Even after a good performance in 2008, healthcare stocks don’t look too expensive
Given the relatively defensive nature of healthcare earnings, we analyse whether they are
more expensive compared to other periods in their history. We look at healthcare stocks on a
PE basis, and compare that to the ASX 200 PE (including resources). The outputs
demonstrate that on a PE relative basis, RHC and HSP are the most expensive compared to
historical averages (at 6% and 5% premiums to historical averages), and COH and CSL are
the cheapest stocks (at 13.4% and 9.7% discounts to historical averages).
Australian healthcare stocks maintained performance in a previous US recession
In general, US-exposed Australian healthcare stocks performed well during the last US
recession (2001-02), but underperformed in the year following. The ASX/S&P Healthcare
indices also performed well during the US recession before declining in the year following.
We believe the derating of Australian healthcare stocks after the recession may also have
been due to: 1) the time lag between the recession and the earnings impact; and 2) the
market believing that healthcare was a defensive sector during this recession. After the
recession, the market may have switched out of healthcare into other sectors.
Debt to remain an issue in 2009
Given the virtual closure of the credit markets, we continue to believe companies with heavy
gearing and that have refinancing due in 2009/10 are likely to be subject to extra scrutiny by
the equity market. The majority of the healthcare companies in our universe have strong
balance sheets, with refinancing not due until the medium term.
We believe healthcare companies look set for a strong 2009
We believe healthcare companies will outperform during a global recession, which we expect
to continue for at least 1H09. Therefore, we continue to recommend an overweight position
in the healthcare sector, and maintain CSL as our top pick. However, once the economic
outlook for growth improves, we will be watching for the market to potentially start switching
out of defensive stocks.

Contents
2009: Factors in play for healthcare stocks 3
We see a number of influences on the 2009 performance of the Australian
healthcare stocks. These include the impact on stocks from a potential recession in
Australia and other major markets, and the impact of any potential refinancing.
3
Impact of a possible US and global recession 3
Debt issues remain in focus 3
Recession – impact on healthcare stocks 4
We consider the potential impact of a US recession on the performance of
Australian healthcare companies by considering their historical performance during
the last recession in the US and globally.
4
Recession looms as the credit meltdown intensifies 4
Performance of Australian healthcare stocks during and after the last US recession 7
Healthcare – expensive defensive? 11
Healthcare exposure to the USD – what is the ABN AMRO house view on the
AUD/USD exchange rate?
11
Conclusion 13
Debt likely to remain an issue in 2009 14
Given the tightening of the credit markets, we continue to believe companies with
heavy gearing and that have refinancing due in 2009/10 are likely to be subject to
extra scrutiny by the equity market.
14
ABN AMRO house view 14
Why are debt markets so important to an equity market recovery? 16
Ready-reckoner on debt issues for healthcare companies 18
Cochlear 22
CSL Ltd 23
Healthscope 24
IBA Health 25
Primary Healthcare 26
Ramsay Healthcare 27
ResMed 28
Sonic Healthcare 29
Conclusion 30
Major sensitivities and drivers 31
We have analysed the major sensitivities and drivers for the healthcare stocks in
our universe.
31
Cochlear 31
CSL Ltd 32
Heathscope 33
IBA Health 34
Primary Healthcare 35
Ramsay Healthcare 36
ResMed 37
Sonic Healthcare 38
Conclusion 39