Healthcare Technology &
Distribution
2009 Outlook: Sticking with the PBMs
Healthcare Technology &
Distribution
Lisa C. GillAC
(1-212) 622-6466
lisa.c.gill@jpmorgan.com
Michael Minchak, CFA
(1-212) 622-6506
michael.minchak@jpmorgan.com
Atif Rahim
(1-212) 622-6671
atif.a.rahim@jpmorgan.com
J.P. Morgan Securities Inc.
See page 47 for analyst certification and important disclosures.
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Today, we are publishing our 2009 outlook, which includes our thoughts around
each of the seven sub-sectors within our coverage universe. We discuss the key
drivers of the outlook, catalysts for the group, and provide historical valuation
data. We also highlight our thoughts around which names we like within each
sector and discuss our 2009 financial projections for each company in detail.
Finally, in conjunction with this outlook, we are also establishing target prices.
• The PBM group remains our favorite sub-sector, and we highlight Medco
as our top pick for 1H09 both within the PBM group and among our entire
coverage universe. We believe PBM fundamentals continue to be strong,
driven by generics and specialty pharmacy. In our view, clearly differentiated
offerings at Medco and CVS should lead to market share gains. As it relates to
CVS Caremark, while we think the valuation remains compelling, exposure to
the consumer on the front end is likely to continue to act as a near-term
overhang.
• Among the distributors, we favor Overweight-rated Cardinal Health and
McKesson due to their higher-margin non-distribution businesses, which
normally grow earnings faster than the distribution business. Hospital budgetary
constraints are likely to pressure these non-distribution businesses in the first
half of 2009, but we believe this is currently reflected in the stocks, and our
thesis is longer-term in nature. As such, we maintain our Overweight
recommendations on shares of Cardinal Health and McKesson.
• As it pertains to retail pharmacies, we continue to favor shares of CVS
Caremark over Walgreens. CVS has been outperforming WAG on the retail
side both in terms of revenue growth and margin expansion, while CVS's PBM
business lessens the reliance on the retail segment, which could be impacted by
the weak economic environment. For those with long time horizons and high
risk tolerances, we also recommend shares of Rite Aid, based on improving
operating metrics, but note that the near term is likely to continue to be clouded
by the economic environment as well as concern over its high leverage ratios.
• We view Omnicare shares as attractively priced at current levels, and we
believe management efforts to grow the company and operate a lean
infrastructure should pay dividends over the long run. As we look to 2009,
fundamentals of the long-term care (LTC) pharmacy industry—an aging
population, increasing utilization of pharmacotherapy—should continue to
provide a favorable tailwind. Overall, the LTC market is also somewhat
insulated from macroeconomic factors, which should allow Omnicare to weather
the current economic downturn.
• On the dental side, we would remain cautious on both Henry Schein and
Patterson. In our view, the weak economy is likely to continue to have a
negative impact on dental consumables and dental equipment sales trends,
which is likely to drive a deceleration in earnings growth.

Table of Contents
Introduction ..............................................................................9
Things to Watch for in 2009 ......................................................................................10
Pharmacy Benefit Management ............................................12
Outlook for 2009........................................................................................................12
Catalysts.....................................................................................................................14
Stock Selection ..........................................................................................................15
Valuation....................................................................................................................15
2009 Projections ........................................................................................................16
Express Scripts (ESRX/Neutral)................................................................................17
Medco Health Solutions (MHS/Overweight).............................................................18
Pharmaceutical Distributors..................................................19
Outlook for 2009........................................................................................................19
Risks ..........................................................................................................................20
Catalysts.....................................................................................................................21
Stock Selection ..........................................................................................................21
Valuation....................................................................................................................21
2009 Projections ........................................................................................................22
AmerisourceBergen (ABC/Neutral) ..........................................................................22
Cardinal Health (CAH/Overweight) ..........................................................................23
McKesson (MCK/Overweight)..................................................................................24
Retail Pharmacy......................................................................25
Outlook for 2009........................................................................................................25
Catalysts.....................................................................................................................27
Stock Selection ..........................................................................................................27
Valuation....................................................................................................................28
2009 Projections ........................................................................................................28
CVS Caremark (CVS/Overweight)............................................................................29
Rite Aid (RAD/Overweight)......................................................................................31
Walgreen Co. (WAG/Neutral) ...................................................................................31
Long-Term Care Pharmacy....................................................32
Omnicare (OCR/Overweight)....................................................................................32
Catalysts.....................................................................................................................33
Risks ..........................................................................................................................34
Valuation....................................................................................................................34
2009 Projections ........................................................................................................34
Medical-Surgical Distributors................................................35
Outlook for 2009........................................................................................................35
Valuation....................................................................................................................36
2009 Projections ........................................................................................................36
Owens & Minor (OMI/Neutral).................................................................................37
PSS World Medical (PSSI/Neutral)...........................................................................37

Dental Distributors .................................................................38
Outlook for 2009........................................................................................................38
Catalysts.....................................................................................................................40
Stock Selection ..........................................................................................................41
Valuation....................................................................................................................41
2009 Projections ........................................................................................................41
Henry Schein (HSIC/Neutral)....................................................................................42
Patterson Companies (PDCO/Neutral) ......................................................................43
Animal Health Distributors ....................................................44
Outlook for 2009........................................................................................................44
2009 Projections ........................................................................................................45
Animal Health International (AHII/Neutral) .............................................................45
MWI Veterinary Supply (MWIV/Neutral) ................................................................46