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Krause Fund
Research Fall 2015
Healthcare Gilead Sciences, Inc. (NASDAQ: GILD)
Recommendation: BUY 17 November 2015
Analysts
Alexandra Bartlett Emily Merdinger [email protected] [email protected]
Siddig Siddig Shachi Vyas [email protected] [email protected]
Company Overview Gilead Sciences, Inc. (GILD) is a biopharmaceutical company developing innovative medicines to help individuals across the globe suffering from life-threatening illnesses. While the company is a leading producer of HIV/AIDS and hepatitis therapies, it is investing in therapies for cardiovascular conditions, hematology and cancer, and inflammatory diseases. New drugs come from internal development, acquisitions, and in-licensing. Treatments are marketed and distributed through its own commercial teams and/or through third-party distributors and corporate partners. Gilead has financially significant active collaborations with BMS, Janssen, and Japan Tobacco to develop and commercialize different products. The company operates in more than 30 countries worldwide and is headquartered in Foster City, California.
Current Price $103.81
Target Price $143.52
GILD Maintains Strong Pipeline
Gilead has 36 drug candidates in the pipeline across five disease indications
Strong revenue growth of 28.6% estimated from 2014 to 2015 demonstrates that Harvoni and current marketed drugs will continue to provide robust revenue.
Gilead took advantage of low interest rates to issue $10 billion in notes, which will allow share repurchasing, acquisitions, and payment of dividends.
In November 2015, the FDA approved Genvoya-one of several TAF drugs in Gilead’s pipeline. Two NDAs and marketing authorization applications for TAF-based regimens for HIV treatment could lead to approval of two new products in the next six months.
Gilead’s preexisting commitment to providing affordable care to individuals requiring treatment will decrease the effects of pressure to decrease drug prices.
Gilead has started paying a $0.43 quarterly dividend, which is atypical for a biotechnology company.
One Year Stock Performance
Stock Performance Highlights 52 week High
$123.37
52 week Low $85.95
Beta Value Average Daily Volume
1.02 11.84 m
Share Highlights Market Capitalization $149.61 b
Shares Outstanding
Book Value per share
1.522 b $10.39
EPS $7.95
P/E Ratio 64.52
Dividend Yield (2015E) 1.68%
Dividend Payout Ratio (2015E) 19%
Company Performance Highlights ROA 34.79% ROE
Sales
R&D as %of Sales
76.23%
$24.474 b
11.5%
Financial Ratios Current Ratio 3.07 Debt to Equity 5.18
2
Executive Summary After further review, we recommend a buy for Gilead
because of its robust and diverse pipeline. There are 36
drugs in the pipeline that would provide treatment for
the growing areas of oncology, cardiovascular conditions,
and infections.
In 2014, Gilead saw a 375% increase in cash from 2013.
This dramatic increase was primarily due to the $10.3
billion brought in from the company’s hepatitis C drug
Sovaldi. We predicted 2015 revenue to grow to $31.5
billion driven mostly by promising sales of Harvoni and
Sovaldi. We believe that Gilead will achieve a price of
$143 per share.
General Information Gilead Sciences, Inc. (GILD) is a global biopharmaceutical company developing innovative medicines to help individuals suffering from life- threatening illnesses. The company is a leading producer of antiviral treatments for human immunodeficiency virus (HIV), hepatitis B (HBV), and hepatitis C (HCV). Gilead invests in therapies addressing cardiovascular conditions, hematology and cancer, and inflammatory diseases. Antiviral products represented 91% of total revenues in 2014, 83% in 2013,
and 82% in 20121. While more money has been invested in growing the liver disease and oncology therapies, Gilead has maintained its dominance in the HIV market and is going to continue to spend money on R&D for drugs that address it.
Life Cycle Gilead is experiencing the growth portion of its business
cycle. It has 36 drug candidates in the pipeline across five
segments: HIV/AIDS, liver diseases,
hematology/oncology, cardiovascular, and
inflammation/respiratory3. Three of Gilead’s pipeline
candidates have submitted to the EU Commission and
two of those are awaiting U.S. FDA approval.
In 2014, four Gilead drugs—Vitecka, Tybost, Harvoni and
Zydelig—were approved by the FDA and European
Commissioni. This is quite unusual considering that a
good year for the biotechnology industry is when two
drugs are approved. There may be another year of
unusually high approval rates because Gilead has paid
$125 million for a FDA priority review voucher in
November 2014. This allows a review starting any time
after November 2015 to be cut in half, which will
decrease the time it takes to bring the drug candidate to
market32.
In May of 2015, Gilead acquired EpiTherapeutics for
$65 million in cash on hand to expand into small
molecular therapies for oncological indications. This
acquisition was supported by the company’s 375%
increase in cash last fiscal year.
Products and Markets Major drugs in the company’s portfolio along with its 2014 sales and patent expiration are shown in the following table:
Product 2014 Sales
(USD M)
U.S. Patent
Expiration Atripla 3,470 2021 Truvada 3,340 2021 Viread 1,058 2018 Complera/Eviplera 1,228 2023 Stribild 1,197 2029 Sovaldi 10,283 2029 Harvoni 2,127 2030 Letairis 595 2018 Ranexa 510 2019 Zydelig 23 2025 AmBisome 388 2016
Source: Gilead 2014 10-K
Gilead’s revenue breakdown by segment is shown in the graphic below:
2014 Sales
Source: Gilead 2014 10-K
HIV/AIDS Human immunodeficiency virus (HIV) weakens the immune system by killing T cells and can lead to acquired immunodeficiency syndrome (AIDS). The immune systems is so weakened that there is little tolerance to common microbes, cancers, and serious
infections32. In 2013, there were 35 million people living with HIV/AIDS1. Each year there are approximately 500,000 people who become infected in
the U.S. and 2.3 million worldwides. In March of 2015, there were approximately 15 million HIV positive people taking antiretroviral therapy.
4%
51%
7%
38%
3
Source: UNAIDS
There are 39 branded HIV drugs available in the U.S. as well as a number of generics. Gilead’s HIV/AIDS treatments are 50% fixed dose combination antiretrovirals, which means that the drug uses at least two medications from different drug classes. These drug classes include nucleoside reverse transcriptase inhibitors (NRTIs), non-nucleoside reverse transcriptase inhibitors (NNRTIs), CCR5 Antagonists, protease inhibitors (PIs), and integrase strand transfer inhibitors (INSTIs). Each drug class interacts with different enzymes that are important to HIV-1 replication.
Stribild, Complera/Eviplera, Atripla, and Truvada make up 36% of the available combination drug market. Gilead’s competes in this drug class with ViiV Healthcare’s Combivir, Epzicom/Kivexa, and Trizivir3. This drug class generated $9,235 or 37.8% of Gilead’s 2014 revenue. Genvoya—a combination of four drug types—was approved by the U.S. FDA on November 5, 2015 and is expected to provide higher efficacy at 1/10th
the dosage.
GlaxoSmithKline (GSK) has 60% of all NRTI drugs with Ziagen, Retrovir, and Epivir. Gilead’s NRTI products include Viread and Emtrivera, which are both coming off patent in less than 5 years. Gilead has focused its R&D money on combination drugs as 80% of its pipeline
drugs are combination type3.
In the INSTIs class, the product offerings are split evenly between Gilead, ViiV Healthcare, and Merck. This was not a significant source of revenues for Gilead in 2014 and it was 4.0% of Merck’s revenue in 20143.
Other companies with treatments in the HIV/AIDs space include Boehringer Ingelheim GmbH, AbbVie, Pfizer, Janssen, and Roche3.
Hepatitis C Hepatitis C is a liver infection caused by the blood-borne
Hepatitis C virus (HCV). For 70-85% of infected people,
the infection becomes a serious infection that can
require liver transplants if not addressed. More than
350,000 people die annually due to HCV complications4.
Antivirals can cure the disease with minimal side effects.
As seen in the chart below, the treatment regimen has
evolved to a single tablet regimen (STR), which makes it
easier for the patient to stick to the treatment and
results in fewer complications. Gilead offers three
current STR products and has five in the pipeline3.
Source: Harvoni Product Page
More than 185 million people are infected with HCV
with most of them in emerging markets4. The global
prevalence of HCV can be seen in the figure below:
Source: Gilead’s Q3 Earnings Slides
Egypt has the highest prevalence at 14.7% of the
population. To provide access to the treatments, Gilead
offers the Egyptian Ministry of Health a greatly reduced
price of Sovaldi4. Gilead makes a commitment to
provide access to its products elsewhere in the world by
contracting with generic manufacturers in India or
creating seven drug access programs in the U.S. alone3.
Health insurers in the U.S. still will delay treatments
until the disease has progressed to a certain point6.
Insurers have called for Gilead to cut the price of its
newest HCV drugs: Sovaldi and Harvoni. Sovaldi is
4
currently priced at $1,000-per-pill while Harvoni is
currently available for $1,125-per-pill7. These two drugs
provided 51% of Gilead’s revenues in 2014, so overall
revenues would be significantly impacted in the next
two years if prices were capped in Gilead’s core markets
(U.S., Japan, and the Big-5 European countries).
In December 2014, AbbVie launched a HCV drug: Viekira
Pak for those with HCV of genotype-1, which is the most
prevalent type in the U.S.3. The drug has faced FDA
scrutiny over Viekira Pak’s potential to cause serious
liver damage8. Sovaldi sales are more likely to be
impacted in the long run as Sovaldi treats genotype-1
patients. Harvoni has been expanded to treat patients
with genotypes 1, 4, 5 and 6 as well as those co-infected
with HIV9. However, Gilead’s treatments have been
prescribed at least 10 times as much as Viekira Pak.
Merck has also been developing HCV treatments that
have shown cure rates as high as 100% after 8-weeks10.
Current Gilead HCV treatments require 8, 12 or 24
weeks to achieve cure rates of 94-99%, so Merck’s
condensed timeline could decrease Gilead’s sales.
Hepatitis B Hepatitis B is a liver infection caused by the blood-borne
Hepatitis B virus (HBV). Approximately 400 million
people live with chronic hepatitis B infection globally
with the highest rate of 8% in China. The World Health
Organization estimates that at least 780,000 people die
from HBV every year. The global prevalence of HBV can
be seen in the figure below:
Source: Gilead Hepatitis Fact Sheet
Viread and Hespera are the only HBV drugs offered by
Gilead at the present time. Gilead’s Viread and Hespera
competes with GSK’s Zefflix, Bristol Myers-Squibb’s
Baraclude, and Novartis’ Tyzeka/Sebivo11. However,
Gilead has been researching three drugs including a
tenofovir alafenamide (TAF) drug that would treat HBV.
This new compound when combined with other drugs
could provide effective new HBV treatments to increase
Gilead’s market share in the hepatitis B therapy space.
Analysis of Recent Earnings Gilead began paying a $0.43 quarterly-dividend in 2015. Dividend payments are unusual in a biotechnology company, which suggests that the management is confident in the drugs in the pipeline and the 5-year forecast of sales of newly-released pharmaceuticals. The dividend yield of 1.68% combined with a $15 billion share repurchases provides investors a return while still allowing the company to reinvest in developing new drugs. While the dividend yield is below that of Pfizer’s 3.27% and GSK’s 5.67%, Gilead is more likely going to be able to continue to be able to continue to pay these dividends if revenues fall as it has a dividend coverage ratio of 4.3.
Total revenue in the third quarter increased from $7.2 billion in 2014 to $8.2 billion. Total revenues continued to be driven by product sales rather than licensing and other contractual revenues. This increase in sales also saw an increase in R&D and SG&A expenses as a percentage of sales, which is expected as Gilead looks to diversify not only its pipeline but also its customer
base3, which can be seen in the figure below.
Gilead Pharmaceutical Segment Sales
Source:
Kalorama Information
Gilead’s three major operating costs are broken down
as a percentage of 2014 sales in the figure below:
Source: FactSet
5
Gilead spent the least on R&D—11.5% of 2014 sales—in
comparison to six of its competitors. A summary of
Gilead’s competitors is shown in the following table:
Co. Ticker Sales (M) R&D % Sales
CELG 7,643 32.1%
AMGN 20,035 22.2%
ABBV 19,960 16.5%
MRK 42,237 17.0%
GSK 35,913 15.0%
BIIB 9,703 19.5%
GILD 24,890 11.5% Source: Company 10-Ks
These numbers suggest that Gilead is able to push more
successful drugs through the pipeline with less
investment. Progression in the later stages of the FDA
approval process does require more investment, which
is reflected by Gilead’s R&D expenses as a percentage of
sales of 18.14% and 18.93% in 2012 and 2013,
respectively3.
Gilead will continue to have enough funding for its
global drug assistance, which could reduce the pressure
that it faces from U.S. politicians looking to lower drug
cost premiums. However, activists hope to challenge
Gilead’s patents for Sovaldi in Argentina, China, Brazil,
Russia, and Ukraine as they view the drug as being too
expensive30.
Production and Distribution Manufacturing Process and Costs
Gilead’s production and manufacture of drugs can be
separated into two categories: (1) the research and
development required to produce new drugs; and (2)
the manufacturing and sale of previously developed
drugs29. Prior to being submitted for approval, Gilead
drugs go through the three initial phases of drug
development: (1) discovery and development; (2) pre-
clinical research, and (3) clinical research30.
Gilead manufacturing takes place both in-house and
through contracted independent third parties3. It
produces both within the United States and abroad,
with manufacturing facilities in California, Ireland, and
Canada in addition to its independently contracted
manufacturers3. Through contracting out production
Gilead is able to increase production capabilities via
external manufacturing. If issues arise within Gilead’s
internal manufacturing processes it will allow the
company to continue to meet a majority of its
production quotas and deliver products to customers.
Distribution Products are marketed primarily by commercial teams and third party distributors. If a pharmaceutical treatment is more complex, the company provides additional guidance. In the US, 12 drugs are sold exclusively through wholesalers—Cardinal Health, Inc; McKesson Corporation; and AmerisourceBergen Corporation—who accounted for 87% of domestic and
63% of worldwide product sales3. Gilead’s reliance on these three distributors for such a large portion of its revenues is risky. The impact of any of these three wholesalers discontinuing business with Gilead or experiencing disruptions to operations would have a major impact on Gilead revenues and its ability to complete distribution of drugs.
Gilead begins by marketing drugs within the U.S. and Europe because regulatory approval is achieved there first. To continue to push global sales, the company then moves to the Asiatic market, particularly Japan. For example, Sovaldi was approved in the U.S. in late 2013 and in the E.U. in early 2014, and it is now available in
over 40 countries3.
Competition A table comparing Gilead to two large cap
pharmaceutical companies, Pfizer and GSK, as well as
the biotechnology industry is found below:
Source: Yahoo Finance
GILD Pfizer GSK Biotech Industry
Mkt Cap 156.32B 198.96B 93.51B 196.91M
Rev/Employee 4.170 m 0.616 m 0.371m 0.190 m
Qtly Rev Growth (yoy)
0.26 -0.07 0.06 0.18
Rev (ttm) 29.19B 48.20B 36.33B 8.35M
GM (ttm) 0.87 0.82 0.68 0.59
EBITDA (ttm) 20.32B 19.61B 10.27B -11.71M
OM (ttm) 0.66 0.3 0.22 -1.85
NI(ttm) 15.04B 8.91B 15.05B N/A
EPS (ttm) 9.48 1.41 6.19 -0.33
P/E (ttm) 11.24 22.9 6.25 24.71
P/S (ttm) 5.32 4.15 2.65 20.49
ROE(%) 92.9 12.4 149.5 N/A
6
GSK has been able to generate a high level of
return to its equity holders at about 1.5 times that
of Gilead’s ROE of 92.9%. Both Gilead’s and GSK’s
ROE are high in comparison to that of Pfizer’s,
which suggests that both companies had high net
incomes for the year. Gilead does have a low debt
level, which could contribute to its higher return.
Gilead has been able to generate incredibly high
revenue per each employee. With 7,000 employees
and two very successful HCV drugs, this value will
decrease over time as expansion forces the
company to hire more people. The $0.190 million-
per-employee for the biotech industry indicates
that a majority of biotechnology companies are
small-cap with very few employees.
With an operating margin of 0.66, Gilead has a
large amount of revenue left after stripping the
production costs, which could allow it to take on
more debt in the future, pay for dividends, or
service its existing debt including the $10 billion
taken out in September of 2015. The biotechnology
sector has an operating margin of -1.85%, which
indicates that many small companies do not see a
profit in early stages of development, which allows
for the larger-cap companies to acquire the
research of the companies operating at a loss.
Pfizer and GSK have similar operating margins of
0.3 and 0.22, respectively. This combined with
similar sized 2014 revenues suggests that the
companies have similar operating expenses.
Gilead is able to compete with other
biopharmaceutical companies primarily on cost,
ease of use, patent protection, and efficacy3. HIV
market share and price are being pressured
because of the existence of 39 branded drugs and a
handful of generic products.
Competing drugs and discounts have been driving
prices down and pressuring Gilead to maintain its
lead in that area.
Pfizer’s biopharmaceutical products make up 92%
of the company’s revenue, down from 93% in
201330. By December 31, 2014, Pfizer had 23
programs in Phase III and a total of 28 projects in
R&D. The difference between Gilead’s pipelines
and that of Pfizer is large, but Pfizer is heavily
investing in R&D to cover up the patent
expirations of many drugs. Pfizer also faces larger
competition from biosimilars31.
GSK is a leader in vaccines, which is a space that
Gilead does not participate in. However, GSK has
therapies for HIV, cancer, infectious diseases,
cardiovascular conditions and others.
It is important to note that GSK and Pfizer
cooperate with ViiV healthcare, a producer of
eleven HIV/AIDS treatments. Shared success with
ViiV boosts both companies, but if there is a
downturn in the market, both will move down but
less than the more exposed Gilead12
Top GILD Middle PFE Bottom GSK: Cash Use ($M) Source: FactSet
Pfizer’s stockpile of cash has either been decreasing
or only moderately increasing the past three years.
While the firm still has cash to reinvest into
developing new drugs or acquiring companies, a
continuation of this trend whether it be from
political pressure for lower drug costs or expiration
of patents, cash flow problems will make it difficult
to make innovative products.
Gilead’s patents on its three largest revenue
producing drugs (Harvoni, Sovaldi, and Truvada) do
not expire until 2030, 2029, and 2021, respectively30.
Patents for Pfizer’s top revenue-generating
7
biopharmaceutical therapy expire in 2020 and
202331. GSK’s patents are expiring in 2025, 2021,
and 2027, which will allow it to see sustained
revenues.
For a comparison of the other biopharmaceutical
companies that compete with Gilead’s anti-infective
therapies, the following table is presented:
Source: FactSet
Gilead is the second largest company in the six
company group by market cap, enterprise value
and sales. Since 50% of 2014 sales were made up of
two drugs, Gilead is likely to lose its position to
Amgen or AbbVie.
Gilead has a low level of debt to EBITDA, which
means that it will have no issues paying off debt. In
fiscal year 2015, this number is likely to rise because
of the increase in notes taken out. However, Gilead
has significant cash available to service it. Amgen
and Merck have higher ratios of 0.41 and 0.40,
respectively. While this is not an exceptionally high
number, it suggests that these two companies
might have to cease share repurchases or find other
ways to finance acquisitions in the future.
If Amgen is able to get regulatory approval of
even a portion of its 28 pipeline candidates, it will
experience market share growth in inflammation
and oncology. This could make it difficult for
Gilead to pick up market share in those two
areas. Similarly Merck is likely to experience
significant sales growth if some of its 9 therapies
make it to market. Sales growth would provide
Merck and Amgen additional funds to acquire
companies if they so choose, which might create
competition as Gilead considers acquiring
companies.
Biogen at 39.6% and Gilead at 121.8% saw
significant sales growth. The other competitors saw
slower growth or a loss. Average growth margin
ratio across the six companies was 80%, which
Gilead exceeded by 4.4%. This suggests that all
companies can cover their SG&A expenses, but
Gilead’s above average gross margin will sustain
predicted growth in SG&A expenses.
AbbVie and Gilead saw the highest return on equity,
which suggests both are particularly adept at using
investor’s money to produce revenues. Celgene,
Merck, and Amgen were still able to generate
approximately 24% ROE, but it suggests investors
are not achieving maximum returns.
From this comparison, Gilead’s performance in fiscal
year 2014 was robust in comparison to other
companies invested in antivirals. We believe that
this will allow Gilead to continue to maintain its
strong pipeline, returns to investors, and earnings
per share growth.
Foreign Sales Select Gilead produced drugs are distributed both
within the United States as well as in foreign
countries in which they have been approved. A
recent deal to resolve legal action filed against
Gilead, Mylan Inc.’s Indian subsidiary will make
them the sole distributor of Gilead’s Hepatitis C
treatments within India. This deal is a win for Mylan
in the pharmaceutical wars emerging in the race to
provide treatment for the disease. Hepatitis C
medications have had a significant impact on
Gilead’s revenue stream, with a substantial increase
in total revenues riding on "the back of almost $4
billion in hepatitis C drug sales."29
CELG AMGN ABBV MRK BIIB GILD
MV (B) 85.7 114.3 97.9 148.1 63.5 147.8
EV (B) 93.6 115 120.7 162.8 64.2 154.9
Sales (B)
7.64 20.04 19.96 42.24 9.70 24.89
#Phase III
8 28 15 22 4 8
# Pre- Reg
6 6 4 9 1 3
D net/ EBITDA
-0.22 0.41 0.98 0.40 -0.27 0.14
GM (%)
92.2 78.9 78.4 63.9 83.4 84.4
OM(%) 34.9 34.1 30.1 21.8 40.9 61.3 NM (%)
19.3 25.7 8.9 28.3 30.3 48.6
ROE(% )
29.7 24.1 56.9 24.2 34.3 90.3
Sales g (%)
17.1 7.3 6.2 -4.5 39.6 121.8
EPS (%) 4.2 0.9 -57.0 176.9 58.4 306.1
8
Source: FactSet
The chart above shows that approximately 26% of sales
come from outside the United States. To protect against
currency fluctuations especially in the European Union,
Gilead’s management uses foreign currency exchange
forward and option contracts3. The company’s revenues
would be adversely affected if the dollar appreciates
more than the hedging efforts.
Biotechnology The human health biotechnology industry focuses
on improving people’s health with research
centered on the creation of recombinant DNA.
These DNA alterations have led biotech
companies to discover treatments for diseases
including forms of cancer, AIDS, Alzheimer’s, and
diabetes. Biotechnology companies are some of
the most research-intensive companies in the
world due to the laborious process of developing
new, successful products. A majority of the
biotech industry is extremely small companies
requiring external funding, typically provided by
big pharmaceutical companies or investment
entities11.
Biotechnology firms’ product lines include various
drug delivery vehicles including monoclonal
antibodies, gene inhibitors, small molecules, and
peptides. Utilizing these delivery vehicles medium
to large cap biotechnology companies cover a
variety of therapeutic areas that include HIV/AIDS,
liver diseases, hematology/oncology,
cardiovascular, inflammation, respiratory,
neuroscience, bone health, and nephrology.
Revenue streams for biotechnology companies
result from drug sales, product licensing, and
developing bioprocessing products for the
production of biologic drugs.
Government Regulations Biotechnology firms are strictly regulated by the
US Food & Drug Administration. As firms develop
and test drugs they are subject to firm guidelines
to follow throughout the process. The five key
steps included in the drug development process
are described below12.
Step 1: Discovery and Development.
During the Discovery and Development step of
drug production a scientist for a firm will discover
a promising new drug. Discovery typically occurs
when scientists gain new insight into a disease,
realize unintended effects of other treatments,
conduct broad research of molecular compounds
to test impacts on various diseases, or take
advantage of new technological advances. Once a
promising new drug has been identified,
researchers conduct experiments to gather further
information
Step 2: Preclinical Research
Preclinical research is intended to test a drug’s
potential to cause serious harm prior to conducting
research on humans. Preclinical testing is typically
conducted both in vitro (within test tubes) and in
vivo (animal testing).
This step is closely regulated by the FDA with
minimum basic requirements guiding many aspects
of the research studies. The results from this testing
is used to determine the viability of the drug and to
decide whether to proceed to clinical research.
Step 3: Clinical Research
Once the drug has reached the clinical research
stage researchers begin testing on humans. Because
of this, the four phases that comprise clinical trials
are closely regulated by the FDA. Before beginning
clinical trials the firm must submit an Investigational
New Drug (IND) application to the FDA including
information gathered during preclinical research.
After the application has been approved by the FDA,
researchers may begin the four phases of a clinical
trial.
Phase 1: The purpose of the first phase is to
test the safety and dosage of the drug. The
trial is conducted with 20 to 100 healthy
patients over several months.
Approximately 70% of drugs successfully
move past this phase.
9
Phase 2: The purpose of the second phase
is to test the efficacy and side effects of the
drug. The trial is conducted with up to
several hundred people with the disease
over several months to two years.
Approximately 33% of drugs successfully
most past this phase.
Phase 3: The purpose of the third phase is
to test the efficacy of the drug and monitor
adverse reactions. The trial is conducted
with 300 to 3,000 volunteers who have the
disease over 1 to 4 years. Approximately 25-
30% of drugs successfully move past this
phase.
Phase 4: The purpose of the fourth phase
is to test the safety and efficacy of the
drug. The trial is conducting with several
thousand volunteers who have the disease.
Drugs that successfully move past this
phase are submitted for FDA approval. Step 4: FDA Review
Once a developer has significant evidence from
early research and preclinical and clinical trials that
the drug is safe and effective, an application to
market the drug may be submitted to the FDA. The
developers will submit a New Drug Application
telling the story of the drug describing its
effectiveness and level of safety. All information
from preclinical to phase 3 trials must be included
in the application. After submission the FDA review
team has six to ten months to review the
application and make the decision whether to
approve the drug for marketing. If approved, the
FDA works with the developer to refine prescribing
information in the ‘labeling’ process before the
drug is marketed for use. Often the developer must
address issues or answer follow-up questions
before the drug is approved.
Step 5: FDA Post-Market Safety Marketing
Once the drug has been approved by the FDA it is
closely monitored as it proceeds to market. If the
developer wishes to make any significant changes
it must first gain approval from the FDA via a
supplemental application. The marketing and use
of the drugs are closely monitored by the FDA for
the lifetime for of the drug and FDA is working to
increase efficiency in active surveillance in order
to monitor products in real time.
The strict guidelines and lengthy approval process
makes developing and testing new products highly
capital intensive. As a result, any drugs dropped at
any point during the pipeline can lead to large
losses for the developing firm. This risk shows the
importance of thoroughly conducting early testing.
The lengthy time horizon for developing new
products leads to risk of diminishing revenues as
existing patents expire if new drugs are not
completed and approved. These factors indicate
that it is critical for firms to utilize their capital to
maintain a strong pipeline of drugs to maintain
potential for future revenues.
Industry Developments and Trends FDA approval rates
In 2014 the FDA approved 44 new drugs, up from
27 in 2013 and the highest number since 1996’s
record 53 approvals. So far in 2015 the drug
approval rate has surged 89% from just 50% in
2008. The drugs approved in 2014 spanned 10
different therapeutic areas, up from 8 in 2013. The
Fed has indicated they believe the trend of
increasing drug approvals will continue as firms
continue to develop treatments for critical
diseases19. The following chart demonstrates the
increasing FDA approval ratings from 2008 to 2015.
Source: The Drug Development Process
This higher approval rating and wider variety of
diseases being treated is indicative of more drugs
making it from the discovery and testing phases to
the revenue generating phase. This surge in FDA
approvals is accompanied by technological advances
and innovation leading to faster and cheaper R&D
processes. This trend in approvals leads to a positive
10
outlook for biotechnology and pharmaceutical
firms because the increase in FDA approval rates
means increasing products for sale and therefore
higher revenue opportunities. One issue brought
on by increasing approval rates is the question of
standards. As drugs continue to be approved more
quickly are standards being lowered on safety and
effectiveness? As the trend continues in the coming
years it will be critical for Gilead to guard against
this by following internal standards to avoid recalls
or potential lawsuits for ineffective or dangerous
products.
M&A and Dividends Large cap biotech firms have recently experienced
increased cash flows needed to acquire firms and
pay dividends to investors14. Large pharmaceutical
firms look at M&A as a tool to expand their
pipeline and acquire new drugs to replace losses
stemming from expiring or non-issued patents. For
smaller biotechnology firms M&A exists as a viable
exit strategy when expanded production
capabilities are needed to earn profits15. The
following table provides information concerning
recent M&A activity both concerning the number
and size of transactions.
Source: Factset
IPOs After a substantial drop off in 2008 and 2009 the
IPO market for biotechnology companies globally
has begun to recover, reaching a record number
of 63 IPOs in 2014 with the US16. Though the
boom has slowed slightly in 2015, the trend is
expected to remain intact for the foreseeable
future. According to Portfolio Manager David
Miller, the main factor contributing to the upward
trend in IPOs is increasing investor interest in
biotech and pharmaceutical companies due to the
FDA’s increasing regulatory reasonability and
scientific advances17.
Priority Review Vouchers “Priority review vouchers” issued by the FDA as
rewards for developing drugs for pediatric
conditions or tropical diseases. The vouchers are
intended to encourage more research in
underfunded diseases and are received when the
FDA approves a drug falling in this category and
can be redeemed to speed FDA consideration from
the standard ten months to six months for any
subsequent drug for any disease18.
The vouchers can be sold for profit in a secondary
market. Gilead was the first company to purchase
a tropical disease voucher in November 2014 from
Canadian pharmaceutical company Knight
Therapeutics19. As the price continues to rise,
vouchers criticized because funding is being
directed towards the vouchers instead of
developing other important treatments further.
The vouchers create a competitive advantages for
firms developing drugs that would not otherwise
be eligible for expedited review helping companies
gain approval for drugs before rival firms
developing similar treatments.
Economic Analysis Demography
The aging of the US and world populations has had a significant impact on healthcare spending. By 2050, for the first time in human history, the world population over 65 –also known as the Silver
Generation– will outnumber those under 1420. As the average age of the world population rises, healthcare spending increases in response to increasing health complications accompanying age, specifically cardiovascular disease and
cancer21,22. As a result, demand for Gilead’s
cardiovascular and oncology related drugs will increase as global aging continues, signifying potential for continued future growth in revenues from drugs such as Zydelig and Renexa. The increase in risk of infection caused by age will also increase Gilead’s sales, but is a less significant influence.
M&A Transaction Value Analysis
Number of Deals
Transaction Value
Average
LTM '15
Multiple
s Transaction Value
1000+
LTM '15
4
LTM '14 % Change
2 100.0
LTM '15
45,623.9
LTM '14 % Change
25,922.0 76.0
EV / Sales
461.4
EV / EBITDA
-115.
6 500 to 999.9
250 to 499.9
2
4
5 -60.0
1 300.0
1,627.3
1,494.7
3,266.4 -50.2
255.0 486.2
22.0
2,076.1
-29.9
-13.5 100 to 249.9
50 to 99.9
7
3
4 75.0
1 200.0
1,218.1
171.8
588.6 106.9
83.6 105.5
14.3
4.8
-8.7
-9.2
25 to 49.9
10 to 24.9 --
5 2 150.0
2 -- --
192.3 60.3 219.0
23.0 --
--
1.6
--
0.5
Under 10
Undisclosed Value
5
27
13 -61.5
24 12.5 --
25.6
--
42.4 -39.6 --
-- --
--
--
11
Source: Bank of America Merrill Lynch
As populations in developing countries grow and
the spread of diseases such as HIV and Hepatitis
continue, companies such as Gilead are pressured
to decrease the cost of viral therapies to be sold
abroad. Currently, Gilead works with regional
business partners and generic licensing partners to
produce and distribute drugs used for HIV
treatment at a steeply discounted price in low- and
middle-income countries. These discounted prices
and the distribution of generic drugs produces little
to no profit for Gilead. As the demand for these
steeply discounted treatments in developing
countries grows, Gilead will be pushed to continue
its supply, potentially harming future potential
profits if the price is pushed below the cost of
production23.
Government Legislation The Affordable Care Act (ACA), passed in 2010,
continues to have a significant impact on the
economic landscape surrounding the Healthcare
sector. Increased costs introduced with the Act are
offset by the cash flows provided by newly insured
consumers24. As the number of insured Americans
increases, healthcare spending as a percent of GDP
is on the rise. Insured consumers are more likely to
opt into elective procedures and seek medical
attention when ill. As access to healthcare
increases, the demand for drugs will grow, leading
to increased revenues for companies such as
Gilead. The chart below shows the effect ACA has
had on healthcare spending as a percent of GDP for
both historical and forecasted years.
Source: The American Spectator
The Cadillac Tax, beginning in 2018, will counteract
a portion of the increased healthcare spending
resulting from increased insurance coverage. The
Cadillac Tax is a tax of “40% of the cost of health
coverage that exceeds the predetermined
threshold amounts.”25 The tax is intended to
decrease employee and employer excess
healthcare spending and help to finance the
expanded insurance coverage brought about by
the Affordable Care Act. The tax will have a direct
negative impact on elective healthcare spending,
while helping to fund the increase in healthcare
spending due to expanded healthcare insurance.
This tax will increase Gilead revenues by positively
affecting the ability of Americans to afford
necessary treatments.
Exchange Rates Though a majority of Gilead’s revenues result from
sales within the US, approximately 26% of 2014
revenues came from sales outside the United
States, mainly with Germany and the UK33.
According to Gilead’s management, “currency
fluctuations and hedging expenses may cause our
earnings to fluctuate” which, in turn, could
adversely affect Gilead’s stock price3. Because
Gilead is a net receiver of foreign currencies, most
significantly the Euro, when the US dollar
strengthens the relative value of sales is adversely
affected, while when the US dollar weakens, the
relative value of sales increases. Gilead hedges a
percent of forecasted international sales using
foreign currency exchange forward and option
contracts, focusing mostly on the Euro3. Though
the hedging reduces Gilead’s exposure to currency
fluctuations, it does not eliminate risk. Hedging
12
expenses associated with these activities can also
lead to fluctuations in earnings and downward
pressure on the stock price.
Since 2011, the percent of Gilead revenues
originating from sales outside the US has declined,
therefore lessening their exposure to risk
associated with currency fluctuations33. Overall,
currency risk will continue to affect Gilead, but
hedging attempts and the recent decline in
international sales serve as buffers between Gilead
and negative shifts in the strength of the US dollar.
Interest Rates Biopharmaceutical companies require substantial
capital for both operating activities and investing in
expansion, as a result, interest rates are critical to
financing decisions26. The Fed officials have
confirmed an approaching slow increase in interest
rates with target projections for 2015 year-end
stand at 0.625% while 2016 and 2017 year-end are
1.625% and 2.875% respectively27. Under the
current low rates, companies have been carrying
substantial amounts of debt on their balance sheet
comprised of both variable- and fixed- rate loans26.
The recent refinancing and substantial increase in
Gilead’s Senior Unsecured debt in September 2015
is likely a response to the looming increase in rates.
Assuming large amounts of debt under the current
low rates will enable Gilead to avoid raising capital
under the increased rates in the future. Overall, as
shown in the chart below, since 2009 the amount
of debt issued to healthcare companies has grown
steadily.
Source: Market Realist
Capital Markets Outlook The increased spending caused by growing access
and demand for healthcare is leading to increased
revenues and cash inflows for biotechnology firms.
This increased access to cash promotes firm’s ability
to invest in new technology and projects. The
healthcare sector as a whole is positioned to
outperform the market in the future. Two key
components to this success are the record high M&A
activity and the projected continued increases in
consumer healthcare spending28.
Valuation Revenue growth
We modeled product sales of $31.8 million for 2015 after examining the third quarter 10Q data. Average consensus for Gilead’s revenues is $32,147 million in 2015 and $31,263 in 2016. Our 2016 revenue increases in 2016 on the expectation that the TAF therapies are approved and drive sales upward in the HBV or the oncology markets.
Genvoya—a tenofovir alafenamide (TAF) therapy— was approved by the U.S. FDA for HIV-1 infection treatment on November 5, 2015. TAF has demonstrated high antiviral efficacy and an improved renal and bone safety profile when compared to the tenofovir disoproxil fumarate (TDF) making up Gilead’s Viread and Stribild. Production and marketing will be delayed for 2016, so new sales of Genvoya were estimated to be 180%. This drug would cannibalize sales of Viread and Stribild as the new drug has a higher efficacy at 1/10th the dosage.
Harvoni has a high cure rate (96-99%) after a brief period—8, 12, or 24 weeks. Growth could come from increasing the price of the treatment or from patients switching subscriptions. Harvoni is currently available for $1,125-per-pill. Political and health insurance backlash over current prices means that prices will likely not increase. The model reflects positive growth for Harvoni because it can be used by patient with genotype 1, 4, 5, and 6 HCV, treatment-experienced patients, and those with HCV co-infected with HIV, which makes up to 30% of
those in the U.S. infected with HIV29.
Solvadi is currently priced at $1,000-per-pill and is only for treatments for patients with genotype 1 HCV, so we expected growth to level out and modestly decline over time.
As drugs come off patent, the growth yoy will be minimal or negative as doctors will be less
13
likely to prescribe a name brand when a less expensive generic version will be more available shortly. Additionally, there are only so many patients that will be first-time treatment seekers, so newer more effective or safer drugs will be pushed over older medicines.
Profit Margins
SG&A: Management expects SG&A to increase from 2014 to support its expansion into the European and Asian markets—specifically Japan. Using management guidance, historical trends, and third quarter data, we forecasted SG&A as a percentage of sales.
COGS: We forecasted as an average of historical percent of sales. There was no additional guidance from management.
R&D: Higher expenses were forecasted because an increased number of drug candidates are expected to progress through the pipeline in the forecasted years.
Other Key Assumptions
Debt: In September 2015, Gilead issued notes in a total aggregate principal amount of $10.0 billion. We believe this action is an anomaly in part to take advantage of the low interest rate environment and will be corrected over the remaining forecast period.
Dividends: On February 15, 2015, Gilead’s board announced its intent to begin a dividend program. The dividends have been declared for the last three quarters. We forecasted the dividend to grow conservatively at 1.25%. There was no management guidance on dividend growth and other biotechnology companies paying dividends that are significantly higher and therefore susceptible to revenue fluctuations.
Share repurchases: We forecasted the number of share repurchased following management’s guidance. Management indicated that the $3 billion remainder of the $5 billion repurchase program authorized in 2014 would be completed in 2015 followed by the initiation of a $15 billion 5-year repurchase program.
Normal cash: We forecasted normal cash as a percentage of sales using the minimum value from the 5-year historical common size balance sheet.
WACC: o Cost of debt: Yield to maturity taken from
Morningstar on Gilead’s debt maturing in 2046, issued September 2015.
o Beta: We calculated beta used for the WACC calculation by averaging six betas retrieved from Bloomberg. These betas were calculated using weekly and monthly data between a one year and five year horizon.
o Equity risk premium: Calculated by adjusting Damodaran’s estimated equity risk premium. Adjustments replaced the 10-year
Treasury rate with the 30-year Treasury rate to match the time horizon used for the risk free rate.
Earnings Results
Our expected EPS for FY2015 is $8.98, which falls
below the analyst estimated range of $11.78-
$12.55. We are at the higher end of the projected
revenue range indicating that our lower estimate
likely stems from conservative forecasted share
repurchases or high forecasted expenses.
Model Results We expect Gilead’s share price to range from $140-
$145. This is based primarily on our DCF model.
Analyst’s estimates range from $111-$143, so we
are on the higher end of the range. We attribute
this mainly to our assumption that the HCV
revenues will continue to grow in the future due to
new therapies replacing those coming off patent
and the efficacy of the marketed drugs. Sensitivity
analysis suggests that the price could be as high as
$181.71 at the same equity risk premium and a 3%
CV growth rate of NOPLAT. The range for CV growth
rate of NOPLAT is typically 2%-4% instead of the
1.25% we used.
DCF
Based on our discounted cash flow and economic
profit models, we have a target price of $143.52.
The share price was driven by revenue growth
allowed by a strong pipeline of new drugs and
patent protection of current marketed drugs.
DDM
The DDM model produced a price of $105.73,
which falls outside of the analyst estimates. We
believe that this low price results from
unpredictable dividend growth. Our conservative
dividends result in a low DDM valuation that we
discounted when issuing our target price and
recommendation.
Relative Valuation
We compared Gilead to six comparable
14
biotechnology and pharmaceutical companies.
Our relative P/E model gives us a price of $187.98.
This high value stems from a high average P/E of
21.2 for the comparable companies versus
Gilead’s 11.5. Gilead’s low P/E ratio indicates the
stock is undervalued based on forecasted
earnings. Our EV/EBITDA model produced a price
of $174.09, which also falls outside of analyst
projections.
Catalysts for Growth/Change Eleclazine: A stage 3 drug that has indications to
treat Long QT syndrome—a genetic and rare heart
condition. Acceptance of this drug would provide
Gilead revenue streams from the growing
cardiovascular/blood therapeutic category.
Oncology: Cancer therapies are expected to
increase sales revenue by 47.4% by 2023. Since
Gilead has been investing in developing six drugs
related to cancer treatment, it is positioned to
capitalize on this expected industry trend.
Biosimilar drugs: Provide companies who offer a
discount for drugs with very similar chemical
structures to the premium pharmaceuticals. This
will threaten the
$500 billion in sales from companies like Pfizer,
AbbVie, and Merck who depend on patent-
protected drugs. This new class of drugs will be
favored by healthcare watch groups, health
insurers, and global governments looking to cut
healthcare costs that have strained government
healthcare systems and coverage. Gilead will see
revenues decrease in its core markets, but will not
be greatly impacted on emerging market sales.
TAF: Two NDAs and marketing authorization
applications for TAF-based regimens for HIV
treatment could lead to approval of two new single
tablet regimen drugs in next six months in addition
to the recently approved Genvoya. These drugs will
show more favorable renal and bone safety for the
increasing number of older patients.
Debt: The low interest rate environment has
enabled firms to take on large amounts of debt at
low cost.
With access to low-cost capital firms are able to
increase investments into technology and research
enabling firms to promote future growth.
Key Investment Positives or Negatives Products in late stage approval: There are seven
drugs in Phase III and three in pre-registration. The
disease targets addressed by the pharmaceuticals
include three for HIV/AIDS, two for liver diseases,
four for oncology, and one for cardiovascular
conditions. Results have been positive for other
Phase II drugs, which suggests a strong pipeline in
the future29.
Cash: Gilead has $12.261 billion and has used it to
not only reinvest in the company but also to return
cash to the shareholders with dividends and share
repurchases. Dividends paid out were $633 million
and $5.349 billion in shares were repurchased.
Hepatitis C: As discussed previously, Gilead’s
development of Sovaldi and Harvoni, treatments
for Hepatitis C, has provided a significant
advantage in generating revenues. However,
Gilead announced earlier this year the substantial
revenues stemming from sales of these drugs will
likely be diminished in 2015 due to significant
discounts necessary for Gilead to compete with
competitor AbbVie Inc.’s deep discounts provided
on a recently developed treatment.
Pricing Pressure: After Hillary Clinton tweeted out
about biotechnology price gouging, the
biotechnology stocks plunged. The public, the
government and health insurers are demanding
lower prices and access to company information
on its pricing. There will be no change until after
the conclusion of the U.S. election cycle in the late
part of 2016. If insurance companies prevent
patients from accessing treatments such as
Harvoni, Genvoya or Sovoldi, Gilead will be heavily
impacted as much of the revenue comes not from
the many patients in the emerging markets but
rather the patients in the U.S.
Reliance on Distributors: Gilead's significant reliance
on three independent distributors for 63%2 of its
total revenue presents a weakness that could cause
issues in the future. If labor standstills or other
operating disruptions arise with any of these three
major partners, Gilead could face problems with its
ability to sell and deliver products to customers as
the wholesalers represent a major pipeline for
Gilead’s revenues.
15
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2015-04-20
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16
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Important Disclaimer This report was created by students enrolled in the Security
Analysis (6F:112) class at the University of Iowa. The report
was originally created to offer an internal investment
recommendation for the University of Iowa Krause Fund and its
advisory board. The report also provides potential employers
and other interested parties an example of the students’ skills,
knowledge and abilities. Members of the Krause Fund are not
registered investment advisors, brokers or officially licensed
financial professionals. The investment advice contained in this
report does not represent an offer or solicitation to buy or sell
any of the securities mentioned. 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 Krause
Fund may hold a financial interest in the companies mentioned
in this report.
17
Gilead Sciences, Inc.
Revenue Decomposition
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E CV (2019)
Antiviral Products (U.S. Patent Exp): HIV/AIDS
Atripla (2021) 3,574.0 3,648.0 3,470.0 3,175.05 3,238.55 3,303.32 3,369.39 3,436.78
Growth 10.8% 2.1% -4.9% -8.5% 2.0% 2.0% 2.0% 2.0%
Truvada (2021) 3,181.0 3,136.0 3,340.0 3,456.90 3,474.18 3,439.44 3,370.65 3,368.97
Growth 10.6% -1.4% 6.5% 3.5% 0.5% -1.0% -2.0% -0.1%
Emtriva (2021) - - - - - - - -
Growth - - - - - - - -
Viread (2018) 849.0 959.0 1,058.0 1,139.47 1,162.26 1,173.88 1,115.18 1,081.73
Growth 15.1% 13.0% 10.3% 7.7% 2.0% 1.0% -5.0% -3.0%
Complere/Eviplera (2023) 342.0 810.0 1,228.0 1,473.60 1,503.07 1,533.13 1,563.80 1,595.07
Growth 782.6% 136.8% 51.6% 20.0% 2.0% 2.0% 2.0% 2.0%
Stribild (2029) 58.0 539.0 1,197.0 1,556.10 1,789.52 1,861.10 1,898.32 1,897.37
Growth 829.3% 122.1% 30.0% 15.0% 4.0% 2.0% -0.1%
Genvoya-Future - - - - 200.00 600.00 900.00 1,125.00
Growth 200.0% 50.0% 25.0%
HBV
Hepsera (2014) - - - - - - - -
Growth - - - - - - - -
HCV
Sovaldi (2029) - 139.0 10,283.0 4,113.20 4,257.16 4,342.31 4,385.73 4,517.30
Growth 7297.8% -60.0% 3.5% 2.0% 1.0% 3.0%
Harvoni (2030) - - 2,127.0 14,569.95 15,079.90 15,306.10 15,382.63 15,459.54
Growth 585.0% 3.5% 1.5% 0.5% 0.5%
Other antiviral 138.0 111.0 88.0 74.80 73.30 71.84 70.40 68.99
Growth -20% -21% -15.0% -2.0% -2.0% -2.0% -2.0%
Total Antiviral Sales $ 8,142 $ 9,342 $ 22,791 $ 29,559 $ 30,778 $ 31,631 $ 32,056 $ 32,551
Antiviral Growth 15.49% 14.74% 143.96% 29.70% 4.12% 2.77% 1.34% 1.54% Other Products:
Oncology
Letairis (2018) 410.0 520.0 595.0 743.75 766.06 781.38 785.29 769.58
Growth 39.7% 26.8% 14.4% 25.0% 3.0% 2.0% 0.5% -2.0%
Ranexa (2019) 373.0 449.0 510.0 586.50 598.23 607.20 613.28 616.34
Growth 16.6% 20.4% 13.6% 15.0% 2.0% 1.5% 1.0% 0.5%
Cardiovascular
Zydelig (2025) - - 23.0 26.91 29.06 30.52 31.74 32.37
Growth 17.0% 8.0% 5.0% 4.0% 2.0%
Other
AmBisome (2016) 346.0 352.0 388.0 376.36 378.24 370.68 359.56 355.96
Growth 4.8% 1.7% 10.2% -3.0% 0.5% -2.0% -3.0% -1.0%
Other 127.0 141.0 167.0 181.20 186.63 192.23 196.07 200.00
Growth 16.5% 11.0% 18.4% 8.5% 3.0% 3.0% 2.0% 2.0%
Total Other Sales 1,256.0 1,462.0 1,683.0 1,914.72 1,958.23 1,982.01 1,985.93 1,974.25
Total Product Sales $ 9,398 $ 10,804 $ 24,474 $ 31,474 $ 32,736 $ 33,613 $ 34,042 $ 34,525
Total Sales Growth 16% 15% 127% 28.6% 4.0% 2.7% 1.3% 1.4%
18
Gilead Sciences, Inc.
Income Statement
(in millions, except earnings per share)
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E CV (2019)
Product sales 9,398 10,804 24,474 31,474 32,736 33,613 34,042 34,525
Royalty, contract and other revenues 304 398 416 447 481 517 556 597
Total revenues 9,702 11,202 24,890 31,921 33,217 34,130 34,598 35,122
Cost of goods sold (2,388) (2,756) (3,663) (6,208) (6,457) (6,630) (6,715) (6,810)
Depreciation expense (83) (103) (125) (254) (315) (384) (463) (555)
Amortization Expense (195) (242) (925) (826) (832) (846) (853) (741)
Research and development expenses (1,760) (2,120) (2,854) (3,398) (3,535) (3,629) (3,676) (3,728)
Selling, general and administrative expenses (1,461) (1,699) (2,983) (3,312) (3,445) (3,537) (3,583) (3,633)
Operating Income/Loss 4,010 4,524 15,265 17,922 18,633 19,103 19,308 19,655
Interest expense (361) (307) (412) (569) (1,046) (986) (866) (751)
Other income / expense, net (37) (9) 3 (47) (49) (50) (51) (52)
Income before provision for income taxes 3,612 4,208 14,856 17,306 17,538 18,066 18,391 18,853
Provision for income taxes (1,038) (1,151) (2,797) (4,249) (4,306) (4,435) (4,515) (4,628)
Net income / loss 2,574 3,057 12,059 13,057 13,233 13,631 13,876 14,224
Net loss / income attributable to noncontrolling interest 18 18 42 35 37 39 41 43
Net income attributable to Gilead 2,592 3,075 12,101 13,093 13,270 13,670 13,917 14,267
Basic EPS 1.71 2.01 7.95 8.88 9.11 9.47 9.74 10.14
# Shares Outstanding (as of February) 1,515 1,529 1,522 1,474 1,457 1,443 1,428 1,407
Divs. per share - - - 1.72 1.74 1.76 1.79 1.81
Dividends Paid - - - 2,535 2,538 2,544 2,550 2,544
19
Gilead Sciences, Inc.
Balance Sheet
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E CV (2019)
Cash and cash equivalents 1,804 2,113 10,027 28,498 35,507 41,536 47,784 56,596 Short-term marketable securities 59 19 101 101 101 101 101 101
Accounts receivable, net 1,751 2,182 4,635 6,373 6,632 6,814 6,907 7,012
Inventories 1,745 1,697 1,386 2,554 2,657 2,730 2,768 2,810
Deferred tax assets 263 331 508 606 706 809 913 1,020
Prepaid taxes 348 398 391 322 322 322 322 322
Prepaid expenses 102 166 194 339 353 363 368 373 Other current assets 84 91 472 418 435 447 454 460
Total current assets 6,156 6,997 17,714 39,212 46,714 53,122 59,617 68,695
Property, plant and equipment, net 1,100 1,166 1,674 2,076 2,532 3,056 3,660 4,361
Long-term portion of prepaid royalties 176 199 466 244 244 244 244 244
Long-term deferred tax assets 131 190 236 283 331 380 430 481
Long-term marketable securities 720 439 1,598 1,630 1,663 1,697 1,731 1,766
Intangible assets, net 11,736 11,900 11,073 10,690 10,286 9,851 9,392 9,027
Goodwill 1,061 1,169 1,172 1,172 1,172 1,172 1,172 1,172
Other long-term assets 159 519 731 856 891 915 928 942
Total assets $ 21,240 $ 22,579 $ 34,664 56,163 63,832 70,436 77,174 86,688
Liabilities and Stockholders Equity
Current liabilities:
Accounts payable 1,327 1,256 955 3,397 3,535 3,632 3,682 3,738
Accrued government and other rebates 745 1,018 2,316 3,009 3,172 3,302 3,391 3,487
Accrued compensation and employee benefits 205 243 316 605 629 647 655 665
Income taxes payable 13 11 105 93 94 97 98 101
Other accrued liabilities 675 1,071 1,452 2,137 2,224 2,285 2,316 2,352
Deferred revenues 103 111 134 305 318 326 331 336
Dividends Payable - - - 634 634 636 637 636
Current portion of long-term debt and other obligations, net 1,169 2,697 483 993 1,819 1,643 1,438 1,246
Total current liabilities 4,238 6,407 5,761 11,173 12,425 12,567 12,549 12,560
Long-term debt, net 7,055 3,939 11,921 21,831 19,714 17,258 14,946.61 15,275
Long-term income taxes payable 116 162 562 608 616 634 646 662
Long-term deferred tax liabilities 10 83 51 116 183 251 321 392
Other long-term obligations excluding long-term deferred tax liabilities 271 179 535 696 724 744 754 766
Equity component of currently redeemable convertible notes 7 64 15 9 5 3 2 1
Stockholders' equity
Common stock & Additional paid-in Capital 5,644 5,388 2,393 2,685 2,978 3,270 3,504 3,504
Common Stock, Treasury - - - (6,000) (9,000) (12,000) (15,000) (18,000)
Accumulated other comprehensive income / loss (46) (124) 301 301 301 301 301 301
Retained earnings / accumulated deficit 3,705 6,106 12,732 23,888 34,584 45,672 57,000 68,679
Total Gilead stockholders' equity 9,303 11,370 15,426 20,875 28,862 37,243 45,805 54,484
Noncontrolling interest 241 375 393 412 432 452 474 497
Total stockholders’ equity 9,544 11,745 15,819 21,286 29,294 37,696 46,279 54,981 Total liabilities and stockholders’ equity $ 21,240 $ 22,579 $ 34,664 55,720 62,961 69,154 75,498 84,636
20
Gilead Sciences, Inc.
Cash Flow Statement
Fiscal Years Ending Dec. 31 2012 2013 2014
Net income / loss 2,574 3,057 12,059
Depreciation and Amortization expense 83 103 125
Stock-based compensation expense 209 252 360
Excess tax benefits from stock-based compensation (114) (279) (482)
Tax benefits from exercise and vesting of stock-based awards 113 285 484
Deferred income taxes (39) (98) (236)
Change in fair value of contingent consideration 69 59 22
Other (3) 46 79
Changes in operating assets and liabilities
Accounts receivable, net 198 (315) (2,578)
Inventories (350) (343) 143
Prepaid expenses and other assets (129) (170) (371)
Accounts payable 117 (98) (289)
Income taxes payable (68) 30 533
Accrued liabilities 396 312 2,013
Deferred revenues 23 22 31
Net cash provided by operating activities 3,195 3,105 12,818
Investing Activities
Purchases of marketable securities (1,245) (257) (2,107)
Proceeds from sales of marketable securities 528 494 807
Proceeds from maturities of marketable securities 45 78 52
Other investments (25) - (18)
Acquisitions, net of cash acquired (10,752) (379) -
Capital expenditures (397) (190) (557)
Net cash used in / provided by investing activities (11,846) (254) (1,823)
Financing Activities
Proceeds from debt financing, net of issuance costs 2,144 - 7,932
Proceeds from convertible note hedges 214 2,774 2,543
Purchases of convertible note hedges - - (26)
Repayments of debt and other obligations (1,839) (4,440) (4,779)
Payments to settle warrants - (1,040) (4,093)
Proceeds from issuances of common stock 466 313 331
Repurchases of common stock (667) (582) (5,349)
Payment of dividend - - -
Excess tax benefits from stock-based compensation 114 279 482
Payment of contingent consideration - - (101)
Net distributions to / contributions from noncontrolling interest 131 152 35
Net cash provided by / used in financing activities 563 (2,544) (3,025)
Effect of exchange rate changes on cash and cash equivalents 8 2 (56)
Net change in cash and cash equivalents (8,080) 309 7,914
Cash and cash equivalents at beginning of period 9,884 1,804 2,113
Cash and cash equivalents at end of period 1,804 2,113 10,027
Supplemental disclosure - - -
Interest paid, net of amounts capitalized (249) (238) (330)
Income taxes paid (1,101) (1,051) (2,060)
21
Gilead Sciences, Inc.
Cash Flow Statement
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E CV (2019)
Net income / loss 13,057 13,233 13,631 13,876 14,224
Adjustments
Depreciation 254 315 384 463 555
Amortization 826 832 846 853 741
Change in accounts receivable, net (1,738) (259) (182) (93) (105)
Change in inventories (1,168) (104) (73) (37) (42)
Change in prepaid taxes 69 - - - -
Change in prepaid expenses (145) (14) (10) (5) (6)
Change in other current assets 54 (17) (12) (6) (7)
Change in deferred tax assets (98) (100) (103) (104) (107)
Change in long-term deferred tax asset (47) (48) (49) (50) (51)
Change in long-term deferred tax liability 65 66 68 70 71
Change in accounts payable 2,442 138 97 50 56
Change in accrued government and other rebates 693 163 130 89 96
Change in accrued compensation and employee benefits 289 25 17 9 10
Change in current income taxes payable (12) 1 3 2 2
Change in long-term income taxes payable 46 8 19 11 16
Change in other accrued liabilities 685 87 61 31 35
Change in deferred revenues 171 12 9 4 5
Change in dividends payable 634 1 2 1 (1)
Change in other long-term obligations 161 28 20 10 11
Net cash provided by operating activities 16,237 14,368 14,857 15,174 15,505
Investing Activities
Purchase/Sale current marketable securities (0) (0) (0) (0) (0)
Purchase/Sale long-term marketable securities (32) (33) (34) (34) (35)
Capital Expenditures (gross) (655) (771) (907) (1,068) (1,256)
Change in other long-term assets (125) (35) (24) (13) (14)
Change in long-term portion of pre-paid royalties 222 - - - -
Equity component of currently redeemable convertible notes (6) (4) (2) (1) (1)
Net cash used in / provided by investing activities (596) (842) (968) (1,116) (1,306)
Financing Activities
Payment of Dividends (1,901) (2,537) (2,542) (2,548) (2,545)
Change in long-term debt, net 9,910 (2,117) (2,455) (2,312) 328
Changes in current portion of LT debt 510 826 (176) (205) (193)
Repurchases of common stock (6,000) (3,000) (3,000) (3,000) (3,000)
Common stock and APIC 292 292 292 234 -
Change in non-controlling interests 19 20 21 22 23
Net cash provided by / used in financing activities 2,830 (6,517) (7,861) (7,809) (5,387)
Net change in cash and cash equivalents
18,471
7,009
6,029
6,249
8,812
Cash and cash equivalents at beginning of period 10,027 28,498 35,507 41,536 47,784
Cash and cash equivalents at end of period 28,498 35,507 41,536 47,784 56,596
22
Gilead Sciences, Inc.
Common Size Income Statement
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E CV (2019)
Product sales 96.87% 96.45% 98.33% 98.60% 98.55% 98.49% 98.39% 98.30% Royalty, contract and other revenues 3.13% 3.55% 1.67% 1.40% 1.45% 1.51% 1.61% 1.70%
Total revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of goods sold -24.61% -24.60% -14.72% -19.45% -19.44% -19.43% -19.41% -19.39%
Depreciation expense -0.86% -0.92% -0.50% -0.79% -0.95% -1.12% -1.34% -1.58%
Amortization expense -2.01% -2.16% -3.72% -2.59% -2.50% -2.48% -2.47% -2.11%
Research and development expenses -18.14% -18.93% -11.47% -10.65% -10.64% -10.63% -10.62% -10.61%
Selling, general and administrative expenses -15.06% -15.17% -11.98% -10.38% -10.37% -10.36% -10.35% -10.34%
Operating Income/Loss 41.33% 40.39% 61.33% 56.15% 56.09% 55.97% 55.81% 55.96% Interest expense -3.72% -2.74% -1.66% -1.78% -3.15% -2.89% -2.50% -2.14%
Other income / expense, net -0.38% -0.08% 0.01% -0.15% -0.15% -0.15% -0.15% -0.15%
Income before provision for income taxes 37.23% 37.56% 59.69% 54.22% 52.80% 52.93% 53.16% 53.68%
Provision for income taxes -10.70% -10.27% -11.24% -13.31% -12.96% -13.00% -13.05% -13.18%
Net income / loss 26.53% 27.29% 48.45% 40.91% 39.84% 39.94% 40.11% 40.50%
Net loss / income attributable to noncontrolling interest 0.19% 0.16% 0.17% 0.11% 0.11% 0.11% 0.12% 0.12%
Net income attributable to Gilead 26.72% 27.45% 48.62% 41.02% 39.95% 40.05% 40.22% 40.62%
23
Gilead Sciences, Inc.
Common Size Balance Sheet Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E CV (2019)
Cash and cash equivalents 18.59% 18.86% 40.29% 89.28% 106.89% 121.70% 138.11% 161.14% Short-term marketable securities 0.60% 0.17% 0.41% 0.32% 0.30% 0.30% 0.29% 0.29%
Accounts receivable, net 18.05% 19.48% 18.62% 19.96% 19.96% 19.96% 19.96% 19.96%
Inventories 17.99% 15.15% 5.57% 8.00% 8.00% 8.00% 8.00% 8.00%
Deferred tax assets 2.71% 2.95% 2.04% 1.90% 2.13% 2.37% 2.64% 2.90%
Prepaid taxes 3.59% 3.55% 1.57% 1.01% 0.97% 0.94% 0.93% 0.92%
Prepaid expenses 1.06% 1.48% 0.78% 1.06% 1.06% 1.06% 1.06% 1.06%
Other current assets 0.87% 0.81% 1.90% 1.31% 1.31% 1.31% 1.31% 1.31%
Total current assets 63.45% 62.46% 71.17% 122.84% 140.63% 155.65% 172.32% 195.59%
Property, plant and equipment, net 11.34% 10.41% 6.73% 6.50% 7.62% 8.95% 10.58% 12.42%
Long-term portion of prepaid royalties 1.81% 1.78% 1.87% 0.76% 0.73% 0.71% 0.70% 0.69%
Long-term deferred tax assets 1.35% 1.70% 0.95% 0.89% 1.00% 1.11% 1.24% 1.37%
Long-term marketable securities 7.42% 3.92% 6.42% 5.11% 5.01% 4.97% 5.00% 5.03%
Intangible assets, net 120.97% 106.23% 44.49% 33.49% 30.96% 28.86% 27.15% 25.70%
Goodwill 10.94% 10.44% 4.71% 3.67% 3.53% 3.43% 3.39% 3.34%
Other long-term assets 1.64% 4.63% 2.94% 2.68% 2.68% 2.68% 2.68% 2.68%
Total assets 218.92% 201.56% 139.27% 175.94% 192.17% 206.38% 223.06% 246.82% Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable 13.68% 11.21% 3.84% 10.64% 10.64% 10.64% 10.64% 10.64%
Accrued government and other rebates 7.68% 9.09% 9.30% 9.43% 9.55% 9.67% 9.80% 9.93%
Accrued compensation and employee benefits 2.11% 2.17% 1.27% 1.89% 1.89% 1.89% 1.89% 1.89%
Income taxes payable 0.14% 0.10% 0.42% 0.29% 0.28% 0.28% 0.28% 0.29%
Other accrued liabilities 6.95% 9.56% 5.83% 6.70% 6.70% 6.70% 6.70% 6.70%
Deferred revenues 1.06% 0.99% 0.54% 0.96% 0.96% 0.96% 0.96% 0.96%
Dividends Payable 0.00% 0.00% 0.00% 1.99% 1.91% 1.86% 1.84% 1.81%
Current portion of long-term debt and other obligations, net 12.05% 24.08% 1.94% 3.11% 5.48% 4.81% 4.16% 3.55%
Total current liabilities 43.68% 57.20% 23.15% 35.00% 37.41% 36.82% 36.27% 35.76%
Long-term debt, net 72.71% 35.16% 47.89% 68.39% 59.35% 50.57% 43.20% 43.49%
Long-term income taxes payable 1.19% 1.45% 2.26% 1.90% 1.85% 1.86% 1.87% 1.88%
Long-term deferred tax liabilities 0.11% 0.74% 0.20% 0.36% 0.55% 0.74% 0.93% 1.12%
Other long-term obligations excluding long-term deferred tax liabilities 2.79% 1.60% 2.15% 2.18% 2.18% 2.18% 2.18% 2.18%
Equity component of currently redeemable convertible notes 0.07% 0.57% 0.06% 0.03% 0.02% 0.01% 0.01% 0.00% Stockholder's equity
Common stock & Additional paid-in Capital 58.17% 48.10% 9.61% 8.41% 8.96% 9.58% 10.13% 9.98%
Common Stock , Treasury Stock 0.00% 0.00% 0.00% -18.80% -27.09% -35.16% -43.36% -51.25%
Accumulated other comprehensive income / loss -0.47% -1.11% 1.21% 0.94% 0.91% 0.88% 0.87% 0.86%
Retained earnings / accumulated deficit 38.19% 54.51% 51.15% 74.84% 104.11% 133.82% 164.75% 195.54%
Total Gilead stockholders' equity 95.88% 101.50% 61.98% 65.39% 86.89% 109.12% 132.39% 155.13%
Noncontrolling interest 2.49% 3.35% 1.58% 1.29% 1.30% 1.33% 1.37% 1.41%
Total stockholders’ equity 98.37% 104.85% 63.56% 66.68% 88.19% 110.45% 133.76% 156.54%
Total liabilities and stockholders’ equity 218.92% 201.56% 139.27% 174.56% 189.55% 202.62% 218.22% 240.98%
24
Gilead Sciences, Inc.
Weighted Average Cost of Capital (WACC) Estimation
Equity
Beta 1.0215
Equity risk premium 5.72%
Cost of equity 8.71%
Share Price $102.57
Shares Outstanding 1,522
Market Capitalization $156,112
Debt
Pre-tax Cost of Debt 4.58%
Tax Rate 18.70%
After-tax Cost of Debt 3.72%
Market Value of Debt 12,419
Capitalized Operating Leases 258
Enterprise Value $168,788
Weight of Equity 92.49%
Weight of Debt 7.36%
WACC 8.33%
25
Gilead Sciences, Inc.
Value Driver Estimation
(in USD Millions)
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E CV (2019)
Net Sales $ 9,702 $ 11,202 $ 24,890 31,921 33,217 34,130 34,598 35,122
- Cost of Goods Sold (2,388) (2,756) (3,663) (6,208) (6,457) (6,630) (6,715) (6,810)
- SG&A Expense (1,461) (1,699) (2,983) (3,312) (3,445) (3,537) (3,583) (3,633)
-R&D expenses (1,760) (2,120) (2,854) (3,398) (3,535) (3,629) (3,676) (3,728)
-Depreciation (83) (103) (125) (254) (315) (384) (463) (555)
-Amortization (195) (242) (925) (826) (832) (846) (853) (741)
+ Implied Interest on Operating Leases 8 8 9 15 18 22 26 31
EBITA $ 3,823 $ 4,290 $ 14,349 17,937 18,651 19,124 19,334 19,686
Less: Adjusted Taxes
Provision for Income Taxes 1,038 1,151 2,797 4,249 4,306 4,435 4,515 4,628
+Tax Shield on Interest Expense 97 89 77 140 257 242 213 184
+Tax Shield on Implied Lease Interest 2 2 2 4 4 5 6 8
-Tax on non-operating Income (Loss) (10) (3) 1 (12) (12) (12) (13) (13)
Total Adjusted Taxes 1,128 1,240 2,876 4,380 4,555 4,670 4,721 4,807
Plus: Change in Deferred Taxes
Current Year Deferred Tax Liability 10 83 51 116 183 251 321 392
Current Year Deferred Tax Asset 394 521 744 889 1,037 1,189 1,343 1,501
Previous Year Deferred Tax Liability 10 83 51 116 183 251 321
Previous Year Deferred Tax Asset 352 394 521 744 889 1,037 1,189 1,343
Net Change in Deferred Taxes (31) (54) (255) (80) (81) (83) (85) (87)
NOPLAT 2,664 2,996 11,218 13,476 14,015 14,371 14,528 14,791
Operating Current Assets:
Normal Cash (lesser of actual or %)
206 241 1,145 3,645 3,793 3,898 3,951 4,011
Accounts Receivable, Net 1,751 2,182 4,635 6,373 6,632 6,814 6,907 7,012
Inventory 1,745 1,697 1,386 2,554 2,657 2,730 2,768 2,810
PPD Expenses 102 166 194 339 353 363 368 373
PPD Taxes 348 398 391 322 322 322 322 322
Other Current Assets 84 91 472 418 435 447 454 460
Operating Current Assets 4,237 4,775 8,223 13,652 14,193 14,574 14,770 14,989
Operating Current Liabilities:
Accounts Payable 1,327 1,256 955 3,397 3,535 3,632 3,682 3,738
Accrued government and other rebates 745 1,018 2,316 3,009 3,172 3,302 3,391 3,487
Accrued compensation and employee benefits 205 243 316 605 629 647 655 665
Income Taxes Payable 13 11 105 93 94 97 98 101
Other accrued liabilities excluding accrued royalties 675 1,071 1,452 2,137 2,224 2,285 2,316 2,352
Deferred revenues 103 111 134 305 318 326 331 336
Dividends Payable - - - 634 634 636 637 636
Operating Current Liabilities 3,068 3,710 5,278 10,180 10,606 10,925 11,111 11,314
Net Operating Working Capital 1,169 1,065 2,945 3,472 3,587 3,650 3,658 3,674
Plus: Net PPE 1,100 1,166 1,674 2,076 2,532 3,056 3,660 4,361
PV of Operating Leases 185 197 258 319 390 470 563 671
Net Intangible Assets 11,736 11,900 11,073 10,690 10,286 9,851 9,392 9,027
Long-term portion of prepaid royalties 176 199 466 244 244 244 244 244
Other long-term assets 159 519 731 856 891 915 928 942
Plus: Other Operating Assets 12,256 12,815 12,528 12,109 11,810 11,480 11,127 10,883
Other LT obligations exc. LT deferred tax liabilities 271 179 535 696 724 744 754 766
Less: Other Operating Liabilities 271 179 535 696 724 744 754 766
Invested Capital 14,254 14,867 16,612 16,961 17,204 17,441 17,691 18,153
Return on Invested Capital
NOPLAT 2,664 2,996 11,218 13,476 14,015 14,371 14,528 14,791
÷Beginning Invested Capital 4,773 14,254 14,867 16,612 16,961 17,204 17,441 17,691
ROIC 55.81% 21.02% 75.45% 81.13% 82.63% 83.53% 83.29% 83.61%
Economic Profit
Beginning Invested Capital 4,773 14,254 14,867 16,612 16,961 17,204 17,441 17,691
ROIC 55.81% 21.02% 75.45% 81.13% 82.63% 83.53% 83.29% 83.61%
WACC 8.33% 8.33% 8.33% 8.33% 8.33% 8.33% 8.33% 8.33%
EP=Beg. IC * (ROIC-WACC) 2,266 1,809 9,979 12,092 12,602 12,937 13,074 13,317
FCF
NOPLAT 2,664 2,996 11,218 13,476 14,015 14,371 14,528 14,791
Add: Beg IC 4,773 14,254 14,867 16,612 16,961 17,204 17,441 17,691
Less: Current IC 14,254 14,867 16,612 16,961 17,204 17,441 17,691 18,153
FCF (6,817) 2,384 9,473 13,127 13,772 14,134 14,278 14,329
26
Gilead Sciences, Inc.
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth 1.25% CV ROIC 84% WACC 8.33% Cost of Equity 8.71%
Discount Period 1 2 3 4 5
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E CV (2019)
DCF Model NOPLAT 13,476 14,015 14,371 14,528 14,791
FCF 13,127 13,772 14,134 14,278 14,329
CV (t=4) 205,689
CF to Discount 13,127 13,772 14,134 14,278 205,689
PV(CF) 12,117 11,734 11,117 10,366 149,334
Value of Operations 194,669
+Excess Cash 22,048
+Short-Term Marketable Securities 101 +Long-Term Marketable Securities 1,598 +Minority Intersts 35 -PV Operating Leases 258 -Short-Term Debt 483 -Long-Term Debt 11,921 -PV ESOP 3,225
Value of Equity 203,012 Shares Outstanding 1,522 Intrinsic Value of Stock 133.38
Fraction of Year Elapsed 0.877 Adjusted Stock Price (as of 11/16/2015) 143.52
EP Model
Beginning Invested Capital 16,612 Economic Profit 12,092 12,602 12,937 13,074 13,317
CV (t=4) 187,999
EP to Discount 12,092 12,602 12,937 13,074 187,999
PV(EP) 11,162 10,738 10,175 9,492 136,491
Value of Operations 194,669
+Excess Cash 22,048
+ Short-Term Marketable Securities 101 +Long-Term Marketable Securities 1,598 -PV Operating Leases 258 -Short-Term Debt 483 -Long-Term Debt 11,921 -PV ESOP 3,225
Value of Equity 203,012 Shares Outstanding 1,522 Intrinsic Value of Stock 133.38
Fraction of Year Elapsed 0.877 Adjusted Stock Price (as of 11/16/2015) 143.52
27
Gilead Sciences, Inc.
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E CV (2019)
EPS $ 8.88 $ 9.11 $ 9.47 $ 9.74 $ 10.14 Periods to Discount 1 2 3 4 4
Key Assumptions
CV growth 1.25%
CV ROE 25.95%
Cost of Equity 8.71%
Future Cash Flows
P/E Multiple (CV Year) 12.75
EPS (CV Year) 10.14
Future Stock Price 129.28
Dividends Per Share 1.72 1.74 1.76 1.79 129.28
Discounted Cash Flows 1.58 1.47 1.37 1.28 92.55
Intrinsic Value $ 98.26
Fraction of Year Elapsed 0.876712
Adjusted Stock Price (as of 11/16/15) 105.73
28
Gilead Sciences, Inc. Relative Valuation Models
Ticker
Company
Price
EPS 15E
EPS 16E
P/E 15
P/E 16 EV/EBITDA
15E EV/EBITDA
16E
ABBV AbbVie $59.86 $3.47 $4.65 17.3 12.9 12.2 10.27 MRK Merck $53.03 $1.72 $2.87 30.8 18.5 11.2 10.92
GSK GSK $39.87 $1.89 $0.55 21.1 72.5 11.4 10.49
AMGN Amgen $151.55 $8.51 $9.00 17.8 16.8 11.2 10.19
CELG Celgene $107.49 $2.15 $4.18 50.0 25.7 22.0 16.20 BIIB Biogen $284.84 $15.14 $17.59 18.8 16.2 11.6 10.61
Average 26.0 27.1 13.3 11.4
New Avg 21.2 18.0
GILD Gilead Sciences, Inc. $102.57 $8.88 $9.11 11.5 11.3
GILD EBITDA (15E)
GILD EBITDA (15E)
18,955
19,731
Implied Value:
Relative P/E (EPS15) $ 187.98
Relative P/E (EPS16) $ 164.09
EV/EBITDA (15E) $ 174.09
EV/EBITDA (16E) $ 164.28
29
Beta SG&A CAPEX Growth
Rf Normal Rd
Cash
ERP COGS
CV growth
of NOPLAT
R&D
Expenses
143.52 0.9 0.95 1 1.05 1.1 1.15 1.2
2.25%
2.50%
170.40
164.46
163.65
158.21
157.46
152.45
151.77
147.14
146.51
142.22
141.64
137.66
137.11
133.41
2.75%
3.00%
158.96
153.85
153.15
148.43
147.78
143.42
142.82
138.77
138.21
134.44
133.92
130.40
129.92
126.63
3.25% 149.08 144.02 139.33 134.96 130.89 127.09 123.52
3.50% 144.63 139.90 135.49 131.38 127.55 123.95 120.58
3.75% 140.47 136.02 131.88 128.01 124.39 120.99 117.80
4.00% 136.56 132.38 128.48 124.83 121.40 118.18 115.15
4.25% 132.89 128.95 125.27 121.81 118.57 115.52 112.64
143.52 8% 9% 10% 11% 12% 13% 14%
4.00% 152.42 149.97 147.52 145.07 142.62 140.17 137.72
6.00% 151.69 149.24 146.79 144.34 141.89 139.44 136.99
8.00% 150.96 148.51 146.06 143.61 141.15 138.70 136.25
9.00% 150.59 148.14 145.69 143.24 140.79 138.34 135.89
10.00% 150.23 147.78 145.32 142.87 140.42 137.97 135.52
11.00% 149.86 147.41 144.96 142.51 140.06 137.61 135.16
12.00% 149.49 147.04 144.59 142.14 139.69 137.24 134.79
13.00% 149.13 146.68 144.23 141.78 139.33 136.88 134.43
14.00% 148.76 146.31 143.86 141.41 138.96 136.51 134.06
143.52 15% 16% 17% 18% 19% 20% 21%
3.50%
4.00%
145.02
144.45
144.92
144.35
144.81
144.24
144.70
144.14
144.59
144.03
144.48
143.92
144.36
143.80
4.50%
5.00%
143.89
143.33
143.79
143.23
143.68
143.12
143.57
143.02
143.47
142.91
143.36
142.80
143.24
142.69
5.50% 142.77 142.67 142.57 142.46 142.36 142.25 142.14
6.00% 142.22 142.12 142.02 141.91 141.81 141.70 141.59
6.50% 141.67 141.57 141.47 141.37 141.26 141.16 141.05
7.00% 141.13 141.03 140.93 140.83 140.72 140.62 140.51
143.52 4.75% 5.00% 5.25% 5.50% 5.75% 6.00% 6.25%
1.00% 158.28 153.15 148.37 143.92 139.75 135.84 132.16
1.25% 162.76 157.27 152.18 147.43 143.01 138.86 134.98
1.50% 167.63 161.74 156.28 151.22 146.50 142.10 137.99
1.75% 172.92 166.57 160.72 155.30 150.27 145.58 141.21
2.00% 178.70 171.84 165.53 159.71 154.32 149.32 144.67
2.25% 185.04 177.60 170.77 164.50 158.71 153.36 148.39
2.50% 192.03 183.91 176.50 169.71 163.48 157.72 152.40
2.75% 199.76 190.87 182.78 175.41 168.67 162.46 156.74
3.00% 208.38 198.57 189.71 181.67 174.34 167.62 161.46
143.52 18.5% 19% 19.5% 20% 20.5% 21% 21.5%
10.00% 148.48 147.25 146.03 144.80 143.58 142.35 141.13
11.00% 146.03 144.80 143.58 142.35 141.13 139.90 138.68
12.00% 143.58 142.35 141.13 139.90 138.68 137.45 136.23
13.00% 141.13 139.90 138.68 137.45 136.23 135.00 133.78
14.00% 138.68 137.45 136.23 135.00 133.78 132.55 131.33
15.00% 136.23 135.00 133.78 132.55 131.33 130.10 128.88
16.00% 133.78 132.55 131.33 130.10 128.88 127.65 126.43
17.00% 131.33 130.10 128.88 127.65 126.43 125.20 123.98
18.00% 128.88 127.65 126.43 125.20 123.98 122.75 121.53
30
Gilead Sciences, Inc.
Key Management Ratios
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E CV (2019)
Liquidity Ratios
Current Ratio (CA/CL) 1.45 1.09 3.07 3.51 3.76 4.23 4.75 5.47
Quick Ratio (current assets - inventories)/CL 1.04 0.83 2.83 3.28 3.55 4.01 4.53 5.25
Cash Ratio (cash and cash equivalents/CL) 0.43 0.33 1.74 2.55 2.86 3.31 3.81 4.51
Activity or Asset-Management Ratios
Asset Turnover Ratio (Sales/Total Assets) 45.68% 49.61% 71.80% 56.84% 52.04% 48.46% 44.83% 40.52%
Inventory Turnover Ratio (Sales/Total Inventory) 5.56 6.60 17.96 12.50 12.50 12.50 12.50 12.50
Receivables Turnover Ratio (Sales/Avg AR) 5.24 5.70 7.30 5.80 5.11 5.08 5.04 5.05
Financial Leverage Ratios
Debt-to-Equity Ratio (Total Debt/Total Equity) 1.46 1.23 5.18 8.50 7.23 5.78 4.68 4.71
Equity Ratio (Shareholders Equity/Total Assets) 0.45 0.52 0.46 0.38 0.46 0.54 0.60 0.63
Interest Coverage (Operating Inc./Interest Expense) 11.11 14.74 37.05 31.51 17.82 19.37 22.30 26.19
Profitability Ratios
Return on Assets (NI/Total Assets) 12.12% 13.54% 34.79% 23.25% 20.73% 19.35% 17.98% 16.41%
Return on Equity (NI/SE) 26.97% 26.03% 76.23% 61.34% 45.17% 36.16% 29.98% 25.87%
Gross Margin (rev-COGS)/rev 75.39% 75.40% 85.28% 80.55% 80.56% 80.57% 80.59% 80.61%
EBIT Margin (EBIT/Sales) 41.33% 40.39% 61.33% 56.15% 56.09% 55.97% 55.81% 55.96%
Profit Margin (NI/Sales) 26.53% 27.29% 48.45% 40.91% 39.84% 39.94% 40.11% 40.50%
Payout Policy Ratios
Payout Ratio (dividends per share/earnings per share) 0 0 0 14.52% 19.12% 18.60% 18.31% 17.84%
Total Payout Ratio ((Div + Repurch)/NI) 25.73% 18.93% 44.20% 60.35% 41.73% 40.55% 39.87% 38.87%
31
Present Value of Operating Lease Obligations (2011) Present Value of Operating Lease Obligations (2012) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2014)
Fiscal Years Ending Dec. 31
Operating
Leases
Fiscal Years Ending Dec. 31
Operating
Leases
Fiscal Years Ending Dec. 31
Operating
Leases
Fiscal Years Ending Dec. 31
Operating
Leases
2012 43.635 2013 47.009 2014 49 2015 58
2013 36.302 2014 42.947 2015 46 2016 53
2014 30.027 2015 37.566 2016 41 2017 49
2015 23.961 2016 26.648 2017 32 2018 36
2016 17.814 2017 19.211 2018 25 2019 33
Thereafter 53.215 Thereafter 40.264 Thereafter 32 Thereafter 73
Total Minimum Payments 204.954 Total Minimum Payments 213.645 Total Minimum Payments 226 Total Minimum Payments 302
Less: Interest 31 Less: Interest 29 Less: Interest 29 Less: Interest 44
PV of Minimum Payments 174 PV of Minimum Payments 185 PV of Minimum Payments 197 PV of Minimum Payments 258
Capitalization of Operating Leases
Pre-Tax Cost of Debt
4.58%
Capitalization of Operating Leases
Pre-Tax Cost of Debt
4.58%
Capitalization of Operating Leases
Pre-Tax Cost of Debt
4.58%
Capitalization of Operating Leases
Pre-Tax Cost of Debt
4.58%
Number Years Implied by Year 6 Payment 3.0 Number Years Implied by Year 6 Payment 2.1 Number Years Implied by Year 6 Payment 1.3 Number Years Implied by Year 6 Payment 2.2
Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease
Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment
1 43.635 41.7 1 47.009 45.0 1 48.976 46.8 1 58 55.5
2 36.302 33.2 2 42.947 39.3 2 46.345 42.4 2 53 48.5
3 30.027 26.3 3 37.566 32.8 3 41.384 36.2 3 49 42.8
4 23.961 20.0 4 26.648 22.3 4 32.482 27.2 4 36 30.1
5 17.814 14.2 5 19.211 15.4 5 25.204 20.1 5 33 26.4
6 & beyond 17.814 38.9 6 & beyond 19.211 30.0 6 & beyond 25.204 24.3 6 & beyond 33 54.3
PV of Minimum Payments 174.4 PV of Minimum Payments 184.7 PV of Minimum Payments 196.9 PV of Minimum Payments 257.6
32
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outsta
Number of Options Outstanding (shares): 39
Average Time to Maturity (years): 3.80
Expected Annual Number of Options Exercised: 10
Current Average Strike Price: $ 28.38
Cost of Equity: 8.71%
Current Stock Price: $102.57
2015E 2016E 2017E 2018E CV (2019)
Increase in Shares Outstanding: 10 10 10 8 Average Strike Price: $ 28.38 $ 28.38 $ 28.38 $ 28.38 $ 28.38
Increase in Common Stock Account: 292 292 292 234 -
Change in Treasury Stock 6,000 3,000 3,000 3,000 3,000
Expected Price of Repurchased Shares: $102.57 $ 111.51 $ 121.22 $ 131.79 $ 143.27
Number of Shares Repurchased: 58 27 25 23 21
Shares Outstanding (beginning of the year) 1,522 1,474 1,457 1,443 1,428
Plus: Shares Issued Through ESOP 10 10 10 8 0
Less: Shares Repurchased in Treasury 58 27 25 23 21
Shares Outstanding (end of the year) 1,474 1,457 1,443 1,428 1,407
(Assumes common stock and additional paid in capital are combined into one account).
33
VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol
GILD
Current Stock Price $102.57
Risk Free Rate 2.87%
Current Dividend Yield 0.00%
Annualized St. Dev. of Stock Returns 36.46%
Average Average B-S Value Range of Number Exercise Remaining Option of Options
Outstanding Options of Shares Price Life (yrs) Price Granted
Range 1 39.144 22.63 3.80 $ 82.40 $ 3,225
Total 39.144 $ 22.63 3.80 $ 82.40 $ 3,225