Gilead Sciences (GILD) The Henry Fund Stock Rating

The Henry Fund
Henry B. Tippie School of Management
Charles Schaller [[email protected]]
March 3rd, 2016
Gilead Sciences (GILD)
Investment Thesis
We issue a BUY recommendation for Gilead Sciences. We believe that high
sales, a robust pipeline, low costs and the potential for M&A will cause Gilead
to outperform market expectations.
Drivers of Thesis
Gilead is transitioning from a growth stock to a value stock. This has
spooked some investors. Not knowing what to expect has led the market
to undervalue the stock. We forecast that short term revenues will fall by
about 2% per year before leveling off in 2020 and entering a continuing
growth of 0.5%.
Falling Costs amidst Rising Sales: As most of Gilead’s costs are related to
patents, intellectual property and R&D their COGS has decreased as a
percentage of sales while sales have risen significantly. This has led to low
costs and high margins which we forecast to continue. Our model reflects
this assumption with COGS at 10% of sales.
Strong pipeline of upcoming drugs: Gilead is expected to release 4 drugs
this year and 3 more shortly after 2020. Expected this year is a HBV
treatment which is as effective as Harvoni at curing the disease. We
forecast that these drugs will make up 11% of Gilead’s revenue for 2016
growing to 54% by 2020.
Risks to Thesis
Competitors Pipelines: More than 50% of Gilead’s revenue comes from
Hepatitis C medications. Their biggest threat to profitability is Merck’s new
HCV drug. We modeled this impact through reduced HCV drug revenues
due to lower prices in response to competition and lost sales due to
customers switching to Merck.
Government Intervention: Through forced price ceilings and truncated
patent periods the government could have a significant impact on Gilead’s
profitability. The news should be monitored for congressional policy
changes related to pricing, patents and biosimilars (generic
biopharmaceuticals)
Target Price
Henry Fund DCF
Henry Fund DDM
Relative Multiple
Price Data
Current Price
52wk Range
Consensus 1yr Target
Key Statistics
Market Cap (B)
Shares Outstanding (M)
Institutional Ownership
Three Year Beta
Dividend Yield
Est. 5yr Growth
Price/Earnings (TTM)
Price/Earnings (FY1)
Price/Sales (TTM)
Price/Book (mrq)
Profitability
Operating Margin
Profit Margin
Return on Assets (TTM)
Return on Equity (TTM)
GILD
Earnings Estimates
2013
$2.01
17.55%
2014
$8.33
314.40%
2015
$12.37
48.43%
2016E
$10.92
-11.73%
2017E
$11.21
2.65%
2018E
$11.22
0.01%
12 Month Performance
GILD
20%
$115-120
$118.23
$92.73
$138.79
$88.03
$81.89 – 123.37
$116.20
$121.9
1,367
81.4%
1.042
1.92%
-9.41%
7.5
7.3
4.2
6.8
66.4%
55.5%
34.9%
94.7%
Industry
Sector
100
94.7
80
60
40
40.6
20
Year
EPS
growth
Buy
Stock Rating
Healthcare – Branded Biopharmaceuticals
7.5
23.0
24.8
P/E
ROE
19.4
0
Source: GILD 2015
10K
Company Description
S&P 500
Gilead Sciences is a biopharmaceutical company
focused on research and development of
innovative medicines for uncured diseases.
Gilead’s current product line focuses on treating
HIV/AIDS, Hepatitis C, several types of Cancer as
well as inflammatory and respiratory diseases.
Gilead has had a stellar 3 year run, seeing tripledigit revenue growth in 2014. Much of its success
is due to two star drugs: Solvadi and Harvoni.
15%
10%
5%
0%
-5%
-10%
-15%
-20%
M
A
M
J
J
A
S
O
N
D
J
F
Source: GILD 2015 10K
Important disclosures appear on the last page of this report.
EXECUTIVE SUMMARY
We give a buy recommendation for Gilead Sciences.
Speculation as to future growth and new competition
paired with market volatility has led the market to
undervalue Gilead, as evidenced by its forward PE of 7.3
(Compared to an industry average of 23).
Gilead has seen astronomical revenue growth in the last 3
years. While their revenue growth has been incredible,
they are not expected to continued growth at this rate,
which has driven down the price of their stock. While
Gilead still maintains a fairly broad product line (18 active
drugs) nearly all of their growth since 2012 has been from
two Hepatitis C drugs: Sovaldi (2013) and Harvoni (2014).
Just as Gilead owes its newfound revenue to HCV drugs,
likewise Gilead’s future revenue stability will be
dependent on the continued success of these drugs.
HIV/AIDS medication has provided a solid and reliable 33%
of revenue however it has not provided the blockbuster
numbers of Sovaldi and Harvoni.
We believe that creative pricing strategies paired with a
strong pipeline and future M&A activity will position
Gilead to outperform current market expectations.
COMPANY DESCRIPTION
Gilead’s current portfolio of drugs chiefly centers around
treating 4 types of diseases: Liver Disease (Hep B and C),
HIV/AIDS, Cancer and heart disease. Additionally Gilead
has a number of drugs which do not fit into a specific
category and are labeled “other.” The following list
contains their drug line, type and expiration date of
patents in the US and Europe.
Gilead Product Line
Drug Name
Sovaldi
Harvoni
Atripla
Truvada
Complera/Eviplers
Stribild
Genvoya
Viread
Letairis
Ranexa
Lexiscan
Zydelig
Tamiflu
AmBisome
Macugen
Cayston
Viteka
Tybost
Disease Treated
Liver Disease
Liver Disease
HIV/ AIDS
HIV/ AIDS
HIV/ AIDS
HIV/ AIDS
HIV/ AIDS
HIV/AIDS/HCV
Heart Disease
Heart Disease
Heart disease
Cancer
Other (Antiviral)
Other (Anti-Fungal)
Other (Blindness)
Other (C. Fibrosis)
Other (Anti-Viral)
Other (Anti-Viral
US Patent
Expiration
2029
2030
2021
2021
2023
2029
2029
2017
2018
2019
2022
2025
2017
2016
2017
2021
2023
2029
EU Patent
Expiration
2028
2030
2018
2018
2022
2027
2028
2018
2020
2023
2025
2025
2016
2008
2017
2021
2028
2027
Source: GILD 2015 10K
California based Gilead Sciences, Inc. is a research-based
biopharmaceutical company that discovers, develops and
commercializes innovative medicines in areas of unmet
medical need. Gilead was founded in 1988 and currently
employs 7,900 employees. Gilead has traded on the
NASDAQ since 1992 under symbol: GILD.
Gilead’s drug portfolio may seem broad but in reality their
key operations are HIV/AIDS and Hepatitis C (HCV)
antivirals. A look at Gilead’s 2015 sales numbers shows
that 93.74% of their revenue came from HIV/AIDS and HCV
drugs.
2015 Revenue Breakdown
In 2009 Gilead was recognized as one of the Fastest
Growing Companies from Fortune, the same year they
were rated as one of America’s Top Companies to work for
by Forbes.1 In 2012 Gilead released Truvada, the first drug
shown to reduce the risk of HIV infection.
4.01%
0.41%
1.84%
3.59%
HIV/AIDS
30.62%
Gilead was chosen by CVS Health as their main option for
patients on its commercial drug list. This softens the
blow felt from Express Scripts Holding Co, the largest
pharmacy benefit manager to choose Gilead’s competitor
AbbVie’s Hep C drug as the exclusive treatment option for
patients on its main commercial plan in December of
2014.2
Liver Disease
HIV/AIDS/Liver
Heart Disease
59.53%
Cancer
Other
Source: GILD 2015 10K
Page 2
Hepatitis C Virus (HCV)
Revenue Breakdown by Drug Type – 2015
Drug Name
Drug Type
Hepsera
Liver Disease
Sovaldi
Liver Disease
Harvoni
Liver Disease
Total Liver Disease
Emtriva
HIV/ AIDS
Atripla
HIV/ AIDS
Truvada
HIV/ AIDS
Complera/Eviplers
HIV/ AIDS
Stribild
HIV/ AIDS
Genvoya
HIV/ AIDS
Viread
HIV/AIDS/HCV
Total HIV / AIDS
Letairis
Heart Disease
Ranexa
Heart Disease
Zydelig
Cancer
AmBisome
Other (Anti-Fungal)
Tamiflu
Macugen
Cayston
Other
Viteka
Tybost
Lexiscan
Total Other
Total Revenue
2015 Rev
0
5,276
13,864
19,140
0
3,134
3,459
1,427
1,825
45
1,108
10,998
700
588
132
350
% of rev
0
16.41%
43.12%
59.53%
0
9.75%
10.76%
4.44%
5.68%
0.14%
3.45%
34.22%
2.18%
1.83%
.041%
1.09%
243
0.75%
2,013
32151
Hepatitis C medication provides the largest portion of
Gileads annual revenue. Hepatitis C is a virus which causes
inflammation of the liver, with an estimated 80% of those
infected developing Chronic hepatitis. People infected
with Hepatitis can develop cirrhosis (scarring of the liver
and some may also develop liver cancer. Infection rates
have been stable over the past 5 years.3
HCV is spread primarily through contact with infected
blood. It can also be spread through unprotected sex and
childbirth, although this is less common. Unlike Hepatitis
B there is no vaccine to prevent HCV. About 3.2 million
people in the U.S. are chronically infected with HCV, with
many showing no symptoms. HCV can take between 10 –
40 years to cause serious damage to the liver.4
There are at least 6 genetic variations of HCV (genotypes
1-6). Genotypes 1 and 5 make up the 75% of all HCV
infections, making them the most focused on genotypes
for treatment. Genotype important when considering
treatment options as certain genotypes are resistant or
even immune to specific drugs.
5.89%
100%
Source: GILD 2015 10K
In light of Gilead’s heavy reliance on HIV/AIDS and HCV
medication, Gilead’s future value creation will lie in one of
the following strategies:
Maintaining competitive advantage in the Biopharma
space through patent exclusivity of drugs. This will be
difficult in light of recent developments that will be
noted later in this report.
Development of new drugs that make competitor
HIV/AIDS and HCV offerings obsolete. This will be an
important strategy for Gilead as we forecast continued
R&D spending of over $3 Billion per year (about 11%
of sales).
Developing or acquiring drug patents that will expand
them into the treatment of other diseases. We
forecast a high likelihood of this as well.
A cursory understanding of the main diseases Gilead drugs
treat will aid in understanding the market they are
currently facing.
Prevalence of HCV Genotypes
6.00%
1.00%
0.01%
0.01%
Geno 1
Geno 2
Geno 3
17.98%
Geno 4
Geno 5
75.00%
Geno 6
Source: InfoHep.org
Gilead drug Sovaldi treats genotypes 1-4. Harvoni treats 1,
3, and 4 and has a higher cure rate with fewer side effects
than Sovaldi. Genotypes 5 and 6 are negligible as a
percentage of total population, constrained to geographic
areas like Hong Kong and Panama.
Infection rates are high (>3.5% of population) in Central
and East Asia. They are intermediate (1.5 – 3.5%) in South
and Southeast Asia as well as sub-Saharan Africa, Latin
Page 3
America, Europe, and Oceania. They are low (<1.5%) in
Asia Pacific, Latin America and North America.
Source: Wikipedia
Until recently there were limited options for treatment of
HCV. Daily interferon injections were the best hope for a
cure and they carried heavy side effects (intense flu-like
symptoms) with a less than 50% cure rate.5 Recent
breakthrough drugs by Gilead and competitor Merck boast
85 – 100% cure rates for the disease in pill form.
HCV Medications makes up the majority of Gilead’s Liver
drug catalogue, and as such they have invested heavily in
their HCV pipeline. This was not always the case. Until
2013 HCV/HVB medications only made up about 5% of
sales. That number is now nearly 90%.
HCV / HBC Drug Revenue (M)
20000
HBV is Vaccine-preventable. In the United States HBV
Vaccines are mandatory for involvement in public
school. In spite of this there are 1.25 million HBV
carriers in the US.6
HBV is less likely to develop into a chronic condition.
Among adults with HBV less than 2% fail to clear the
virus within 6 months of infection. However, chronic
infection rates are much higher for newborns (80%)
and children (20%)7
In spite of these facts HBV is extremely dangerous.
Hepatitis B is second only to tobacco as a cause of cancer,
leading to an estimated 600,000 deaths annually.8Another
notable difference is that there is not currently an effective
cure for HBV. While HBV is less likely to develop into a
chronic liver disease a cure would be in high-demand as it
would not only eliminate short term (6 month) symptoms
but also eliminate the possibility of long term infection.
Gilead’s Viread has been their best option for treating the
disease although the drug’s website clearly states that it
does not cure the disease. A new drug: TAF (nucleotide
reverse transcriptase inhibitor) has recently passed the 3rd
round of the FDA approval process and expected to be
released for sale in the next 6 months. This drug has been
shown to show the same results as current leading HBV
drugs with a significant decrease in bone density
reduction, which can be caused by HBV drugs.9
It is notable that HCV drugs have not shown themselves to
be effective against HBV. Because of this Gilead has not
seen much income from HBV medication. This also means
that if Gilead were able to develop an effective HBV cure
as they have with Truvada and Solvadi they would enter a
market with significant profit potential without
cannibalizing their HCV drug sales.
15000
10000
5000
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: GILD 10K
Hepatitis B Virus (HBV)
HBV is far more prevalent than HCV. It is estimated that 2
Billion, either currently have HBV or have had it in their
lives. Like HCV it can cause serious damage to the liver
leading to cirrhosis, cancer and liver failure. However, HBV
has some notable differences from HBV.
While there is profitability to be found in an HBV cure it
would most likely not be as lucrative as HCV drugs have
shown to be. This is largely due to how many HBV
sufferers live in the developing world and in countries too
poor to afford much healthcare. Another complication to
marketing a HBV cure globally is the fact that many
emerging economies with higher rates of infection (China,
Russia, India) have complex drug patent laws, often
producing their own versions of generic for much lower
prices.
Page 4
play a significant role in Gilead’s future earning potential,
generating $1.1 billion in revenue (3.5% of sales) in 2016
increasing to $5.5 billion (18.75% of sales) in 2020.
We forecast that HCV / HBV medications will steadily
produce about 52% of revenues through 2020. Within the
category we forecast that Gilead’s upcoming HBV drug will
grow as a portion of revenues by 3% per year, making up
15% of revenues ($4.25B) by 2020. HBV currently
contributes a negligible amount to revenues.
Source: Wikipedia
HCV / HBV Pipeline
HIV / AIDS
The number and type of drugs in a company’s research
pipeline are a clear indicator of the company’s plan for
future profitability. Of their 38 drug patents currently in
FDA testing 10 of them are HCV / HBV drugs.
Human Immunodeficiency virus (HIV) is a virus that attacks
the immune system, specifically the CD4 cells (T cells),
which help the immune system fight off infections. This
makes the patient more likely to develop infections or
infection-related cancers. Over time, HIV can destroy so
many of these cells that the body cannot fight off
infections and disease. These opportunistic infections
take advantage of a very weak immune system and signal
that the person has AIDS, the last stage of HIV infection.10
Unlike most viruses the human body is unable to rid itself
completely of the HIV virus. Once a person is infected with
HIV they will have it for the rest of their life. Furthermore
there is no cure HIV. Although there is no cure, there have
been significant advances in treatment options for HIV
over the last 2 decades. In the 80’s a diagnosis of HIV was
effectively a death sentence. Now with proper treatment
a person diagnosed with HIV will live nearly as long as a
person without the disease.11
Source: Gilead Company Website
Gilead’s current research pipeline of drugs. Drugs in the submission stage
should be released for sale within 1 year, Phase 3 drugs may see release in 5-10
years. Phase 2 and Phase 1 are in early phase of testing and may not advance
to the next phase, although each phase can take 1-2 years.
HIV / AIDS drugs have been a mainstay of Gilead’s product
line for close for over a decade. From the early 2000’s up
through 2013 they made up about 80% of Gilead’s total
revenues.12 Although HVC drugs have the lion’s share of
sales this should not be interpreted as a decline in
HIV/AIDS drugs. In fact Gilead has seen an average of 12%
annual growth in HIV/AIDS drugs over the last 5 years.
Of those drugs the most exciting prospect is STR of
Sofosbuvir. STR is a pan-genotypic (designed to treat every
genotype of HCV. In a 12-week study of 624 patients a
remarkable 99% showed aviremia (no presence of virus in
blood) at the end of the study. This drug has passed all 3
phases of testing and has been fast-tracked by the FDA
(meaning the final approval process is likely to last 5-6
months rather than 10-12. We forecast that this drug will
Page 5
HIV / AIDS Drug Revenue (M)
12000
10000
8000
6000
4000
2000
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Gilead Company Website
While developments have been encouraging, the process
of HIV treatment is complicated and has historically
required a complex cocktail of drugs, each with its own
side effects and potential harmful interactions with other
drugs the patient might be taking. In late 2015 Gilead
began sales of Genvoya, a once-daily HIV/AIDS treatment.
The first of its kind, Genvoya’s single pill dose reduces the
risk of negative drug interactions or side effects. We
forecast its sales potential to offset the loss of revenue
incurred when the patent for anti-viral Viread ($1.1B in
sales for 2015) expires in 2018. We forecast Genvoya’s
revenues to grow from $600 million in 2016 (1.95% of total
revenues) to $2.4 billion in 2020 (8.1% of total revenues).
HIV / AIDS Pipeline:
Gilead’s HIV / AIDS pipeline is noticeably smaller than
those of their other drug offerings. We do not expect
Gilead to cease their development of HIV / AIDS drugs and
as such expect that further drug development may be
done through M&A activity. Notably Gilead has 2 drugs
that have passed the final round of FDA testing and are
expected to reach the market later this year. We have
factored their future sales into our revenue modeling.
Epidemiologically, HIV/AIDS is a global pandemic. About
37 million people worldwide have HIV with about 2 million
new infections occurring each year. More than half of
total infected are woman and 2.6 million are less than 15
years old. Aids results in about 1.2 million deaths per
year.13
As seen in the map below, Sub-Saharan Africa contains the
highest number of infections. It is estimated that twothirds of all infections (and two-thirds of all deaths) occur
in this region. South and South East Asia have the second
highest number of infections.
In the United States there are approximately 1.2 million
people living with HIV. Approximately 18,000 people die
from the disease annually.
Source: Gilead Company Website
Gilead’s current research pipeline of HIV / AIDS drugs.
We forecast HIV/ AIDS drug sales to continue to make up
about 30% of total sales through 2020. New Drugs STR of
R/F/TAF will grow as a % of revenues by about 0.5% per
year totaling 2.5% ($750M) and F/TAF will grow as a % of
sales by 1.5% per year totaling 6.8% ($2B).
Cancer / Other
Due to diversity of cancer types and the reality that they
make up such a small portion of Gilead’s drug sales they
will not receive the background or epidemiology that
Hepatitis and HIV/AIDS have received. However, in spite
of their relatively low revenue historical revenue
generation, Gilead seems to be setting their R&D sights on
developing a number of new cancer drugs. Five drugs are
in Phase 3 of FDA testing and are expected to launch some
time after 2021 (Phase 3 can take up to 10 years).
Source: Wikipedia
Page 6
was working on an even better HCV medicine, Harvoni. In
light of that many patients postponed treatment.
Net Revenue vs. Net Income (M)
35,000
30,000
25,000
20,000
15,000
10,000
5,000
(5,000)2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Net Revenue
Net Income
Source: GILD 2015 10K
Source: Gilead Company Website
2015 – The Year of Harvoni
Gilead’s current research pipeline of HIV / AIDS drugs.
We forecast cancer drugs to continue to play a minimal
role in contributing to Gilead’s total revenue. Cancer drugs
contribute 0.41% of total revenues. We forecast rates to
increase by 0.40% per year, totaling 2.9% of sales ($849M)
by 2020.
RECENT DEVELOPMENTS
To accurately understand Gilead’s current situation it is
important to understand the last 3 years of growth for the
company. Between 2008 and 2013 growth steadily
climbed from $5 to $9 Billion by about $1 Billion per year.
Gilead’s main money makers were HIV/AIDS drugs (About
85% of sales). Liver drugs made up a slim 5-8% of total
sales. This entire model was turned on its head with the
release of breakthrough drug Sovaldi
Harvoni, released in late 2014 was an even bigger success
than Sovaldi. Harvoni boasted an even higher cure rate
(100% for certain genotypes) as well as fewer side effects.
Harvoni functioned as a standalone HCV medication
whereas Sovaldi required additional medications which
had adverse side effects.
The resulting sales were remarkable. In 2015 Gilead took
in $13.8 Billion in revenue from Harvoni, offsetting a $5
billion drop in resulting Sovaldi sales. To put this in
perspective Harvoni alone was responsible for more
revenue than Gilead’s entire product line in 2013. This was
largely due to two factors:
2014 – The year of Sovaldi
Sovaldi was a breakthrough in the treatment of HCV. Prior
to Sovaldi the only effective treatment was interferon.
This required daily patient injections with a less than 50%
success rate.14 Sovaldi entered in late 2013 and took the
market by storm. It’s 90%15 cure rate made Sovaldi the
obvious drug of choice for HCV. As a result it commanded
a premium price: roughly $84,000 for a 12-week
treatment. Gilead saw their revenues grow from $10.8B
to $24.4B16, with (75% of that growth attributed to
Sovaldi). Even as Sovaldi took off it was known that Gilead
Page 7
The superiority of the drug: Harvoni was far and away
the most effective treatment for a chronic and life
threatening disease. In terms of drug efficacy there
was little competition.
The premium price: Gilead priced Harvoni at $94,500
for a twelve week treatment supply of drugs. This
extremely high price paired with relatively low fixed
costs and a strong competitive advantage through
patents and FDA approval time made 2015 the most
profitable year in Gilead’s history. 60% of revenue was
from Sovaldi and Harvoni.
2016 – A Major Threat Emerges
In late 2015 Merck Pharmaceuticals received final FDA
approval to begin production of its new HCV drug,
Zepatier. The emergence of this drug was not a surprise to
Gilead as the FDA process is public and can take a decade
to complete. There was however much speculation as to
how Merck would price the drug in response to Gilead’s
extremely high prices.
Merck ultimately priced Zepatier at $54,600 for a 12 week
treatment. This is $30,000 cheaper than Sovaldi and
$40,000 cheaper than Harvoni.
The drugs are not perfectly comparable: Zepatier treats
genotypes 1 and 4. Harvoni treats 1, 3, and 4. Sovaldi
treats 1, 2, 3, 4. As stated previously, Genotypes 1 and 5
make up about 75% of HCV infections. This means that
about 75% of Gilead’s market for HCV is potentially at
stake. Gilead will be forced to respond with lower prices
or lose the majority of their most profitable market to
Merck.
Merck vs. Gilead Hep C. Drug Comparison
Drug Name
Price
Genotypes Treated
Zepatier (Merck)
$54,600
1
4
Sovaldi (Gilead)
$84,000
1 2 3 4
Harvoni (Gilead)
$94,500
1
3 4
Source: Hepatitis Foundation
We constructed our model with the assumption that
Gilead’s strategy in response to Merck’s new drug would
be one of the most significant determinants of their
continued competitive advantage. We forecast that
Gilead will reduce the price of their older HCV drugs,
Sovaldi to position it against Zepatier. Additionally they
will maintain the higher priced Harvoni at its current level.
INDUSTRY ANALYSIS
A relatively new entrant to the healthcare sector, the
Biotech industry began in the 1970’s. It has since grown
from a handful of companies to over 1,200 in the US alone.
Companies in the Biotech space are focused on
developing, patenting and marketing new drugs. The
United States leads the world in Biotech, with revenues
exceeding US$60 billion and an industry market value in
2014 of $360 billion.17
Biotech pharmaceuticals is a sub-division of the larger
biotech category. Biotechnology is the process of genetic
manipulation of microorganisms for practical use and as
such has many non-pharmaceutical applications such as
livestock feed, chemicals and medical devices. For the
duration of this report the term “biotech” will refer
specifically to the pharmaceutical applications of
biotechnology.
Biotech is a high risk, high reward industry inside the fairly
stable defensive sector of health care. Every year
hundreds of companies race to develop “star drugs” that
will devour market share while sitting safely behind an FDA
approved patent. Many compete and few succeed. Those
firms that do succeed tend to continue succeeding as tens
of millions of dollars of revenue are channeled into R&D
annually. Some estimates state that only 1 out of every
5,000 – 10,000 potential drug candidates will make it to
market. Beyond that only 20% of marketed drugs are
profitable. Most firms make the majority of their profits
from a handful of drugs.
Biotech shares an ambiguous border with the broader
industry of “pharmaceuticals”. The two share many of the
same drivers, with many companies having both
pharmaceutical and biotechnology divisions. Due to these
blurred lines and the fact that the technical distinction
between the two is the molecular composition and size of
their ingredients they are often merged into the broader
(and unofficial) title of Biopharmaceuticals. It is expected
in coming years the category will become an official
industry within healthcare.
Patents & FDA Approval
Patents are king in the Biotech industry. A company with
a successful patent can enjoy near monopolistic profit
levels until the patent expires or a competing drug is
produced that does not violate the existing patent.
Patents have traditionally lasted for 20 years from the time
of patent issuance. While this may seem like a lengthy
window of profit opportunity it is deceptive. Patents are
filed in the earliest stages of a drug’s engineering. The
subsequent R&D paired with arduous FDA approval
process can last up to 10 years.
Before a drug can be marketed to the public it must first
pass 3 phases of FDA approval.
Phase I: 30 healthy volunteers test the safety profile of the
drug to ensure it is not harmful to humans.
Page 8
Phase II: A few hundred patients are used to test the drugs
dosing and efficacy in treating the illness. These patients
are tested against a control group given a placebo drug.
Phase III: In the longest (and most expensive) phase
several thousand participants are used to test the drugs
efficacy, safety and fine tune the proper dosing.
Once the drug has successfully passed all 3 phases (which
typically costs millions of dollars) the firm presents a New
Drug Application to the FDA. These documents can be
over 50,000 pages long. It is worth noting that at any
phase in the process the FDA can decline to approve the
drug even after years of testing and millions in expenses.
Once the patent expires other companies are free to use
the chemical recipe to produce generics (referred to as
“biosimilars” in the biotech industry). The US government
recently passed legislation shortening biotech patents to
12 years. This is because biosimilars (unlike generics) must
go through their own FDA approval process, making them
much harder to replicate in a generic format.
Porter’s Five Forces:
Threat of Entry: Medium. A company can enter the
market fairly easily. Success hinges on high amounts of
R&D capital and creating patents. Many firms enter, few
succeed.
Supplier Power:
Low. The true value in Biotech
Pharmaceuticals lies in their patents. Drug components
are often simply commodities purchased from a highly
fragmented market.
This significantly increases
profitability for Biotech Pharmaceuticals companies.
Buyer Power: Low (could rise): Biotech industry has a
unique structure that adds to the complexity of its
economics. A number of significant factors result in
significant competitive advantage for biotech companies.
Most significant is the fact that in biotechnology the end
users are typically purchasing the product to treat lifethreatening illnesses with no known cure. In light of this
there are very few substitutions to biotech products and
end users have very little buyer power over how much
they will pay for the drugs. Additionally the majority of the
value in the industry is in intellectual capital (patented
drug formulas). The actual ingredients of the formulas
tend to be commoditized, leading to low supplier power.
This weak buyer power is balanced by another uniqueness
of the healthcare industry. While millions of people may
be taking a particular drug there are a very small (a few
dozen) number of payers. The vast majority of money that
exchanges hands in the biotech industry happens between
the firm and two groups: Insurance companies and the
U.S. government. It is from these two giants that the
majority of patient advocacy and cost negotiations come
from. Insurance companies frequently bargain for lower
costs and the U.S. Government has the power to use
regulation to limit company pricing or at least lessen the
duration of its patents.
Recent high profile pharmaceutical controversies such as
Martin Shkreli’s hyperinflation of an AIDS related drug
have raised public cries for increased regulation of
healthcare costs.
Extent of Rivalry: Extremely High.
Due to limited
demand (not everyone needs Biotech Pharmaceuticals)
and a small number of large companies competing for a
limited but highly profitable market the Biotech
Pharmaceuticals industry has extremely high competition.
A rival drug patent being passed may reduce a companies’
selling price by 50%.
Porter's Five Forces Analysis:
Biopharma Industry
New Entrants
Buyer
5
4
3
2
1
0
Supplier
Substitutes:
Low: As Biotech Pharmaceuticals are
typically used to treat diseases with no existing cure
customers with life threatening illnesses face the real
possibility of death if they stop using the product. This
unique position lends to the high profitability of the
Biotech Pharmaceuticals industry.
Page 9
Rivalry
Substitutes
Source: Henry Fund Research
oncology was one of the key drivers to mergers in 2015,
which also saw a high value on diabetes treatment drugs.20
Research and Development
Biotech is one of the most research-intensive industries in
the United States18 According to a 2014 report by PR
Newswire, biotech companies in the US have invested
more than $600 billion in R&D since the year 2000. It is
not uncommon for a firm to spend 15-30% of revenues on
R&D. Biotech is a constant race to stay ahead of the pack
and develop the next big drug, as such R&D dollars spent
is one of the most telling items on an income statement
with regards to future prospects of a firm.
AbbVie-Pharmacyclic
Abbvie, one of the largest players in the Biotech industry
purchased cancer treatment company Pharmacyclics for
$21 billion. This move gives Abbvie a scientific and
commercial present in the oncology research space as well
as gaining the patent to Imbruvica a first-in-class
treatment for hematological cancers (a $24 billion global
market).21
Pfizer-Allergen (Canceled)
R&D Spending Among Top Firms
8000
One of the most notable M&A proposals of 2015 was the
merger of Pfizer and Allergen would have formed the
world’s biggest drug company by sales. While the major
incentive for the merger was taxes (Pfizer would have
moved from US to Irish tax rates) the newly merged
company would have had annual sales of over $65 Billion
and would, no doubt impact the biotech landscape.22
6000
4000
2000
0
GILD
AMGN
ABBV
CELG
BIIB
Merck
Impact of M & A
Source: Factset
R&D Spending as % of Revenue
40
30
20
10
0
GILD
AMGN
ABBV
CELG
BIIB
MRK
Source: Factset
Mergers and acquisitions have the potential of upsetting
some of the balance in the industry by making long-term
strategic forecasting more difficult. Traditionally if a
company were developing a new drug it would spend
years in the approval process, during which other firms
would be able to monitor the progress and brace for any
competitive threat. Under an M & A model a larger
company could scoop up a smaller company at the point
of patent granting and proceed to market and produce the
drug using their economies of scale and infrastructure,
leading it to be a much greater competitive threat than if
it were a smaller company with fewer resources.
Mergers and Acquisitions also further consolidate the
power of a few top firms in an industry that tends to be
dominated by a few powerhouse firms.
INDUSTRY TRENDS
Mergers and Acquisitions
2015 was the year of M&A for Biotech companies. The
first 6 months saw $59.3 billion in deals (a 94% increase
over the same period in 2014). This has led some experts
to speculate that some major players are beginning to rely
more on M&A than R&D, which has traditionally been
done in house, allowing smaller companies to develop high
potential drugs and then purchasing them and
implementing them into their product line19 Immuno-
Gilead’s M&A Prospects.
We forecast a high likelihood of M&A in the next 10 years
for Gilead. With revenues nearly 5 times what they were
in 2010 Gilead faces the question of what to do with their
new cash reserves. Variable costs are quite low (COGS has
dropped from 20% of revenue to 10% in light of economies
of scale) and margins are quite high (profit margin
forecasted to be 49%, up from 27% in 2013). Surely a
Page 10
significant portion will be reinvested in R&D to ensure the
vibrant pipeline which is vital to their future success.
Another portion will be paid out to stockholders in the
form of dividends as Gilead seeks to keep investors happy
with their value in the absence of previous extreme
growth. We forecast dividends to increase by about $0.11
annually in keeping with revenue forecasts.
The past 5 years have been very lucrative for major
Biopharma companies. Revenues have been steadily
growing amidst major developments in the biotech space
such as HCV cures and preventative HIV medication.
Gilead’s growth has been far out of proportion with the
current trends, seeing growth at a far greater rate.
In spite of these costs Gilead still has more money than
they know what to do with. In 2015 they purchased $10
Billion in long-term marketable securities. We forecast
that the next 10 years will show Gilead making acquisitions
as they seek to pursue more immediate growth
opportunities than their 5-10 year pipeline can provide.
Peer Margins
80.00%
60.00%
40.00%
20.00%
0.00%
Profit Margin
PEER COMPARISONS
GILD
While there are over 1,000 existing firms that would
classify themselves as biotech the majority of profitability
and market share in the industry is consolidated amongst
a smaller number of large firms. A study of the
competitive landscape gives a picture of potential future
profitability.
Several large firms may be in the same space but offering
different treatments for different diseases. This could
allow major companies to excel in the biotech industry
without and direct rivalry. Rivalry happens when two
companies market similar drugs against each other. Profit
margins can run anywhere from 20 – 50% so a price war
can significantly limit profitability. In the absence of
government regulation a look at the future pipeline for any
potential competing drugs are on their way can be an
indicator of trouble on the horizon.
MRK
AMGN
Operating Margin
ABBV
CELG
BIIB
Source: Factset
Merck Pharmaceuticals
Merck represents the largest competitive threat to
Gilead’s current position. While not operating exclusively
in the Biotech industry, Merck’s has risen to the forefront
of Gilead’s competitors with their new HCV drug,
Zepatier. Throughout 2014 and 2015 Harvoni and Sovaldi
were the only effective HCV cures on the market,
commanding significant profits. Investors are now
speculative that Gilead can maintain strong profits with a
comparable product being offered at a nearly $20,000
discount. The majority lowered target prices by analysts
is due to their suspicions that Gilead’s profitability was
dependent on a near monopoly and that Zepatier will
spell the end of their run of profits.
Interestingly enough, Merck is the only one of Gilead’s
major peers we reviewed that has seen drops in revenues
over the past 4 years.
Annual Growth Among Peers
50,000
Abbvie Inc.
40,000
30,000
20,000
10,000
GILD
MRK
2012
AMGN
2013
ABBV
2014
CELG
2015
BIIB
Source: Factset
Abbvie Inc. formed in 2013 after separating from Abbott
Laboratories. AbbVie specializes in forming advance
therapies for complex and serious illnesses. 23 AbbVie, one
of the largest firms in the industry became even larger in
2015 when it acquired Pharmacyclic for $21 billion, giving
it further reach into developing and marketing therapies
for blood cancer. Being one of the largest players in the
industry means AbbVie is more likely to experience
heightened rivalries over competing drugs. Notable
Page 11
skirmishes were AbbVie beating out Gilead for preferred
status from Express Scripts and the introduction of a
competing Hep C drug in 2016 that will directly compete
with Gilead’s Sovaldi, likely leading to a lowered price on
Gilead’s biggest money maker. Express Scripts is the
nation’s largest PBM and in losing them to Abbvie Gilead
lost out on 28% of the national PBM market.
Celgene Corporation
Celgene specializes in manufacturing cancer and
inflammatory disorder therapies.24 Significant drugs in
their product line include Revlimid, Pomalyst/Imnovid and
Abraxane which has found broad use in breast, lung and
pancreatic cancers in the United States. Celgene is
another leader that has slowed their investment in R&D,
seeing their R&D growth slow from 29.1% in 2013 down to
9.2%, although this should not be viewed as a sign that
they are not investing in their future pipeline. In 2014 In
April of 2015 Celgene made news when they announcd
they would begin a collaboration with Astrazenica to study
their Phase III cancer drug candidate, MEDI4736. Later
that same month Celgene acquired Quanticel for about
$485 million. Celgene is using mergers and acquisitions to
position themselves as a leader in cancer drug
development.
Celgene and Gilead have competed in the past in the
HIV/AIDS and cancer drug markets. More recently
Celgene’s purchase of drug company Avila could bring
them into the HCV market (Avila has two HCV drugs in the
research pipeline).
could be riding the tide of their star drugs while not
assigning an appropriate amount to R&D.
Biogen Inc
Biogen develops therapies for neurological autoimmune
and hematological disorders.26 One of Biogen’s star drugs
is Tecfidera, a treatment for multiple sclerosis. Tecfidera’s
revenues totaled $825 million, part of Biogen’s total MS
product line sales of $2.1 Billion. Although one of the
smaller players in the top 8 in terms of market cap Biogen
has seen strong revenue growth, seeing revenues increase
by 32% in 2013 and 46% in 2014.
Peer Comparison – Notable Items
It bears repeating that the Biotech Industry is one in which
a small number of companies profit while many others fail.
Because of that the small number of industry leaders
should not be considered the norm within the industry.
Gilead’s P/E (both trailing and forward) are notably lower
than their peers. This is largely due to investor speculation
as to whether Gilead’s growth has been a “flash in the pan”
and is unsustainable.
GILD
MRK
AMGN
ABBV
BIIB
CELG
EPS
11.91
1.56
9.06
3.13
15.34
1.94
P/E FY15
7.53
36.45
16.26
18.02
17.57
53.74
P/E FY16E
7.03
15.00
12.07
9.39
13.11
14.18
Data Source: Yahoo Finance
Amgen Inc.
Amgen Inc, based in California has grown to become one
of the world’s largest independent biotech companies. It’s
total revenues in the first quarter of 2015 were $5.03
Billion, (up 11% from 2014). It owns the patent to Enbrel,
Prolia, Epogen, Sensipar, and Xgeva. In spite of a strong
year changing foreign exchange rates negatively
influenced their product sales growth25. Amgen leads the
industry in sales but their revenue growth was some of the
lowest among the top 8 (7.5%, explained in part but not
completely by their high revenue numbers from previous
years). They are also greatly slowed their R&D investment
growth (a 5% increase in 2014 vs. 21% in 2013). We feel
this could be a sign of problems down the line as Amgen
Gilead’s ROA is extremely high, nearly twice as high as
their nearest competitor (BIIB). Gilead’s ROE is over 100%.
This towers over most competitor ROE’s which average
around 28% with the exception of Abbvie, which boasts a
155% ROE for 2015.
Gilead has the strongest profit margin of its peers, over
50%. These strong profit margins are indicative of the
premium prices that they have been charging over the last
2 years for HCV drugs as well as the efficient economies of
scale and low costs of drug production once patents have
been attained and R&D is complete.
Page 12
GILD
MRK
AMGN
ABBV
CELG
BIIB
Revenue
24,890,000
39,498,000
20,063,000
19,960,000
7,670,400
8,507,935
R&D
2,854,000
6,704000
4,297,000
3,297,000
2,430,666
1,893,422
Health Care as % of GPD
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
One troubling note of comparison: R&D. While Gilead
leads its peers in revenue their R&D investments for 2015
are decidedly middle-of-the-pack. Amgen invested $4.3B
in R&D for 2015, Abbvie invested $3.3B. Gilead only
invested $2.9B, nearly on par with Celgene (who only saw
$7.6B in revenue). R&D investment is the heart of a
vibrant pipeline. Gilead’s lower relative investment in
R&D could signal expectations of growth through M&A in
the coming years.
20.0%
15.0%
10.0%
5.0%
0.0%
2003
Data Source: Yahoo Finance
Health Care and Rx As a Percentage
of GDP
2002
Profit Mar.
55.48%
11.25%
32.03%
22.50%
17.31%
32.95%
2001
ROE
103.61%
9.53%
25.77%
155.76%
26.92%
35.60%
2000
GILD
MRK
AMGN
ABBV
CELG
BIIB
ROA
32.17%
5.14%
7.73%
11.53%
18.54%
Rx as % of Healthcare
Data Source: Bureau of Economic Analysis
Projected GDP Growth
30,000
25,000
20,000
R&D/ Rev
11%
17%
21%
17%
32%
22%
15,000
10,000
5,000
20162017201820192020202120222023202420252026
Data Source: Yahoo Finance (figures are in thousands)
Data
Source:
Bureau
of
Economic
Analysis
CATALYSTS FOR GROWTH
ECONOMIC OUTLOOK
GDP Growth
Population change.
Prescription drugs (which include biotech drugs) have a
fairly strong correlation with the healthcare sector which
itself shares a strong correlation with the US GDP. An
analysis of the last 6 years of financial data shows that
Healthcare has consistently hovered at about 17.4% of the
GSP while prescription drugs have amounted to an
average of 9.6% of healthcare costs. This allows us to
forecast prescription drug expenditures as 1.6% of GDP.
Using government forecasts for GDP growth we can
forecast prescription drug expenditures steadily growing
by 4% (about $350 million) annually into the future.27
More people in a given market logically increases the need
for medicine. According to the United Nation’s world
Population Prospects report the world population is
growing by approximately 74 million people per year. By
these estimates the world population will reach 9.0 Billion
by 2020 and 11 Billion by 2050.
It should be noted that while the bulk of this growth will
be in less developed regions, a notable exception is the
United States, with an expected increase of 95 million
people in the next 30 years (31% growth)28
Increasing Wealth
The wealthier people are the more health care they tend
to consume. The economic development of emerging
economies is of specific interest in this area as it will yield
Page 13
an increase in healthcare consumption in markets that
may not currently be pursued.
Demographic Shifts
Aging populations consume more medication. The US
census department forecasts that by 2050 the number of
Americans over the age of 65 will increase from 43.1
Million to 83.7 million.29
An additional demographic is the increase in obesity. The
CDC reports that 34.9% of US adults are obese30, leading
to conditions like heart disease, type 2 diabetes and
certain types of cancer. The market for diabetes related
biotech presents significant opportunities.
Cures for Untreatable / Incurable Diseases
INVESTMENT POSITIVES
Biotech offers the potential to treat and cure diseases that
currently offer no effective treatment options. The
exciting advances in biotech offer the potential to
introduced wholly unique offerings to this market facing
no competition. For example, if an effective HIV/AIDS
vaccination were developed every major government in
the world would purchase hundreds of millions of copies.
These speculations may seem to border on science fiction
but in light of the direction medical science is taking claims
for “miracle” drugs coming down major company pipelines
should be investigated and considered.
Projected to maintain high levels of revenue into the
future.
Low costs deliver strong margins.
Robust pipeline is forecasted to deliver a more diverse
product line by 2020, protecting against future
situations like the Zepatier rivalry Gilead is facing.
High levels of cash reserves create opportunity for
increased dividends, R&D and M&A to expand product
line.
INVESTMENT NEGATIVES
Number of People with Private Health
Insurance.
Gileads most valuable brands are under attack from
substitutes. Unless Gilead is able to produce a new
drug far superior to Zapatier it is unlikely that their
high priced HCV drugs can run unchecked as they have
in the past.
Gilead’s high prices have attracted negative attention
from the government. They are in the process of being
sued by the state of New Hampshire for their high
prices. If the government chooses to step in and assert
price limits on a pharma company this year Gilead’s
HCV drug pricing have given them a fairly large target
on their back.
An increase in health insurance increases the purchasing
power of potential customers which will likely have a
positive impact on Gilead’s sales. The Affordable Care Act
of 2010 greatly impacted the Healthcare industry. The
ACA sought to lower healthcare prices through increasing
competition by creating a number of federal and state
health insurance exchanges.
Additionally the ACA
mandated the purchase of private health insurance.
Individuals faced a tax penalty for not having private
insurance by 2015.31
As a result the number of uninsured Americans has seen a
marked drop. According to studies conducted by the
National Health Interview Survey the number of uninsured
Americans fell by about 8% to 41 million people in the first
quarter of 2014. This drop represents 3.8 million
Americans gaining private health insurance.32
VALUATION
For our valuation model we used a 3 Year stock Beta of
1.362. We feel the past 3 years of market data best
represent the future firm and market conditions that will
create volatility for Gilead. We then calculated a WACC of
Page 14
8.54%. We assume a CV growth of 0.5% annually
beginning in 2021.
be offering discounts and rebates up to 46% (though it’s
likely that not all discounts will be that significant).33
Revenue Growth:
Gilead will keep Harvoni priced high at $94,500 for a 12week treatment.
Projected Revenue Growth
Harvoni will remain the premier drug of choice for
Genotypes 2, 3, 5, and 6 (which Zepatier cannot treat).
This protects at least 25% of their sales from loss to
Zepatier. We predict a 20% drop in sales as customers
move from Harvoni to Sovaldi in response to the lower
prices. This is unfortunate but preferable than losing them
to Merck. This will yield total revenue drops of $2.2B of
Harvoni revenue about 20%) in 2016.
35,000
30,000
25,000
20,000
15,000
10,000
5,000
-
2. Upcoming Drug Launches
2013 2014 2015 2016E 2017E 2018E 2019E 2020E
Revenue growth over the next 5 years will be based on a
complex relationship between expiring product patents,
new drug debuts and competitive pricing. We forecast
that Gilead’s strong growth period is likely over but value
is poised to remain mostly stable, yielding between $2830 billion in annual profit through 2020. We forecast that
revenue, averaging about 2% annually before stabilizing in
CV and continuing at .5% growth. We base this model on
the following 3 upcoming major factors facing Gilead.
1. Price Adjustments in Response to Merck
In the next year Gilead will release an All-Genotype Drug
that will capture major market share.
As mentioned earlier, one of the most exciting drugs in
Gilead’s pipeline is STR of Sofosbuvir, which just passed the
3rd round of testing and is in the final stages of FDA review.
STR has shown a nearly 100% cure rate in all 6 variants of
HCV. This drug will quickly become a top seller. As a result
Sovaldi and Harvoni sales will fall in 2017 (STR will likely
launch in 4Q of 2016). In spite of this Gilead stands a good
chance to recapture lost market share from Merck as STR
boasts a higher cure rate than Zepatier. This drug could be
priced at two levels:
Gilead must adjust its pricing model to compete with
Merck’s Zepatir or risk losing up to 75% of its market share.
We forecast the following actions on Gillead’s part:
The first option is a broad, wide selling drug billed
as the “magic bullet” for all variants of HCV. Priced
somewhere between Sovaldi and Harvoni’s
current prices.
The second option is as an ultra-high premium pill
prescribed for the 2-5% of HCV patients for whom
all other dugs will be ineffective due to their HCV
being caused by the 5 and 6 variants of HCV.
Lowering the price of Sovaldi to match Zepatier
We expect that Gilead will lower the price of Sovaldi to
$54,000 for a 12-week treatment to match the price of
Zepatier. This will diffuse much of the danger of losing
market share to Merck, specifically with insurance
companies moving to a cheaper HCV drug. This will yield
a 35% reduction in sales revenue from Sovaldi. This price
drop may have favorable consequences for Gilead as well.
We predict a 10% increase in sales due to the new lower
cost. We also predict a 13% boost in Sovaldi sales due to
switchers from Harvoni (a 20% increase at 65% of the
original Sovaldi price yields an increase of 13%). This will
lead to a total revenue drop of $1.2B from Sovaldi revenue
(about 12%) in 2016. This is supported by recent action by
Gilead. In February of 2016 Gilead announced they would
In light of the fact that most cases of genotypes 5 and 6
occur in developing countries the more likely pricing
position is option 1.
Upcoming new HIV/AIDS medication will lead to
moderate (but not blockbuster) profits.
The final two drugs that have passed 3rd round testing and
are currently in the FDA licensing process are F/TAF and
STR of R/F/TAF. Until Sovaldi/Harvoni, HIV/AIDS drugs
made up about 75% of total sales. That number has
Page 15
dropped to a steady 33% in 2014 and 2015. We forecast
those percentages will remain steady into the future.
These new drugs will cover the lost revenues due to patent
expirations of Emtriva 2021) and the European expiration
of Atrilpla and Truvada (both in 2018). Additionally
Genvoya ill gain sales starting in 2016, extending the
profitability that would have been lost with the expiration
of Viread 2017).
3. Long-term Value of Once-a-Day Pills
Historical Operating Costs as
Percent of Revenue
25%
20%
15%
10%
Three major development in the treatment of HIV, HCV,
and HBV are the recent release of Genvoya (HIV) and the
future releases of TAF (HBC) and STR (HCV). These pills
consolidate an entire daily cocktail of drugs into a single
pill. From a financial perspective this is very advantageous
for Gilead. Traditionally HIV patients take 3 or more pills
per day. These pills could each be made by a different
company. In producing a one-a-day treatment pill Gilead
guarantees that the will provide 100% of this patients drug
needs. This is a better position for them than providing all
three of the individual drugs, as they are able to take
advantage of economies of scale.
Finally through treating chronic illness they maintain
revenue streams from customers on a long-term basis.
While a single patient taking Harvoni may pay a premium
price of $84,000 it is a one-time interaction with the
company as they will not need treatment again. The
lifetime value for HIV/HBV customers can prove to be
higher, even if the per pill price is much lower.
5%
0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
COGS
Depreciation
Amortization
R&D
SGA
Source: GILD 2015 10K
Profit Margin Forecasts
Gilead will enjoy Gross Margins of 90%, EBIT Margins of
59% and profit margins of 46.5%. This allows some room
for reduced prices in the face of increasing competition
but Gilead will need to offset these reductions by
increased sales volume to sustain revenues.
Historic and Projected Margins
100.0%
90.0%
80.0%
Operating Expenses Assumptions:
70.0%
Between 2007 and 2012 COGS made up an average of 20%
of revenue34, 2014 and 2015 saw that percentage fall to
10% (revenues in contrast increased by over 100%).35 This
is due to relatively inexpensive drug ingredients and
significant economies of scale. We expect this to remain
constant into the future and forecast COGS to remain at
10% of revenues. We expect R&D to remain a consistent
11% of revenue as Gilead’s pipeline of future drugs will
play a vital role in their future profitability. SGA will remain
consistent at 15.5% as it has for the last several years.
Capex will remain a low 2.5% of revenue as most of
Gilead’s costs are R&D and most of their assets are
intangibles.
60.0%
50.0%
40.0%
30.0%
20.0%
2013 2014 2015 2016E 2017E 2018E 2019E 2020E
Gross Margin
EBIT margin
Profit Margin
Source: GILD 2015 10K
Transition from growth to value
Gilead has begun the transition from a growth stock to a
valued stock. This is evidenced by their decision to issue
their first ever dividend in 2015. Further growth at the
current rate would be nearly impossible (to match 2014’s
growth rate Gilead would need to see $74 billion in
Page 16
revenue in 2016). Additionally increased competition will
remove some of the premium pricing power that Gilead
has enjoyed on its HCV drugs. Gilead’s merit as a growth
stock will be dependent on their maintaining their
approximately $30 billion in annual sales in the years to
come.
significant impact on the profitability of Gilead’s
products.
Success of Zepatier. Zepatier’s success will come
chiefly at the expense of Gilead’s Harvoni/Sovaldi
sales. Conversely, any setbacks that Zepatier would
have will positively impact Gilead. For example, a
recall of the drug could lead to an unexpected surge
for Gilead.
Gilead’s 2016 revenue numbers. If Gilead appears to
be slipping considerably, specifically in the HCV
medication segment, it could be cause for concern.
Model Results
Our DCF/EP results reveal that according to our model the
market’s current price of $87.83ii is under-valuing GILD by
about $30 per share. This means Gilead has significant
upside. Our DDM gives a lower price of $92.73. While both
indicate undervaluation by the market we have opted to
use DCF/EP as our target price as Gilead only has a oneyear history of dividends. This makes it difficult to forecast
amounts and frequency of dividend increases and leads to
a less reliable forecast. Additionally we believe our
Relative P/E value of $138.79 is too high as it does not take
into consideration external factors such as speculation on
future earnings and competition.
REFERENCES
1. Wikipedia: Gilead Sciences.
https://en.wikipedia.org/wiki/Gilead_Sciences
2. Mergent: Biotech Industry Analysis 2015. P.4
3. Hepatitis Foundation: About Hepatitis
http://www.hepatitisfoundation.org/HEPATITIS/HepatitisC.html
4. Ibid.
5. Hepatitis
Our Forecast vs. Analyst Consensus
C
Society:
Harvoni
vs.
Sovaldi
http://esofosbuvir.com/harvoni-medicine-even-bettersovaldi/harvoni-vs-sovaldi/
Our target price of $118.23 and LT Growth rate of 0.5% are
similar to a consensus of analysts with the general
direction of Gilead’s future, however we adapt a more
optimistic outlook. An aggregate of 26 analyst opinions
gives Gilead a buy rating with a target price of $116.19 and
a LT Growth Rate of 0.1%. We account for that difference
price to our slightly higher CV growth rate (0.5% vs 0.1%) a
lower average tax rate (17% vs 17.5%) and slightly lower
COGS (10% vs 11.33%). We believe that Gilead’s HBV drug
and the potential for M&A will give Gilead a higher rate of
growth (albeit still low) than the average analyst estimate.
Additionally our EPS is 5% lower than estimates. This is
because we are slightly more conservative with the
number of share repurchases Gilead will make over the
coming years.
KEYS TO MONITOR
Medical breakthroughs by competitors. Specifically in
the areas of HCV/HBV, HIV/AIDS and Cancer. A more
effective treatment or cure designed by a competing
company would certainly have an adverse effect on
Gilead’s revenue.
Government legislation. Congressional legislation
pertaining to price ceilings, patent life changes and
relaxed biosimilar regulations would also have a
6. Hepatitis B Foundation: Hep B epidemiology.
7. Ibid.
8. Gilead Investor Website
9. Pharma Times: “EU Reviews Gilead’s TAF for Hep B
Infection”
http://www.pharmatimes.com/Article/16-0226/EU_reviews_Gilead_s_TAF_for_hep_B_infection.aspx
10. AIDS.Gov: HIV/AIDS Basics
11. Ibid.
12. GILD 2015 10K
13. Wikipedia: HIV/AIDS Epidemiology
https://en.wikipedia.org/wiki/HIV/AIDS#Epidemiology
14. Hepatitis C Society: Harvoni vs. Sovaldi
http://esofosbuvir.com/harvoni-medicine-even-bettersovaldi/harvoni-vs-sovaldi/
15. Ibid.
16. GILD 2015 10K
17. Mergent: Biotech Industry Analysis 2015. P.10
18. Mergent: Biotech Industry Analysis 2015. P.11
19. Forbes: Are M&A Replacing R&D in Pharma?
http://www.forbes.com/sites/nicolefisher/2015/04/22/arema-replacing-rd-in-pharma/#5babfd0cb576
20. NatureReviews: Biopharma deal-making in 2015:
Changing the Pharma Landscape.
Page 17
http://www.nature.com/nrd/journal/v15/n2/full/nrd.2016.
10.html
21. Street Insider: AbbVie (ABBV) Announces Completion
of Pharmacyclics Acquisition
http://www.streetinsider.com/Corporate+News/AbbVie+(A
BBV)+Announces+Completion+of+Pharmacyclics+Acquisitio
n/10594347.html
22. Fortune: Pfizer, Allergan Confirm $160 Billion Merger
Deal.
http://fortune.com/2015/11/23/pfizer-allergan-merger/
23. Wikipedia: AbVie
24. Mergent: Biotech Industry Analysis 2015. P.4
25. Ibid.
26. Mergent: Biotech Industry Analysis 2015. P.5
27. Bureau of Economic Analysis: Healthcare Spending,
Prescription Spending, GDP Growth Forecasts.
http://www.bea.gov/
28. United Nations: World Population Estimates
http://esa.un.org/unpd/wpp/
29. US Census Website: An Aging Nation: The Older
Population in the United States
https://www.census.gov/prod/2014pubs/p25-1140.pdf
30. Centers for Disease Control and Prevention: Adult
Obesity Facts.http://www.cdc.gov/obesity/data/adult.html
31. IBISWorld
32. New York Times: “Number of Americans Without
Health Insurance Falls”
http://www.nytimes.com/2014/09/16/us/number-ofamericans-without-health-insurance-falls-surveyshows.html?_r=0
33. Market Watch: Gilead to Discount its Pricey Sovaldi
Drug
IMPORTANT DISCLAIMER
Henry Fund reports are created by student enrolled in the
Applied Securities Management (Henry Fund) program at
the University of Iowa’s Tippie School of Management.
These reports are intended to provide potential employers
and other interested parties an example of the analytical
skills, investment knowledge, and communication abilities
of Henry Fund students. Henry Fund analysts are not
registered investment advisors, brokers or officially
licensed financial professionals. The investment opinion
contained in this report does not represent an offer or
solicitation to buy or sell any of the aforementioned
securities. Unless otherwise noted, facts and figures
included in this report are from publicly available sources.
This report is not a complete compilation of data, and its
accuracy is not guaranteed. From time to time, the
University of Iowa, its faculty, staff, students, or the Henry
Fund may hold a financial interest in the companies
mentioned in this report.
http://www.marketwatch.com/story/gilead-to-discount-itspricey-sovaldi-drug-2015-02-04
34. GILD 2015 10K
35. GILD 2015 10K
1 Wikipedia: Gilead S cien ces
https://e n.wikipedia. org/wiki/Gilead_S cien ces
2 Mergent p.4
3 http://www.he patitisfoundation.org /HEPATITIS/H epatitis-C.ht ml
4 EBID
5 Esofbuvir
6 HepB. org
7 Hepatitisfoundation.org
8 Gilead Investor Relations Website.
9 http://www.pharmati mes. com/Article/1 6-0 2-2 6/EU_reviews _Gilead_ s_TAF_for_hep _B_i nfe ction.a spx
10 AIDS.gov
11 AIDS.gov
12 GILD 10 K
13 https://e n.wikipedia. org/wiki/HIV/AIDS#Epi demi ology
14http://es ofosbuvir.com/ harvoni -me dicine-eve n-better-soval di/harvoni -vs -sovaldi/
15 http://es ofosbuvir.com/ harvoni-me dicine -even -better-sovaldi /harvoni -vs-sovaldi/
16 GILD 201 5 10K
17 Mergent p. 10
18 Mergent p.11
19
http://www.forbes.com/sites/nicolefisher/2015/04/22/arema-replacing-rd-in-pharma/#5babfd0cb576
20
http://www.nature.com/nrd/journal/v15/n2/full/nrd.2016.10.
html
21
http://www.streetinsider.com/Corporate+News/AbbVie+(ABBV
Page 18
GileadSciences
RevenueDecomposition
FiscalYearsEndingDec.31
RevenueDecomposition(SalesDollars)
AntiVirals
Sovaldi
Atripla
Truvada
Harvoni
Hepsera
Complera/Eviplers
Emtriva
Stribild
Viread
Genvoya
OtherAntivirals
PIPELINE:F/TAF(SubmittedforApproval)
PIPELINE:STRofR/F/TAF(SubmitedforApproval)
PIPELINE:STRofSofosbuvir(SubmittedForApproval)
PIPELINE:TAF(SubmittedforApproval)
PIPELINE:Idelalisib(Phase3,ETA2021)
PIPELINE:Momelotinab(Phase3,ETA2022)
PIPELINE:GS-5745(Phase3,ETA2021)
TotalAntiviralProduts
OtherProducts
Letairis
Ranexa
AmBisome
Zydelig
Other
TotalOtherProducts
TotalProductSales
RevenueGrowth
RevenueDecomposition(%ofSales)
AntiVirals
Sovaldi
Atripla
Truvada
Harvoni
Hepsera
Complera/Eviplers
Emtriva
Stribild
Viread
Genvoya
OtherAntivirals
PIPELINE:F/TAF(SubmittedforApproval)
PIPELINE:STRofR/F/TAF(SubmitedforApproval)
PIPELINE:STRofSofosbuvir(SubmittedForApproval)
PIPELINE:TAF(SubmittedforApproval)
PIPELINE:Idelalisib(Phase3,ETA2021)
PIPELINE:Momelotinab(Phase3,ETA2022)
PIPELINE:GS-5745(Phase3,ETA2021)
TotalAntiviralProduts
OtherProducts
Letairis
Ranexa
AmBisome
Zydelig
Other
TotalOtherProducts
TotalProductSales
DrugType
ExpirationYr(US)
LiverDisease
HIV/AIDS
HIV/AIDS
LiverDisease
LiverDisease
HIV/AIDS
HIV/AIDS
HIV/AIDS
HIV/AIDS&LiverDisease
2029
2021
2021
2030
2014
2023
2021
2029
2017
2028
2018
2018
2030
2016
2022
2016
2027
2018
HeartDisease
HeartDisease
Antibiotic
Cancer
2018
2019
2016
2025
2020
2023
2008
2025
LiverDisease
HIV/AIDS
HIV/AIDS
LiverDisease
LiverDisease
HIV/AIDS
HIV/AIDS
HIV/AIDS
HIV/AIDS&LiverDisease
HIV/AIDS&LiverDisease
2029
2021
2021
2030
2014
2023
2021
2029
2017
2028
2018
2018
2030
2016
2022
2016
2027
2018
2018
2019
2016
2025
2020
2023
2008
2025
HIV/AIDS
HIV/AIDS
LiverDisease(HCV)
LiverDisease(HBV)
Cancer
Cancer
Cancer
HIV/AIDS
HIV/AIDS
LiverDisease(HCV)
LiverDisease(HBV)
Cancer
Cancer
Cancer
HeartDisease
HeartDisease
Antibiotic
Cancer
RevenueDecomposition(TreatmentType)
HIV/AIDS
LiverDisease
HIV/AIDS&LiverDisease*
HeartDisease
Cancer
Antibiotics
Other-Antiviral
Other-Misc
Total
*Oneproductismarketedtowardsboth.Thisisnotamergingofbothofthebroadercategories
RevenueDecomposition(Region)$Sales
UnitedStates
Europe
OtherCountries
TotalRevenues
RevenueDecomposition(Region)%ofSales
UnitedStates
Europe
OtherCountries
TotalRevenues
TotalForeignSales
ExpirationYr(EU)
2013
2014
2015
139
3,648
3,136
810
539
959
111
9,342
520
449
352
141
1,462
10,804
14.96%
10,283
3,470
3,340
2,127
1,228
1,197
1,058
88
22,791
595
510
388
23
167
1,683
24,474
126.53%
5,276
3,134
3,459
13,864
1,427
1,825
1,108
45
69
30,207
700
588
350
132
174
1,944
32,151
31.37%
2016E
4,200
2,900
3,500
10,000
1,500
2,000
1,150
600
60
750
300
1,100
800
28,860
2017E
3,800
2,500
3,200
8,000
1,425
2,100
1,100
1,200
65
1,250
450
2,200
1,600
28,890
2018E
3,000
2,250
2,600
7,200
1,250
2,050
350
1,800
70
1,500
600
3,300
2,400
28,370
2019E
2,975
1,850
2,000
4,800
1,225
2,000
250
2,400
75
1,800
750
4,400
3,100
27,625
2020E
2,775
1,575
1,825
2,800
1,200
1,950
150
3,000
80
2,000
750
5,500
4,250
27,855
750
775
650
300
100
625
650
675
700
250
300
100
75
50
25
250
500
650
750
850
175
180
185
190
195
2,100 2,205 2,235 1,990 1,420
30,960 31,095 30,605 29,615 29,275
-3.70%
0.44%
-1.58%
-3.23%
-1.15%
1.29% 42.02%
16.41%
13.57%
33.77% 14.18%
9.75%
9.37%
29.03% 13.65%
10.76%
11.30%
8.69%
43.12%
32.30%
- - - 7.50%
5.02%
4.44%
4.84%
- - - 4.99%
4.89%
5.68%
6.46%
8.88%
4.32%
3.45%
3.71%
0.14%
1.94%
1.03%
0.36%
0.21%
0.19%
- 0.00%
2.42%
- 0.00%
0.97%
- 0.00%
3.55%
- 0.00%
2.58%
- - - - - - - - - 86.47% 93.12%
93.95%
93.22%
4.81%
2.43%
2.18%
2.42%
4.16%
2.08%
1.83%
2.02%
3.26%
1.59%
1.09%
0.97%
0.09%
0.41%
0.81%
1.31%
0.68%
0.54%
0.57%
13.53%
6.88%
6.05%
6.78%
100%
100%
100.00%
100.00%
12.22%
8.04%
10.29%
25.73%
4.58%
6.75%
3.54%
3.86%
0.21%
4.02%
1.45%
7.08%
5.15%
92.91%
2.49%
2.09%
0.32%
1.61%
0.58%
7.09%
100.00%
9.80%
7.35%
8.50%
23.53%
4.08%
6.70%
1.14%
5.88%
0.23%
4.90%
1.96%
10.78%
7.84%
92.70%
2.12%
2.21%
0.25%
2.12%
0.60%
7.30%
100.00%
10.05%
6.25%
6.75%
16.21%
4.14%
6.75%
0.84%
8.10%
0.25%
6.08%
2.53%
14.86%
10.47%
93.28%
1.01%
2.36%
0.17%
2.53%
0.64%
6.72%
100.00%
9.48%
5.38%
6.23%
9.56%
4.10%
6.66%
0.51%
10.25%
0.27%
6.83%
2.56%
18.79%
14.52%
95.15%
0.34%
0.85%
0.09%
2.90%
0.67%
4.85%
100.00%
75.28%
1.29%
8.88%
8.97%
3.26%
1.03%
1.31%
100%
37.73%
50.71%
4.32%
4.51%
0.09%
1.59%
0.36%
0.68%
100%
30.62%
59.53%
3.59%
4.01%
0.41%
1.09%
0.21%
0.54%
100%
35.37%
52.00%
5.65%
4.44%
0.81%
0.97%
0.19%
0.57%
100%
35.13%
50.17%
7.40%
4.58%
1.61%
0.32%
0.21%
0.58%
100%
33.49%
51.95%
7.02%
4.33%
2.12%
0.25%
0.23%
0.60%
100%
32.50%
51.58%
8.95%
3.38%
2.53%
0.17%
0.25%
0.64%
100%
31.77%
52.35%
10.76%
1.20%
2.90%
0.09%
0.27%
0.67%
100%
6,695
3,614
893
11,202
18,182
5,442
1,266
24,890
21234
7528
3877
32639
20,141.69
7,140.75
3,677.56
30,960.00
20,229.52
7,171.89
3,693.60
31,095.00
19,910.74
7,058.87
3,635.39
30,605.00
19,266.67
6,830.53
3,517.80
29,615.00
19,045.48
6,752.11
3,477.41
29,275.00
59.77% 73.05%
32.26% 21.86%
7.97%
5.09%
100% 100.00%
40.23% 26.95%
65.06%
23.06%
11.88%
100.00%
34.94%
65.06%
23.06%
11.88%
100.00%
34.94%
65.06%
23.06%
11.88%
100.00%
34.94%
65.06%
23.06%
11.88%
100.00%
34.94%
65.06%
23.06%
11.88%
100.00%
34.94%
65.06%
23.06%
11.88%
100.00%
34.94%
GileadSciences
IncomeStatement
FiscalYearsEndingDec.31
Revenues
Product sales
Royalty, contract and other revenues
Royalty revenues
Contract and other revenues
Total revenues
Costs and Expenses
Cost of goods sold
Depreciation Expense
Amortization Expense
Research and development expenses
Selling, general and administrative expenses
Purchased in-process research and development
Total costs and expenses
Income / loss from operations
Interest expense
Other income / expense, net
Minority Interest in joint venture
Income / loss before provision for income taxes
Provision for income taxes
Net income / loss
Net loss / income attributable to noncontrolling interest
Net income attributable to Gilead
BasicEarningsPerShare(EPS)
NumberofSharesOutstanding
AnnualDividendsperShare
2013
2016E
2017E
2018E
2019E
2020E
32,151 30,960
488 311.15
--
--
32,639 31,271
31,095
312.50
-
-
31,408
30,605
307.58
-
-
30,913
29,615
297.63
-
-
29,913
29,275
294.21
-
-
29,569
(2,908) (3,096)
(161) (241)
(937.00) (819.76)
(3,014) (3,440)
(3,426) (4,847)
(10,446) (12,443)
22,193 18,828
(688) (478)
154 21,659 18,350
(3,553) (3,119)
18,106 15,230
2 14
18,108 15,244
2.01 8.33 12.37 10.92
1,529 1,452 1,422 1,396
1.29 1.40
(3,110)
(299)
(754.18)
(3,455)
(4,868)
(12,485)
18,922
(397)
18,526
(3,149)
15,376
14
15,390
11.21
1,373
1.51
(3,061)
(351)
(693.84)
(3,400)
(4,791)
(12,297)
18,616
(338)
18,278
(3,107)
15,170
14
15,184
11.22
1,353
1.62
(2,962)
(396)
(638.34)
(3,290)
(4,636)
(11,923)
17,990
(331)
17,659
(3,002)
14,657
14
14,671
11.02
1,332
1.73
(2,928)
(434)
(587.27)
(3,253)
(4,583)
(11,785)
17,785
(345)
17,440
(2,965)
14,475
14
14,489
11.07
1,308
1.84
10,804
398
11,202
2014
24,474
416
24,890
(2,514)
(2,738)
(103) (125)
(242) (925)
(2,120)
(2,854)
(1,699)
(2,983)
(6,678)
(9,625)
4,524
15,265
(307)
(412)
(9)
3
4,208
14,856
(1,151)
(2,797)
3,057
12,059
18
42
3,075
12,101
2015
GileadSciences
BalanceSheet
FiscalYearsEndingDec.31
Assets
CurrentAssets
Cash, cash equivalents and marketable securities
Cash and cash equivalents
Short-term marketable securities
Accounts receivable, net
Inventories
Deferred tax assets
Prepaid taxes
Prepaid expenses
Other current assets
Total current assets
Property, plant and equipment, net
Long-term portion of prepaid royalties
Long-term deferred tax assets
Long-term marketable securities
Intangible assets, net
Goodwill
Other long-term assets
Total assets
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable
Accrued government and other rebates
Accrued compensation and employee benefits
Income taxes payable
Other accrued liabilities
Deferred revenues
Current portion of long-term debt and other obligations, net
Total current liabilities
Long-term debt, net
Long-term income taxes payable
Long-term deferred tax liabilities
Other long-term obligations excluding long-term deferred tax liabilities
Equity component of currently redeemable convertible notes
Long-term deferred revenues
Other long-term obligations
2012
2013
2014
1,804
59
1,751
1,745
263
348
102
84
6,156
1,100
176
131
720
11,736
1,061
159
21,240
2,824
19
2,182
1,697
331
398
166
91
6,997
1,166
199
190
439
11,900
1,169
519
22,579
1,327
745
205
13
675
103
1,169
4,238
7,055
116
10
250
7
21
-
1,256
1,018
243
11
1,071
111
2,697
6,407
3,939
162
83
179
64
-
955
2,316
316
105
1,452
134
483
5,761
11,921
562
51
535
15
-
5,643
5,388
(46)
3,705
9,303
241
9,544
21,240
(124)
6,106
11,370
375
11,745
22,579
2015
2016E
2017E
2018E
10,027 12,851.00 17,641.73 27,034 37,331
101 1,756 1,786 1,817 1,848
4,635 5,854 6,611 6,640 6,535
1,386 1,955 1,876 1,884 1,855
508 828 907 911 896
391 773 407 408 402
194 240 403 405 399
472 506 250 251 247
17,714 24,763 29,882 39,351 49,513
1,674 2,276 2,823 3,316 3,744
466 400 625 628 618
236 324 313 314 309
1,598 11,601 1,564 1,570 1,546
11,073
10,247
9,427
8,673
7,979
1,172
1,172
1,172
1,172
1,172
731 1,056 639 642 632
34,664 51,839 46,445 55,666 65,513
1,178
4,118
380
65
2,727
440
983
9,891
21,195
1,243
1.4
394
1,251
2,814
360
39
2,170
138
1183
7,955
7,611
457
60
582
1,256
2,827
361
39
2,180
138
4
6,805
7,489
459
80
585
1,237
2,782
355
39
2,145
136
4
6,698
7,333
451
60
575
2019E
2020E
47,539 56,726
1,879 1,911
6,324 6,251
1,795 1,774
867 858
389 384
386 381
239 237
59,418 68,522
4,102 4,413
598 591
299 296
1,496 1,478
7,341
1,172
6,754
1,172
611 604
75,038 83,831
1,197
2,692
344
38
2,076
132
499
6,977
7,144
437
80
557
1,183
2,661
340
37
2,052
130
499
6,902
6,991
432
60
550
2
-
15
-
15
-
15
-
15
-
15
-
2,393
445
617
790
962
1,065
1,065
-3000
-6000
-9000
-12000
-15000
301
12,732
15,426
393
15,819
34,664
88
18,001
Stockholders'Equity
Preferred stock
Common stock and Additional Paid-in capital
Treasury Stock
Accumulated other comprehensive income / loss
Retained earnings / accumulated deficit
Total Gilead stockholders' equity
Noncontrolling interest
Total stockholders’ equity
Total liabilities and stockholders’ equity
301
31,254
301
44,536
301
57,496
301
69,827
301
81,865
18,534 29,173 39,627 49,759 59,193 68,232
579
593
607
621
635
649
19,113 29,766 40,234 50,380 59,828 68,881
51,839 46,445 55,666 65,513 75,038 83,831
GileadSciences
CashFlowStatement
FiscalYearsEndingDec.31
2006
2007
2008
2009
2010
2011
2012
2013
2014
OperatingActivities
Net income / loss
Adjustments to reconcile net income / loss to net cash provided by op activities
Depreciation expense
Amortization expense
Purchased in-process research and development expense
Stock-based compensation expense
In-process research and development impairment charges
Excess tax benefits from stock-based compensation
Tax benefits from exercise and vesting of stock-based awards
Deferred income taxes
Change in fair value of contingent consideration
Other
Changes in operating assets and liabilities
Accounts receivable, net
Inventories
Prepaid expenses and other assets
Accounts payable
Income taxes payable
Accrued liabilities
Deferred revenues
Minority interest
Net cash provided by operating activities
Investing Activities
Purchases of marketable securities
Proceeds from sales of marketable securities
Proceeds from maturities of marketable securities
Other investments
Acquisitions, net of cash acquired
Capital expenditures
Net cash used in / provided by investing activities
Financing Activities
Proceeds from debt financing, net of issuance costs
Proceeds from credit facilities, net of issuance costs
Proceeds from convertible note hedges
Proceeds from sale of warrants
Purchases of convertible note hedges
Repayments of debt and other obligations
Repayments of debt financing
Repayments of credit facility
Repayments of other long-term obligations
Payments to settle warrants
Proceeds from issuances of common stock
Repurchases of common stock
Payments of dividends
Extinguishment of long-term debt
Excess tax benefits from stock-based compensation
Payment of contingent consideration
Contributions from / distributions to noncontrolling interest
Net cash provided by / used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information
Interest paid, net of amounts capitalized
Income taxes paid
(1,190)
1,576
1,970
2,626
2,890
2,789
2,574
3,057
12,059
28
20
2,394
134
(95)
128
(9)
-
37
64
185
(76)
111
113
-
52
104
11
153
(192)
210
(25)
-
65
148
181
(80)
88
(42)
-
67
198
200
136
(82)
82
12
-
72
230
192
27
(41)
37
64
8
48
83
195
209
(114)
113
(39)
69
(3)
103
242
252
(279)
285
(98)
59
46
125
925
360
(482)
484
(236)
22
79
(184)
(358)
19
264
(69)
39
4
61
1,218
(138)
(35)
(252)
(78)
77
80
13
1,669
(257)
(331)
10
313
(24)
136
25
2,143
(356)
(75)
(66)
204
166
109
49
3,080
(349)
(161)
(70)
(4)
(186)
120
(30)
2,834
(376)
(201)
(14)
429
111
292
(29)
3,639
198
(350)
(129)
117
(68)
317
23
3,195
(315)
(343)
(170)
(98)
30
312
22
3,105
(2,578)
143
(371)
(289)
533
2,013
31
12,818
(2,601)
3,254
457
(9)
(2,736)
(105)
(1,739)
(3,502)
2,134
195
(5)
(46)
(79)
(1,302)
(3,273)
3,026
194
(11)
(115)
(179)
(2,614)
1,441
436
(1,248)
(230)
(2,216)
(5,503)
3,034
684
(91)
(62)
(1,938)
(5,128)
8,650
788
(589)
(132)
3,590
(1,245)
528
45
(25)
(10,752)
(397)
(11,846)
(257)
494
78
(379)
(190)
(254)
(2,107)
807
52
(18)
(557)
(1,823)
1,276
235
(379)
(202)
168
(545)
95
649
(20)
(99)
(99)
243
(488)
76
96
(171)
(44)
246
(1,970)
192
61
(1,475)
1
400
400
(406)
(400)
(400)
(6)
223
(998)
(305)
80
(45)
(1,051)
1
2,963
155
(363)
(506)
(500)
(6)
221
(4,023)
82
132
(1,339)
77
4,661
36
(688)
(686)
(2)
212
(2,383)
41
(115)
1,764
(17)
2,144
214
(1,839)
466
(667)
114
131
563
8
2,774
(4,440)
(1,040)
313
(582)
279
152
(2,544)
2
7,932
2,543
(26)
(4,779)
(4,093)
331
(5,349)
482
(101)
35
(3,025)
(56)
108
708
816
152
816
968
491
968
1,459
(186)
1,459
1,273
(365)
1,273
908
8,976
908
9,884
(8,080)
9,884
1,804
309
1,804
2,113
7,914
2,113
10,027
(16)
(490)
(7)
(565)
(9)
(746)
(16)
(1,130)
(249)
(1,101)
(238)
(1,051)
(4)
(4)
(7)
(496)
(62)
(621)
(330)
(2,060.00)
GileadSciences
CashFlowStatement
Cash Flows from Operating Activities (Forecasted)
Net Income
Adjustments to reconcile net income to net cash
Add: Depreciation and Amortization
Allowance for doubtful accounts
Changes in working capital accounts
Increase in receivables
Increase in inventories
Increase in preapaid expenses and other current assets
Increase in accounts payable
Increase in accrued compensation and other liabilities
Stock based compensation expense
Increase in income taxes payable
Increase in defferred revenue
Increase in deferred taxes
Increase in accrued government and other rebates
Increase in prepaid royalties
Increase in LT Deferred Tax Liabilities
Change in other long-term assets
Increase in other non-current liabilities
Net Cash provided by operating activities
Cash Flows From Investing Activities
Decrease in short-term investments
Decrease in long-term investments
Capital expenditures
Capitalization of intangible assts
Long term debt payment
Net cash used for investing activities
Cash Flows from Financing Activities
Change in debt
Increase in Additional Paid in Capital
Issuance of Common Stock
Payment of dividends
Equity Component of Currently Redeemable Convertible Notes
Repurchases of common stock
Change in non-controlling interest
Net cash provided by financing activities
Net Increase in Cash
Cash, Beginning of the Year
Cash, End of Year
2015
18,106
2016E
15,244
2017E
15,390
2018E
15,184
2019E
14,671
2020E
14,489
1,098.00
1,060.56
1,052.88
1,044.68
1,034.47
1,021.24
(1,219)
(569)
(462)
223.00
1,339.00
(757)
79
459
72.85
(577.16)
(29)
(8)
(5)
5.45
11.03
105
30
17
(19.80)
(40.04)
211
60
34
(40.00)
(80.90)
73
21
12
(13.74)
(27.78)
641.00
306.00
(408.00)
1,802.00
66.00
(49.60)
(325.00)
(141.40)
20,407
(812.45)
(302.41)
(67.57)
(1,303.60)
(225.42)
58.60
416.82
188.45
13,534
2.36
0.60
(5.32)
12.27
(2.73)
20.00
(2.79)
2.54
16,445
(7.75)
(2.18)
19.30
(44.54)
9.90
(20.00)
10.12
(9.21)
16,276
(15.91)
(4.40)
39.00
(90.00)
20.00
20.00
20.44
(18.61)
15,860
(5.48)
(1.51)
13.39
(30.91)
6.87
(20.00)
7.02
(6.39)
15,537
(1,655)
(10,003)
(441)
111
500
(11,488)
183
10,037
(788)
200
9,632
(31)
(7)
(791)
(1,179)
(2,008)
(31)
25
(779)
(785)
(32)
50
(754)
495
(240)
(32)
17
(745)
(760)
9,274
(1,948)
(13,584)
172
(122)
172
(156)
172
(188)
103
(154)
-
(1,873)
(13)
(1)
186
5,625
(1,991)
13
(3,000)
14
(18,375)
(2,108)
(3,000)
14
(5,044)
(2,225)
(3,000)
14
(5,194)
(2,340)
(3,000)
14
(5,411)
(2,451)
(3,000)
14
(5,590)
14,543.92
4,790.73
9,392.67
10,296.51
10,208.41
9,186.39
10,027
12,851
17,642
27,034
37,331
47,539
24,570.92
17,641.73
27,034.40
37,330.91
47,539.33
56,725.71
GileadSciences
CommonSizeIncomeStatement
FiscalYearsEndingDec.31
Revenues:
Product sales
Royalty, contract and other revenues
Total revenues
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
100.00% 100.00%
3.68%
1.70%
103.68% 101.70%
100.00%
1.52%
101.52%
100.00%
1.01%
101.01%
100.00%
1.01%
101.01%
100.00%
1.01%
101.01%
100.00%
1.01%
101.01%
100.00%
1.01%
101.01%
-23.27%
-0.95%
-2.24%
-19.62%
-15.73%
-9.04%
-0.50%
-2.91%
-9.37%
-10.66%
0.00%
-32.49%
69.03%
-2.14%
0.48%
67.37%
-11.05%
56.32%
0.01%
56.32%
-10.00%
-0.78%
-2.65%
-11.11%
-15.66%
0.00%
-40.19%
60.81%
-1.54%
0.00%
59.27%
-10.08%
49.19%
0.05%
49.24%
-10.00%
-0.96%
-2.43%
-11.11%
-15.66%
0.00%
-40.15%
60.85%
-1.28%
0.00%
59.58%
-10.13%
49.45%
0.05%
49.49%
-10.00%
-1.15%
-2.27%
-11.11%
-15.66%
0.00%
-40.18%
60.83%
-1.10%
0.00%
59.72%
-10.15%
49.57%
0.05%
49.61%
-10.00%
-1.34%
-2.16%
-11.11%
-15.66%
0.00%
-40.26%
60.75%
-1.12%
0.00%
59.63%
-10.14%
49.49%
0.05%
49.54%
-10.00%
-1.48%
-2.01%
-11.11%
-15.66%
0.00%
-40.25%
60.75%
-1.18%
0.00%
59.57%
-10.13%
49.45%
0.05%
49.49%
CostsandExpenses
Cost of goods sold
Depreciation Expense
Amortization Expense
Research and development expenses
Selling, general and administrative expenses
Purchased in-process research and development
Total costs and expenses
Income / loss from operations
Interest expense
Other income / expense, net
Income / loss before provision for income taxes
Provision for income taxes
Net income / loss
Net loss / income attributable to noncontrolling interest
Net income attributable to Gilead
-11.19%
-0.51%
-3.78%
-11.66%
-12.19%
0.00%
0.00%
-61.81%
41.87%
-2.84%
-0.08%
38.95%
-10.65%
28.30%
0.17%
28.46%
-39.33%
62.37%
-1.68%
0.01%
60.70%
-11.43%
49.27%
0.17%
49.44%
GileadSciences
CommonSizeBalanceSheet
FiscalYearsEndingDec.31
2013
2014
2015E
2016E
2017E
2018E
2019E
2020E
19.56%
0.18%
20.20%
15.71%
3.06%
3.68%
1.54%
0.84%
64.76%
10.79%
1.84%
1.76%
4.06%
110.14%
10.82%
4.80%
208.99%
40.97%
0.41%
18.94%
5.66%
2.08%
1.60%
0.79%
1.93%
72.38%
6.84%
1.90%
0.96%
6.53%
45.24%
4.79%
2.99%
141.64%
0.00%
5.46%
18.21%
6.08%
2.58%
2.40%
0.75%
1.57%
77.02%
7.08%
1.24%
1.01%
36.08%
31.87%
3.65%
31.87%
161.24%
56.98%
5.77%
21.35%
6.06%
2.93%
1.31%
1.30%
0.81%
96.52%
9.12%
2.02%
1.01%
5.05%
30.45%
3.79%
30.45%
150.02%
86.94%
5.84%
21.35%
6.06%
2.93%
1.31%
1.30%
0.81%
126.55%
10.66%
2.02%
1.01%
5.05%
27.89%
3.77%
27.89%
179.02%
121.98%
6.04%
21.35%
6.06%
2.93%
1.31%
1.30%
0.81%
161.78%
12.23%
2.02%
1.01%
5.05%
26.07%
3.83%
26.07%
214.06%
160.52%
6.35%
21.35%
6.06%
2.93%
1.31%
1.30%
0.81%
200.64%
13.85%
2.02%
1.01%
5.05%
24.79%
3.96%
24.79%
253.38%
193.77%
6.53%
21.35%
6.06%
2.93%
1.31%
1.30%
0.81%
234.06%
15.07%
2.02%
1.01%
5.05%
23.07%
4.00%
23.07%
286.36%
11.63%
9.42%
2.25%
0.10%
9.91%
0.00%
0.00%
1.03%
24.96%
59.30%
36.46%
1.50%
0.77%
1.66%
0.59%
0.22%
0.00%
0.00%
3.90%
9.46%
1.29%
0.43%
5.93%
0.00%
0.00%
0.55%
1.97%
23.54%
48.71%
2.30%
0.21%
2.19%
0.06%
0.00%
0.00%
0.00%
3.66%
12.81%
1.18%
0.20%
8.48%
0.00%
0.00%
1.37%
3.06%
30.76%
65.92%
3.87%
0.00%
1.22%
0.01%
0.00%
0.00%
0.00%
4.04%
9.09%
1.16%
0.13%
7.01%
0.00%
0.00%
0.44%
3.82%
25.69%
24.58%
1.47%
0.19%
1.88%
0.05%
0.00%
0.00%
0.00%
4.04%
9.09%
1.16%
0.13%
7.01%
0.00%
0.00%
0.44%
0.01%
21.89%
24.08%
1.47%
0.26%
1.88%
0.05%
0.00%
0.00%
0.00%
4.04%
9.09%
1.16%
0.13%
7.01%
0.00%
0.00%
0.44%
0.01%
21.89%
23.96%
1.47%
0.20%
1.88%
0.05%
0.00%
0.00%
0.00%
4.04%
9.09%
1.16%
0.13%
7.01%
0.00%
0.00%
0.44%
1.68%
23.56%
24.12%
1.47%
0.27%
1.88%
0.05%
0.00%
0.00%
0.00%
4.04%
9.09%
1.16%
0.13%
7.01%
0.00%
0.00%
0.44%
1.70%
23.58%
23.88%
1.47%
0.20%
1.88%
0.05%
0.00%
0.00%
0.00%
0.00%
49.87%
-1.15%
56.52%
105.24%
3.47%
108.71%
208.99%
0.00%
9.78%
1.23%
52.02%
63.03%
1.61%
64.64%
141.64%
0.00%
1.38%
0.27%
55.99%
57.65%
1.80%
59.45%
161.24%
0.00%
1.99%
0.97%
100.95%
94.23%
1.92%
96.14%
150.02%
0.00%
2.54%
0.97%
143.23%
127.44%
1.95%
129.39%
179.02%
0.00%
3.14%
0.98%
187.87%
162.59%
2.03%
164.61%
214.06%
0.00%
3.60%
1.02%
235.78%
199.88%
2.14%
202.02%
253.38%
0.00%
3.64%
1.03%
279.64%
233.07%
2.22%
235.29%
286.36%
Assets
CurrentAssets
Cash and cash equivalents
Short-term marketable securities
Accounts receivable, net
Inventories
Deferred tax assets
Prepaid taxes
Prepaid expenses
Other current assets
Total current assets
Property, plant and equipment, net
Long-term portion of prepaid royalties
Long-term deferred tax assets
Long-term marketable securities
Intangible assets, net
Goodwill
Other long-term assets
Total assets
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable
Accrued government and other rebates
Accrued compensation and employee benefits
Income taxes payable
Other accrued liabilities
Accrued royalties
Other accrued liabilities excluding accrued royalties
Deferred revenues
Current portion of long-term debt and other obligations, net
Total current liabilities
Long-term debt, net
Long-term income taxes payable
Long-term deferred tax liabilities
Other long-term obligations excluding long-term deferred tax liabilities
Equity component of currently redeemable convertible notes
Long-term deferred revenues
Other long-term obligations
Minority interest
Stockholders'Equity
Preferred stock
Common stock & Additional Paid-in Capital
Accumulated other comprehensive income / loss
Retained earnings / accumulated deficit
Total Gilead stockholders' equity
Noncontrolling interest
Total stockholders’ equity
Total liabilities and stockholders’ equity
GileadSciences
ValueDriverEstimation
FiscalYearsEndingDec.31
NetOperatingProfitLessAdjustedTaxes(NOPLAT)
InvestedCapital(IC)
ReturnonInvestedCapital(ROIC)
FreeCashFlot(FCF)
EconomicProfit(EP)
TaxRates
StatutoryRate
+StateTaxes,netoffed.Benefit
+ForeignEarningsatdifferentrates
MarginalTaxRate
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
3233
12144
18101
15628
15731
15462
15003
14769
14724
16306
15136
17146
16928
16614
16214
15916
22.8%
82.5%
111.0%
103.3%
91.7%
91.3%
90.3%
91.1%
2688
10563
19271
13618
15949
15776
15404
15066
2,022 10,886 16,708 14,335 14,266 14,016 13,584 13,383
35.0%
0.5%
-6.6%
28.9%
35.0%
0.60%
-16.9%
18.7%
35.0%
0.50%
-18.5%
17.00%
35.0%
0.50%
-18.5%
17.00%
35.0%
0.50%
-18.5%
17.00%
35.0%
0.50%
-18.5%
17.00%
35.0%
0.50%
-18.5%
17.00%
35.0%
0.50%
-18.5%
17.00%
CalculatingNOPLAT
OperatingRevenues
-CostofGoodsSold
-SGAExpenses
-Depreciation
-AmortizationofNon-GoodwillIntangibles
-ResearchandDevelopmentExpenses
-OtherOperatingExpenses
+ImpliedInterestonOperatingLeases
AdjustedEBITA
11202
24890
32639
31271
31408
30913
29913
29569
-2514
-2738
-2908
-3096
-3110
-3061
-2962
-2928
-1699
-2983
-3426
-4847
-4868
-4791
-4636
-4583
-103
-125
-161
-241
-299
-351
-396
-434
-242
-925
-937
-820
-754
-694
-638
-587
-2120
-2854
-3014
-3440
-3455
-3400
-3290
-3253
0
0
0
0
0
0
0
0
8
9
12
12
13
14
16
17
4,532 15,274 22,205 18,840 18,935 18,630 18,005 17,801
AdjustedTaxes
IncomeTaxProvision
Add:TaxShieldonInterestExpense
Add:TaxonImpliedLeaseInterest
Add:TaxShieldonAmortizedGoodwill
Less:TaxonInterest(orInvestment)Income
AdjustedTaxes
1,151 2,797 3,553 3,119 3,149 3,107 3,002 2,965
88.72 77.04 116.96 81.26 67.42 57.45 56.25 58.60
2 2 2 2 2 2 3 3
- - - - - - - -
(3) 1 26 - - - - -
1,245 2,875 3,646 3,203 3,219 3,167 3,061 3,026
Plus:ChangeinDeferredTaxAssets/Liabilities
CurrentYearDeferredTaxAssets
CurrentYearDeferredTaxLiabilities
PreviousYearDeferredTaxAssets
PreviousYearDeferredTaxLiabilities
ChangeinDeferredTaxes
521 744 1,152 1,220 1,225 1,206 1,167 1,153
83 51 1 60 80 60 80 60
394 521 744 1,152 1,220 1,225 1,206 1,167
10 83 51 1 60 80 60 80
(54) (255) (458) (9) 15(1) 59(7)
EBITA
-Adjustedtaxes
+ChangeinDefferedTaxes(t-1)
NOPLAT
4,532 15,274 22,205 18,840 18,935 18,630 18,005 17,801
(1,245) (2,875) (3,646) (3,203) (3,219) (3,167) (3,061) (3,026)
(54) (255) (458) (9) 15 (1) 59 (7)
3,233 12,144 18,101 15,628 15,731 15,462 15,003 14,769
InvestedCapitalComputation
OperatingCurrentAssets:
NormalCash(5%ofRevenue)
AccountsReceivable,Net
Inventory
PrepaidExpenses&OperatingCurrentAssets
TotalOperatingCurrentAssets
560 1,245 1,632 1,564 1,570 1,546 1,496 1,478
2,182 4,635 5,854 6,611 6,640 6,535 6,324 6,251
1,697 1,386 1,955 1,876 1,884 1,855 1,795 1,774
257 666 746 654 656 646 625 618
4,696 7,932 10,187 10,704 10,751 10,581 10,239 10,122
OperatingCurrentLiabilities:
AccountsPayable
IncomeTaxesPayable
EmployeeCompensation&Withholdings
DeferredRevenue
AccruedGovtRebates
OtherAccountsPayable&AccruedLiabilities
TotalOperatingCurrentLiabilities
1,256 955 1,178 1,251 1,256 1,237 1,197 1,183
11 105 65 39 39 39 38 37
243 316 380 360 361 355 344 340
111 134 440 138 138 136 132 130
1,018 2,316 4,118 2,814 2,827 2,782 2,692 2,661
1,071 1,452 2,727 2,170 2,180 2,145 2,076 2,052
3,710 5,278 8,908 6,772 6,801 6,694 6,478 6,403
TotalOperatingCurrentAssets
Less:TotalOperatingCurrentLiabilities
NetOperatingWorkingCapital
4,696 7,932 10,187 10,704 10,751 10,581 10,239 10,122
3,710 5,278 8,908 6,772 6,801 6,694 6,478 6,403
986 2,654 1,279 3,932 3,949 3,887 3,761 3,718
NetPPE
1,166 1,674 2,276 2,823 3,316 3,744 4,102 4,413
OtherOperatingAssets
OtherIntangibleAssets,net
Long-termPortionofPrepaidRoyalties
OtherLong-termAssets
PVofOperatingLeases
OtherOperatingAssets
11,900
199
519
197
12,815
OtherOperatingLiabilities
TotalOtherLong-TermLiabilities
LongTermDeferredRevenues
OtherOperatingLiabilities
243 550 396 597 600 590 572 565
- - - - - - - -
243 550 396 597 600 590 572 565
InvestedCapital:
Add:NetOperatingWorkingCapital
Add:NetPPE
Add:OtherOperatingAssets
Less:OtherOperatingLiabilities
TotalInvestedCapital
986 2,654 1,279 3,932 3,949 3,887 3,761 3,718
1,166 1,674 2,276 2,823 3,316 3,744 4,102 4,413
12,815 12,528 11,977 10,987 10,262 9,574 8,922 8,350
(243) (550) (396) (597) (600) (590) (572) (565)
14,724 16,306 15,136 17,146 16,928 16,614 16,214 15,916
ReturnOnInvestedCapital
NOPLAT/
BeginningInvestedCapital
ROIC
3,233 12,144 18,101 15,628 15,731 15,462 15,003 14,769
14,179 14,724 16,306 15,136 17,146 16,928 16,614 16,214
22.8%
82.5%
111.0%
103.3%
91.7%
91.3%
90.3%
91.1%
EconomicProfit
BeginningInvestedCapital
ROIC
WACC
EconomicProfit(BegIC*(ROIC-WACC))
14,179 14,724 16,306 15,136 17,146 16,928 16,614 16,214
22.8%
82.5%
111.0%
103.3%
91.7%
91.3%
90.3%
91.1%
8.54%
8.54%
8.54%
8.54%
8.54%
8.54%
8.54%
8.54%
2,022 10,886 16,708 14,335 14,266 14,016 13,584 13,383
FCF
NOPLAT
Add:BegInvestedCapital
Less:CurrentInvestedCapital
FCF
3,233 12,144 18,101 15,628 15,731 15,462 15,003 14,769
14,179 14,724 16,306 15,136 17,146 16,928 16,614 16,214
(14,724) (16,306) (15,136) (17,146) (16,928) (16,614) (16,214) (15,916)
2,688 10,563 19,271 13,618 15,949 15,776 15,404 15,066
11,073 10,247 9,427 8,673 7,979 7,341 6,754
466 400 625 628 618 598 591
731 1,056 639 642 632 611 604
258 274 295 319 344 372 401
12,528 11,977 10,987 10,262 9,574 8,922 8,350
GileadSciences
KeyManagementRatios
FiscalYearsEndingDec.31
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
LiquidityRatios
CurrentRatio(CurrentAssets/CurrentLiabilities)
OperatingCashFlowRatio(OperatingCF/CurrentLiabilities)
QuickRatio(Currentassets-Inventories)/CurrentLiabilities
1.09 3.07 2.50 3.76 5.78 7.39 8.52 9.93
0.48 2.22 2.06 1.70 2.42 2.43 2.27 2.25
0.83 2.83 2.31 3.52 5.51 7.11 8.26 9.67
ActivityorAsset-ManagementRatios
AssetTurnoverRatio(sales/totalassets)
InventoryTurnoverRatio(Sales/TotalInventory)
ReceivablesTurnoverRatio(Sales/AverageAccts.Receivable)
50%
72%
63%
67%
56%
47%
40%
35%
6.6 18.0 16.7 16.7 16.7 16.7 16.7 16.7
5.7
7.3
6.2
5.0
4.7
4.7
4.7
4.7
FinancialLeverageRatios
DebttoEquityRatio(TotalDebt/TotalEquity)
EquityRatio(ShareholdersEquity/TotalAssets)
InterestCoverage(EBIT/InterestExpense)
60%
0.52
13.71
82%
0.46
36.06
121%
0.37
31.48
31%
0.64
38.39
20%
0.72
46.71
15%
0.77
54.09
14%
0.80
53.37
12%
0.82
50.59
ProfitabilityRatios
ReturnonAssets(NetIncome/TotalAssets)
ReturnonEquity(Netincome/ShareholdersEquity)
GrossMargin(Revenue-Cogs)/Revenue
EBITmargin(EBIT/SALES)
ProfitMargin(NetIncome/Sales)
13.5%
26.0%
77.6%
37.6%
27.5%
34.8%
76.2%
89.0%
59.7%
48.6%
34.9%
94.7%
91.1%
66.4%
55.5%
32.8%
51.2%
90.1%
58.7%
48.7%
27.6%
38.2%
90.1%
59.0%
49.0%
23.2%
30.1%
90.1%
59.1%
49.1%
19.5%
24.5%
90.1%
59.0%
49.0%
17.3%
21.0%
90.1%
59.0%
49.0%
19%
44%
27%
33%
33%
34%
36%
38%
PayoutPolicyRatios
TotalPayoutRatio(Dividendspaid+Repurchases)/NI
GileadSciences
WeightedAverageCostofCapital(WACC)Estimation
WACC
CostofEquity
CostofDebt
CostofPreferredStock
MarketValueofEquity(Millions)
MarketValueofTotalDebt(Millions)
MarketValueofPreferredStock
MarketValueofFirm
MarginalTaxRate
Equations:
EquityMarketRiskPremium
xBeta
+RiskfreeRate
CostofEquity
CalculatingCostofEquity
SharesOutstanding(Millions)
xCurrentPrice
EquityValue
TotalValueofEquity
CalculatingCostofDebt
MarketValueoftotaldebt
TotalValueofDebt
InterestIncome(returnoninvestments)
8.54%
9.40%
4.51%
0
125,705
22,452
0
148,157
17.00%
5.00%
1.326
2.77%
9.40%
1,422
88.4
125,705
125,705
22,452
22,452
FairValueofDebt
PVofoperatingLeases
ValueofTotalDebt
22,178
274
22,452
GileadSciences
DiscountedCashFlow(DCF)
andEconomicProfit(EP)ValuationModels
KeyInputs:
CVGrowth
CVROIC
WACC
CostofEquity
0.50%
21%
8.54%
9.40%
FiscalYearsEndingDec.31
2016E
2017E
2018E
2019E
2020E
DCFModel
DiscountPeriod
NOPLAT
BeginningIC
EndingIC
ΔinInvestedCapital
1
2
3
4
5
15,628 15,731 15,462 15,003 14,769
15,136 17,146 16,928 16,614 16,214
17,146 16,928 16,614 16,214 15,916
2,010 (218) (313) (401) (297)
NOPLAT
Less:ΔinInvestedCapital
FreeCashFlow
ContinuingValue
PVocContinuingValue
PVoffreecashflows
15,628 15,731 15,462 15,003 14,769
(2,010) 218 313 401 297
13,618 15,949 15,776 15,404 15,066
179,274
129,156
12,547 13,537 12,336 11,098
ValueofOperations
+ShortTermInvestments
+ExcessCash
-TotalDebt
-PVofOperatingLeases
-PVofEmployeeStockOptions
-PVofUnderfundedPension&RetirementLiabilities
ValueofEquity
SharesOutstanding
IntrinsicValue(pershare)
PriceToday2/26/16
178,674
1,756
12,208
(22,178)
(274)
(2,408)
167,778
1,441
116.42
118.86
EPModel
PeriodstoDiscount
EconomicProfit
ContinuingValue
PVofTerminalYearEP
PVofEconomicProfit
SumofEP
Add:BeginningInvestedCapitalCV
ValueofOperations
+ShortTermInvestments
+ExcessCash
-TotalDebt
-PVofOperatingLeases
-PVofEmployeeStockOptions
-PVofUnderfundedPension&RetirementLiabilities
ValueofEquity
SharesOutstanding
IntrinsicValue(pershare)
PriceToday2/26/16
1 2 3 4 5
14,335 14,266 14,016 13,584 13,383
163,060
117,474.68
13,207 12,109 10,960 9,786 8,883
163,538
15,136
178,674
1,756
12,208
(22,178)
(274)
(2,408)
167,778
1,441
116.42
118.86
GileadSciences
DividendDiscountModel(DDM)orFundamentalP/EValuationModel
FiscalYearsEndingDec.31
EPS
2016E
2017E
2018E
2019E
2020E
$10.92 $11.21 $11.22 $11.02 $11.07
KeyAssumptions
CVgrowth
CVROE
CostofEquity
0.50%
21.10%
9.40%
FutureCashFlows
P/EMultiple(CVYear)
EPS(CVYear)
FutureStockPrice
DividendsPerShare
FutureCashFlows
Periods
DiscountedCashFlows
$1.40 $1.51 $1.62 $1.73
$1.40 $1.51 $1.62 $1.73 $121.47
1
2
3
4
4
$1.29 $1.28 $1.27 $1.25 $87.51
IntrinsicValue(12/31/15)
PriceToday
$91.31
$93.83
10.97
$11.07
$121.47
GileadSciences
RelativeValuationModels
Ticker
GSK
AMGN
ABBV
CELG
Company
GlaxoSmithKline
Amgen
Abbvie
Celgene
Price
$19.55
$147.60
$56.00
$103.37
GILD
GileadSciences
$88.10
ImpliedValue:
RelativeP/E(EPS15)
RelativeP/E(EPS16)
EPS
2016E
$2.47
$10.83
$5.03
$5.69
EPS
2017E
$2.61
$12.14
$5.98
$7.26
Average
P/E15
7.9
13.6
11.1
18.2
12.7
P/E16
7.5
12.2
9.4
14.2
10.8
10.92 11.21 8.1 7.9
$138.79
$121.19
VALUATIONOFOPTIONSGRANTEDINESOP
TickerSymbol
CurrentStockPrice
RiskFreeRate
CurrentDividendYield
AnnualizedSt.Dev.ofStockReturns
Rangeof
OutstandingOptions
Range1
Total
Number
ofShares
39.144
39
GILD
$88.99
1.71%
1.92%
9.78%
Average
Exercise
Price
22.63
$22.63
Average
B-S
Value
Remaining
Option
ofOptions
Life(yrs)
Price
Granted
3.80 $61.52 $2,408
3.80 $67.78 $2,408
PresentValueofOperatingLeaseObligations(2015)
Operating
Leases
66
63
51
43
31
63
317
43
274
FiscalYearsEndingDec.31
2016
2017
2018
2019
2020
Thereafter
TotalMinimumPayments
Less:Interest
PVofMinimumPayments
CapitalizationofOperatingLeases
Pre-TaxCostofDebt
NumberYearsImpliedbyYear6Payment
Year
1
2
3
4
5
6&beyond
PVofMinimumPayments
Lease
Commitment
66
63
51
43
31
31
PresentValueofOperatingLeaseObligations(2014)
FiscalYearsEndingDec.31
2015
2016
2017
2018
2019
Thereafter
TotalMinimumPayments
Less:Interest
PVofMinimumPayments
Operating
Leases
58
53
49
36
33
73
302
44
258
CapitalizationofOperatingLeases
PresentValueofOperatingLeaseObligations(2013)
FiscalYearsEnding
2014
2015
2016
2017
2018
Thereafter
TotalMinimumPayments
Less:Interest
PVofMinimumPayments
Operating
Leases
49
46
41
32
25
32
226
29
197
CapitalizationofOperatingLeases
PresentValueofOperatingLeaseObligations(2012)
FiscalYearsEnding
2013
2014
2015
2016
2017
Thereafter
TotalMinimumPayments
Less:Interest
PVofMinimumPayments
Operating
Leases
47
43
38
27
19
40
214
29
185
CapitalizationofOperatingLeases
4.51%
2.0
Pre-TaxCostofDebt
NumberYearsImpliedbyYear6Payment
4.51%
2.2
Pre-TaxCostofDebt
NumberYearsImpliedbyYear6Payment
4.51%
1.3
Pre-TaxCostofDebt
NumberYearsImpliedbyYear6Payment
4.51%
2.1
PVLease
Payment
63.2
57.7
44.7
36.0
24.9
47.3
273.7
Lease
Year
Commitment
1
58
2
53
3
49
4
36
5
33
6&beyond
33
PVofMinimumPayments
PVLease
Payment
55.5
48.5
42.9
30.2
26.5
54.6
258.2
Lease
Year
Commitment
1
48.976
2
46.345
3
41.384
4
32.482
5
25.204
6&beyond
25.204
PVofMinimumPayments
PVLease
Payment
46.9
42.4
36.3
27.2
20.2
24.4
197.3
Lease
Year
Commitment
1
47.007
2
42.947
3
37.566
4
26.648
5
19.211
6&beyond
19.211
PVofMinimumPayments
PVLease
Payment
45.0
39.3
32.9
22.3
15.4
30.2
185.1
EffectsofESOPExerciseandShareRepurchasesonCommonStockBalanceSheetAccountandNumberofSharesOutstanding
NumberofOptionsOutstanding(shares):
AverageTimetoMaturity(years):
ExpectedAnnualNumberofOptionsExercised:
27.41
3.60
8
CurrentAverageStrikePrice:
CostofEquity:
CurrentStockPrice:
$22.63
9.40%
$89.66
IncreaseinSharesOutstanding:
AverageStrikePrice:
IncreaseinCommonStockAccount:
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
8
8
8
5
0
0
0
0
0
0
$22.63 $22.63 $22.63 $22.63 $22.63 $22.63 $22.63 $22.63 $22.63 $22.63
172 172 172 103 -
ChangeinTreasuryStock
ExpectedPriceofRepurchasedShares:
NumberofSharesRepurchased:
3,000
3,000
3,000
3,000
3,000
3,000
3,000
3,000
3,000
3,000
$89.66 $98.09 $107.31 $117.40 $128.43 $140.50 $153.71 $168.16 $183.97 $201.26
33 31 28 26 23 21 20 18 16 15
SharesOutstanding(beginningoftheyear)
Plus:SharesIssuedThroughESOP
Less:SharesRepurchasedinTreasury
SharesOutstanding(endoftheyear)
1,422
1,396
1,373
1,353
1,332
1,308
1,287
1,268
1,250
1,233
8
8
8
5
0
0
0
0
0
0
33 31 28 26 23 21 20 18 16 15
1,396
1,373
1,353
1,332
1,308
1,287
1,268
1,250
1,233
1,219
ImpactofChangesinCostsofEquity/DebtonWACC
CostofEquity
8.54%
7.4%
8.4%
9.4%
10.4%
2.5%
6.59%
7.44%
8.29%
9.14%
3.5%
6.72%
7.57%
8.42%
9.26%
4.5%
6.84%
7.69%
8.54%
9.39%
5.5%
6.97%
7.82%
8.67%
9.52%
6.5%
7.10%
7.94%
8.79%
9.64%
11.4%
9.99%
10.11%
10.24%
10.36%
10.49%
CVofROIC
$118.86
11%
21%
31%
41%
51%
-3.5%
109.86
100.33
97.02
95.29
94.25
-1.5%
112.65
107.75
106.05
105.16
104.62
0.5%
116.82
118.86
119.57
119.94
120.16
2.5%
123.75
137.32
142.04
144.49
145.98
4.5% 137.5315 174.0408 186.7391 193.3402 197.3526
COGSas%ofSales
$118.86
1.00%
5.00%
10.58%
15.00%
20.00%
Amortizationas%ofNetIntang.
2%
5%
8%
11%
122.52
121.46
120.69
120.16
121.64
120.57
119.80
119.27
120.70
119.63
118.86
118.33
120.15
119.09
118.32
117.79
119.72
118.65
117.88
117.35
14%
119.85
118.96
118.02
117.48
117.04
ImpactofChangesinMarketValueofDebt/EquityonWACC
MarketValueofDebt
8.54% 17,500 20,000 22,452 25,000 27,000
105,000
8.71%
8.62%
8.54%
8.46%
8.40%
115,000
8.71%
8.62%
8.54%
8.46%
8.40%
125,278
8.71%
8.62%
8.54%
8.46%
8.40%
135,000
8.71%
8.62%
8.54%
8.46%
8.40%
145,000
8.71%
8.62%
8.54%
8.46%
8.40%
WACC
20%
117.71
113.53
109.34
105.15
100.96
$118.86
6.50%
7.50%
8.54%
9.50%
10.50%
Capexas%ofSales
1.5%
2.0%
2.5%
160.43
160.43
160.43
137.06
137.06
137.06
118.90
118.90
118.90
105.85
105.85
105.85
94.90
94.90
94.90
3.0%
160.43
137.06
118.90
105.85
94.90
3.5%
160.43
137.06
118.90
105.85
94.90
MarginalTaxRate
17%
124.06
119.87
115.68
111.49
107.30
$118.86
35.00%
26.00%
17.00%
8.00%
1.00%
NormalCashLevels
1.0%
3.0%
5.0%
93.05
92.90
92.75
106.20
106.05
105.90
119.16
119.01
118.86
131.93
131.78
131.63
141.74
141.58
141.43
7.0%
92.60
105.75
118.71
131.48
141.28
9.0%
92.45
105.60
118.56
131.33
141.13
SharesOutstanding
Dep.as%ofNetPPE
SGAas%ofSales
8%
11%
15.5%
143.11
136.76
127.24
138.92
132.57
123.05
134.73
128.38
118.86
130.54
124.19
114.67
126.35
120.00
110.48
$118.86
6.0%
8.0%
10.0%
12.0%
14.0%
MarketValueofEquity
CVofGrowth
CostofDebt
SensitivityAnalysis
YearlyDividendGrowth($)
$118.86 $(0.11) $$0.11 $0.22 $0.33
1,000,000,000
171.29
171.29
171.29
171.29
171.29
1,200,000,000
142.75
142.75
142.75
142.75
142.75
1,441,180,186
118.86
118.86
118.86
118.86
118.86
1,600,000,000
107.06
107.06
107.06
107.06
107.06
1,800,000,000
95.16
95.16
95.16
95.16
95.16