2009 Healthcare Industry Outlook & Investment Strategy CFA Society of Louisville December 15, 2008

1. 2009 Healthcare Industry Outlook &Investment StrategyCFA Society of Louisville December 15, 2008 Robert R. Hawkins, CFA 443 224-1312 rrhawkins@stifel.com All relevant disclosures and certifications can found on page 33 of this report and on the research page at stifel.com

2. Agenda • Economic Outlook • Regulatory Environment • Market Outlook • Healthcare Investment Strategy • Sector Recommendations • Stock Picks

3. Stifel Nicolaus Commercial

4. The New Stifel Research • Today, Stifel has 149 professionals in Research • 63 analysts & 59 associates • 826 companies under coverage • Key Differentiation: Over 50% with Industry Experience. • Acquisitions, adept hiring, and internal development have fueled coverage expansion • Legg Mason Capital Markets merged with Stifel Financial in December 2005 • Stifel acquired Ryan Beck in March 2007

5. Research Coverage by Firm Source: StarMine through 9/31/08

6. No. of Qualifying Rank Firm Total Awards Analysts 1 Goldman Sachs 14 52 2 Morgan Stanley 12 44 3 Merrill Lynch 11 66 4 Standard & Poor's 9 48 5 Stifel Nicolaus 8 41 6 Deutsche Bank 8 47 7 Lehman Brothers 8 63 8 UBS 7 47 9 Bear Stearns 7 50 10 Citigroup 61 7 11 Credit Suisse 6 48 12 FTN Midwest Securities 5 20 13 BMO Capital Markets 5 22 14 Piper Jaffray 5 26 74 15 J.P. Morgan Chase 5 Award Winning Research WSJ Best of Survey -2008 FT/StarMine Best Brokerage Survey ‘08 Institutional Investor 2008: Best Boutiques and Regionals

7. Economic Outlook

8. Recession Source: National Economic Trends. Research.stlouisfed.org Source: The Conference Board Source: National Economic Trends. Research.stlouisfed.org

9. Recession: How Long? • When Started?: December 2007 • Average Recession: 10-13 months • Current Recession is Above Average • Housing/Asset Deflation • Consumer Recession • Credit Crisis = Massive Deleveraging • Prolonged by G10 and Emerging Market Recession Date Recession Begins Average including Great Depression: Contraction 13 months Expansion 57 Average Post World War II: Contraction 10 months Expansion 58 Source: National Bureau of Economic Research

10. Monetary & Fiscal Actions • Monetary Actions – Impact in 12 months • Rate cuts – Mostly complete in U.S. • Capital injections – started • Direct asset purchases – Mortgage rates dropping • Reducing counterparty risk – Next? • Fiscal Stimulus – Impact 24-36 months Source: Stifel Nicolaus Fixed Income Research. Bloomberg.

11. Regulatory Environment

12. The New New Deal Proposed Stimulus Plan in January (1H09) • SCHIP expansion • Insurance reform (exchange/connector system) • Healthcare IT expansion Healthcare Reform (2H09) • MA plan cuts – incremental? • Drug reform – direct negotiation, re-importation; e-Rx? • 2010 Physician Fix: revitalize proposed cuts from 2008

13. Market Outlook

14. Business Cycle:Sector Performance Source: Standard & Poor’s Guide to Sector Investing, Sam Stovall. 1996

15. Early Contraction • Relative strength: Consumer Staples • Relative strength: Healthcare Source: FactSet Source: FactSet

16. Late Contraction • Relative strength: Utilities • Relative strength: Consumer Cyclicals Source: FactSet Source: FactSet

17. Recovery Likely Slower Oversupply of Credit • Global lending frozen despite rate cuts, intervention • Estimate: 20% oversupply of credit • Cost of debt capital has sky-rocketed • Unemployment moving higher • Consumer spending down • Economy/Unemployment • Housing wealth-effect • Home equity availability Must be Reduced Source: Stifel Nicolaus Fixed Income Research. Bloomberg Source: Stifel Nicolaus Fixed Income Research. Bloomberg

18. Market Recovery • Typical Recovery • Market looks forward 6 months • Market turns in the late contraction phase, usually 6 months after it started (avg. contraction is 10-13 mos.) • Best Estimate • Market recovers 2H09 • Recession ends 1H10

19. Road Signs to Recovery Source: University of Michigan Source: Stifel Nicolaus Fixed Income Group, Bloomberg Source: Census Bureau.& Stifel Nicolaus

20. Healthcare Investing 101

21. National Health Expenditures(1) 1980 – 2015 15% of GDP, growing to 20% Healthcare Investing 101:Why Invest In Health Care? • Strong organic growth rate – 7% • Demographics; aging population • Rising technology costs • Chronic disease/Obesity • High potential for margin expansion • Greater probability for value creation Source: Centers for Medicare & Medicaid Services, Office of the Actuary (1)Years 2005 – 2015 are projections

22. Healthcare Investing 101:Not All Sectors Counter-Cyclical • Investment Hazards • Economic Sensitivity • Structural Problems • Political Headwinds • Bottom Line: Cannot passively invest in healthcare during a downturn!

23. Insurance Premium > Inflation Consumer Spending Housing Slump Rising Unemployment Employers/Employees drop coverage (HMOs) Patients cancel elective procedures (Drs., OP) Senior housing vacancies Bad debt increases at hospitals Healthcare Investing 101:Economic Sensitivity

24. Big Pharma Generics Rx, Bio, Device Managed Care Hospitals Product Pipeline Foreign Competition FDA Bottleneck Rising MLR Leverage, bad debt, volumes Healthcare Investing 101:Structural Problems

25. Healthcare Investing 101:Political Headwinds Budget Constraints Republicans Budget hawks Cut providers Democrats Cut MA Direct negotiate Rx Cut out middleman (PBMs) CMS “Whack-a-Provider” If sector grows > 7%, it gets “whacked!” • Recently “whacked”: LTACHs, rehab • About to get “whacked?”: home respiratory, home health, nursing homes, MA plans, drug companies?

26. Healthcare Investment Strategy

27. Recommendation

28. Sector Strategy 1H09

29. Sector Strategy 2H09

30. Sector Strategy 1H10

31. Stock Picks

32. APPENDIX Methodology For Sector Weightings, Stock Picks and Company Highlights We apply a quantitative model (supplied by EquityCompass Strategies, a Stifel Nicolaus affiliate) that has been in use and back tested over seven years to screen roughly 3,100 stocks. The complete model key immediately follows the Appendix in our report, “2009 Healthcare Industry Outlook & Investment Strategy”, December 15, 2008. Methodology • Investment opportunities for healthcare stocks and sectors are ranked relative to opportunities with other non-healthcare stocks and sectors. • We then carve out all of the healthcare stocks and reorganize them into 15 healthcare sectors. • We combine the EquityCompass quantitative data with our fundamental analysis and rate each healthcare subsector. • Within sections covered by Stifel analysts, stock ratings are included. • We typically highlight companies that have been significantly outperforming or underperforming the S&P during the last three months or that have made significant announcements such as acquisitions, new product approvals or introductions, etc. Caveats • Ratings of Non-covered Sectors: In some cases a sector is not covered by a Stifel analyst and the recommendations and data are derived from the EquityCompass quantitative models and denoted as Not Rated (NR). In certain circumstances, if our fundamental analysis reveals that a specific sector or stock that is not covered by Stifel strongly contradicts the quantitative rating, we will adjust the rating recommendation. We denote those adjustments in the Appendix in our report, “2009 Healthcare Industry Outlook & Investment Strategy”, December 15, 2008. • Inclusion of Hold-Rated Companies: In certain circumstances our analysts will feature certain Hold-rated companies within the Best Ideas & Company Highlights section of the Appendix. At times these companies may be denoted as suitable investments for investors with longer-term investment time horizons or in some cases for income-oriented investors and not necessarily stock appreciation.

33. Important Disclosures and Certifications I, Rob Hawkins, certify that the views expressed in this research report accurately reflect my personal views about the subject securities or issuers; and I, Rob Hawkins, certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report. Choice Financial Partners, Inc. doing business as EquityCompass Strategies is a wholly owned subsidiary and affiliated SEC Registered Investment Adviser of Stifel Financial Corp. The EquityCompass is a series of equity models that quantify investment characteristics for stock selection and portfolio management. The core components of EquityCompass are a measure of relative valuation, analysis of long-term relative price trends, and comparisons of quality fundamentals that create shareholder value. Each of the equity models offers investment insight appropriate over different time horizons, which separately and together establish a disciplined and probabilistic approach for augmenting or challenging traditional bottom-up research.