Gilead Sciences (GILD)

Sector: Biotechnology Price:$100.65Market Cap:$149bnCompany OverviewResearch-based biopharmaceutical company Headquartered in Foster City, CaliforniaDevelops and commercialises medicines in areas of unmet medical need (innovative drugs in targeting uncaptured market share)Product Portfolio: 21 with FDA approvalSpecific focus on antiviral drugs to treat patients infected with HIV, hepatitis B, influenza, and pulmonary diseasesA number of category firsts: first complete treatment regimens for HIV infection in a once-daily single pill, first oral antiretroviral pill available to reduce the risk of acquiring HIV infection

Industry OverviewBiotechnology has high barriers to entry: R&D: GILD spent 2.85 billion in 2014)FDA approval: 5+ years and uncertainPatents: commercial value in the form of pricing power ($1000 per pill for Sovaldi and $1125 for Harvoni)Demand always exists for medicines for serious illness: HIV, hepatitis B & C, etc.

Industry OverviewSurge in M&A activity with pharma and biotech companies with the goal of pipeline enhancementIncreased licensing and partnering between pharma and biotech companiesGILD has been incredibly successful at forming competitive and collaborative relationships and has become the top M&A player in the industry over the past 15 yearsGILD has made 9 acquisitions since 2000 (Pharmasset, Myogen, Triangle)Not a single deal has provided negative returns to GILD shareholders6 have been undeniable successes

Current ProductsHIV/AIDS, Oncology, Cardiovascular, Respiratory Drugs (Tamiflu)Greatest percentage of their sales are from their Hep C Drugs, Sovaldi and Harvoni, two truly revolutionary medications for Hep CThese two drugs made up for $25 billion in sales in 2014Harvoni is already tracking for $3.5 billion in sales in first quarter of 2015Sovaldi and Harvoni (a drug made from a combination of Sovaldi and another drug) are so revolutionary because previous Hep C drugs had low cure rates and required interferon, which gave patients painful flu-like symptoms lasting up to 84 weeksSovadli still needs to be taken with ribavarin (genotypes 2 and 3 only), mild side effects significantly less painful than interferonHarvoni, however, is taken without interferon and without ribavarin and still maintains its very high cure rate

PipelineNew AIDS/HIV drug currently undergoing the U.S. and E.U. Regulatory Submission Process Two cardiovascular drugs in Phase 3 testing (final phase before FDA approval)Two liver drugs in Phase 3 testing Pipeline Portfolio: 32 products across all 3 phasesHistory of acquiring pharma/biotech companies with drugs in Phase 2 and Phase 3 testing (acquired Pharmasset for $11.2 billion in 2012 to effectively get access to Sovaldi)Potential acquisitions are on the horizon as Gilead currently sits on cash reserves of more than $10 billion$10.3 billion in sales in year 1 vs. $11 bil acquisition cost: demand is most definitely there, despite pricing pressure3 million people in the U.S. with Hep C, Gilead treating 117,000 patients through the first three quarters of 2014, leaves Gilead 2.9 million patients in the form of uncaptured market share

Mitigating Risk: Potential Pricing PressureIncreased emphasis on managed healthcare has put additional pressure on product pricingLegislation has been enacted since 10, Gilead revenues still increasing in past 5 years, Biotech sector in general has continually outperformed S&P500 despite prominence of managed healthcarePricing is justifiable and sustainable: no current alternative to Sovaldi/Harvoni, you cant choose when you get sick, over 90% cure rate without the need for interferon, leaps and bounds above previous forms of treatment: basically a miracle drugMedicare/Medicaid Discounts: In exchange for the discounts, payers are agreeing to treat more patients, even those with little liver damage: less expensive pills, but greater volume of patients offset potential discountswe are required to provide a 50% discount on products sold to patients while they are in the Medicare Part D donut hole -- between high coverage and catastrophic coverage 2014: 20% disc, 2015: 30% disc in competition with AbbVie BUT ONLY for genotype I Mitigating Risk - LitigationDec13: FDA approval of SovaldiOct14: FDA approval of the fixed-dose combination of ledipasvir and sofosbuvir (Harvoni)Sovaldi + Harvoni becomes lucrative, leads to intellectual property claims (that are without merit)AbbVie Harvoni Patent: Gilead filed an application in Sept11, a month (5 weeks) before AbbVies first application: first to file law states that Gilead is in the right and owns the intellectual propertyAbbVie cannot market Harvoni since it does not own patents on either individual drug in the combination, worst case scenario they can only potentially compel royalty payments and damages from Gilead (estimated 10%)

AbbVie: worst case scenario -- pay royalties on Sovaldi, estimated at 10%Idenix: worst case scenario -- completely lose patent and right to commercialize Sovaldi -- greatest hurdle has already been passed Gilead does not have patents for the two drugs used in the Harvoni combination, although the company did file an application in September 2011, a month before AbbVies first application.

AbbVie patents have not blocked or delayed the commercialization of Gileads combination product in the US or Europe - no other foreign patents expected, AbbVie litigation expected to take several years to resolveconcerns regarding the patent portfolio are already priced into the Gilead share price, with Gilead undervalued on most metrics vs. its pharma peers Previous challengers Idenix and Roche: both allege that they were the first to conceive the compound behind Sovaldi, court ruled in favor of Gilead in both lawsuits, worst case scenario w/ Idenix and Roche is that Gilead completely loses the patent and right to commercialize Sovaldi - greatest hurdle has already been passedGilead has and will continue to aggressively defend its patents

Mitigating Risk - CompetitorsSovaldi vs. Viekira Pak (VP) Sovaldi can cure almost all hepatitis C patients [genotype 1, 2, 3, 4, 5 and 6 infections]VP drug from AbbeVie is inferior in many fields based on clinical dataSovaldi has shorter list of adverse effects than VP, easier to take in combinations with other drugs, 1 pill a day vs. 3 pills a day for VPVP only approved for hepatitis C genotype 1 patients and not for patients diagnosed with the other genotypesGilead may have to share some of the market with AbbVie in genotype 1 but it will maintain its monopoly in other hepatitis C patients

side note: Mercks HCV drugs grazoprevir and elbasvir are approaching regulatory approval but not as potent as Harvoni

Necessary drug: benefit from ridding patients of the virus, which can lead to liver cancer and the need for liver transplants that cost a lot more than $84K (average cost of treatment)CVS, Humana, Aetna, Anthem, EnvisionRx all chose Sovaldi vs. ExpressScript with VP82% of all hepatitis C drug spending is on Sovaldi what about generics? sold in emerging markets like Africa, generic Sovaldis cost less, but given the sheer size of the patient population in these markets, it should still translate into big money for Gilead

Financials Highlights -Excellent returns to shareholders:-Return on invested capital (excluding goodwill) has averaged 60.9% over past 3 years-Return on equity stands at 82.8%-Stockholders equity has increased 35.05% Year-over-Year-Strong capital positioning:-Debt to EBITDA = 1.4x-Debt to book cap = 36.9%-Average FCF margin of ~35% over past 3 years-Current Ratio = 3.10-Debt/Equity of 0.80 does not pose a major problem -Well-positioned for another major acquisition -Sitting on $11bn+ in cash -EBITDA Margin > 65%Excellent indicator of future revenue growth

Financial Highlights

Market CapPEGP/E (TTM)ForwardP/EEV/EBITDAP/BP/FCFGILD$149B.9413.369.588.929.6011.96AMGN$118B2.1023.2714.8813.704.6120.75CELG$92B1.8747.6318.1029.5914.0334.78BIIB$97B1.8533.3220.7620.748.9943.81ALXN$35B2.1152.1323.2234.0610.2368.24REGN$45B7.57142.7634.6349.6117.5109.64GRFS$23B3.0744.7614.8523.228.08-Mean 40.2221.0728.4510.5733.11Median44.7619.4331.8259.634.78Implied PriceRange$171-$384$152-$355$137-$539$47-$180$170-$341Comparable Analysis Red meaning didnt use in mean and median calcs because outliersGILDS from Finviz : EPS 7.37 (TTM) Forward EPS year 10.27 (yahoo) EBITDA :16.69 B (non control: 393M) (MKT cap after trasn min=205 max=804) cash(10,027MIL)(debt= 12,404M) (yahoo) Bookvalue per share: 10.30 FCFpersahre 12.26B/1.49B = 8.22 number of shares:1.49BComparable Analysis Market CapROAROEOperating MarginsProfit MarginsGILD$146B39.4%82.8%61.3%48.6%AMGN$118B7.5%21%34.7%25.7%CELG$92B12.9%37%33.5%26.1%BIIB$97B22.1%29.440.430.2%ALXN$35B17.5%21.9%41%29.4%REGN$45B9.7%14.4%29.7%12.3%GRFS$23B----GILD Ratios vs. Industry -P/E: 13.36 vs. 46.50-Future P/E: 9.72 vs. 30.70-P/S: 6.09 vs. 208.22-P/CF: 11.83 vs. 62.13-Earnings Growth: 303.27% vs. 49.62%