy) and VRTX (Buy) are well position, as orphan drug pricing is likely to
be more insulated given it represents a smaller proportion of total drug spend and often deliver significant benefits to patients.
Thirdly, we see generic drug makers, MYL (CL-Buy) and TEVA (Buy) as more insulated from threats of pricing pressure as their
generic portfolios have been less exposed to outsized price increases.
1.
Sizing the potential impact from Dual Eligible changes. Drug manufacturers enjoyed large windfalls under the creation of
Medicare Part D as dual eligible beneficiaries (eligible for both Medicare and Medicaid) were stepped up to the higher Part
D prices. The Committee on Oversight and Government Reform estimates the industry received a gain of almost $7bn in the
first two years post the enactment of Part D. The debate is whether or not the rebates on dual eligibles be stepped up to
Medicaids rebate (minimum rebate of 23.1%). This proposal has been discussed in almost every broad healthcare cost
cutting debate, but has never been acted on. Nevertheless, with the potential for changing political winds, we revisit the
exposures of each of our biopharma companies (Exhibit 3).
2.
Broad rebate applied to all Medicare drugs. Beyond dual eligibles another potential way in which the US government could
look to control drug costs could be via a broad rebate applied to all Medicare drugs. This could start low and grow over
time. However, this would likely be much more complicated than making changes to dual eligible rebates as there is no
framework/policy in place. Below we provide estimates for Medicare exposure across our coverage universe (Exhibits 4-5).
3.
What if US pricing power disappears? Finally we wanted to explore the scenario where the ability to take price increases in
the US becomes nearly impossible (similar to the current situation in Europe). While we think this is an extremely low
likelihood scenario, we ran an analysis on two of our companies for illustrative purposes. Clearly the bottom-line impact is
more significant than the top line (Exhibit 6).
12
December 17, 2015
Exhibit 3: Assessing the impact of a dual eligible step up to Biopharma 2015 EPS
Impact on EPS evaluated based on a 23% rebate to estimated Medicare Part D Exposure
$18.00
2015E EPS
EPS Impact
-20%
EPS Impact (%)
-18%
$16.00
-16%
$14.00
-14%
$12.00
-12%
$10.00
-10%
$8.00
-8%
$6.00
6.8%
-6%
4.9%
$4.00
-4%
$2.00
2.2%
2.5%
1.9%
1.5%
1.8%
1.2%
-2%
1.6%
1.2%
0.3%
$0.00
BMY
LLY
ABBV
MRK
JNJ
PFE
BXLT
GILD
CELG
Pharma
BIIB
AMGN
0.0%
0.0%
ALXN
REGN
-0%
Biotech*
*Non-GAAP EPS for ALXN, AMGN, BIIB, CELG, GILD, and REGN
Source: Goldman Sachs Global Investment Research
Exhibit 4: Government exposure as a % of 2014 revenue in Pharma
Exhibit 5: Government exposure as a % of 2014 revenue in Biotech
Based on GS estimates if company data not available
Based on GS estimates if company data not available
Company
Total
Medicare/Medicaid
Exposure
ABBV
BMY
BXLT
JNJ
LLY
MRK
PFE
AGN
12%
36%
24%
12%
26%
16%
23%
25%
ABBV: based on Humira sales
Exposure as a % of Revenue
Medicare
Part B
Medicare
Part D
1%
10%
22%
5%
9%
5%
15%
1%
11%
26%
1%
7%
17%
11%
8%
24%
Exposure (as a % of 2014 Revenue)

Total Government
Exposure
Medicaid
Medicare
Medicare
Part D
Medicare
Part B
ALXN
7%
6%
1%
0%
1%
AMGN
30%
4%
27%
5%
22%
BIIB
18%
2%
16%
8%
9%
CELG
35%
3%
32%
32%
0%
GILD
44%
26%
18%
18%
0%
REGN
44%
2%
42%
0%
42%
VRTX
9%
9%
0%
0%
0%
Medicare Part B/D breakdown estimated based on molecule type
AGN: based on proforma estimates (excluding generic sales)

LLY and MRK: based on 2013 figures
Source: Company data, Goldman Sachs Global Investment Research.
13
December 17, 2015
Exhibit 6: Pricing Sensitivity Lilly and Celgene

Impact of the removal of price growth on Sales and EPS for LLY and CELG
$30,000
$10,000
8% Impact
$8,000
$6,000
$4,000
Current Estimates (CAGR = 15%)

Flat Pricing Estimates (CAGR = 12%)
$2,000
$0
CELG EPS Estimates
FY14
FY15
FY16
FY17
LLY Sales Estimates
$12,000
$25,000
$20,000
$10,000
$0
FY14
$7.00
$7.00
$6.00
$5.00
15% Impact
$4.00
$3.00
$2.00

$1.00
$0.00

$5,000
$8.00
$6.00
9% Impact
$15,000
FY18
LLY EPS Estimates
CELG Sales Estimates
$14,000
FY15
FY16
FY17
FY18
FY19
FY20
$5.00
$4.00
30% Impact
$3.00
$2.00
$1.00
$0.00
FY14
FY15
FY16
FY17
FY18
FY14
FY15
FY16
FY17
FY18
FY19
FY20
Source: Company data, FactSet, Goldman Sachs Global Investment Research.
4.
Cancer combination pricing: the white elephant in the room. Affordability of new cancer drugs has become a growing
societal issue given the high cost of new therapies (about $10,000 per month). But more pressing is the growing realization
that oncology treatment is moving to combinations of very expensive drugs and the potential for more chronic usage of
drugs. There are numerous IO + IO and IO + target therapy combinations that are in clinical development each of which
costs more than $100K/year. Opdivo and Yervoy were recently approved in 1L melanoma (October 2015) and as the drugs
are not co-formulated the pricing is based on existing prices of the single agent. Opdivo is priced at $12.5K/month or
$150K/year in the US and Yervoy is $132K for four doses. Based on the dosing regimens the combination of the two for a
full year is $256K. Additionally there are now numerous triple combinations in multiple myeloma being analyzed. Darazlex
(daratumumab) is priced at $134K for the initial year of therapy and $70K for subsequent years. While it will be used as
monotherapy initially JNJ/Genmab are running trials in combination with Revlimid which is priced at $127K.
5.
The Black Swan Potential for broad price restrictions. Under the Affordable Care Act (ACA), a long shot scenario could
materialize where the president has the ability to enact broad restrictions on drug pricing through either the Independent
Payment Advisory Board (IPAB) and/or the Center for Medicare and Medicaid Innovation (CMMI). IPAB is triggered when
the rate of Medicares rate of spending growth exceeds inflation (potential impact in 2017+). While IPAB has not officially
14
December 17, 2015
been seated, its powers are held with the Secretary of HHS. If IPAB is triggered, theoretically it could give CMS the authority
to target spending outliers that could focus on specific categories rather than specific drugs. CMMI has the authority to
institute broad pilot programs designed to save costs. This could include paths such as least costly alternative or extending
drug spend into ACO models (possibly pulling part D drugs into bundles). However, we note its possible that movement on
any of the above fronts would likely result in legal challenges that could delay the implementation of these policies. In
totality, it appears that these debates may mostly serve as overhangs and headline risk in 2016.
6.
A word on biosimilars. While 2015 marked FDA approval of the first true biosimilar in the US, Sandozs Zarxio, it also
featured a number of delays (Celltrions biosimilar Remicade, Apotexs biosimilar G-CSF drugs and PFEs biosimilar
Epogen). Hence in 2016 our focus will be three-fold, assessing the uptake and impact of Zarxio on AMGNs Neupogen
(consensus is modelling a 12% yoy decline) and monitoring regulatory progress for biosimilars which experienced delays in
2015. We also expect focus on ABBVs Humira and any potential updates on competition from AMGNs biosimilar. ABBV
recently outline significant IP that they believe will protect Humira until into the next decade in the US. Additionally AMGN
management comments shifted on the 3Q earnings call acknowledging Humiras IP.
Like any drug market, in our view the biosimilars market will be defined by the competitive landscape (number of
options), doctor/patient acceptance and pricing/reimbursement considerations. As we have previously written the
technical challenges of developing and commercializing biosimilars could ultimately limit the number of players and
potential share/price erosion to less than that seen with small molecule generics. While this story is still playing out, we did
see some evidence of this in 2015.
Exhibit 7: Status of select US biosimilars
Reference drug
Biosimilar
Company
Filing status
Next steps
Epogen
Retacrit
Hospira (PFE)
Received complete response letter (CRL)
Submit response to CRL in 1H16
Humira
ABP 501
AMGN
Filed with FDA and EMA (11/25/15, 12/3/15)
FDA filing acceptance
Neupogen
Zarxio
Sandoz (Novartis)
Approved on 3/6/15
Launched September 2015
Neupogen
Grastofil
Apotex
FDA accepted BLA on 02/17/2015
PDUFA likely passed
Neulasta
Pegfilgrastim Apotex
Apotex
PDUFA likely passed
Neulasta
Pegfilgrastim Sandoz
Sandoz (Novartis)
PDUFA 3Q16
Remicade
Remsima
Celltrion
Filed with FDA (8/11/14)
PDUFA likely passed
15
December 17, 2015
Biopharma Big Picture: 2016 Investable Themes

As we look toward 2016 our focus is on (1) Immuno-oncology, which we believe remains an investible theme that is still in
its early stages, (2) the Alzheimers class which we believe will attract increased investor attention, though we remain
Neutral-rated on globally leveraged names BIIB and LLY, (3) key launches in the sector, including PCSK9 cholesterol drugs
from AMGN and REGN/SNY, (4) growth in late-stage CRO book-to-bills, which have accelerated in 2015 amid record biotech
funding and strong late-stage pharma pipeline growth, and (5) smid biotech catalysts where we have high conviction.
1.
2.
Early innings of the Immuno-oncology story. We expect first full year PD-1 sales of around $1.5 bn for Opdivo and Keytruda
driven by the rollout of new indications in lung, melanoma and renal. While appreciation for the IO class has certainly
grown over the past couple of years, from a commercial perspective we believe we are in the early innings of the story. We
believe the class will generate 2025 sales of approximately $30-40 bn (with half of that coming from lung, renal, and
melanoma), which could include potential for combinations. IO will continue to dominate the news flow across the sector,
with multiple new tumor studies in 2016 potentially stopped early for registration, including 1L lung, bladder, head and neck
and blood cancers. Key catalysts in 2016:
Will Roches lung filing for atezolizumab based on BIRCH trial be accepted for registration in 1Q16 or will the FDA
request the company to submit its application until after results from OAK (phase 3 all comers randomized OS trial).
If Roche is delayed by a couple of years, we see substantial upside to Opdivo and Keytruda.
IO combinations will be brought to the forefront in 2016 likely at ASCO. BMY will have data readouts for their LAG3,
anti-KIR, and CD-137 in 2016 and will enter into new combination trials for their IDO, OX-40, CD-73, and GITR. We
believe MRK may have potential data readouts for Keytruda in combination with the companys own GITR, LLYs
Alimta, PFEs 4-1BB, Novartiss BRAF/MEK and possibly other combos. We see new IO partnerships announced
almost weekly to look at different combinations across tumor types.
We expect early proof-of-concept from INCYs IDO in combination with PD1/PDL1s from Pharma partners MRK,
BMY, AZN and Roche in multiple indications throughout 2016, with potential for progress into pivotal trials. In
addition, INCY and MRK are slated to initiate a pivotal IDO/Keytruda combination study in frontline melanoma in
H1/16.
Engineered T-cell platforms (CAR Ts/TCRs) from KITE, JUNO and NVS will also yield data throughout 2016 including
pivotal data in leukemia and lymphoma by YE16 (KITE in DLBCL, JUNO in adult ALL and NVS in pediatric ALL) and
potential proof of concept in solid tumors (KITE in cervical and head and neck cancer and potentially glioblastoma
and other solid tumors by ASCO, JUNO in neuroblastoma and potentially other solid tumors by YE16). We see
proof-of-concept for CAR-Ts/TCRs in solid tumors as a major driver of upside for players in the engineered T-cell
space.
Alzheimers disease (AD) catalysts will also be front and center in 2016, particularly for LLY and BIIBs assets.
LLY demonstrated a deep commitment to Alzheimers at its recent investor event. Management outlined multiple
platforms for targeting various points in the AD disease cascaded. Sola EXPEDITION 3 results could potentially topline at the very end of 2016 and the full data is likely to be presented in 2017. We model a 25% probability of success,
or $1.0 bn by 2020. (Our un-risk adjusted peak sales estimate is $8.0 bn).
16
December 17, 2015
BIIBs Aducanumab (a-beta antibody) Ph3 AD program is under way and we expect data in 2019/2020. But in 2016
we could get two updates from the initial Ph1b trial data from the titration arm as well as from the rollover, openlabel extension portion (beyond one year). However, we do not view these as upside drivers given BIIB has already
designed the Aducanumab Ph3 program to incorporate dose titration and the Ph1b open-label extension lacks a
control arm. With respect to additional assets in BIIBs AD portfolio, we expect updates on Eisais BAN2401 (a-beta
antibody) and E2609 (BACE inhibitor) in 2016. For BAN2401 the Ph2 data will be fairly robust (N=650 patients over a
range of doses) and will include cognition data (novel composite endpoint called ADCOMS), 65% of the components
come from CDR-sb and hence might be generally comparable to Aducanumab Ph1b. Whereas the E2609 data will be
primarily focused on safety/tolerability.
Exhibit 8: Timeline for AD catalysts

2016 is a major year for Alzheimers
2016
Eli Lilly
2017
2018
Primary
Completion
solanezumab EXPEDITION 3
2019
Eli Lilly
2021
Primary
Completion
BACE Inhibitor (LY3314814) AMARANTH

Eisai / Biogen
2020
Study
Complete
2015
Study
Complete
Data
Release
Eisai / Biogen
BACE Inhibitor (BAN2401) Phase 2

Eisai / Biogen
aducanumab (BIIB037)
Phase 1b
Data
Release
Study
Complete
BACE Inhibitor Phase 1/2
Eisai / Biogen
Primary
Completion
Merck
BACE inhibitor verubecestat (MK-8931) EPOCH
Primary
Completion
Mild to Mod, no PET scan
Merck
BACE inhibitor verubecestat (MK-8931) APECS, Prodromal, w/PET scan

Roche
gantenerumab, Mild w/PET scan
Study
Complete
BIIB037 Phase 3 Alzheimer's Data
Primary
Completion
Study
Complete
2014
Primary
Completion
Source: clinicaltrials.gov
17
December 17, 2015
Beyond AD, we expect a high degree of focus on BIIBs anti-Lingo Ph2 MS data. While not a pivotal trial, it has the potential
to significantly impact BIIBs multiple give the target profile of this drug (remyelination for MS). Earlier this year reported
data from the first Ph2 trial of the drug in AON. In our view the data were mixed as while there appears to be a signal of
activity on the primary endpoint recovery of optic nerve latency (time for a signal to travel from the retina to the visual
cortex), as measured by full field visual evoked potential (FF-VEP), relative to placebo the study showed no effect on
secondary endpoints. We were looking for a signal of activity across multiple measures. Hence, we expect definitive proofof-concept for anti-Lingo to remain an outstanding question until we see data in a second Ph2 trial in MS in 2016.
3.
Outside of cancer and CNS within large-cap biotech we see several additional important pipeline catalysts including
AMGN/REGN PCSK9 Ph3 CV outcomes data, AMGNs Romo Ph3 osteoporosis data, REGNs Dupi Ph3 atopic dermatitis data,
CELGs Revlimid Ph3 REMARC trial and GILDs Simtuzumab Ph2 IPF and NASH data. In our view expectations are highest
for PCSK9 outcomes data (given robust cholesterol reductions and genetic support) and lowest for Simtuzumab (given prior
failures in cancer).
4.
Gaining leverage to the overall biopharma innovation cycle through the CROs. The CRO group has experienced high-single
digit backlog growth on average through 2015, which has contributed to an acceleration of trailing 12-month book-to-bills
well above normalized levels. In our view, record biotech funding and a continued focus by large pharma in investing in
their late-stage pipelines (which grew 8% on an annualized basis through the first nine months of the year) have been the
key drivers of this recent backlog strength we expect these trends to continue. As a result, we expect 2016 to deliver
accelerating sales growth across the group, helping drive margin expansion and generate greater levels of cash flow for
capital allocation.
18
December 17, 2015
Exhibit 9: Risk/Reward for select Ph3 pipeline catalysts
LLY/Solanezumab
Alzheimers
HigherReward
ALKS/5461
Depression
OPHT/Fovista-Wet AMD
BMY/Opdivo-New indications
INCY/Baricitinib-RA
KITE/KTE-C19
DLBCL
JUNO/JCAR015-ALL
BMRN/BMN 190-Batten
MRK/Keytruda
New indications
REGN/Dupi
Atopic derm/asthma
TEVA/Auspex
Tardive dyskinesia
ABBV/Elagolix
Endometriosis
AMGN/Repatha
CV outcomes
AMGN/Romo
osteoporosis
LowerReward
FGEN/Roxa-CKD China
BMRN/PEG-PAL
PKU
INCY/Jakafi
Pancreatic cancer
ALXN/Soliris-MG
BLUE/Lenti-D-CCALD
SGEN/Adcetris
CTCL-frontline
JNJ/Sirukumab-RA
LowerRisk
Pharma
HigherRisk
Largecap Biotech
Smidcap Biotech
Source: Company data, Goldman Sachs Global Investment Research
19
December 17, 2015
5.
Smid-biotech catalysts: Therapeutic modalities have evolved rapidly from small molecules and large molecules, now
proven platforms, to antibody-drug conjugates, antisense/RNAi, epigenetics, engineered T cells, gene therapy/editing and
cancer vaccines among others. We look for these novel platforms to yield transformative therapies, with pipeline progress
and pivotal readouts in 2016.
BMRN leading diversified rare disease play: We expect a multitude of 2016 catalysts. We look towards BMN 701
data (n=20, old manufacturing process in pivotal study) in Pompe disease in January, BMN 190 Batten disease final
data (likely at WORLD conference from Feb 29-Mar 4) and Phase III PEG-PAL for PKU results in Q1. BMN 250 Phase
I/II in MPS IIIB will enter the clinic in Q1. At the April 20, 2016 R&D day, we expect first BMN 270 data for hemophilia
A (upside to model), BMN 111 (Phase I/II1-year data at Phase III dose) and a potential new program disclosure. We
also look to the Kyndrisa in Duchennes muscular dystrophy CHMP decision in E.U. in 2Q.
BLUE lead gene therapy company: In terms of catalysts for 2016, we expect Lenti-D pivotal data in CCALD (rare
neurological disorder) to serve as proof-of-concept in terms of efficacy/durability, clarity on second-generation
LentiGlobin post FDA discussions (whether an IND is required), LentiGlobin data in Beta-thal and SCD at EHA (June
9-12) and ASH (December 3-6), and the immuno-oncology platform to progress with bb2121 for relapsed multiple
myeloma to enter the clinic in 1Q16, with data by YE16/2017.
KITE A CAR-T/TCR immuno-oncology leader: In 2016, we expect to see NCI Phase I/II data from the TCR targeting
HPV-16 E6 in cervical and head and neck cancer and possibly from the CAR targeting EGFRvIII in glioblastoma (an
aggressive brain tumor) by the American Society of Clinical Oncology (ASCO, June 3-7) meeting, which should
serve as major catalysts. The lead CAR-T program, KTE-C19, Phase I/II interim pivotal data is expected in 2H
followed by a BLA filing by YE16.
INCY immuno-oncology biotech leader: Positioned for abundant newsflow in 2016 from the lead immunooncology drug IDO, with Jakafi pivotal data and multiple readouts from the early stage pipeline. We look towards
additional readouts for IDO combinations with e BMYs PD-1 antibody Opdivo, RHHBYs PD-L1 antibody
atezolizumab, and AZNs PD-L1 antibody durvalumab likely through 1H and at ASCO with likely progress into
pivotal programs. We look towards a potential baricitinib approval in RA in the US in late-2016 (pending regulatory
submission by LLY in late-2015). Phase III JANUS-1 study of Jakafi in pancreatic cancer and Phase II results in breast
and colon cancer will read out in 2016. Initial Phase I/II data for novel FGFR, PIM, and BET inhibitors in multiple
malignancies should also read out in 2016.
20
December 17, 2015
From Launch to Margin: Focus on Expanders
Top margin inflection

picks: ABBV, AMGN,
BMY, VRTX
Strong new product momentum has led to continued improvements in margins and the converging of biotech and pharma (blurred
lines) into one bio-pharma sector. Successful new product launches have blurred the distinctions between the traditional pharma
companies and biotech companies. Indeed, BMY and LLY trade in line with higher-multiple biotechs while GILD, AMGN and now
BIIB sport multiples that are more typical of traditional pharma. This is a trend we expect to continue, with pipeline progress from
pharma looking more like biotech. Our call on large-cap pharma continues to be constructive (Attractive view) as we see the sector
entering a period of improved operating margin expansion after several years of flat to down margins driven by the patent cliff. We
see 600 basis points of margin expansion for the large cap pharma sector, with BMY showing the most leverage among its peer
group diven by Opdivo sales. Biotech saw a significant amount of margin expansion over the past several years driven by major
new product launches, and while we still expect improvement going forward, it is likely to be at a slower pace.
Our coverage view on pharma remain Attractive: On a composite basis, we model 600 basis points of operating margin
improvement for the large cap pharma sector. No company is likely to exhibit as much margin leverage as BMY over the
next five years, with EBIT margins growing from 25% to 43% by 2020. As Opdivo, with an operating margin estimated in the
75% range ramps to its peak potential of >$10 bn driven by numerous cancer indications. We also see margin improvement
from ABBV (42.5% to 49% by 2020) from growth in Humira, pipeline launches, and operational efficacy. With the stock
trading at 11x our 2016 EPS estimate (versus 17x for the sector) we believe the market is grossly undervaluing ABBVs
future cash flows due to continued concerns about biosimilars, despite our continued view that biosimilar competition will
likely behave more like proprietary drugs than AB-rated generics and the increased likelihood that prolonged patent
litigation will delay the launch of biosimilars into the next decade. On the other hand, we see flat operating margins for JNJ
(31% unchanged through 2020) driven by continued pressure from MD&D and Consumer.
Our coverage view on Biotech remains Neutral and we continue to see a need to remain selective heading into 2016 as we
expect the year to be similar to 2015. We expect margins among the core four (AMGN, BIIB, CELG and GILD; Exhibit 10) to
expand slightly (from 54.6% to 55.3% over 2015-18E), while margins for ALXN, REGN and VRTX should continue to expand
more significantly (VRTX should see the most significant swing as it transitions to profitability on the back of the Orkambi
launch).
When looking at expected margin expansion versus P/E, we highlight ABBV, which has one of the highest expected margin
expansion profiles in our biopharma coverage (6.5% from 2015-18E) but is trading at the second lowest multiple (10.6x 2016 EPS)
compared to peers. BMY has the highest expected margin expansion in our biopharma coverage (10% from 2015-18E), but is also
trading at the highest multiple (28x). GILD is notable because it is the only company in our coverage we forecast to see material
margin degradation over the next three years (-5% from 2015-18E), and is also trading at the lowest multiple in our coverage (9x).
21
December 17, 2015
Exhibit 10: Margin expansion expected to continue through pharma and biotech names
2015-18E margin expansion vs. 2016 P/E
35x
30x
BMY
2016 P/E
25x
LLY
20x
CELG
BIIB
PFE
15x
10x
JNJ
MRK
AMGN
ABBV
GILD
5x
0x
-10%
-5%
0%
5%
10%
15%
2015E - 2018E Margin Expansion

Source: Company data, FactSet, Goldman Sachs Global Investment Research
22
December 17, 2015
Utilization Tug of War: Need For A Product Cycle Overlay

As we look toward 2016 we expect (1) a waning benefit from the ACA tailwinds of the last 12-18 months and (2) a pickup in cyclical
/core utilization growth. With these two potentially opposing forces tugging at the utilization theme, we prefer an overlay of
product cycles and margin expansion opportunities, which we express via our preference for MedTech.
Diving into a little more detail, we see stable utilization as important backdrop under which companies can execute idiosyncratic
growth drives. Importantly, for MedTech, our analysis suggests that very little of the top-line acceleration seen over the past two
years has come from core business improvement. In fact, we have observed no incremental contribution from underlying trends
with the bulk of the uptick from new product launches. In other sectors like Providers, however, we would argue that a large
percentage of the volume acceleration seen in 2014 and into 1H15 came from ACA and other external factors. Given some of the
gives and takes involved with the forward utilization view, we think that multiple expansion needs to come from more companyspecific drivers, further supporting our MedTech view.
Putting the utilization theme in context

Utilization in isolation has not proven to be the sole barometer of stock performance, evidenced by the lack of an observed
correlation between volume-exposed stocks and relative share price movement over the ytd period or last 24 months. Over these
representative time frames, outperformance has stemmed from idiosyncratic drivers (product cycles, capital allocation,
restructuring) in the context of stable utilization; while, underperformance has resulted from both company-specific factors
(competition, P&L pressure, high expectations) as well as external variables (concerns over ACA exchanges). Looking to 2016, our
long standing macro utilization model continues to suggest an uptick in same store volumes, which we expect to be a tailwind to
a number of industry verticals. Further, as we dissect the conflicting factors related to utilization (macro uptick vs. ACA risk), we
think that the cyclical will win out over exogenous drivers.
From a stock perspective, however, we do not see any reason for a departure from performance drivers since 2014 and, while we
are constructive on utilization, this one input is not sufficient to be the sole basis for any of our stock or sector recommendations. To
support our forward outlook, we think a stable utilization environment is critical such that companies can engage in business
investment and drive top-line growth, margin expansion, deploy capital, etc. In turn, these activities should form the basis for our
stock picking framework. Within this context, we retain our Attractive view on Medical Devices and Neutral coverage view on
Diagnostics, the Supply Chain/Drug Chains, Providers, and Managed Care.
Revisiting our macro utilization model

Five years ago, we introduced our top-down healthcare consumption model that called for a multi-year slowdown in utilization
(defined as per capita spending, or same store sales growth). Specifically, we established a view that utilization would decelerate
and remained subdued until the 2014 time frame with improvements thereafter (see our note Weak volumes likely to persist;
positioning ahead of 3Q dated October 6, 2010). Over this economic cycle, we point out that the rate of job growth and
improvement in real wages has been somewhat more moderate than in past recoveries this has somewhat pushed out the timing
for a volume inflection; however, we do not think a slower recovery is reflective of a lack of recovery, and we expect 2016 to show
more significant growth in medical cost trend.
23
December 17, 2015
Exhibit 11: The economic cycle and healthcare spending trends

Commercial medical cost trend relative to the timing of the economic cycle since 1982
16.0%
Recession
Recession
Recession
Recession
14.0%
12.0%
10.0%
8.0%
?
6.0%
4.0%
2.0%
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
0.0%
Source: Company data, industry surveys, CMS, Goldman Sachs Global Investment Research.
24
December 17, 2015
Lateral read and cross sector data points
Hospitals: Same-store admissions growth peaked in 1Q15 and has decelerated sequentially in both 2Q and 3Q15, reflecting
diminished contribution from ACA coverage expansion. That said, the most recent (3Q) volume growth was still strong for
most companies and we expect sequential acceleration into 4Q. In 2016, we are assuming no contribution from the ACA to
volumes beyond roughly maintaining the level of coverage expansion achieved through this year. However, we are
expecting core (non-ACA) volumes will continue to be a key driver.
Labs: After 3 quarters of sequential volume acceleration (4Q14-3Q15), volume growth decelerated in 3Q15. On a two-year
basis volume growth, the rate of acceleration slowed in 3Q15 following a robust 2Q15 and trend appears to be normalizing
at a low-single-digit rate.
Medical Devices: Since 4Q14 organic growth has stabilized across various MedTech end markets (orthopaedics, supplies).
That said, the rate of acceleration has moderated as the industry laps tough comps from 2H14. Overall, multi-year trend
appears to be improving albeit at a slower pace.
Prescription drug volumes: We expect a gradual acceleration in Rx growth for 2016 on modest improvement in same-store
volumes against easy compares. While the deceleration in Rx volumes in 2015 is worth noting, we think it was largely due
to cycling the uplift from ACA the prior year. The two-year stack has remained relatively stable throughout 2015, and we
expect that once ACA comparisons are cycled, we should see y/y Rx growth accelerate.
25
December 17, 2015
The M&A March: Slower, Selective, More Strategic

1.
We expect the pace of M&A going forward to slow given that acquirers stocks have been starting to underperform
again after deals are announced. Since 2012, we have seen acquirers across all sectors (with the exception of Energy)
being rewarded for M&A with aggregate stock outperformance two days post deal announcements (Exhibit 12). However,
the magnitude of outperformance has steadily declined over the last several years with 2015 just barely positive, and we are
seeing a gradual reversion to the mean when considering that acquirers stocks underperformed in almost every year in the
period 1996-2011. Specifically in healthcare (Exhibits 13-14), when comparing stock performance for acquirers in 2015 vs.
2014 it is clear that 2015 has been a lot more challenging. In 2015, acquirers have outperformed to a much lesser extent
than in 2014 in the two days following deal announcements across all subsectors of healthcare, and when looking at
performance through the end of the year the difference was even more dramatic (in biopharma and managed care
acquirers actually underperformed significantly this year). With M&A losing some of its appeal and acquirers getting much
less credit by investors for deals, we expect the pace of M&A to slow down somewhat going forward.
Acquirer stocks
starting to
underperform
Exhibit 12: Acquirers have been outperforming around large ($1.5bn+) M&A deal announcements, except in Energy
Across these sectors, acquirers have outperformed for twothirds of the $1.5bn+ deal announcements since 2012
6%
4.6%
8%
4%
3.3%
6%
1.8%
2%
0.4%
1.3%
0.7%
0.2%
The hit rate of

outperformance is
lower for Utilities (50%)
and Energy (30%)
4%
2%
0%
(0.5%)
(0.9%)
(1.0%)
-2%
0%
(1.6%)
(2.0%)
(2.0%)
-2%
(2.5%)
(3.0%)
(3.3%)
(3.5%)
-4%
-4%
(4.4%)
-6%
(5.2%)
-6%
(6.3%)
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
-8%
26
December 17, 2015
Exhibit 13: Performance from 1 day before to 2 days post announcement of

the deal
Exhibit 14: Performance from 1 day before announcement of the deal to end
of the year
7%
6%
40%
6%
30%
5%
30%
4%
3%
3%
2%
2%
1%
1%
1%
0.4%
0%
Biopharma
Medtech
Managed Care
Price performance
Price performance
5%
15%
10%
10%
4%
0.5%
0%
Biopharma
Medtech
Managed Care
-20%
-15%
-1%
-2%
2014 Average
2015 Average
2.
Biopharma firepower
could rise to $168bn186bn in 2018 from
$88bn-96bn today
HC Services
-10%
HC Services
-1%
19%
20%
-22%
-30%
2014 Average
2015 Average
Still a lot of balance sheet firepower for M&A, so some level of deals could continue but likely strategic over
financial. Despite the substantial amount of deal making over the last few years within healthcare, companies balance
sheets across all the subsectors in healthcare continue to have significant firepower. Exhibit x shows the estimated
firepower to do deals when balance sheets are levered up to 2x and 4x, and compares the levels in 2015 with 2012 (when a
lot of the M&A started). Interestingly, those levels have not come down that much with Pharma and Biotech actually
showing greater firepower in 2015 than in 2012. Similarly, a bottoms up analysis of large-cap pharma and biotech shows
that these companies could have up to $88-96bn of firepower currently and up to $168-186bn of firepower in 2018 if those
companies are levered up to 2x. Average net leverage ratios across all healthcare have been continuing to climb over time,
but is still at a reasonable level in our view at roughly 1.4x. When looking at the net leverage across the Specialty & SMID
pharma (one of the more active participants in recent M&A), we expect the larger companies that are more highly levered at
around 4x (e.g., VRX, ENDP, MNK) to focus more on execution and paying down debt from recent deals in the near term.
However, we think some of the SMID pharma companies that are much less levered (e.g., JAZZ, IPXL, AKRX) could
potentially drive more of the M&A going forward as they look to get bigger and create more efficiencies. When considering
healthcare M&A overall, we believe investors have most soured on deals that have been primarily for financial engineering
purposes (e.g., acquiring mature assets and driving accretion largely through price increases and/or cost synergies, tax
inversions, etc.). Where we expect companies to be more focused with their M&A going forward is on strategic deals that
add new products or technologies, that have very good durability, and that will be significant contributors to long-term
organic growth even if they are less accretive in the very near term.
27
December 17, 2015
Exhibit 15: Aggregate balance sheet firepower by Health Care subsector

300
300
2012 - Firepower at 4x
250
200
200
150
150
100
100
50
Aggregate Firepower ($, billions)
Aggregate Firepower ($, billions)
250
50
2012
2015
2012
Pharma
2015
Biotech
2012
2015
HC Providers & Svcs
2012
2015
HC Tech & Equip
2012
2015
Life Sc Tools & Dx
3.
Rising interest rates

unlikely to be a
headwind
Higher interest rates probably will not change the dynamics for M&A that much, including a trend towards more
stock deals. Interestingly, there is a very strong correlation between the Federal funds rate and the 10 year Treasury rates
with the US M&A volumes over the last ten years (Exhibit 16). What we have seen in the past is that higher rates are
typically associated with a growing economy with higher consumer and business confidence that ultimately drives greater
M&A activity. As such, we do not believe a higher interest rate environment in and of itself would necessarily change the
level of M&A in healthcare. However, the level of accretion from such deals could certainly decrease with a higher cost of
debt. As an example in Specialty Pharma with ENDPs deal for Par that closed on September 28, 2015, based on our
estimates the deal is likely to be accretive to EPS by 18-21% in 2016. We ran a sensitivity analysis and for every incremental
100bps in interest rate (actual rate for deal was 5.25-6%) that would have reduced the accretion by only ~1-2% (with ~$25mn
of additional synergies needed to offset that). So even if interest rates went up 200-300bp we do not think that would have
been a deal-breaker for ENDP. A noticeable trend within healthcare has been the increased use of stock in deals which has
gone up significantly over the last two years (Exhibit 17). All cash deals have represented only 25% of the overall healthcare
M&A volume YTD in 2015, well below the 20-year average of 47%. If borrowing costs end up going higher, stock deals
could potentially be a trend that continues to increase going forward.
28
December 17, 2015
Exhibit 16: Correlation with US M&A Volumes as percentage of market cap (1995 2014)
78%
72%
64%
61%
59%
53%
51%
-7%
-17%
-22%
-23%
-55%
Source: Federal Reserve, Dealogic, Bloomberg, FactSet, iBoxx, Goldman Sachs Global Investment Research
29
December 17, 2015
Exhibit 17: Health Care announced M&A volumes by payment type
600
100%
90%
500
80%
70%
400
60%
300
50%
40%
200
30%
20%
100
2015TD, All-Cash
deals represent just
25% of total
volumes, well below
20-year average
levels (47%).
10%
0%
Stock Only
Cash / Stock & Other
Cash Only
Cash Only (%, RHS)
20yr Avg. ('95-'14)
Source: Dealogic, Goldman Sachs Global Investment Research. As of November 30, 2015.
30
December 17, 2015
M&A Implementation: GS HC Strategic Assets Basket Refresh + LBO Screen

We refresh our Healthcare Strategic Assets basket (Bloomberg ticker: GSGLGHSA) and add 15 new names due to expansion of coverage
and reassessment of strategic potential. The GS Healthcare Strategic Assets Basket now offers 40 names where our analysts see 15% or
greater probability of strategic M&A in the next 12 months. Year to date, the basket the basket is up 16 % vs. the S&P HC Index up 4% and
the S&P 500 down 1%. Since inception on September 20, 2010, the basket is up 204% vs. the S&P HC Index up 79% and the S&P 500 up
79%.
We offer this basket as one way to implement a sector M&A theme and to identify where there could be M&A risk.
We also highlight six companies within our Europe Coverage where an M&A component is factored into our analysts valuation
methodology and target. Buy-rated names on the list include: GLPG.AS, IPH.PA, SN.L, and ZELA.CO (Exhibit 19).
M&A framework
Across our coverage universe, we examine stocks using an M&A framework, considering both quantitative factors (IRR and
theoretical returns following a buyout, using our standardized departmental LBO model) and qualitative factors (market opportunity
for key products, pipeline, intellectual property and competitive landscape) to incorporate the potential that certain companies could
be acquired at a premium to current share prices.
We then calculate an M&A score as a means of ranking companies under coverage from 1 to 4, with 1 representing high (30%-50%)
probability of M&A activity, 2 representing medium (15%-30%) probability, 3 representing low (10%-15%) probability and 4
representing minimal to no probability (0%-10%). For companies ranked 1 or 2, in line with our departmental guidelines, we
incorporate an M&A component into our target price.
Exhibit 18: M&A Basket sector composition
MedTech
20%
Specialty &
SMID Pharma
17%
Biotech
22%
Managed Care
10%
Exhibit 19: EU Healthcare companies with M&A included in price
Ticker
SN.L
ATLN.VX
GEN.CO
IPH.PA
ZELA.CO
EKTAb.ST
GN.CO
GXIG.DE
SOON.VX
GLPG.AS
MORG.DE
Sector
MedTech
Biotech
Biotech
Biotech
Biotech
MedTech
MedTech
MedTech
MedTech
Biotech
Biotech
Rating
Buy
Neutral
Neutral
Buy*
Buy
Neutral
Neutral
Sell
Neutral
Buy
Neutral
M&A
Weighting
30%
30%
30%
30%
30%
15%
15%
15%
15%
15%
12%
Pricing
Currency
GBP
CHF
DKK
EUR
DKK
SEK
DKK
EUR
CHF
EUR
EUR
M&A
Value
1,510
197
1,500
19
218
100
200
60
144
80
87
Target Price
1,300
121
1,000
22
200
55
145
44
121
26
75
Target
Period
12 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
Current
Price
1,086
135
920
13
142
73
120
70
124
52
56
*IPH.PA is on the European Conviction List.

Other
15%
Life
Science
Tools
8%
Facilities
8%
*Other includes Diagnostics, Supply Chain, Major Pharma each 5% of the basket and Dental
which represents 2% of the basket
Source: Goldman Sachs Global Investment Research, FactSet
For EU Biotech M&A framework see Europe: Healthcare: Biotechnology: Innovation drives value
creation (2): EU biotech acquisition target, Published February 2, 2015
For EU MedTech M&A framework see Europe: Healthcare: Medical Technology: Adjusting to a new
normal: Less growth and more buyer consolidation drive focus on cash, Published June 23, 2014
Source: Goldman Sachs Global Investment Research, FactSet, Pricing as of November 26, 2014.
31
December 17, 2015
Exhibit 20: Potential Healthcare candidates for M&A activity under GS coverage
Checked () names are included in the GSGLGHSA basket; BOLD names are new additions
Ticker
Company Name
A
ALGN
ALKS
ANAC
ARIA
BCR
BKD
BLUE
BMRN
CNC
COO
EVH
EW
EXAS
FEIC
GBT
GKOS
GMED
HAE
HOLX
HTWR
INCY
IPXL
IRWD
JAZZ
KITE
LPNT
MCRB
MGLN
MNTA
MOH
NUVA
PCRX
PMC
SAGE
SCAI
TMH
TTOO
VRTX
WAT
WCG
ZTS
Agilent Technologies, Inc

Align Technology Inc.
Alkermes Plc
Anacor Pharmaceuticals Inc.
Ariad Pharmaceuticals Inc.
C.R. Bard Inc.
Brookdale Senior Living Inc.
bluebird bio
BioMarin Pharmaceutical Inc.
Centene Corp.
The Cooper Companies Inc.
Evolent Health Inc.
Edwards Lifesciences Corp.
Exact Sciences Corp.
FEI Co.
Global Blood Therapeutics Inc.
Glaukos Corp.
Globus Medical Inc.
Haemonetics Corp.
Hologic Inc.
HeartWare International Inc.
Incyte Corp.
Impax Laboratories Inc.
Ironwood Pharmaceuticals Inc.
Jazz Pharmaceuticals
Kite Pharma Inc.
LifePoint Health Inc.
Seres Therapeutics Inc.
Magellan Health Services Inc.
Momenta Pharmaceuticals Inc.
Molina Healthcare Inc.
NuVasive Inc.
Pacira Pharmaceuticals Inc.
PharMerica Corp.
Sage Therapeutics Inc.
Surgical Care Affiliates Inc.
Team Health Holdings
T2 Biosystems Inc.
Vertex Pharmaceuticals Inc.
Waters Corp.
WellCare Health Plans Inc.
Zoetis Inc.
Analyst
Isaac Ro
Robert P. Jones
Terence Flynn, PhD
Gary Nachman
Terence Flynn, PhD
David H. Roman
Salveen Richter
Salveen Richter
Matthew Borsch, CFA
David H. Roman
Robert P. Jones
David H. Roman
Isaac Ro
Isaac Ro
Terence Flynn, PhD
David H. Roman
David H. Roman
David H. Roman
Isaac Ro
David H. Roman
Salveen Richter
Gary Nachman
Gary Nachman
Gary Nachman
Salveen Richter
Matthew Borsch, CFA
Terence Flynn, PhD
Matthew Borsch, CFA
Gary Nachman
Matthew Borsch, CFA
David H. Roman
Gary Nachman
Gary Nachman
Matthew Borsch, CFA
Matthew Borsch, CFA
Isaac Ro
Terence Flynn, PhD
Isaac Ro
Matthew Borsch, CFA
Jami Rubin
Sector
Life Science Tools
Dental
SMID Biotech
Specialty & SMID Pharma
SMID Biotech
Medical Supplies
Emerging Biotech
Emerging Biotech
Managed Care
Medical Devices
Healthcare IT
Medical Devices
Diagnostics
Life Science Tools
SMID Biotech
Medical Devices
Medical Devices
Medical Supplies
Diagnostics
Medical Devices
Emerging Biotech
Emerging Biotech
Facilities
SMID Biotech
Managed Care
Managed Care
Medical Devices
Facilities
Facilities
Diagnostics
Large/Mid-Cap Biotech
Life Science Tools
Managed Care
M&A Rank
Analyst
Rating
Pricing
Currency
Market Cap
($, mn)
Last Close
($)
M&A Value
($)
GSGLGHSA
Basket
1
2
1
1
2
2
2
2
1
2
2
2
2
2
2
2
1
1
2
2
2
1
1
2
2
2
2
1
2
2
2
1
1
2
2
2
2
2
1
2
1
2
Buy
Buy
Neutral
Buy
Neutral
Buy
Buy
Buy
Buy
Sell
Neutral
Buy
Buy
Neutral
Buy
Neutral
Neutral
Neutral
Sell
Buy*
Neutral
Buy
Neutral
Sell
Neutral
Buy
Buy
Neutral
Neutral
Neutral
Neutral
Neutral
Buy
Neutral
Buy
Buy
Neutral
Neutral
Buy
Neutral
Buy
Neutral
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
13,525
5,170
10,749
5,150
1,094
13,870
3,376
2,132
15,195
7,000
6,636
762
17,263
771
3,221
971
743
2,523
1,602
10,606
797
20,350
2,898
1,570
8,315
2,838
2,952
1,481
1,332
1,076
3,280
2,472
2,295
955
1,619
1,447
3,256
191
28,429
10,748
3,517
23,387
40.81
65.84
72.74
112.98
6.15
187.72
18.27
59.97
99.14
58.72
136.51
12.92
80.03
8.34
79.51
33.02
23.15
26.50
31.59
38.50
46.38
114.73
41.82
11.00
138.47
64.24
69.28
40.90
56.30
15.94
58.48
51.55
70.89
31.36
56.10
37.33
44.94
9.70
117.28
131.61
79.74
46.97
52.00
76.00
68.00
182.00
20.00
241.00
46.00
197.00
170.00
71.00
161.00
37.00
184.00
13.00
100.00
108.00
37.00
30.00
46.00
54.00
85.00
180.00
53.00
18.00
173.00
132.00
105.00
66.00
80.00
20.00
105.00
65.00
80.00
45.00
93.00
46.00
73.00
25.00
181.00
168.00
135.00
51.00
*HOLX is on the Americas Conviction List.

We have excluded EVH and TTOO from the basket because of trading liquidity constraints. M&A rank definitions are provided in the M&A framework section on the previous page.
Source: Goldman Sachs Global Investment Research, FactSet. Pricing as of December 15, 2015.
32
December 17, 2015
Financial buyer list: Companies with the highest IRRs

In addition to our analyst-driven Healthcare Strategic Assets basket, we provide a list of companies in our US Healthcare coverage
universe with IRRs over 15% based on our quantitative standardized departmental LBO model.
Assumptions: As a base case, this purely quantitative model (applicable to our non-financial coverage) assumes a five-year holding
period, a 20% premium, initial leverage based on S&P GICS Level 1 sector-specific debt/EBITDA multiples (median plus 1 standard
deviation; and rent-adjusted for Retail companies), a 7% weighted average cost of debt, and an exit multiple based on a companys
three-year historical EV/EBITDA. 2016 is year 1. Operational assumptions for sales growth, EBITDA margin and capex growth are
taken from our analyst forecasts, extrapolated when required.
Taking size into consideration, we exclude any companies with a market cap of over $15 bn (and under $200 mn), those who already
operate with high leverage and Managed Care names. In addition, we exclude relatively recent IPOs (those priced since January 1,
2013).
Given the variety of qualitative and industry-specific factors that go into a leveraged buyout, we do not necessarily believe that each
of the companies with IRRs greater than 15%, is a viable buyout candidate. However, a high IRR, at the very least, serves as a
positive valuation signpost.
This list includes all stocks under our coverage irrespective of our analysts ratings.
Exhibit 21: Healthcare companies with IRRs of 15% or more
IRRs based on our standardized departmental LBO model (IRRs and pricing as of the market close of December 15, 2015
Ticker
Company name
IRR
Market Cap Sector

($, mn)
TMH
Team Health Holdings
21.7%
3,256
Providers
JAZZ
Jazz Pharmaceuticals
19.9%
8,516
AMSG Amsurg Corp.
18.7%
4,048
Providers
IPXL
Impax Laboratories Inc.
16.1%
2,949
LPNT
LifePoint Health Inc.
15.4%
3,015
Hospitals
M&A rank definitions are provided in the M&A framework section on page 3.
Rating
Neutral
Neutral
Buy
Neutral
Buy
Last Price
($)
44.94
138.47
83.55
41.82
69.28
Target
Price
($)
63.00
154.00
101.00
40.00
84.00
Upside To
Price
Target
40%
11%
21%
-4%
21%
Target
Period
12 months
12 months
12 months
12 months
12 months
Source: Goldman Sachs Global Investment Research.
33
December 17, 2015
Rating and pricing information

AbbVie Inc. (B/A, $57.63), Adeptus Health Inc. (B/A, $52.01), Alere Inc. (B/N, $39.70), Alexion Pharmaceuticals Inc. (N/N, $188.91),
Amgen Inc. (B/N, $164.58), Baxter International Inc. (B/N, $37.83), Boston Scientific Corp. (B/A, $18.88), Bristol-Myers Squibb Co. (B/A,
$70.71), Cardinal Health Inc. (B/N, $88.22), Cerner Corp. (B/N, $61.16), Cigna Corp. (B/N, $141.19), Dimension Therapeutics (B/N,
$9.98), Endo International Plc (B/A, $62.03), Envision Healthcare Holdings (B/N, $24.02), Evolent Health Inc. (B/N, $13.39), FibroGen
Inc. (B/N, $30.78), Hologic Inc. (B/N, $38.99), Horizon Pharma Plc (B/A, $21.15), INC Research Holdings (B/A, $48.00), Intuitive Surgical
Inc. (B/A, $545.13), McKesson Corp. (B/N, $190.72), Medtronic plc (B/A, $78.57), Mylan NV (B/A, $54.39), Quintiles Transnational
Holdings (B/A, $68.73), Regeneron Pharmaceuticals Inc. (B/N, $559.67), Stryker Corp. (B/A, $93.93), Teva Pharmaceuticals (B/A,
$65.87), Thermo Fisher Scientific Inc. (B/A, $140.45), VWR Corp. (B/A, $26.40) and ZELTIQ Aesthetics Inc. (B/A, $28.25).
Equity basket disclosure

The ability to trade the basket(s) discussed in this research will depend upon market conditions, including liquidity and borrow
constraints at the time of trade.
34
December 17, 2015
Disclosure Appendix
Reg AC
We, Jami Rubin, David H. Roman, Matthew Borsch, CFA, Robert P. Jones, Salveen Richter, Terence Flynn, PhD, Isaac Ro, Gary Nachman, Stephan Stewart, CFA and Adam Noble, hereby certify that all
of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is
or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
We, Asad Haider, CFA and Alec Phillips, hereby certify that all of the views expressed in this report accurately reflect our personal views, which have not been influenced by considerations of the firm's
business or client relationships.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.
Investment Profile
The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth,
returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage
universe.
The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:
Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI,
ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month
volatility adjusted for dividends.
Quantum
Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make
comparisons between companies in different sectors and markets.
GS SUSTAIN
GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well
positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on
quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the
environmental, social and governance issues facing their industry).
Disclosures
Coverage group(s) of stocks by primary analyst(s)
Jami Rubin: America-Major Pharmaceuticals, America-Pharmaceuticals Generics. David H. Roman: America-Medical Devices, America-Medical Supplies. Matthew Borsch, CFA: America-HCManaged,
America-Healthcare Services:Facilities. Robert P. Jones: America-Dental services and Equipment, America-Drug Chains, America-Healthcare IT, America-Healthcare Services: CROs, America-Healthcare
Supply Chain. Salveen Richter: America-Emerging Biotech. Terence Flynn, PhD: America-Large Biotech, America-SMID Biotech. Isaac Ro: America-Diagnostics, America-Labs and Services, AmericaLife Science Tools. Gary Nachman: America-Specialty & SMID Pharmaceuticals. Stephan Stewart, CFA: America-Healthcare Supply Chain.
America-Dental services and Equipment: Align Technology Inc., Dentsply International Inc., Henry Schein Inc., Patterson Cos., Sirona Dental Systems Inc..
America-Diagnostics: Alere Inc., Cepheid, Exact Sciences Corp., Foundation Medicine Inc., Hologic Inc., Myriad Genetics Inc., Qiagen NV, T2 Biosystems Inc..
America-Drug Chains: CVS Health Corp., Rite Aid Corp., Walgreens Boots Alliance Inc..
America-Emerging Biotech: Atara Biotherapeutics Inc., BioMarin Pharmaceutical Inc., bluebird bio, Incyte Corp., Isis Pharmaceuticals Inc., Juno Therapeutics Inc., Kite Pharma Inc., Seattle Genetics Inc..
America-HCManaged: Aetna Inc., Anthem Inc., Centene Corp., Cigna Corp., Health Net Inc., Humana Inc., Magellan Health Services Inc., Molina Healthcare Inc., UnitedHealth Group, WellCare Health
Plans Inc..
America-Healthcare IT: Allscripts Healthcare Solutions, Athenahealth Inc., Castlight Health Inc., Cerner Corp., Evolent Health Inc..
America-Healthcare Services: CROs: Charles River Laboratories, ICON Plc, INC Research Holdings, Parexel International Corp., Quintiles Transnational Holdings.
America-Healthcare Services:Facilities: Adeptus Health Inc., Amsurg Corp., Community Health Systems Inc., DaVita Inc., Envision Healthcare Holdings, ExamWorks Group, HCA Holdings, LifePoint
Health Inc., Surgery Partners Inc., Surgical Care Affiliates Inc., Team Health Holdings, Tenet Healthcare Corp., Universal Health Services Inc..
America-Healthcare Supply Chain: AmerisourceBergen Corp., Bright Horizons Family, Brookdale Senior Living Inc., Cardinal Health Inc., Express Scripts Holding, McKesson Corp., Owens & Minor Inc.,
PharMerica Corp..
America-Labs and Services: Laboratory Corp. of America Holdings, Quest Diagnostics Inc., Stericycle Inc..
35
December 17, 2015
America-Large Biotech: Alexion Pharmaceuticals Inc., Amgen Inc., Biogen Inc., Celgene Corp., Gilead Sciences Inc., Regeneron Pharmaceuticals Inc., Vertex Pharmaceuticals Inc..
America-Life Science Tools: Agilent Technologies, Bruker Corp., Danaher Corp., FEI Co., Illumina Inc., Mettler-Toledo International Inc., PerkinElmer Inc., Thermo Fisher Scientific Inc., VWR Corp.,
Waters Corp..
America-Major Pharmaceuticals: AbbVie Inc., Baxalta Inc., Bristol-Myers Squibb Co., Eli Lilly & Co., Johnson & Johnson, MannKind Corp., Merck & Co., Pfizer Inc., Zoetis Inc..
America-Medical Devices: Boston Scientific Corp., Edwards Lifesciences Corp., Glaukos Corp., Globus Medical Inc., HeartWare International Inc., Hill-Rom Holdings, Intuitive Surgical Inc., Medtronic plc,
NuVasive Inc., St. Jude Medical Inc., Stryker Corp., The Cooper Companies Inc., Varian Medical Systems Inc., ZELTIQ Aesthetics Inc., Zimmer Biomet Holdings.
America-Medical Supplies: Abbott Laboratories, Baxter International Inc., Becton Dickinson & Co., C.R. Bard Inc., Haemonetics Corp..
America-Pharmaceuticals Generics: Allergan Plc, Mylan NV, Perrigo Co., Teva Pharmaceuticals.
America-SMID Biotech: Agios Pharmaceuticals Inc., Alkermes Plc, Alnylam Pharmaceuticals Inc., Ariad Pharmaceuticals Inc., Blueprint Medicines Corp., Clovis Oncology Inc., Dimension Therapeutics,
FibroGen Inc., Global Blood Therapeutics Inc., Ophthotech Corp., Seres Therapeutics Inc., United Therapeutics Corp..
America-Specialty & SMID Pharmaceuticals: Akorn Inc., Anacor Pharmaceuticals Inc., Catalent Inc., Endo International Plc, Horizon Pharma Plc, Impax Laboratories Inc., Ironwood Pharmaceuticals Inc.,
Jazz Pharmaceuticals, Mallinckrodt Plc, Momenta Pharmaceuticals Inc., Pacira Pharmaceuticals Inc., Sage Therapeutics Inc., Valeant Pharmaceuticals, Valeant Pharmaceuticals.
Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global coverage universe
Rating Distribution
Buy
Hold
Investment Banking Relationships
Sell
Buy
Hold
Sell
Global
32%
53%
15%
63%
57%
52%
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2016 Healthcare Outlook

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December

2016 Healthcare Outlook: Shifting

Becoming more selective after five years of outperformance

Drug pricing debate to intensify

As a confluence of macro, micro and political

We do not expect Congressional action on drug

Utilization now a mixed bag

Asad Haider, CFA

Matthew Borsch, CFA

M&A less of a stock driver

The Goldman Sachs Group, Inc.

Goldman Sachs Global Investment Research

Global Investment Research

December 17, 2015

PM Summary: Shifting Sands

2016 View: Whats Changed

Highest Conviction Single Stock Ideas for 2016

GS Healthcare Team 2016 Subsector Coverage Views + Key Stock Picks

A View from Washington: Marking Time Until the Election

Emerging Uncertainties: Key Themes Facing New Challenges

Stress Testing the 2016 Pricing Overhang: 6 Key Variables

Biopharma Big Picture: 2016 Investable Themes

From Launch to Margin: Focus on Expanders

Utilization Tug of War: Need For A Product Cycle Overlay

The M&A March: Slower, Selective, More Strategic

Goldman Sachs Global Investment Research

December 17, 2015

GIR Americas Healthcare Team

Healthcare Supply Chain

Managed Care & Facilities

Life Science Tools & Diagnostics

Specialty & SMID Pharmaceuticals

Goldman Sachs Global Investment Research

December 17, 2015

PM Summary: Shifting Sands

Goldman Sachs Global Investment Research

December 17, 2015

2016 View: Whats Changed

Lowering exposure to ACA exchange verticals, as we expect uncertainty to persist.

Shifting allocations within the HC Supply Chain as industry tailwinds moderate.

Gaining more exposure to verticals leveraged to accelerating biopharma R&D spend

Goldman Sachs Global Investment Research

December 17, 2015

Highest Conviction Single Stock Ideas for 2016

Terence Flynn, PhD

Bullish on BMY's positioning for Opdivo and larger I-O franchise

Tomo product cycle underappreciated, with execution from management on de-leveraging

Life Science Tools

Source: Factset, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research

December 17, 2015

GS Healthcare Team 2016 Subsector Coverage Views + Key Stock Picks

BMY (CL), ABBV (CL)

MYL (CL), TEVA

Specialty & SMID Pharmaceuticals

ANAC, ENDP, SAGE, HZNP,

MDT (CL), ZLTQ (CL), BSX,

New product cycles, margin expansion, stabilizing utilization

TMO (CL), A, FEIC, VWR

Large Cap Biotech

AMGN (CL), DMTX, FGEN,

New product cycles, pricing dynamics, pipelines and capital allocation

BMRN, BLUE, INCY, KITE

Labs and Services