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Krause Fund Research
Spring 2015
Healthcare Recommendation: BUY
Analysts
Imran Hasan
Imran-hasan@uiowa.edu
Alex Knight
Alex-knight@uiowa.edu
Company Overview
Gilead Sciences, Inc., is a biopharmaceutical company that
discovers, develops, and commercializes medicines for the
treatment of life threatening diseases in North America, South
America, Europe, and the Asia-Pacific. They have drugs that can
treat a wide variety of diseases. Their largest product lines help
in the treatment of Hepatitis C, HIV/AIDS, rare cardiovascular
diseases, and Hepatitis B. Further, it has product candidates in
various stages for the treatment of HIV, liver,
oncology/inflammation, cardiovascular, and respiratory diseases.
The company markets its products through its commercial teams
and/or in conjunction with third-party distributors and corporate
partners. Gilead has collaborations with BMS, Janssen, and
Japan Tobacco to develop and commercialize various products.
The company was founded in 1987 and is headquartered in
Foster City, California
Stock Performance Highlights 52 week High $116.83
52 week Low $71.63
Beta Value 0.9
Average Daily Volume 11,743,000
Share Highlights Market Capitalization $156.68b
Shares Outstanding 1.49 b
Book Value per share $10.30
EPS (ttm) $7.35
P/E Ratio 14.31
Dividend Yield NA
Dividend Payout Ratio NA
Company Performance Highlights ROA 34.15%
ROE 87.25%
Sales $24.89 b
Financial Ratios Current Ratio 3.08
Debt to Equity 78.34%
Gilead Sciences, Inc. (NASDAQ: GILD)
April 17, 2015
Current Price $101.09
Target Price $151.09
GILD Positioned to Breakout in 2015
2015 sets the stage for Gilead to take complete market share
of the Hepatitis C industry with new blockbuster drug
Gilead’s revenue double at the end of FY2014 with profit
margins hovering above 85%. Current product offerings show no
sign of decline
Low interest rate environment along with $10B+ cash on
hand sets the stage for Gilead to significantly expand the
business.
Gilead sees opportunity in emerging markets through
licensing out generics.
Gilead plans to continue to increase R&D as % of sales,
passing pharmaceutical counterparts.
Promising pipeline of 29 drugs across several industries
including one that received orphan designation
One Year Stock Performance
2
Investment Thesis
Healthcare spending is rising and more people
are covered with insurance than ever. The
healthcare market is being flooded with
investment as investors see the potential.
Gilead Sciences, Inc. is ahead of the curve and
on top of the biotechnology industry. They
have established drug franchises in HIV/AIDS,
cardiovascular diseases, and Hepatitis B. As of
last year Gilead added their biggest franchise
to their company becoming the number
provide of treatment for Hepatitis C. Gilead’s
strong patents and protected revenue streams in
niche markets make it an excellent investment
choice. Their low levels of debt coupled with a
stockpile of cash make them a very exciting
company to watch in 2015. Their robust
pipeline of 29 drugs spread across several
subsectors provides investors with the
diversification they need. Our team
recommends a BUY on Gilead at $145. Their
growth prospects and tight cost structure make
them a very lucrative investment.
Economic Analysis
Our team believes that there are four economic
indicators that influence the future
performance of GILD. These economic
indicators are Gross Domestic Product, Interest
Rates, Demographics, Government
Legislation, and innovation.
Gross Domestic Product
Gross Domestic Product (GDP) represents the
monetary value of all finished goods and
services within a country. It’s a strong
indicator of a county’s economic health and
can help to provide insight into where the
economy is headed. During the most recent
quarter of Q4 2014 GDP grew at 2.2%, but
lagged behind Q1 2013.1 The slowed growth in
GDP is due to a strong U.S. dollar and
decreased government spending. The strength
of the dollar is causing the U.S. to import
heavily.
We expect GDP in Q1 2015 to be 2% as it
continues to lag from last year. This is due to
the dollar continuing to strengthen, decreased
consumer spending, and slowed
manufacturing. While GDP is slowing down
this will have little effect on the healthcare
industry because of how desensitized it is to
what is driving the deceleration. Healthcare
makes up 17.4% of GDP, which makes it the
single largest share.3 The healthcare industry is
relatively unaffected by the current drivers of
GDP and is actually expected to grow1.1%
faster than GDP through 2023. This is largely
due to the American Care Act (ACA) which
has allowed increased access to healthcare. The
ACA will help to drive healthcare GDP
because the states will have to take the burden
of paying for healthcare for many of its
citizens. Since, the government has entered the
market this has motivated companies to expand
their healthcare businesses. This is supported
by the National Health Expenditures Account
estimating that healthcare will increase to
19.3% of GDP by 2023.3 This is very
important to the business of Gilead because of
how expensive their drugs are such as Harvoni
which retails at $93K a treatment. The
increased access and emphasis on healthcare in
the economy going forward will allow Gilead
to continue to benefit from more patients being
able to use their insurance to buy their
treatments.
Interest Rates
Currently, the U.S. offers a very strong interest
rate environment with the 10-year treasury
yielding 1.87%.4 That is nearly a percentage
point lower than this same time last year. This
is surprising since there has been talks of a
Federal Reserve increasing the rate for some
time now. The recent decline is due to the Fed
laying out certain expectations before anything
will happen. They would like to see
unemployment consistently at 5% and inflation
reach a steady 2%.5 Our team expects that in
the short term interest rates will rise slightly to
2% because the strong employment market.
We don’t believe the Fed will take any action
though until Q1 of next year because of the
3
extremely low inflation environment we are in.
We believe that within the next three years
interest rates will reach 3.85% because the Fed
will increase rates due to inflation reaching
their targets. The low interest rate environment
is a positive for the healthcare industry because
it comes at a time when companies are
expanding rapidly. The expansion within
Gilead’s sector; biotechnology has come in
two different ways. One of which is Mergers &
Acquisitions (M&A) and the other is increased
research spending. The low cost of borrowing
has sparked M&A in the biotech industry as
companies look to diversify their product lines.
In 2014 deal volume rose 37.5% from 2013
levels and is expected to further grow in 2015. 6 A large portion of operating expenses for a
biotech company is their research arm which
helps them to stay competitive. The low cost of
borrowing provides the opportunity for biotech
companies to invest heavily in their product
pipeline now so that they stay competitive once
rates to rise. This provides Gilead a very strong
opportunity to expand since they are sitting on
over $10 billion in cash and have very little
debt. We expect Gilead to invest heavily in
their pipeline as they look to diversity outside
of their main product segments: Hepatitis C
and HIV/AIDS.
Demographics
The aging population of the United States
plays an important role in healthcare industry.
Baby boomers will begin to hit the retirement
age and will qualify for Medicare.
Source: CMS
Above is the most recent enrollment
demographic data from the Center for
Medicare and Medicaid Services. The 52
million number is expected to increase rapidly
as the population continues to age. This
provides the healthcare industry a large amount
of new patients that will need and have access
to healthcare. The aging population has
become a recent target of Gilead as they look
to diversity their products. Currently, Gilead
has drugs in phase 2 testing or later to treat
liver disease, lymphoma, hypertension, and
illnesses associated with cystic fibrosis.7 Of the
four diseases listed above each of them affect a
different demographic and provides
diversification for Gilead.
Government Legislation
The government plays an important role within
the healthcare industry because of their power
to regulate and the large amount of healthcare
spending they engage in. As noted above
Medicare enrollment is expected to increase
yoy in 2015. Along with this the Center for
Medicare and Medicaid Services has reported
that the sustainable growth rate (SGR) for their
services is expected to be -13.7%. This is the
lowest since the SGR was first used in 1997.
The sharp decline in the growth rate is due to a
cut in expenditures because of the ACA.
The passage of the ACA has opened up many
opportunities for new streams of income. The
new streams of income come from patients that
were previously not insured.
Innovation
Another large driver of the Healthcare industry is
innovation and the appetite that companies and
investors have for it. As the market continues to
release new products and services this creates
opportunities for new streams of revenue. This is
very important for the biotechnology industry as
companies benefit from patent protection for x
years. A patent is granted for 20 years. An
exclusivity patent can be granted varying from 180
days to 7 years.
4
Source: FDA Website
The graph illustrates the steady increase in
innovation, measured by the number of Novel
New Drugs approved by the FDA. One can
observe the importance of developing new and
innovative drugs by looking at the years 2005-
2007 where new drug approvals were lower than
average, in part due to more stringent FDA
requirements following the Vioxx debacle.
Looking at the relative performance of MSCI HC
in those years one can see poor performance vs the
market as a whole.
Capital Markets Outlook
Our team believes that the healthcare sector
provides a strong opportunity to invest. The
low interest rate environment allows healthcare
companies to reinvest as they anticipate greater
demand in the future. The changing
demographics of the United States provides
incentive for companies to invest in new
treatments. This is further driven by the ACA
and enrollment in Medicare increasing because
people will be able to utilize services. GDP
will bounce back into the year just as it did
during 2013. Along with the GDP growth in
the future healthcare is expected to surpass it
by at least a percentage point a year. The
heightened innovation that we are experiencing
currently is a result of the market seeing
growth prospects in the sector as well.
Industry Analysis and
Overview
Gilead Sciences, Inc. is a part of the
biotechnology industry, which is under the
umbrella of the healthcare sector. The
biotechnology industry has been the best
forming industry within the healthcare industry
over the past year. The biotechnology industry
is made up of companies that use living
organisms or molecular and cellular techniques
to create treatments and solutions to current
problems.8 The industry has grown extremely
fast and has seen an annual growth of 5.5%
since 2009. It’s expected to continue to grow at
an annual rate of 9.1% through 2019.8
Source: MSCI10
Industry Trends
The biotechnology industry relies heavily on
finding new or enhanced treatments for various
diseases. Companies tend to focus their
research on treatments that don’t have a cure or
an effective treatment. These medical
conditions tend to be autoimmune diseases,
infectious diseases and various cancers. They
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chose to focus on these because they provide
the largest profit if the treatments end up being
successful. The industry relies heavily on a
“first mover advantage” where companies
attempt to get a patent on their successful
treatment. Research and development can be
extremely costly and risky. Companies will
have a large number of treatments that they are
testing at any given time called their product
pipeline. From the pre-clinical stage only 5 of
the original 5000 compounds will make it to
FDA approval. The high risks allows biotech
companies to charge large premiums on their
successful products to cover losses on the
treatments that didn’t succeed.9 The entire
process can take anywhere from 5-7 years for a
drug to be approved.
During the past year R&D within the biotech
industry has been much greater than their
pharma counterparts. Within the NASDAQ
Biotechnology Index R&D spending was up
14% coupled with 11% increase in revenue
largely driven by the major biotech
companies.11 The increase in R&D has been a
result of increased FDA drug approvals and the
large amount of cash reserves that many
biotech companies were sitting on.
Government Regulation
The biotechnology sector faces a large variety
of regulation due to the nature of their
business. They are heavily regulated by the
Federal Drug Administration (FDA) and go
through a very stringent process to bring any
treatment to market. There are several phases
that a company must go through before they
are able to sell their drug to the public. The
process is as follows:
Pre-Clinical Phase- Researchers will look for
new compounds that could potentially
contribute to the treatment of an illness. They
will test the compound to find the correct
formula, dosage, and will conduct tests on
animals or human tissue. Once this is finished
the compound is submitted as a new drug
application (IND) to the FDA. This will all
typically take 3 years. During this stage a
company can apply for “fast track designation”
if their proposed treatment meets an unmet
medical need.
Phase 1- If the new drug application is
approved researched have permission to
conduct human trials on less than 100 healthy
people. They will look to see if the dosing is
correct, how the human processes it, and if
there are any notable side effects. This will
take a year to complete.9
Phase 2 – If the drug is found to be tolerable
by a human then it will enter testing to see if it
can heal the targeted disease. Researchers now
have permission to test on up to 300 healthy
people. This process will take two years.9
Phase 3 – During this stage researchers may
now test the drug on up to 3000 healthy
patients to see how effective the drug is.
Researchers must also see what the side effects
are and how they plan to distribute the drug at
a large scale. This process will take three
years.9
New Drug Application (NDA) – If the drug
turns out to be effective and safe then it is
submitted to the FDA for approval. The
company will have to provide all of their data
from all of the previous phases. This usually
takes 1-2 years to complete as there is much
due diligence that needs to be done.9
Phase 4 – The company can now distribute the
drug to the public. The FDA continues to look
into any possible short or long term side
effects. 9
There are two ways to expedite the process:
Priority Review and Orphan Drug Status.
Priority Review is given when the treatment
meets an unmet medical need. Orphan Status is
given when the drug treats a disease that has no
other treatments.
Orphan drug designation is very lucrative
because of the tax credits it offers. The U.S.
government offers 50% tax credit on the R&D
cost of an Orphan drug and will provide grants
of up to $30M for the costs associated for
earlier trials. On average an Orphan drug will
return 1.89 times that compared to a non-
Orphan. EvaluatePharma predicts that Orphan
drugs will make up 19.1% of total
6
pharmaceutical sales by 2020. This is due to
the average treatment per patient prescribed to
an Orphan drug is $137,782 relative to $20,875
for one that is not.12
In January Gilead’s simtuzumab was given
Orphan designation which comes with seven-
year period of market exclusivity if approved.13
The FDA’s programs and the innovation of
companies has led to record new drug
approvals. The chart below helps to show the
strong year drug approvals had in 2014. There
were 41 new drug applications filed and all of
them were approved. This indicates that the
FDA is becoming more flexible especially with
drugs that are unique to the market.
Source:FDA14
Currently, Gilead has 7 drugs that are in phase
3 of the FDA process. If the approval trend
continues from 2014, then Gilead will be able
to add new stream of revenue to their existing
business.
Recent Trends and
Developments
The Biotech industry has seen increased
demand from emerging markets, heavy
consolidation, and a strong IPO market.
Emerging Markets
The biotech industry has seen heavy demand
from emerging markets. Many of their drugs
help to solve diseases that are common in
poorer countries. The industry has seen the
demand and has recently made strides to
provide their treatments at a reduced costs.
This is strategic because most drugs are only
held to patent exclusivity within large
established countries. Third party companies
can attempt to copy a drug and sell it where the
patent isn’t recognized at a significant
discount. To combat this problem there has
been a trend within the industry to partner with
a large generic pharmaceutical company, so
that they can manufacture and distribute the
drugs in non-patent areas. This is a win-win
relationship because biotech companies are
able to reap some profits instead of losing it all
to an unknown third party. In February Gilead
signed an exclusive agreement with Mylan to
allow them to sell the generic version of their
two largest drugs in 91 undeveloped countries.
This will create an entirely new product
segment for Gilead as they enter licensing
agreements with other drugs in the future. 15
Source: Statista16
The chart above further shows that demand for
pharmaceuticals is increasing in emerging
markets. Sales growth in emerging markets
outpaced all others and has increased 23%
since 2012.
Heavy Consolidation
In 2014 there were 27 biotech M&A deals
worth $12.7 billion compared to 27 deals in
2013 worth only $7.1 billion.17 The rise in deal
value is an indication that companies are
having to pay a premium for biotech
companies. This premium comes at a time
7
where larger biotech companies have shifted
some of their R&D to buying small but
promising companies. M&A deal volume is
expected to increase further is year as biotech
firms attempt to diversify by merging with
pharmaceutical companies. M&A is further
being driven by interest from private equity
firms.
Source: Basberry Sims
In chart above shows a survey recently
conducted by Bassberry Sims as to what
private equity firms will be most interested in
buying. The number one response were
biotech/pharma companies which further
shows that the economy feels these companies
hold strong value. The surge in M&A activity
comes at an ideal time for Gilead because they
are currently sitting on over $10 billion in cash
and little to no debt. Over 50% of publically
traded healthcare companies are either biotech
or pharmaceutical. Gilead has the resources
and momentum to acquire a competitor or a
smaller company to spur growth. Our team
believes that Gilead will continue to purchase
smaller biotechs because of their success with
Savoldi. Our team believes the heavy
consolidation will continue into the future due
to the low cost of borrowing and the growth
from Obamacare in the U.S.
Strong IPO Market18
In 2014 the biotech industry set a record for the
number of IPOs and the value of proceeds
received from them. The market has a strong
appetite for small biotech stocks that offer
promising treatments especially within cancer
and immunotherapy. Investors see strong
growth potential in the companies in hopes that
they become an acquisition target for a larger
player in the industry. Over the past 12 months
240 stocks have gone public with 1 out of
every 4 attributed to the biotech industry. The
market hasn’t slowed down either; the Nasdaq
Biotechnology Index has already returned 18%
this year. The IPO market’s strength further
justifies the trend in heavy M&A. Gilead can
take advantage of the biotech appetite by
purchasing a company through an issuance of
shares as well. Our team continues to see the
IPO market to stay strong in the biotech
industry. This is due to the low yielding bond
environment causing investors to look for
larger returns elsewhere.
Source: EY Biotech Report19
From the chart above you can see that an
overwhelming amount of IPOs were in the
therapeutic subindustry. The more interesting
story to draw is that only 31% of these
companies were at least into phase 3 of the
FDA process. This statistic shows that
investors are willing to take on the risk and be
patient in hopes that their company catches the
eye of a larger biotech. The industry has begun
to shift to allow larger companies to use small
biotech firms as their vehicle of innovation.
Markets and Competition
The current climate of the biotechnology
industry is very unique. As seen earlier in the
report it’s a very strong market for biotech
companies to grow and expand since investor
8
demand for the industry is at all-time highs.
The market is currently very open to smaller
firms that are looking to expand and are more
than willing to provide the growth financing
through purchasing equity. Government
regulation contributed to the strong climate
with the implementation of accelerate drug
review programs by the FDA and the record
drug approval percentage during 2014.
Threat of New Entrants – The industry is
heavily driven by research and development.
Smaller firms with a promising cure will easily
be able to access the industry. The depth of the
industry allows for new entrants to find niche
markets that they can compete in. The record
number of biotech IPOs indicates that investors
are willing to invest capital into projects that
show promise. Smaller firms can enter the
industry, but it is extremely difficult to become
a large player. On average it takes about $5
billion for a drug to go from pre-clinical stages
to the market. That would be very difficult for
a small firm to achieve on their own and would
most likely look to be acquired. However, if a
small firm was able to take their drug from
start to finish the profit margins would be large
enough to make them an established firm. The
threat of new entrants entering the market is
medium due to strong investor appetite for
biotechs, and the large range of subindustries a
firm could chose to compete in. The threat of a
new entrant having an effect on Gilead’s
business is low due to its large size and ability
to buyout a smaller competitor.
Threat of Substitute Products or Services –
Gilead holds an exclusive patent on all of their
largest drugs with none of them expiring in the
near future. The threat of generic copies
flooding the market is of concern especially
since the government has established a process
for the approval of biosimilars. Gilead has
taken a proactive approach by signing an
exclusivity agreement with Mylan to distribute
generic versions of Harvoni and Sovaldi to
undeveloped countries. The proactive approach
is to push companies outside of the U.S. to
make illegal copies of their drugs.
Additionally, Gilead’s threat to substitutes is
low because of the niche markets they are in.
Bargaining Power of Suppliers – The
biotechnology industry does not rely heavily
on materials or suppliers to add value to the
business. Firms within the industry are
concerned with building partnerships for
commercialization and clinical purposes.
Gilead has created partnerships with numerous
firms to license out their products. They
licensed out the right to manufacture and
distribute Tamiflu to Roche. Gilead has also
entered a partnership to assist and provide
funding to Yale School of Medicine to conduct
research on their behalf.29
Bargaining Power of Customers – Within the
biotech industry customers have very little
power over setting prices. Customers are “price
takers” and don’t have enough power to cause
a shift in price. A large entity like the U.S.
government which pays for customer’s drugs
does have some influence. They can push for
their insurance to only cover up to a certain
amount of a drug. This in turn could force a
company to decrease their price, so that
customers can afford it. Currently, the U.S.
government hasn’t done this to Gilead and
actually supported the branded HIV/AIDS
franchise through drug rebates when a generic
drug maker released an alternative. Gilead is
safe from the influence of customers
attempting to change prices because they
operate in a very niche industry that have few
alternatives available.
Intensity of Competitive Rivalry – There are 10
major players in the biotechnology industry.
They are Gilead, Amgen, Celgene, Biogen,
Regeneron, Alexion, Vertex, Illumina,
BioMarin, and Agilent Technologies.
Company Analysis
Gilead Sciences, Inc. is a biopharmaceutical
company that discovers, develops, and
commercializes medicines for the treatment of
diseases around the world. The company was
founded in 1987 and is headquartered in Foster
City, California.
9
Source: Factset
Corporate Strategy
Gilead aims to find medicines for the treatment
of life threatening diseases. They are focused
on North America, South America, Europe,
and Asia-Pacific. The company has been
successful in providing drugs that treat are
large variety of diseases and are expected to
add more to the list in the future. In addition to
diversifying their product portfolio Gilead
would like to continue their business strategy
of partnerships. They are in commercial
collaboration partnerships which allows other
pharmaceutical institutions to commercialize
some of their products. One of these
agreements is with Japan Tobacco to
commercialize their HIV products in Japan.20 Along with this Gilead has clinical research
partnerships which allows them access to various
institutions to conduct research for drugs in their
pipeline.
Life Cycle: Gilead is currently in the growth portion of the
business life cycle. They have 29 drugs that are
currently in their pipeline and have increased
R&D spending by 34.5% yoy. In 2013 they
acquired YM BioSciences and are rumored to
offer to buy Arrowhead Research Corp. Their
rumored interest in Arrowhead Research Corp.
indicates that Gilead is interested in furthering
growth through acquisitions.
Financial Summary: During 2014 Gilead’s largest share of revenue
came from their Hepatitis C franchise; Sovaldi
and Harvoni. These two drugs made up 49.66%
of their total sales even though Harvoni was only
available for sale during Q4 2014. Followed by
that Gilead’s HIV franchise which comprises
eight drugs made up 41.3% of their sales.
Gilead’s cardiovascular franchise contributed to
4.42% of their total sales. The remaining came
from their other lesser known franchises such as
hepatitis B, oncology, and royalty revenues.
Gilead witnessed their strongest financial year to
date during 2014 with revenues increasing 122%
from 2013. This was attributed to their newly
approved Hepatitis C franchise which was able to
capture 83% of the entire market in just one year.
The success of their two blockbuster drugs
guarantees Gilead strong revenue streams for at
least the next 15 years during the course of the
patents.21 Gross profit increased 10% yoy to 85%
of total sales and we expect it to remain stagnant
at that rate going forward as Gilead’s sales
increase, but they invest more towards R&D.
Another strong figure in Gilead’s financials is the
decrease in the effective tax rate that they are
paying. They only paid 18.83% tax on their
record profits which is 8.52% less than 2013.
This is due to Gilead moving recording profits
overseas and moving their intangibles outside of
the U.S. According to Bloomberg, Gilead will be
able to continue to save on taxes going forward
cutting nearly a percentage point off for every $1
billion in sales of Sovaldi.22 Lastly, Gilead ended
2014 in a very strong financial position. They
have around $10 billion in cash and cash
equivalents, $4.5 billion in accounts receivable
and $11 billion in intangibles. Their largest
liability is long term debt of $$11 billion with
$9.25 billion of it due after 2020.
Product Segments
Gilead has medicines for HIV/AIDS, Hepatitis
B, Hepatitis C, Chronic Lymphocytic
Leukemia, pulmonary arterial hypertension
(PAH), chronic angina, Pseudomonas
10
aeruginosa, influenza, presumed fungal
infection, and neovascular age-related macular
degeneration. Their portfolio has a total of 18
marketed drugs.
Source: Financial Numbers from Gilead 10K
Hepatitis C
Gilead’s largest revenue stream stems from
their Hepatitis C franchise which made up 41%
percent of their revenues in 2014. Their
franchise is made up of Sovaldi and Harvoni
which boast 90 and 95% cure rates in 12
weeks. Prior to the approval of these drugs the
best cure rate that a drug could produce was
70% and produced harsh side effects. Gilead
has taken over the Hepatitis C market with
over 85% market share. CVS estimates that
global spending on specialty pharmaceuticals
will quadruple by 2019. On top of this PWC
recently reported that specialty pharma
spending will make up 50% of all prescription
sales by 2020 and will continue to grow at 9%
annually.
Product Pipeline There are 29 drugs across 5 segments: HIV/Aids,
liver diseases, oncology/inflammation,
cardiovascular disease, and respiratory disease that
are in the pipeline. Of these drugs, six are in phase 3
of the FDA process and one has been submitted for
U.S. and E.U. approval. Gilead has put a large
emphasis on creating a single regimen drug for the
treatment of HIV/AIDS. Their one tablet regimen is
currently the drug that is in the approval process.
Competition
Gilead’s Top Competitors
Source: Yahoo Finance
Gilead has becoming one of the leading
biotechnology companies over the past few
years. They have continually innovated and
introduced new treatments to solidify itself as
an established company within the industry.
Gilead is trading at very attractive multiples
relative to its peers. Its EPS is second only to
Roche and will increase over the next five
years as Gilead continues to implement its
share buyback program. The share buyback
program will also help to bring Gilead’s
price/sales ratio more in line with its
competitors. The high P/S ratio is an indicator
that the market places a higher premium on
each dollar that Gilead generate. This makes
sense since Gilead leads all its competitors in
profit margins achieving 85% in 2014. Along
with this the market is placing Gilead at the
bottom of its competitors valuing its future
growth the least. The low forward P/E ratio is
due to investors being becoming bearish on the
announcement that Gilead would be offering
discounts of over 50% on their top selling drug
Sovaldi. Our team believes that Gilead’s drug
Harvoni will be able to cover the losses due to
the discounts and keep earnings growing.
Lastly, Gilead’s strong EPS makes it an
attractive investment especially since the
number of shares will be decreasing over the
next five years due to the share repurchase
plan. Our team believes that Gilead is heavily
undervalued relative to its peers especially
because the market expects their revenues to
increase next year.
Research & Development
11
Gilead has increased their R&D significantly
nearly tripling the amount since 2008. This is
significantly outpacing the industry average since
2009. As seen from the chart below the U.S. has
seen pharmaceutical research and development
staying relatively low and slightly above GDP.
Gilead’s constant increase in R&D is an indicator
that the company is committed to growth in an
environment where large pharmaceutical
companies are focusing on M&A as a vehicle for
innovation.
Source: Statista23
Our forecast below predicts that Gilead will
continue to increase R&D yoy. Our estimates are
based on Gilead’s guidance prior to the surprise
of revenues doubling. Their original guidance
given in Q1 2014 indicated that they wanted to
increase R&D around 20% per year. The
continued reinvestment into the firm reiterates
their growth stage standing.
2016E 2015E 2014 2013 2012
Sales 29,900 27,934 24,890 11,221 9,614
R&D 4,194 3,462 2,854 2,120 1,760
R&D % of Sales
15.0% 13.0% 11.5% 18.9% 18.3%
YOY Growth of R&D
21.2% 21.3% 34.6% 20.5% -
Payout Policy: Gilead recently announced a $0.43 per share
dividend that will start in the second quarter of
2015. In addition to the dividend, Gilead has
approved a share buyback program of up to $15
billion of company stock. The repurchase
program will begin once Gilead finishes
purchasing $3 billion of company stock from a
previous program. The program will expire 5
years after the $3 billion of company stock from
previous commitments is completed.24
Catalysts for Growth/Change:
Generic Compeition: Within the biotechnology industry a growing
concern since the inception of biosimilars are the
possibility of losing revenues to a generic. Gilead
has patent protection for the next fifteen years on
two of its largest drugs: Harvoni and Sovaldi.
They have patent protection on their 3rd and 4th
best sellers Antripla and Truvada until 2021 in
the U.S. and 2018 in the EU. Antripla and
Truvada make up about 27% of Gilead’s sales,
leading to doubts if they can sustain their
revenues for much longer especially with only 3
years of protection left in the E.U. This shouldn’t
be a concern because Gilead has faced generic
competition from drug makers introducing
alternatives to its HIV franchise. Antripla and
Truvada are very unique because they offer a one
tablet regimen. A generic drug maker offered a
three tablet alternative that the market wasn’t
interested in. Only about 20% of people living
with HIV/AIDS have private insurance while the
rest are treated through government options. The
government actually supports the branded
version of the HIV drugs that Gilead offers. The
government feels that it rather have patients take
a pill a day than them miss a dose and further
hurting their health with a more demanding
regimen. In addition to this, the government
provides drug rebate programs and has special
designated programs for HIV/AIDS treatments
which causes the branded versions to be cheaper.
The fear of the HIV franchise being affected by
any generic competition should be minimal as
Gilead has overcome the problem in the past.25
HIV Spending in Africa: Gilead plays a large role in the treatment of HIV
and the African market will be key to their
growth as they try to distribute their treatments
where HIV is most prevalent. The amount of
spending that African nations place on HIV will
be the largest driver as countries will have to
subsidize these treatments for patients. Recently,
South Africa announced they would spend $2.2
12
billion over the next two years to buy HIV drugs
for public hospitals throughout the country.
Gilead has created programs that help to treat
HIV/AIDS in Africa with their drugs. They’ve
created a tiered system which allows them to
generic versions of their drugs to low income
areas and discounted versions of the branded
drugs to the middle class. The generics are
manufactured through a voluntary partnership in
which they allow high quality and low cost
generics to be made. Gilead’s charitable work
offers little to no profit on their drugs when the
generics are sold. The opportunity they have for
increasing the bottom line is through spreading
the word of their treatment in hopes of more
people wanting it and selling branded versions to
the middle class.26
Source: Gilead Website 26
Since the inception of the program access to
Gilead’s medicines have dramatically
increased. There are currently 24.7 million
people living with HIV/AIDS in low and
middle income countries. Gilead currently is
serving 28.3% of those people with goals of
increasing the number in the future.27
Better Alternatives to Current Franchises: Gilead’s Hepatitis C drug Sovaldi generated
$10.5 billion in sales during 2014contributing
largely to their strong growth yoy. Sovaldi can
produce 90% cure rates in as little as 12 months.
Harvoni is expected to achieve over $10 billion
in sales as well and can produce identical results
but in a shorter period of time. Although these
two drugs dominate the hepatitis C market is a
better alternative can enter the market. In the
beginning of 2015 Achillion Pharmaceuticals
announced that their compound ACH-3102 was
able to achieve 100% cure rates when taken with
a small dose of Sovaldi.28 The trial was only
conducted on a dozen people and the compound
is still in phase two of testing. Even though it has
at least 3-5 years before it would be available on
the market it does pose a threat to Gilead. If
another drug were introduced to the market even
if it incorporated some of Gilead’s product it
would cut into market share and revenues.
Abbvie has an alternative treatment as well
called the Viekira Pak which sells for slightly
less than Gilead’s treatment. The downside to
their treatment is that it is a six pill daily regimen
which increases risk of patients not taking the
full course. Our team feels that this isn’t a valid
concern as phase two in the FDA process doesn’t
provide enough insight as to whether the drug
will be successful. We also feel that the Viekira
Pak won’t be able to take too much market share
from Gilead because payors risk increasing that
patients are not finishing their treatments.
Key Investment Positives: Gilead provides a lot of key investment
opportunities especially because they are in the
growth stage. As stated above they have 29 drugs
across various segments in their pipeline. Their
diversified pipeline provides investors the ability
to reduce risk because of the many new streams
of revenue that Gilead could enter. Gilead’s HIV
franchise is protected because of their past track
record of beating out generic alternatives and the
federal government supports the branded version.
Gilead’s explosive growth in the Hepatitis C
franchise due to Sovaldi and Harvoni should
provide increasing revenues over the next 2-3
years. Even if Achillion produces a drug that
produces higher cure rates, they have noted that
it must be taken together with Sovaldi. Gilead
has a very small amount of LT debt and has
shown a large increase in ST cash and cash
equivalents. This provides further safety to
investors and also shows that Gilead has the
resources available if an acquisition opportunity
presented itself.
Key Investment Negatives: Gilead attributed almost 50% of their 2014 sales
to Sovaldi which does raise a red flag for many
13
investors. Their drug has faced criticism on its
high price and Gilead has responded by noting
that they will offer significant discounts.
Investors could worry that the large discounting
is throwing away profits that could be made in a
time when the drug has the largest ability to do
so. Increased generic competition is also a fear
because this can cause branded drugs to lose
about to 90% of their revenues. Gilead’s HIV
franchise is very dependent on governments
which can also be seen as a negative because the
U.S. could look for other treatments to battle
HIV in a more affordable manner.
Valuation Summary
Our team believes that Gilead is a very unique
company that has various integral parts to its
business that can help its future growth. The
due diligence into the current economic factors
helped to shape some of our assumptions. The
biotechnology industry is growing extremely
fast and offers an opportunity to become a
market leader. Gilead has positioned itself to
through its core business operations to make a
move in the industry and become an
established firm. Our valuation consisted of a
discounted cash flow (DCF), economic profit
model (EP), dividend discount model (DDM),
and the relative valuation model. Through
analyzing and projecting the future streams of
revenue and expenses for Gilead we were able
to decide that Gilead should be a BUY at $132
based on out DCF and EP models.
Assumptions
Gilead plays in a very niche market which
allows it to dominate their competition fairly
easily. They focus on diseases that previously
didn’t have a treatment or there was one that
wasn’t very effective. This strategy allows
them to charge a very handsome premium for
their drugs since there aren’t many alternatives.
From the report you can see that 2014 was a
breakout year for Gilead because of their new
Hepatitis C division. The record sales of
Sovaldi coupled with the approval of Harvoni
allowed it to take charge of the market. Both of
these drugs offer large profit margins for
Gilead and they have the patent for the next 15
years. The Hepatitis C market is expected to
triple in spending by 2023 because of better
treatments coming out on the market. This
creates an opportunity for Gilead and we feel it
will be the largest contributor to its growth. In
addition to this Gilead has a strong HIV/AIDS
franchise that has already took on generic
competition. Gilead’s ability to offer a single
pill regimen will continue to dominate the
industry. We decided to apply a 9% growth
rate based on the growth of specialty pharma
and finally reaching a steady growth stage of
4% annually. We chose to increase all other
streams of drugs by 4% because of the industry
charging more for prescriptions yoy and the
increase in spending from emerging markets. .
Discounted Cash Flow and Economic Profit
Our discounted cash flow and economic profit
models provided us with a target price of
$151.09. The share price was driven by profit
margin estimates which we believe will stay
constant at 85% and growth in their drug
revenues. The growth in revenues and
consistent cost structure will allow Gilead to
have free cash flows of $17 billion in 2020.
Gilead’s tax structure allowing them to move
almost all of their profits from Sovaldi
benefited their share price as well.
Dividend Discount Model
Gilead will begin to pay dividends of $0.43 per
share on a quarterly basis starting in Q2 2015.
This is the first time the Gilead will be paying
dividends. The biotechnology industry
historically has not paid many dividends since
management teams like to reinvest in their
product pipeline. Gilead on the other hand, is
sitting on a large stockpile of cash and we
predict that with their strong growth prospects
that the dividend will stay steady through
2020. The DDM calculated a recommended
price of $185.19 a share. The price is supported
with strong EPS estimates during the terminal
year of $11.91.
Relative P/E Valuation
Our team compared Gilead relative to some of
its peers. We used applied fundamental ratio
14
analysis to come up with a target price of
$157.41. The price target is based on Gilead’s
current price against its estimated forward EPS
ratio. We applied the average forward looking
2015 P/E ratio of four of Gilead’s competitors
to derive the price. We were surprised to see
the Gilead was trading at lower P/E multiples
compared to their peers because of our strong
sentiment that they are in an extreme growth
phase. Out of all the peers Gilead has the
lowest CAGR for EPS growth as well. Our
team feels this is due to Gilead reinvesting in
the company and paying out a hefty dividend.
Weighted Average Cost of Capital
Our WACC calculated to be 7.23% based on a
few different factors. The cost of debt was
derived from the latest maturity bond that
Gilead had on the market. We took the yield
from the bond which was set to mature in
2045. Our choice to pick a bond that was
expiring late into the future was because we
didn’t want short-term factors to throw off the
rate. We derived our equity risk premium by
using the Bloomberg terminal and found the
rate updated as of 4/17/15. Lastly, we found
out cost of equity by using the capital asset
pricing model. We applied a levered beta of
1.18 showing that Gilead’s cost of equity is
7.96%.
CV Growth
We chose to apply a CV growth rate of 4% to
Gilead in 2020. Our team felt that with patents
expiring in the time span and the possibility of
new entrants into Gilead’s markets that the
company would enter a steady growth phase.
We also feel that inflation will rise to 2% by
2020 allowing Gilead to still provide a return
on investment.
Sensitivity Analysis
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.
15
Bureau of Economic Analysis: Report on GDP
https://www.bea.gov/newsreleases/national/gdp/gd
pnewsrelease.htm1
CNN Article on Atlanta Fed Cuttting GDP
Estimates
http://money.cnn.com/2015/04/02/news/economy/
us-economy-growth-zero-growth-first-quarter/ 2
National Healthcare Expenditures Account
http://www.cms.gov/Research-Statistics-Data-and-
Systems/Statistics-Trends-and-
Reports/NationalHealthExpendData/Downloads/Pr
oj2013.pdf 3
U.S. Department of Treasury Interest Rate
Information
http://www.treasury.gov/resource-center/data-
chart-center/interest-
rates/Pages/TextView.aspx?data=yield 4
Reuters: Conditions for Rate Hike Not Yet Met
http://www.reuters.com/article/2015/04/16/us-usa-
fed-rosengren-idUSKBN0N726Q20150416 5
PWC M&A Outlook
http://pwchealth.com/cgi-
local/hregister.cgi/reg/pwc-pharma-deals-insight-
q4-2014.pdf 6
Gilead’s Pipeline
http://www.gilead.com/research/pipeline 7
IBIS Database Biotechnology Industry
http://clients1.ibisworld.com/reports/us/industry/de
fault.aspx?entid=2001 8
Fierce Biotech: FDA Approval Process
http://www.fiercebiotech.com/topics/fda_approval
_process.asp 9
MSCI
http://www.msci.com/resources/factsheets/index_f
act_sheet/msci-acwi-health-care-index.pdf 10
BDO: R&D Spending Analysis
https://www.bdo.com/insights/industries/press-
releases/r-d-spending-surges-in-biotech-industry11
EvaluatePharma Orphan Drug Report
http://info.evaluategroup.com/rs/evaluatepharmaltd
/images/2014OD.pdf 12
Gilead’s simtuzumab given Orphan Status
http://seekingalpha.com/news/2210425-gileads-
simtuzumab-an-orphan-drug-for-rare-liver-
disease13
FDA New Drug Approvals
http://www.fda.gov/Drugs/DevelopmentApproval
Process/DrugInnovation/ucm429873.htm14
WSJ Article on Gilead agreeing to distribute
Hepatitis C drug with Mylan
http://www.wsj.com/articles/mylan-to-distribute-
gileads-hepatitis-c-drugs-in-india-1424698301 15
Statista Word Pharmaceutical Sales
http://www.statista.com/study/10708/us-
pharmaceutical-industry-statista-dossier/ 16
PharmaExec.com: Biotech M&A Trends 2014
http://www.pharmexec.com/wild-ride-biotech-
financial-and-ma-trends-2014 17
MarketWatch Article: Appetite for High-
Growth Stocks
http://www.marketwatch.com/story/appetite-for-
high-growth-stocks-helping-drive-biotech-ipo-
boom-2015-04-20 18
16
Ernst & Young: A new benchmark year for
biotech IPOs
http://lifesciencesblog.ey.com/2015/01/09/2014-a-
new-benchmark-year-for-biotech-ipos-infographic/ 19
Gilead Signs Agreement with Japan Tobacco
http://investors.gilead.com/phoenix.zhtml?c=6996
4&p=irol-newsArticle&ID=687733&highlight= 20
Gilead’s Patent Information
http://stks.freshpatents.com/GILD-sym.php 21
Bloomberg article on Gilead Avoiding Taxes
http://www.bloomberg.com/news/articles/2015-
02-26/gilead-avoids-billions-in-u-s-taxes-on-its-1-
000-a-pill-drug 22
Statista: Yearly Growth Rate of R&D Spending
in U.S. and Europe
http://www.statista.com/statistics/315959/annual-
growth-rate-of-pharmaceutical-research-and-
development-expenditure/ 23
Gilead announces dividend and repurchase
Program
http://www.gilead.com/news/press-
releases/2015/2/gilead-sciences-announces-43-
cents-quarterly-dividend-program-and-15-billion-
share-buyback-program 24
HIV drugs are uniquely shielded from generics
http://www.ft.com/cms/s/2/286774b4-81be-11e2-
b050-00144feabdc0.html#axzz3XwPiny2n 25
HIV Treatment Expansion Snapshot
http://www.gilead.com/~/media/Files/pdfs/other/H
IV%20Treatment%20Expansion%20Fact%20Shee
t%20%20121914.pdf 26
World Health Organization: HIV/AIDS
Statistics
http://www.who.int/mediacentre/factsheets/fs360/e
n/goo 27
Should Gilead Sciences be afraid of Achillion
Pharmaceuticals?
http://www.fool.com/investing/general/2015/04/01
/should-gilead-sciences-inc-be-worried-by-
achillion.aspx28
Yale and Gilead Sciences announce cancer
research collaboration
http://news.yale.edu/2011/03/30/yale-and-gilead-
sciences-announce-cancer-research-collaboration 29
CMS Report on Medicaid and Medicare
http://www.cms.gov/Research-Statistics-Data-and-
Systems/Statistics-Trends-and-
Reports/MCRAdvPartDEnrolData/ 30
Gilead Sciences, Inc.Key Assumptions of Valuation Model
Ticker Symbol GILDCurrent Share Price $101.09Current Model Date 4/17/2015 151.09$ 4.06% 4.16% 4.26% 4.36% 4.46%Fiscal Year End Dec. 31 1.1 151.09 151.09 151.09 151.09 151.09
1.14 151.09 151.09 151.09 151.09 151.09Pre‐Tax Cost of Debt 3.93% Beta 1.18 151.09 151.09 151.09 151.09 151.09Beta 1.18 1.22 151.09 151.09 151.09 151.09 151.09Risk‐Free Rate 2.51% 1.26 151.09 151.09 151.09 151.09 151.09Equity Risk Premium 4.26%CV Growth of EPS 4.00% 151.09$ 13.0% 14.0% 15.0% 16.0% 17.0%Marginal Tax Rate 20% 13.0% 159.78 157.61 155.43 153.26 151.09WACC 7.23% 14.0% 157.61 155.43 153.26 151.09 148.92
CV COGS 15.0% 155.43 153.26 151.09 148.92 146.7516.0% 153.26 151.09 148.92 146.75 144.5717.0% 151.09 148.92 146.75 144.57 142.40
Year 2015E 2016E 2017E 2018E 2019E 2020ERevenue Growth 1.15 1.07 1.07 1.07 1.07 1.04 WACCCost of Goods Sold 0.15 0.15 0.15 0.15 0.15 0.15 151.09$ 5.23% 6.23% 7.23% 8.23% 9.23%Gross Profit 0.85 0.85 0.85 0.85 0.85 0.85 83.0% 164.08 159.74 155.39 151.05 146.70R & D 0.15 0.15 0.15 0.15 0.15 0.15 84.0% 161.91 157.57 153.22 148.88 144.53SG&A 0.14 0.14 0.14 0.14 0.14 0.14 Gross Profit 85.0% 159.74 155.39 151.05 146.70 142.36Operating Expenses 86.0% 157.57 153.22 148.88 144.53 140.19Interest Expense = Avg 4% * 1.04 1.04 1.04 1.04 1.04 87.0% 153.22 148.88 144.53 140.19 135.84Other Income (Expense), netIncome Tax Provision (Benefit) SG&AMinority Interest based on 3 year moving average 0.0053986 0.004871 0.004584 0.004951126 0.004802 0.004779 151.09$ 10.0% 12.0% 14.0% 16.0% 18.0%Net earnings attributable to the noncontrolling interest 13.0% 164.12 159.78 155.43 151.09 146.75Weighted Average Common Shares Outstanding 14.0% 161.95 157.61 153.26 148.92 144.57
CV COGS 15.0% 159.78 155.43 151.09 146.75 142.40Balance Sheet Inputs 16.0% 157.61 153.26 148.92 144.57 140.23Assets 2015 2016 2017 2018 2019 2020 18.0% 153.26 148.92 144.57 140.23 135.88Cash and Cash Equiv. = 15% of sales 0.15 0.15 0.15 0.15 0.15 0.15
Equity Risk Premium
R&D
Gilead Sciences, Inc.Revenue Decomposition
Fiscal Years Ending Dec. 31 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020ERevenuesProduct Sales $7,389,921 $8,102,359 $9,398,371 $10,803,695 24,474,000 27,539,240 29,525,074 31,546,978 33,673,020 36,063,306 37,583,088 Royalty and Contract Revenues 559,499 283,026 304,146 397,993 416,000 395,200 375,440 356,668 338,835 321,893 305,798
Total revenues 7,949,420 8,385,385 9,702,517 11,201,688 24,890,000 27,934,440 29,900,514 31,903,646 34,011,854 36,385,199 37,888,887
Revenue BreakdownHepatitis C FranchiseSovaldi ‐ ‐ ‐ 139,435 10,283,000 6,169,800 6,725,082 7,330,339 7,990,070 8,709,176 9,057,543Growth 7274.76% ‐40.00% 9.00% 9.00% 9.00% 9.00% 4.00%Harvoni ‐ ‐ ‐ ‐ 2,127,000 9,273,720 10,108,355 11,018,107 12,009,736 13,090,613 13,614,237Growth 336.00% 9.00% 9.00% 9.00% 9.00% 4.00%
Total Hepatitis C Sales ‐ ‐ ‐ 139,435 12,410,000 15,443,520 16,833,437 18,348,446 19,999,806 21,799,789 22,671,780 HIV/AIDS FranchiseAtripla 2,926,579 3,224,518 3,574,483 3,648,496 3,470,000 3,608,800 3,753,152 3,903,278 4,059,409 4,221,786 4,390,657Growth ‐ 10.18% 10.85% 2.07% ‐4.89% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%Truvada 2,649,908 2,875,141 3,181,110 3,135,771 3,340,000 3,473,600 3,612,544 3,757,046 3,907,328 4,063,621 4,226,166Growth 8.50% 10.64% ‐1.43% 6.51% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%Complera/Eviplera ‐ 38,747 342,200 809,452 1,228,000 1,277,120 1,328,205 1,381,333 1,436,586 1,494,050 1,553,812Growth 783.17% 136.54% 51.71% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%Stribild ‐ ‐ 57,536 539,256 1,197,000 1,244,880 1,294,675 1,346,462 1,400,321 1,456,334 1,514,587Growth 837.25% 121.97% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%Viread 732,240 737,867 848,697 958,969 1,058,000 1,100,320 1,144,333 1,190,106 1,237,710 1,287,219 1,338,708Growth 0.77% 15.02% 12.99% 10.33% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Total HIV/AIDS Sales ‐ ‐ 8,004,026 9,091,944 10,293,000 10,704,720 11,132,909 11,578,225 12,041,354 12,523,008 13,023,929 Cardiovascular FranchiseLetairis 239,832 293,426 410,054 519,966 595,000 618,800 643,552 669,294 696,066 723,908 752,865Growth #DIV/0! 22.35% 39.75% 26.80% 14.43% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%Ranexa 305,856 320,004 372,949 448,624 510,000 530,400 551,616 573,681 596,628 620,493 645,313Growth #DIV/0! 4.63% 16.55% 20.29% 13.68% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Total CardioVascular Sales 545,688 613,430 783,003 968,590 1,105,000 1,149,200 1,195,168 1,242,975 1,292,694 1,344,401 1,398,178 OncologyZydelig ‐ ‐ ‐ ‐ ‐ 191,000 248,300 322,790 419,627 545,515 709,170Growth ‐ ‐ ‐ ‐ ‐ ‐ 30.00% 30.00% 30.00% 30.00% 30.00%
Total Oncology Sales ‐ ‐ ‐ ‐ ‐ 191,000 248,300 322,790 419,627 545,515 709,170 Other 6,631,633 551,599 575,410 567,327 634,000 637,000 739,000 734,000 678,000 718,000 795,000Growth ‐ ‐91.68% 4.32% ‐1.40% 11.75% 0.47% 16.01% 70.42% 31.40% 61.01% 17.97%
Total Other Sales 6,631,633 551,599 575,410 567,327 634,000 637,000 739,000 734,000 678,000 718,000 795,000
Gilead Sciences, Inc.Income Statement(In thousands except per share amount)Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
RevenuesTotal Revenue 9,702,520 11,201,690 24,890,000 28,623,500 30,627,145 32,771,045 35,065,018 37,519,570 39,020,352 Cost of Revenue 2,471,360 2,858,500 3,788,000 4,293,525 4,594,072 4,915,657 5,259,753 5,627,935 5,853,053 Gross Profit 7,231,150 8,343,190 21,102,000 24,329,975 26,033,073 27,855,388 29,805,266 31,891,634 33,167,300
Operating Expenses
Selling / General / Administrative Expenses, Total 1,461,030 1,699,430 2,964,000 4,007,290 4,287,800 4,587,946 4,909,103 5,252,740 5,462,849 Research & Development 1,759,950 2,119,760 2,737,000 4,293,525 4,594,072 4,915,657 5,259,753 5,627,935 5,853,053 Other Expenses ‐ ‐ 136,000 ‐ ‐ ‐ ‐ ‐ ‐
Total Operating Expense 5,692,340 6,677,690 9,625,000 8,300,815 8,881,872 9,503,603 10,168,855 10,880,675 11,315,902 Earnings from operations 4,010,180 4,524,000 15,265,000 16,029,160 17,151,201 18,351,785 19,636,410 21,010,959 21,851,397 Non‐Operating ExpensesInterest Expense 370,460 321,800 412,000 476,840 495,914 515,750 536,380 557,835 580,149Other Non‐Operating Income (Expense) ‐27,740 6,020 3,000 50,000 50,000 50,000 50,000 50,000 50,000
Net Income Before Taxes 3,611,980 4,208,220 14,856,000 15,602,320 16,705,288 17,886,035 19,150,030 20,503,124 21,321,249Provision for Income Taxes 1,038,380 1,150,930 2,797,000 3,120,464 3,341,058 3,577,207 3,830,006 4,100,625 4,264,250
Net Income After Taxes 2,573,600 3,057,290 12,059,000 12,481,856 13,364,230 14,308,828 15,320,024 16,402,499 17,056,999Minority Interest 17,970 17,520 42,000 67,385 65,093 65,593 75,851 78,764 81,516
Net Income 2,591,570 3,074,810 12,101,000 12,549,241 13,429,323 14,374,421 15,395,875 16,481,263 17,138,515Basic Weighted Average Shares 1,515 1,529 1,522 1,503 1,486 1,471 1,458 1,448 1,439Basic Normalized EPS 1.71 2.01 8.01 8.35 9.04 9.77 10.56 11.38 11.91Effective Tax Rate 28.75% 27.35% 18.83% 20% 20% 20% 20% 20% 20%Dividends Per Share 1.29 1.72 1.72 1.72 1.72 1.72
Gilead Sciences, Inc.Balance Sheet In thousands of USD Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Period Ended 12/31/2012 12/31/2013 12/31/2014 12/31/2015 13/31/16 12/31/2017 13/31/18 12/31/2019 12/31/2020 Assets Current Assets Cash & Equivalents 1,803,694 2,113,000 10,027,000 20,635,690 32,786,339 46,073,523 61,309,917 77,936,411 98,693,593 Short Term Investments 58,556 19,000 101,000 57,247 61,254 65,542 70,130 75,039 78,041 Account Receivables ‐ Net 1,751,383 2,182,000 4,635,000 5,152,230 5,512,886 6,226,499 6,662,353 6,753,523 7,023,663 Total Inventory 1,744,982 1,697,000 1,386,000 1,431,175 1,531,357 1,638,552 1,753,251 1,875,978 1,951,018 Deferred Income Tax 262,641 331,000 508,000 685,000 726,100 740,622 755,434 762,989 785,878 Prepaid Expenses 450,784 564,000 585,000 963,873 963,873 1,033,378 1,104,144 1,178,556 1,262,216 Other Current Assets 84,302 91,000 472,000 572,470 612,543 655,421 701,300 750,391 780,407
Total Current Assets 6,156,342 6,997,000 17,714,000 29,497,685 42,194,353 56,433,536 72,356,530 89,332,887 110,574,816 Property / Plant / Equipment, Total at cost 1,523,560 1,269,200 1,799,000 2,862,350 3,062,715 3,277,105 3,506,502 3,751,957 3,902,035 Less: Accumulated Depreciation (423,300) (103,000) (125,000) (572,470) (612,543) (655,421) (701,300) (750,391) (780,407) Property / Plant / Equipment, Total ‐ Net 1,100,260 1,166,000 1,674,000 2,289,880 2,450,172 2,621,684 2,805,201 3,001,566 3,121,628 Goodwill, Net 1,060,920 1,169,000 1,172,000 1,172,000 1,172,000 1,172,000 1,172,000 1,172,000 1,172,000 Intangibles, Net 11,736,390 11,900,000 11,073,000 10,297,890 9,577,038 8,906,645 8,283,180 7,703,357 7,164,122 Long Term Investments 719,840 439,000 1,598,000 1,144,940 1,225,086 1,310,842 1,402,601 1,500,783 1,560,814 Defered Income Tax 131,110 190,000 236,000 286,235 306,271 327,710 350,650 375,196 390,204 Other Long Term Assets 334,977 357,953 625,187 703,034 741,103 781,837 825,422 872,059 900,574
Total Assets 21,239,840 22,417,719 34,558,187 45,935,510 58,247,938 72,176,904 87,861,820 104,670,719 125,625,545 Liabilities
Current Liabilities Accounts Payable 1,327,340 1,256,000 955,000 1,431,175 1,837,629 1,966,263 2,454,551 2,626,370 2,731,425 Accrued Expenses 1,569,890 2,332,000 2,632,000 4,865,995 5,206,615 5,898,788 6,311,703 6,378,327 6,633,460 Current Portion of Long Term Debt / Capital Leases 1,169,490 2,697,000 483,000 917,000 1,010,162 1,342,730 1,702,632 2,109,786 2,568,269 Deferred Revenues 103,160 111,000 134,000 247,357 244,350 240,361 279,988 291,372 300,265 Income Taxes Payable 13,400 11,000 105,000 62,412 74,727 95,282 88,094 98,419 104,670 Other Current Liabilities 54,620 1,071,000 1,452,000 1,431,175 1,531,357 1,638,552 1,753,251 1,875,978 1,951,018
Total Current Liabilities 4,237,900 6,407,000 5,761,000 8,955,113 9,904,840 11,181,976 12,590,219 13,380,252 14,289,105 Long Term Debt 7,054,560 3,939,000 11,921,000 13,132,111 17,455,494 22,134,216 27,427,224 33,387,492 39,774,873 Long Term Income Taxes Payable 115,822 162,000 562,000 572,470 612,543 655,421 701,300 750,391 780,407 Long Term Deferred Tax Liabilities 10,190 83,000 51,000 57,247 61,254 65,542 70,130 75,039 78,041 Minority Interest 241,130 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Other Long Term Liabilities 257,120 243,000 550,000 572,470 612,543 655,421 701,300 750,391 780,407
Total Liabilities 11,916,722 10,834,000 18,845,000 23,289,411 28,646,673 34,692,576 41,490,174 48,343,566 55,702,833 Equity
Common Equity 5,643,460 5,388,000 2,393,000 2,393,233 2,393,466 2,393,699 2,393,932 2,394,166 2,394,399 Retained Earnings (Accumulated Deficit) 3,704,740 6,106,000 12,732,000 23,342,855 33,297,778 44,180,599 56,067,674 69,022,938 82,618,253 Unrealized Gain (Loss) (44,200) (124,000) 301,000 301,000 301,000 301,000 301,000 301,000 301,000 Translation Adjustment (1,420) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Other Equity, Total (1,420) (375,000) (393,000) (393,000) (393,000) (393,000) (393,000) (393,000) (393,000) Total Before Treasury Stock 9,302,680 10,997,000 15,035,000 25,646,098 35,601,265 46,484,328 58,371,647 71,327,153 84,922,711 Less: Treasury Stock (3,000,000) (6,000,000) (9,000,000) (12,000,000) (15,000,000) (15,000,000)
Total Equity 9,302,680 10,997,000 15,035,000 22,646,098 29,601,265 37,484,328 46,371,647 56,327,153 69,922,711 Total Liabilities & Shareholders' Equity 21,239,840 22,579,000 34,664,000 45,935,510 58,247,938 72,176,904 87,861,821 104,670,719 125,625,544
Gilead Sciences, Inc.Cash Flow Statement
Fiscal Years Ending Dec. 31 2010 2011 2012 2013 2014
Operating Activities:Net income $2,789,059 $2,573,599 $3,057,286 $12,059,000
Adjustments to reconcile net income to net cash:Depreciation expense 67,240 72,187 82,847 102,644 125,000Amortization expense 198,237 230,045 195,359 242,060 925,000Stock‐based compensation expense 200,041 192,378 208,725 251,984 360,000In‐process research and development impairment charges 136,000 26,630 ‐ ‐ ‐ Excess tax benefits from stock‐based compensation (81,620) (40,848) (114,236) (278,773) (482,000)Tax benefits from employee stock plans 82,086 37,231 112,629 284,655 484,000 Deferred income taxes 12,152 64,061 (39,393) (98,181) (236,000)Change in fair value of contingent consideration 8,483 69,469 58,700 22,000Other 10,408 47,931 (1,878) 47,289 79,000
Changes in operating assets and liabilities:Accounts receivable, net (348,875) (375,736) 197,986 (315,299) (2,578,000)Inventories (161,190) (200,793) (349,924) (343,143) 143,000Prepaid expenses and other assets (70,466) (13,959) (129,318) (170,355) (371,000)Accounts payable (4,453) 428,944 117,485 (97,673) (289,000)Income taxes payable (185,733) 110,771 (68,473) 30,021 533,000Accrued liabilities 120,065 292,110 316,594 311,628 2,013,000Deferred revenues (29,728) (29,484) 23,245 22,145 31,000
Net cash provided by operating activities 2,833,913 3,639,010 3,194,716 3,104,988 12,818,000
Investing Activities:Purchases of marketable securities (5,502,687) (5,127,790) (1,244,898) (256,700) (2,107,000)Proceeds from sales of marketable securities 3,033,893 8,649,752 527,712 494,117 807,000Proceeds from maturities of marketable securities 683,927 788,395 44,813 77,655 52,000Purchases of other investments (25,000) (18,000)Acquisitions, net of cash acquired (91,000) (588,608) (10,751,635) (378,645)Capital expenditures (61,884) (131,904) (397,046) (190,782) (557,000)
Net cash provided by (used in) investing acitivites (1,937,751) 3,589,845 (11,846,054) (254,355) (1,823,000)
Financing Activities:Proceeds from debt financing, net of issuance costs 2,962,500 4,660,702 2,144,733 7,932,000Proceeds from convertible note hedges 155,425 36,148 213,856 2,774,402 2,543,000Proceeds from issuances of common stock 221,223 211,737 466,283 313,079 331,000Repurchases of common stock (4,022,593) (2,383,132) (667,041) (582,358) (5,349,000)Repurchases of convertible note hedges (362,622) (26,000)Repayments of debt financing (500,000) (686,135) (1,837,139) (4,439,891)Payments to settle warrants (1,039,695) (4,093,000)Repayments of other long‐term obligations (5,786) (1,562) (2,186) (77)Excess tax benefits from stock‐based compensation 81,620 40,848 114,236 278,773 (4,779,000)Contributions from (distributions to) 131,523 (115,037) 130,604 151,826 35,000 noncontrolling interestDividends paid ‐ ‐ ‐ ‐ ‐
Net cash provided by (used in) financing activities (1,338,710) 1,763,569 563,346 (2,543,941) (3,025,000)
Effect of exchange rate changes on cash 77,469 (16,526) 7,909 2,420 (56,000)Net change in cash and cash equivalents (365,079) 8,975,898 (8,080,083) 309,112 7,914,000Cash and cash equivalents at beginning of period 1,272,958 907,879 9,883,777 1,803,694 2,113,000Cash and cash equivalents at end of period $907,879 $9,883,777 $1,803,694 $2,112,806 $10,027,000
Supplemental disclosure of cash flow information:Interest paid, net of amounts capitalized $15,748 $62,180 $249,358 $238,325 $330,000Income taxes paid $1,129,577 $621,025 $1,101,241 $1,050,588 $2,060,000
$2,889,749
Gilead Sciences, IncCash Flow Statement
2015E 2016E 2017E 2018E 2019E 2020EOperating Activities:Net income 12,549,241 13,429,323 14,374,421 15,395,875 16,481,263 17,138,515
Adjustments to reconcile net income to net cash:Depreciation expense 447,470 40,073 42,878 45,879 49,091 30,016Amortization expense 775,110 720,852 670,393 623,465 579,823 539,235Change in Deferred Income Tax 177,000 41,100 14,522 14,812 7,554 22,890
Changes in working capital accountsChange in Receivables (517,230) (360,656) (713,612) (435,855) (91,169) (270,141)Change in Inventories (45,175) (100,182) (107,195) (114,699) (122,728) (75,039)Change in Prepaid Expenses 378,873 0 69,504 70,767 74,411 83,660Change in Income Taxes Payable (42,588) 12,315 20,555 (7,188) 10,325 6,251Change in Accounts Payable 476,175 406,454 128,634 488,289 171,819 105,055Change in Accrued Expenses 2,233,995 340,620 692,173 412,915 66,624 255,133Change in Other Current Assets (100,470) (40,073) (42,878) (45,879) (49,091) (30,016)Change in Deferred Revenues 113,357 (3,007) (3,989) 39,628 11,384 8,893Change in Other Noncurrent Liabilities (22,470) (40,073) (42,878) (45,879) (49,091) (30,016)Change in Other Current Liabilities 20,825 (100,182) (107,195) (114,699) (122,728) (75,039)
Net cash provided by operating activities 3,894,872 917,240 620,911 931,556 536,224 570,881
Investing Activities:Change in Short Term Investments 43,753 (4,007) (4,288) (4,588) (4,909) (3,002)Change in Long‐Term Assets 453,060 (80,146) (85,756) (91,759) (98,182) (60,031)Change in Other Assets 77,846 38,069 40,734 43,585 46,636 28,515Capital Expenditures (615,880) (160,292) (171,512) (183,518) (196,364) (120,063)
Net cash provided by (used in) investing acitivites (41,220) (206,375) (220,822) (236,279) (252,819) (154,581)
Financing Activities:Proceeds from debt financing, net of issuance costs 1,211,111 4,323,383 4,678,723 5,293,007 5,960,268 6,387,382Changes in Current Portion of Long Term Debt (434,000) (93,162) (332,568) (359,902) (407,154) (458,482)Proceeds from issuances of common stockRepurchases of common stock (3,000,000) (3,000,000) (3,000,000) (3,000,000) (3,000,000) 0Repayments of debt financing (1,632,928) (1,303,207) (935,862) (906,518) (823,774) (870,612)Dividends paid (1,938,386) (1,916,552) (1,897,619) (1,881,346) (1,867,514) (1,855,921)
Net cash provided by (used in) financing activities (5,794,203) (1,989,539) (1,487,326) (854,758) (138,174) 3,202,366
Net change in cash and cash equivalents 10,608,690 12,150,649 13,287,184 15,236,394 16,626,494 20,757,182Cash and cash equivalents at beginning of period 10,027,000 20,635,690 32,786,339 46,073,523 61,309,917 77,936,411Cash and cash equivalents at end of period 20,635,690 32,786,339 46,073,523 61,309,917 77,936,411 98,693,593
Supplemental disclosure of cash flow information:Interest paid, net of amounts capitalized 476,840 495,914 515,750 536,380 557,835 580,149Income taxes paid 3,120,464 3,341,058 3,577,207 3,830,006 4,100,625 4,264,250
Gilead Sciences, Inc.Common Size Income Statement
Fiscal Years Ending Dec. 31 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020EPeriod EndedRevenuesTotal Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of Revenue 23.52% 25.33% 25.47% 25.52% 15.22% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00%Gross Profit 76.48% 74.67% 74.53% 74.48% 84.78% 85.00% 85.00% 85.00% 85.00% 85.00% 85.00%
Operating ExpensesSelling / General / Administrative Expenses, Total 12.81% 14.37% 15.06% 15.17% 11.91% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00%Research & Development 11.61% 14.22% 18.14% 18.92% 11.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00%Unusual Expense (Income) 2.21% 0.88% ‐ ‐ 0.55% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Operating Expense 50.16% 54.80% 58.67% 59.61% 38.67% 29.00% 29.00% 29.00% 29.00% 29.00% 29.00%Earnings from operations 49.84% 45.20% 41.33% 40.39% 61.33% 56.00% 56.00% 56.00% 56.00% 56.00% 56.00%Non‐Operating Expenses
Interest Income (Expense), Net‐Non‐Operating, Total 1.37% 2.45% 3.82% 2.87% 1.66% 1.67% 1.62% 1.57% 1.53% 1.49% 1.49%Other Non‐Operating Income (Expense) 0.76% 0.79% ‐0.29% 0.05% 0.01% 0.17% 0.16% 0.15% 0.14% 0.13% 0.13%
Net Income Before Taxes 49.23% 43.54% 37.23% 37.57% 59.69% 54.51% 54.54% 54.58% 54.61% 54.65% 54.64%Provision for Income Taxes 12.88% 10.28% 10.70% 10.27% 11.24% 10.90% 10.91% 10.92% 10.92% 10.93% 10.93%
Net Income After Taxes 36.35% 33.26% 26.53% 27.29% 48.45% 43.61% 43.64% 43.66% 43.69% 43.72% 43.71%Minority Interest 0.14% 0.17% 0.19% 0.16% 0.17% 0.24% 0.21% 0.20% 0.22% 0.21% 0.21%
Net Income 36.50% 33.43% 26.71% 27.45% 48.62% 43.84% 43.85% 43.86% 43.91% 43.93% 43.92%
Gilead Sciences, Inc.Common Size Balance Sheet
Fiscal Years Ending Dec. 31 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
AssetsCurrent AssetsCash & Equivalents 11.42% 117.87% 18.59% 18.86% 40.29% 72.01% 106.97% 140.51% 174.76% 207.62% 252.83%Short Term Investments 14.97% 0.20% 0.60% 0.17% 0.41% 0.20% 0.20% 0.20% 0.20% 0.20% 0.20%Account Receivables ‐ Net 20.40% 23.27% 18.05% 19.48% 18.62% 18.00% 18.00% 19.00% 19.00% 18.00% 18.00%Total Inventory 15.14% 16.58% 17.98% 15.15% 5.57% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%Deferred Income Tax 3.51% 2.48% 2.71% 2.95% 2.04% 2.39% 2.37% 2.26% 2.15% 2.03% 2.01%
Total Current AssetsProperty / Plant / Equipment, Total at cost 12.80% 13.51% 15.70% 11.33% 7.23% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%Less: Accumulated Depreciation 3.98% 4.27% 4.36% 0.92% 0.50% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%Property / Plant / Equipment, Total ‐ Net 8.82% 9.24% 11.34% 10.41% 6.73% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%Goodwill, Net 6.70% 11.97% 10.93% 10.44% 4.71% 4.09% 3.83% 3.58% 3.34% 3.12% 3.00%Intangibles, Net 11.23% 12.68% 120.96% 106.23% 44.49% 35.98% 31.27% 27.18% 23.62% 20.53% 18.36%Long Term Investments 40.50% 0.76% 7.42% 3.92% 6.42% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%Defered Income Tax ‐ Long Term Asset 1.93% 1.72% 1.35% 1.70% 0.95% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%Other Long Term Assets 4.84% 4.00% 3.45% 3.20% 2.51% 2.46% 2.42% 2.39% 2.35% 2.32% 2.31%
Total Assets 145.83% 206.35% 218.91% 200.13% 138.84% 160.48% 190.18% 220.25% 250.57% 278.98% 321.95%Liabilities
Current LiabilitiesAccounts Payable 10.10% 14.38% 13.68% 11.21% 3.84% 0.05 0.06 0.06 0.07 0.07 0.07Accrued Expenses 11.45% 14.15% 16.18% 20.82% 10.57% 0.17 0.17 0.18 0.18 0.17 0.17Current Portion of LTD / Capital Leases 8.13% 0.02% 12.05% 24.08% 1.94% 3.20% 3.30% 4.10% 4.86% 5.62% 6.58%Customer Advances 1.30% 0.89% 1.06% 0.99% 0.54% 0.86% 0.80% 0.73% 0.80% 0.78% 0.77%Income Taxes Payable 0.02% 0.48% 0.14% 0.10% 0.42% 0.22% 0.24% 0.29% 0.25% 0.26% 0.27%Other Current Liabilities ‐‐ 0.06% 0.56% 9.56% 5.83% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Total Current Liabilities 31.01% 29.99% 43.68% 57.20% 23.15% 31.29% 32.34% 34.12% 35.91% 35.66% 36.62%Long Term Debt 35.71% 90.70% 72.71% 35.16% 47.89% 45.88% 56.99% 67.54% 78.22% 88.99% 101.93%Minority Interest 3.25% 1.53% 2.49% ‐‐ 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other Long Term Liabilities 2.10% 3.76% 2.65% 2.17% 2.21% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%
Total Liabilities 72.07% 125.98% 122.82% 96.72% 75.71% 81.36% 93.53% 105.86% 118.32% 128.85% 142.75%Equity 0.00% 0.00% 0.00% 0.00% 0.00%
Common Stock 0.01% 0.01% 0.02% 0.02% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01%Additional Paid‐In Capital 58.47% 58.47% 58.16% 48.10% 9.61% 8.36% 7.81% 7.30% 6.83% 6.38% 6.14%Retained Earnings (Accumulated Deficit) 14.89% 21.19% 38.18% 54.51% 51.15% 81.55% 108.72% 134.82% 159.90% 183.97% 211.73%Unrealized Gain (Loss) 0.48% 0.84% ‐0.46% ‐1.11% 1.21% 1.05% 0.98% 0.92% 0.86% 0.80% 0.77%Translation Adjustment ‐0.09% ‐0.15% ‐0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other Equity, Total ‐0.09% ‐0.15% ‐0.01% ‐3.35% ‐1.58% ‐1.37% ‐1.28% ‐1.20% ‐1.12% ‐1.05% ‐1.01%
Total Equity 73.67% 80.22% 95.88% 98.17% 60.41% 79.12% 96.65% 114.38% 132.24% 150.13% 179.20%Total Liabilities & Shareholders' Equity 145.83% 206.35% 218.91% 201.57% 139.27% 1.6048181 1.9018403 2.2024596 2.505683 2.7897633 3.2194877
VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol GILDCurrent Stock Price $101.09Risk Free Rate 2.51%Current Dividend Yield 0.00%Annualized St. Dev. of Stock Returns 38.80%
Average Average B‐S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 39,144 22.63 3.80 80.73$ 2,804,000$ Range 2Range 3Range 4Range 5Range 6 ‐$ Range 7 ‐$ Range 8 ‐$ Range 9 ‐$ Range 10 ‐$ Range 11 ‐$ Range 12 ‐$ Range 13 ‐$ Range 14 ‐$ Total 39,144 22.63$ 3.80 80.73$ 2,804,000$
Gilead Sciences, Inc.Value Driver Estimation
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
NOPLAT Computation:
EBITA:Net Sales 9,702,520 11,201,690 24,890,000 28,623,500 30,627,145 32,771,045 35,065,018 37,519,570 39,020,352 ‐Cost of Products Sold 2,471,360 2,858,500 3,788,000 4,293,525 4,594,072 4,915,657 5,259,753 5,627,935 5,853,053 ‐Operating Expenses 5,692,340 6,677,690 9,625,000 8,300,815 8,881,872 9,503,603 10,168,855 10,880,675 11,315,902 +Implied Interest on Operating Leases 25,217 25,590 105,907 113,320 121,253 129,741 138,822 144,375 ‐ EBITA 1,564,037 1,691,090 11,582,907 16,142,480 17,272,454 18,481,526 19,775,233 21,155,334 21,851,397
Less: Adjusted Taxes:Provision for Income Taxes 1,038,380 1,150,930 2,797,000 3,120,464 3,341,058 3,577,207 3,830,006 4,100,625 4,264,250 +Tax Shield on Interest Expense 74,092 64,360 82,400 95,368 99,183 103,150 107,276 111,567 116,030 +Tax Shield on Implied Lease Interest 5,043 5,118 21,181 22,664 24,251 25,948 27,764 28,875 ‐ ‐Tax on Other Interest Income (Expense) (5,548) 1,204 600 10,000 10,000 10,000 10,000 10,000 10,000 Adjusted Taxes 1,123,063 1,219,204 2,899,981 3,228,496 3,454,491 3,696,305 3,955,047 4,231,067 4,370,279
Plus: Change in Deferred Tax (DT) LiabilitiesDT Liabilities 10,190 72,810 (32,000) 6,247 4,007 4,288 4,588 4,909 3,002 DT Current Assets (54,481) (68,359) (177,000) (177,000) (41,100) (14,522) (14,812) (7,554) (22,890) DT Long‐Term Assets 12,910 (58,890) (46,000) (50,235) (20,036) (21,439) (22,940) (24,546) (15,008) Net DT Liabilities (31,381) (54,439) (255,000) (220,988) (57,129) (31,673) (33,164) (27,191) (34,896)
Net Change in DT Liabilities (1,455,961) (23,058) (200,561) 34,012 163,859 25,456 (1,491) 5,973 (7,705)
NOPLAT: EBITA‐Adjusted Taxes+Change in DT 409,593 417,447 8,427,926 12,692,996 13,760,834 14,753,547 15,787,022 16,897,077 17,446,222
Invested Capital Computation:
Operating Current Assets:Normal Cash (lesser of actual or 2%) 485,126 560,085 1,244,500 1,431,175 1,531,357 1,638,552 1,753,251 1,875,978 1,951,018 Accounts Receivable, Net 1,751,383 2,182,000 4,635,000 5,152,230 5,512,886 6,226,499 6,662,353 6,753,523 7,023,663 Inventory 1,744,982 1,697,000 1,386,000 1,431,175 1,531,357 1,638,552 1,753,251 1,875,978 1,951,018 Prepaid Expenses 450,784 564,000 585,000 987,991 987,991 1,058,810 1,134,503 1,215,416 1,301,919 Other Current Operating Assets 84,302 91,000 472,000 572,470 612,543 655,421 701,300 750,391 780,407 Operating Current Assets 4,516,577 5,094,085 8,322,500 9,575,041 10,176,134 11,217,834 12,004,659 12,471,287 13,008,024
Operating Current Liabilities:Accounts Payable 1,327,340 1,256,000 955,000 1,431,175 1,837,629 1,966,263 2,454,551 2,626,370 2,731,425 Accrued Expenses 1,569,890 2,332,000 2,632,000 4,865,995 5,206,615 5,898,788 6,311,703 6,378,327 6,633,460 Deferred Revenue 103,160 111,000 134,000 247,357 244,350 240,361 279,988 291,372 300,265 Income Taxes Payable 13,400 11,000 105,000 62,412 74,727 95,282 88,094 98,419 104,670 Operating Current Liabilities 3,013,790 3,710,000 3,826,000 6,606,938 7,363,320 8,200,693 9,134,336 9,394,487 9,769,819
Net Operating Working Capital 1,502,787 1,384,085 4,496,500 2,968,102 2,812,814 3,017,141 2,870,322 3,076,800 3,238,205
Plus: Net PPE 1,100,260 1,166,000 1,674,000 2,289,880 2,450,172 2,621,684 2,805,201 3,001,566 3,121,628
Plus: PV of Operating Leases 188,428 200,723 572,470 612,543 655,421 701,300 750,391 780,407 ‐
Plus: Other Oper. Assets 12,071,367 12,257,953 11,698,187 11,000,924 10,318,140 9,688,482 9,108,602 8,575,416 8,064,696
Invested Capital: 14,862,842 15,008,760 18,441,157 16,871,448 16,236,547 16,028,607 15,534,518 15,434,189 14,424,530
Value Drivers:
ROICNOPLAT 409,593 417,447 8,427,926 12,692,996 13,760,834 14,753,547 15,787,022 16,897,077 17,446,222 Beginning Invested Capital 3,603,049 14,862,842 15,008,760 18,441,157 16,871,448 16,236,547 16,028,607 15,534,518 15,434,189 ROIC 11.37% 2.81% 56.15% 68.83% 81.56% 90.87% 98.49% 108.77% 113.04%
EPNOPLAT 409,593 417,447 8,427,926 12,692,996 13,760,834 14,753,547 15,787,022 16,897,077 17,446,222 Beginning Invested Capital 3,603,049 14,862,842 15,008,760 18,441,157 16,871,448 16,236,547 16,028,607 15,534,518 15,434,189 WACC 7% 7% 7% 7% 7% 7% 7% 7% 7%EP 149,225 ‐656,591 7,343,343 11,360,377 12,541,647 13,580,241 14,628,742 15,774,501 16,330,896
FCFNOPLAT 409,593 417,447 8,427,926 12,692,996 13,760,834 14,753,547 15,787,022 16,897,077 17,446,222 Change in Invested Capital 11,259,793 145,919 3,432,397 (1,569,709) (634,901) (207,941) (494,089) (100,329) (1,009,659) FCF (10,850,200) 271,528 4,995,529 14,262,705 14,395,736 14,961,488 16,281,111 16,997,406 18,455,881
Gilead Sciences, Inc.Relative Valuation Models
EPS EPS Est. 5yrTicker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr. PEG 15 PEG 16AMGN Amgen Inc. $155.49 $9.31 $10.48 16.7 14.8 11% 151.83 134.88 BIIB Biogen Inc. $413.85 $16.92 $19.87 24.5 20.8 18% 135.88 115.71 GSK GlaxoSmithKline $46.94 $2.73 $3.10 17.2 15.1 14% 122.82 108.16 ACT Actavis PLC $299.48 $17.58 $21.28 17.0 14.1 18% 94.64 78.19
Average 18.8 16.2 126.3 109.2
GILD Gilead Sciences, Inc. $101.09 $8.35 $9.04 12.1 11.2 7.4% 164.4 151.9
Implied Value: Relative P/E (EPS15) $ 157.41 Relative P/E (EPS16) 146.61$ PEG Ratio (EPS15) 77.64$ PEG Ratio (EPS16) 72.68$
Gilead Sciences, Inc.Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E
EPS 8.35$ 9.04$ 9.77$ 10.56$ 11.38$ 11.91$
Key Assumptions CV growth 4.00% CV ROE 27.15% Cost of Equity 7.96%
Future Cash Flows P/E Multiple (CV Year) 21.52 EPS (CV Year) 11.91$ Future Stock Price 256.40$ Dividends Per Share 1.29 1.72 1.72 1.72 1.72 256.40$ Number of Periods 1 2 3 4 5 5
Discounted Cash Flows 1.19$ 1.48$ 1.37$ 1.27$ 1.17$ 174.81$
Intrinsic Value 181.29$ Fraction of year elapsed 0.304
Adjusted Stock Price (as of 04/21/2015) 185.19$
Gilead Sciences, Inc.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs: CV Growth 4.00% CV ROIC 113.31% WACC 7.23% Cost of Equity 7.96%
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E
DCF ModelEBIT 16,142,480 17,272,454 18,481,526 19,775,233 21,155,334 21,851,397 Less: Taxes 3,228,496 3,454,491 3,696,305 3,955,047 4,231,067 4,370,279
Tax Adjusted EBIT 12,913,984 13,817,963 14,785,221 15,820,186 16,924,267 17,481,118 Plus: D&A 447,470 40,073 42,878 45,879 49,091 30,016 Less: Capex 615,880 160,292 171,512 183,518 196,364 120,063 Less: Change in Working Capital (1,552,515) (155,288) 203,012 (151,745) 199,976 158,563
Unlevered Free Cash Flow 14,298,089 13,853,033 14,453,575 15,834,293 16,577,019 248,007,009
Periods to Discount 1 2 3 4 5 5 PV of Cash Flows 13,334,494.63 12,048,749.10 11,723,868.66 11,978,236.47 11,694,972.16 174,967,231.71 Total PV of Cash Flows 235,747,553 Less: LT Debt 13,132,111 Less: PV operating leases 263,197 Enterprise Value 222,352,245 Shares Outstanding 1,502,625 Intrinsic Stock Value 148Fraction of year elapsed 0.304
Adjusted Stock Price (as of 04/21/2015) 151.09$
EP ModelBeginning Invested Capital 18,441,157 Economic Profit 11,360,377 12,543,390 13,581,984 14,630,580 15,776,695 16,333,560 Continuing Value (CV) 235,069,524
WACC 7.23%EP to Discount 11,360,377 12,543,390 13,581,984 14,630,580 15,776,695 235,069,524 Number of Periods 1 2 3 4 5 5 Present Value of Economic Profit 10,594,764.49 10,909,680.61 11,016,886.14 11,067,658.28 11,130,349.22 165,839,925.53
PV of EP 220,559,264
Value of operating assets 239,000,421 Less: long term debt 13,132,111 Less: PV operating leases 263,197 Value of Equity 225,605,113 19,783,023 Shares Outstanding 1,502,625 Intrinsic Value of Stock 148 Fraction of year elapsed 0.304
Adjusted Stock Price (as of 04/21/2015) 151.09$
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares): 39,144Average Time to Maturity (years): 3.80Expected Annual Number of Options Exercised: 10,301
Current Average Strike Price: 22.63$ Cost of Equity: 9.00%Current Stock Price: $101.09
2015E 2016E 2017E 2018E 2019E 2020EIncrease in Shares Outstanding: 10 10 10 10 10 10Average Strike Price: 22.63$ 22.63$ 22.63$ 22.63$ 22.63$ 22.63$ Increase in Common Stock Account: 233 233 233 233 233 233
Change in Treasury Stock 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000Expected Price of Repurchased Shares: 101.09$ 110.19$ 120.11$ 130.91$ 142.70$ 155.54$ Number of Shares Repurchased: 30 27 25 23 21 19
Shares Outstanding (beginning of the year) 1,522 1,503 1,486 1,471 1,458 1,448Plus: Shares Issued Through ESOP 10 10 10 10 10 10Less: Shares Repurchased in Treasury 30 27 25 23 21 19 Shares Outstanding (end of the year) 1,503 1,486 1,471 1,458 1,448 1,439
Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012) Present Value of Operating Lease Obligations (2011) Present Value of Operating Lease Obligations (2010)
Operating Operating Operating Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending 159.737266578493 Leases Fiscal Years Ending Leases Fiscal Years Ending 151.048211434253 Leases2015 58,000 2014 48,976 2013 47,009 2012 43,635 2011 45,887 2016 53,000 2015 46,345 2014 42,947 2013 36,302 2012 37,733 2017 49,000 2016 41,384 2015 37,566 2014 30,027 2013 29,648 2018 36,000 2017 32,482 2016 26,648 2015 23,961 2014 21,477 2019 33,000 2018 25,204 2017 19,211 2016 17,814 2015 19,078 Thereafter 73,000 Thereafter 31,922 Thereafter 40,264 Thereafter 53,215 Thereafter 57,344 Total Minimum Payments 302,000 Total Minimum Payments 226,313 Total Minimum Payments 213,645 Total Minimum Payments 204,954 Total Minimum Payments 211,167 Less: Interest 38,803 Less: Interest 25,590 Less: Interest 25,217 Less: Interest 26,724 Less: Interest 27,730 PV of Minimum Payments 263,197 PV of Minimum Payments 200,723 PV of Minimum Payments 188,428 PV of Minimum Payments 178,230 PV of Minimum Payments 183,437
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre‐Tax Cost of Debt 3.93% Pre‐Tax Cost of Debt 3.93% Pre‐Tax Cost of Debt 3.93% Pre‐Tax Cost of Debt 3.93% Pre‐Tax Cost of Debt 3.93%Number Years Implied by Year 6 Payment 2.21 Number Years Implied by Year 6 Payment 1.27 Number Years Implied by Year 6 Payment 2.10 Number Years Implied by Year 6 Payment 2.99 Number Years Implied by Year 6 Payment 3.01
Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 58,000 55,807 1 48,976 47,124 1 47,009 45,231 1 43,635 41,985 1 45,887 44,152 2 53,000 49,068 2 46,345 42,906 2 42,947 39,760 2 36,302 33,608 2 37,733 34,933 3 49,000 43,649 3 41,384 36,865 3 37,566 33,464 3 30,027 26,748 3 29,648 26,410 4 36,000 30,856 4 32,482 27,841 4 26,648 22,840 4 23,961 20,537 4 21,477 18,408 5 33,000 27,215 5 25,204 20,786 5 19,211 15,843 5 17,814 14,691 5 19,078 15,734 6 & beyond 33,000 56,603 6 & beyond 25,204 25,202 6 & beyond 19,211 31,289 6 & beyond 17,814 40,660 6 & beyond 19,078 43,800 PV of Minimum Payments 263,197 PV of Minimum Payments 200,723 PV of Minimum Payments 188,428 PV of Minimum Payments 178,230 PV of Minimum Payments 183,437
Gilead Sciences, Inc.Weighted Average Cost of Capital (WACC) Estimation
WACC= 7.23%
Equity:Beta 1.18 Beta:Risk-Free 2.51% Unlevered 1.06Equity risk premium 4.62% Levered 1.18Cost of Equity 7.96%
Share Price $101.09Shares Outstanding 1,502,625Market Cap 151,900,313$
Debt:Pre-Tax Cost of Debt 3.93%Tax Rate 20%After-tax Cost of Debt 3.14%
Book Value of Debt 13,132,111$ Capitalized Operating Leases 263,197 Enterprise Value 165,295,621$
% Debt 8.10%Weight of Equity 91.90%
Gilead Sciences, Inc.Key Management Ratios
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Liquidity RatiosCurrent Ratio = CA/CL 1.45 1.09 3.07 3.29 4.26 5.05 5.75 6.68 7.74Quick Ratio = (CA‐INV)/CL 1.04 0.83 2.83 3.13 4.11 4.90 5.61 6.54 7.60Working Capital = CA ‐ CL 1,918,442 590,000 11,953,000 20,542,572 32,289,513 45,251,561 59,766,312 75,952,635 96,285,711 Activity or Asset‐Management RatiosAsset Turnover Ratio = Total Revenue/Total Assets 0.46 0.50 0.72 0.62 0.53 0.45 0.40 0.36 0.31Cash/Asset Ratio = Cash & Cash equiv + ST investements / CL 0.44 0.33 1.76 2.31 3.31 4.12 4.87 5.83 6.91Financial Leverage RatiosDebt to Equity = Total Liabilities/Total Equity 1.28 0.99 1.25 1.03 0.97 0.93 0.89 0.86 0.80Debt ratio = Total Debt/Total Assets 0.33 0.18 0.34 0.29 0.30 0.31 0.31 0.32 0.32Interest Coverage Ratio = EBITA/Int. Expense 4.22 5.26 28.11 33.85 34.83 35.83 36.87 37.92 37.67Profitability RatiosGross Margin = (Rev‐COGS)/Revenues) 74.53% 74.48% 84.78% 85.00% 85.00% 85.00% 85.00% 85.00% 85.00%Operating Margin = Operating Income/Net Sales 41.33% 40.39% 61.33% 56.00% 56.00% 56.00% 56.00% 56.00% 56.00%Net Margin = Net Profit/Revenues 26.71% 27.45% 48.62% 43.84% 43.85% 43.86% 43.91% 43.93% 43.92%Return on Assets = Net Income/Avg Total Assets 13.45% 14.09% 42.48% 31.18% 25.78% 22.04% 19.24% 17.12% 14.88%Return on Equity = Net Income/Avg Total SE 32.34% 30.29% 92.97% 66.61% 51.41% 42.85% 36.72% 32.10% 27.15%Payout Policy RatiosDividend Payout = Dividends per share/EPS 0.00% 0.00% 0.00% 15.45% 14.27% 13.20% 12.22% 11.33% 10.83%
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