gilead sciences (nasdaq: gild)

30
Important disclosures appear on the last page of this report. The Henry Fund Henry B. Tippie School of Management Krishnakumar Bakthisaran [[email protected]] Gilead Sciences (NASDAQ: GILD) April 9, 2015 Healthcare – Biotechnology Stock Rating Buy Investment Thesis Target Price $115-120 We are bullish on Gilead Sciences, as the company more than doubled revenues in FY14 with a great year for Sovaldi, the successful launch of and strong sales of Harvoni in 2015 against little competition, leading market shares in HIV treatment, a robust balance sheet and an astute management known for making smart acquisitions. Drivers of Thesis Strong prescription sales of Harvoni and Sovaldi: Gilead’s Hepatatis C Virus (HCV) treatment in the current year has captured close to 90% of the market per Henry Fund estimates Strong forecast of HIV sales: In HIV treatment, Gilead’s 3 single tablet regimens (STRs) Atripla, Stribild and Complera are market leaders with more than 70% of newly diagnosed HIV patients in the US being prescribed one of these as we estimate a 4% growth in 2015 for Atripla, 20% for Stribild and 25% for Complera High Cash balances indicate a possible M&A streak: Our valuation model’s indicate Gilead could have considerable free cash flow which is ideal for a M&A as the company looks to diversify its portfolio by branching out into oncology and cardiovascular & respiratory disease Strong Exclusivity Agreements with payers for HCV treatment: Gilead’s exclusive agreements with 7 major insurance payers that gives it 75% of the US HCV market ensures that its earnings will be stable in the near term Risks to Thesis Nearly 90% of revenues for Gilead come from antiviral products (HIV, HBV and HCV markets) which is a significantly large undiversified revenue stream The HIV drugs Truvada and Atripla could face generic competition when their patents expire in 2018 and 2021 respectively, which could threaten Gilead’s position as market leader in this space Henry Fund DCF $120 Henry Fund DDM $99 Relative Multiple $128 Price Data Current Price $103.23 52wk Range $65.59 – 116.83 Consensus 1yr Target $119 Key Statistics Market Cap (B) $154.47B Shares Outstanding (M) $1.49 Institutional Ownership 94.30% Five Year Beta 0.90 Dividend Yield 0.00% Est. 5yr Growth 13.22% Price/Earnings (TTM) 14.11 Price/Earnings (FY1) 10.02 Price/Sales (TTM) 6.09 Price/Book (mrq) 9.88 Profitability Operating Margin 62.82% Profit Margin 48.62% Return on Assets (TTM) 34.15% Return on Equity (TTM) 87.25% Earnings Estimates Year 2012 2013 2014 2015E 2016E 2017E EPS $1.71 $2.01 $7.95 $8.71 $7.63 $6.44 growth -5.39% 17.53% 295.28% 9.54% -17.16% 5.78% 12 Month Performance- Source: Yahoo Finance Company Description Gilead Sciences, Inc. is a research-based biopharmaceutical company that discovers, develops and commercializes medicines in areas of unmet medical needs 1 . Gilead’s current therapeutic areas of focus include HIV/AIDS, liver diseases, hematology and cancer, inflammatory and serious respiratory diseases, and cardiovascular conditions and has a portfolio of 20 marketed products across these areas. 14.0 86.6 102.8 14.6 32.9 14.0 0 20 40 60 80 100 120 P/E ROE GILD Industry Sector -10% 0% 10% 20% 30% 40% 50% 60% A M J J A S O N D J F M GILD S&P 500

Upload: doannhi

Post on 13-Feb-2017

229 views

Category:

Documents


6 download

TRANSCRIPT

Page 1: Gilead Sciences (NASDAQ: GILD)

Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management

Krishnakumar Bakthisaran [[email protected]]

Gilead Sciences (NASDAQ: GILD) April 9, 2015

Healthcare – Biotechnology Stock Rating Buy

Investment Thesis Target Price $115-120 We are bullish on Gilead Sciences, as the company more than doubled revenues in FY14 with a great year for Sovaldi, the successful launch of and strong sales of Harvoni in 2015 against little competition, leading market shares in HIV treatment, a robust balance sheet and an astute management known for making smart acquisitions. Drivers of Thesis

Strong prescription sales of Harvoni and Sovaldi: Gilead’s Hepatatis C Virus (HCV) treatment in the current year has captured close to 90% of the market per Henry Fund estimates

Strong forecast of HIV sales: In HIV treatment, Gilead’s 3 single tablet regimens (STRs) Atripla, Stribild and Complera are market leaders with more than 70% of newly diagnosed HIV patients in the US being prescribed one of these as we estimate a 4% growth in 2015 for Atripla, 20% for Stribild and 25% for Complera

High Cash balances indicate a possible M&A streak: Our valuation model’s indicate Gilead could have considerable free cash flow which is ideal for a M&A as the company looks to diversify its portfolio by branching out into oncology and cardiovascular & respiratory disease

Strong Exclusivity Agreements with payers for HCV treatment: Gilead’s exclusive agreements with 7 major insurance payers that gives it 75% of the US HCV market ensures that its earnings will be stable in the near term

Risks to Thesis

Nearly 90% of revenues for Gilead come from antiviral products (HIV, HBV and HCV markets) which is a significantly large undiversified revenue stream

The HIV drugs Truvada and Atripla could face generic competition when their patents expire in 2018 and 2021 respectively, which could threaten Gilead’s position as market leader in this space

Henry Fund DCF $120 Henry Fund DDM $99 Relative Multiple $128 Price Data Current Price $103.23 52wk Range $65.59 – 116.83 Consensus 1yr Target $119 Key Statistics Market Cap (B) $154.47B Shares Outstanding (M) $1.49 Institutional Ownership 94.30% Five Year Beta 0.90 Dividend Yield 0.00% Est. 5yr Growth 13.22% Price/Earnings (TTM) 14.11 Price/Earnings (FY1) 10.02 Price/Sales (TTM) 6.09 Price/Book (mrq) 9.88 Profitability Operating Margin 62.82% Profit Margin 48.62% Return on Assets (TTM) 34.15% Return on Equity (TTM) 87.25%

Earnings Estimates Year 2012 2013 2014 2015E 2016E 2017E

EPS $1.71 $2.01 $7.95 $8.71 $7.63 $6.44

growth -5.39% 17.53% 295.28% 9.54% -17.16% 5.78%

12 Month Performance- Source: Yahoo Finance Company Description

Gilead Sciences, Inc. is a research-based biopharmaceutical company that discovers, develops and commercializes medicines in areas of unmet medical needs1. Gilead’s current therapeutic areas of focus include HIV/AIDS, liver diseases, hematology and cancer, inflammatory and serious respiratory diseases, and cardiovascular conditions and has a portfolio of 20 marketed products across these areas.

14.0

86.6

102.8

14.632.9

14.00

20

40

60

80

100

120

P/E ROE

GILD Industry Sector

-10%

0%

10%

20%

30%

40%

50%

60%

A M J J A S O N D J F M

GILD S&P 500

Page 2: Gilead Sciences (NASDAQ: GILD)

Page 2

Source: Gilead 2014 10-K

Source: Gilead 2014 10-K

EXECUTIVE SUMMARY

We recommend a buy for Gilead Sciences primarily because of the extraordinary performance of its HCV (Hepatitis C Virus) portfolio especially Sovaldi, which brought in $10.2 billion in revenues barely a year after its launch, and Harvoni which was launched in October 2014 and has had a promising start in terms of sales.

Additionally, as these newest launches contribute close to 50% to Gilead’s bottom line, it means that these top grossers are expected to provide a solid foundation for Gilead for the next 15 years till their patents expire in 2029-2030.

There are positives in the HIV space as well, as the company filed for FDA approval for a next generation HIV drug in November 2014 and a decision for that is expected in November 2015. This approval could come well in time for the expected generic competition for Tenofovir, which is the backbone of its HIV portfolio, in 2018.

Gilead also launched its first cancer drug Zydelig and it is expected to bring in $3 billion in revenues in 2015. With such a strong product portfolio that helps it lead both the HIV and HCV space and also a strong product pipeline, we feel confident that Gilead has considerable upside in the long term. We are confident of Gilead achieving a 12 month price target of $120/share.

COMPANY DESCRIPTION

Gilead Sciences is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need1. The company’s primary focus areas include human immunodeficiency virus (HIV), liver diseases such as chronic hepatitis C virus (HCV) infection and chronic hepatitis B virus (HBV) infection, oncology and inflammation, and serious cardiovascular and respiratory conditions.

The following is a chart of the major drugs in the company’s portfolio with 2014 revenues and patent expiration schedules1:

Gilead’s segment wise revenue is shown in the graphic below:

Hepatitis B

Hepatitis B is a severe form of viral hepatitis transmitted in infected blood, causing fever, debility, and jaundice. About 240 million people suffer from a chronic hepatitis B liver infection, more than the hepatitis C population. At least 780,000 people die from the malady every year, according to the World Health Organization2. Contrary to the popular belief that Hepatitis B is predominant in developing markets alone, there are there are 1.25 million individuals living with chronic hepatitis B and over 60,000 new cases annually in the United States. However, the healthcare budgets of developing countries is expected to be burdened by large infected populations. China alone will

51%38%

4%7%

2014 SALES

HCV HIV HBV Others

Page 3: Gilead Sciences (NASDAQ: GILD)

Page 3

Source: Gilead Investor Relations page

Source: Gilead Investor Relations page

have over 63 million prevalent cases of hepatitis B in 20203 and represents a huge opportunity for the major players in this area. HBV can be prevented in 95% of the cases by vaccination.

The following map graphic shows the prevalence of HBV worldwide4.

Currently approved treatments include interferon therapy or oral administration of antivirals. While both of these therapies provide long term viral load suppression, they are associated with very low rates of complete cure3. Currently, five NUCs are available to treat hepatitis B: Zefflix/Epivir-HBV (GlaxoSmithKline); Hespera, Viread (Gilead); Baraclude (Bristol Myers-Squibb); and Tyzeka/Sebivo (Novartis/Idenix)3.

Additionally, with Gilead developing Sovaldi, a cure for Hepatitis C in 2014, the quest for a cure for Hepatitis B is seen as the next frontier for major biotechnology companies in this space2. Gilead is currently evaluating TAF for the treatment of HBV and has completed enrollment for Phase 3 clinical trials1. It is also conducting Phase 2 clinical studies of GS-4774, a Tarmogen T cell immunity stimulator. GS-9620, an oral TLR-7 agonist, is also being evaluated as a potential cure for HBV1.

However Gilead faces strong competition from Oncore, which aims to achieve a complete cure, ContraVir/Chimerix, which is expected to challenge Gilead on pricing and safety and Alnylam, which is developing an RNA based drug that could become the best in class for HBV treatment2.

Gilead is ahead in testing, with Arrowhead and ContraVir/Chimerix close behind. OnCore’s drug is in the

earliest phase of study, and Alnylam is preparing for the first stage of trials2.

We believe that the HBV market could expand greatly as HBV is roughly twice as prevalent as HCV with no known cure and a majority of companies race to find a cure or better treatments for HBV.

We modelled a flat 1.5% y/y growth for Viread till its patent expires in 2018 when it could be replaced by Gilead’s TAF drug that is currently in phase III study. This is primarily because the HBV market has become significantly crowded with a lot of companies racing to produce the next generation of HBV treatment. As a result we believe Viread’s demand will be steady but not capture a chunk of the market.

Hepatitis C

Hepatitis C is a liver disease caused by the hepatitis C virus, ranging in severity from a mild illness lasting a few weeks to a serious, lifelong illness5. Unlike Hepatitis B, Hepatitis C viral infection is susceptible to a relatively easy curative regime because the virus lacks a prolonged dormant phase6. However more than 185 million people worldwide are infected with HCV, most of them in low- and middle-income countries, with HCV related complications resulting in 350,000 deaths each year4.

The graphic below shows the global prevalence of Hepatitis C:

Historically, Hepatitis C was treated with Interferon injections which were toxic causing flu like symptoms, lasted for 6-12 months and had cure rates of 80%. As a result, people tended to put the treatment off until it was absolutely necessary7. With protease inhibitors such as Merck’s Incivek and J&J’s Olysio patients were able to

Page 4: Gilead Sciences (NASDAQ: GILD)

Page 4

Source: Gilead Website

manage the disease like with HIV treatments. But these still had to be injected with interferon.

Gilead’s Sovaldi, approved in December 2013 is the first interferon free antiviral that has a cure rate of 91% with far fewer side effects. Moreover with the therapy duration is just 12 weeks it proved to be by far the most popular HCV therapy in 2014 helping Gilead bring in ~ $10.2B in revenues. However, Gilead’s Harvoni, launched in October 2014 proved to be even more effective. Harvoni is a combination of Gilead’s Sovaldi and Ledipasvir and achieved cure rates of 94-99%.

Based on the analysis of the weekly IMS Scripts data we expect Harvoni and Sovaldi to capture, we expect Gilead to capture nearly 85% of the HCV market. Abbvie’s Viekira Pak which was launched in December 2014 in the US and was expected to challenge Gilead for the market share in HCV markets. However the weekly prescription data indicates that Abbvie’s threat is minimal as Gilead’s treatments are prescribed on an average 20 times as much as Abbvie’s Viekira Pak.

We believe that Harvoni’s superior cure rates at 97% to 99% compared to Viekira Pak’s 89% to 95% cure rates as the primary reason.

Overall we modelled a combined HCV sale of Harvoni and Sovaldi at $15.8B based on the analysis of weekly prescription data. At current prescription rates of roughly 10,000 per week and at an average of $30,000 per script Gilead will be able to generate $15.6B in the United States alone. We thus believe our estimates are fairly justified.

The following chart shows the market distribution in terms of revenues:

Gilead’s Sovaldi was approved for use in Japan for HCV treatment in March 2015. We believe this will be a major

boost for Gilead as Japan has the highest liver cancer rates in any developed country, primarily resulting from liver damage due to HCV. Widespread illegal intravenous drug abuse especially the amphetamine addiction that was endemic in Japan after the Second World War is supposed to have caused this trend. The company faces competition from BMS’s Daclinza in Japan for HCV treatment16. We expect this market to be valued at $1.0B, but will wait for company and industry updates before factoring this into our earnings model.

The snapshot below summarizes the company’s Liver disease pipeline which includes HBV, HCV and NASH treatment programs:

One of the most exciting products in Gilead’s pipeline is Simtuzumab, a compound which has potential in oncology field with hepatic and respiratory diseases17. Gilead is also experimenting the use of Simtuzumab for Nonalcoholic Steatohepatitis (NASH) which affects 2-5% of Americans currently and for which no treatment has been approved currently17. We believe that if Gilead succeeds in getting this approved, it can price it at a hefty premium. Gilead’s management sees this market valued at $5B to $6B17. We will however wait to see if this drug makes it to phase III before factoring it into our earnings model.

Gilead85%

AbbVie10%

Merck5%

HCV REVENUES 2015E

Source: IMS Scripts Data

Page 5: Gilead Sciences (NASDAQ: GILD)

Page 5

Source: Company SEC filings

HIV

The human immunodeficiency virus (HIV) is a lentivirus (a subgroup of retrovirus) that causes the acquired immunodeficiency syndrome (AIDS), a condition in humans in which progressive failure of the immune system allows life-threatening infections and cancers to thrive8. More than 35 million people are living with HIV, the vast majority of them in the developing world. More than two million people are newly infected with HIV every year. Of the 35 million people with HIV worldwide, nearly 16 million people still lack treatment, especially in low and middle income countries9.

New HIV cases in the United States remains stable at 50,000 per year since 2011, while worldwide it has declined to 2.3 million per year in 2013 from 3.4 million per year in 2001. This trend is expected to continue, however the diagnosis rates outside the developing world continue to be poor as stated above.

The following pie chart shows the global market share of HIV drugs in 2014:

Gilead’s currently holds the major market share at 56% through its 3 drugs Atripla (developed by Gilead and BMS jointly), Complera (developed by Gilead and Janssen Therapeutics), Stribild, Truvada and Viread. One of the defining characteristics of Gilead’s HIV franchise is its STR (single tablet regimen) products such as Atripla, Complera and Stribild which are 3 of currently only 4 available STRs in the market10.

Gilead's HIV drugs have patent protection through the coming decade. Atripla's and Truvada's patents expire in 2021 in the U.S. and 2018 in Europe. Complera's patent protects it from competition until 2023 in the U.S. and 2022 in Europe. Stribild's patent runs through 2029 in the U.S., and till 2027 in Europe1.

We believe that Truvada is most vulnerable to competition as its patent expires the earliest with GSK possibly launching a generic version as soon as that happens.

We modelled a 20% y/y growth for Stribild as the drug won approval in EU in May 2013 and we expect sales to accelerate. We also forecast a 25% increase in Complera in 2015 followed by a 10% y/y increase thereafter as we believe the drug sales are in an upward trend similar to Stribild. For Truvada, we forecast a 4% growth in 2015 followed by a 2% y/y growth.

In the pipeline for the HIV franchise is the pending approval for E/C/F/TAF (the single-tablet regimen of elvitegravir, cobicistat, emtricitabine and TAF) for which decision is expected by November 5th 2015 from the FDA. Additionally the firm filed an NDA (new drug application) for F/TAF (emtricitabine and TAF) with the FDA on April 7. 201511. Management also noted that it has an agreement in place with Janssen Therapuetics for an STR of rilpivirine F/TAF which is expected to file an NDA with the FDA in Q4 201511. The common denominator in all these is the TAF (tenofovir alafenamide) component, which has greater antiviral activity and better distribution than the TDF (tenofovir disoproxil fumarate or Viread) 11. Patients on this regimen demonstrated reduced renal damage and loss of bone density and higher plasma lipid levels compared to Viread while proving effective at one tenths the dosage of Viread12. Thus we expect E/C/F/TAF to replace Viread in the market place once it is cleared for approval.

Gilead56%

J & J11%

Merck10%

BMS9%

GSK8%

Abbvie6%

TOP HIV DRUG SALES, 2014

Source: Gilead Investor Relations page

Page 6: Gilead Sciences (NASDAQ: GILD)

Page 6

Source: Gilead Website

Source: Gilead Website

Source: Gilead Website

Because of the better safety profile new drugs, we expect them to atleast replace if not capture additional market share in the HIV pipeline. Again we look forward to examining the weekly prescription data to examine the drug’s performance.

The following snapshot provides a summary of the company’s HIV pipeline:

Other products

Gilead’s other products include other antiviral drugs and other oncology, cardiovascular, respiratory products which contributed to 7% of total revenues in 2014. The company launched its first oncology product in 2014, Zydelig, a blood cancer drug. The drug faces competition from Johnson and Johnson’s Imbruvica and also potentially from AbbVie’s ABT-199 which is currently in phase 3 trials. Other products in the pipeline include GS-6615 and Idelalisib which are in Phase 3 and Phase 2 trials respectively.

We also believe that the company’s January 2015 acquisition of potential NASH (nonalcoholic steatohepatitis) treatments from Phenex Pharmaceuticals is very astute it complements its current liver disease portfolio and also one of the assets in the transaction is Px-104 is in Phase 2 development for treatment of NASH. This deal was valued at $470 million based on achievement on of certain milestones.

While it is too early to predict the impact of this potential drug to Gilead’s bottom line, we believe it is an exciting opportunity.

The following snapshot shows the company’s product pipeline in Hematology/Oncology:

The following snapshot is a summary of the company’s Cardiovascular and Respiratory pipeline:

The following table shows the estimated expiration dates for some of Gilead’s phase 3 candidates:

Page 7: Gilead Sciences (NASDAQ: GILD)

Page 7

Source: Gilead 2014 10-K

RECENT DEVELOPMENTS

Gilead launches Harvoni

Gilead launched Harvoni in October 2014, close on the heels of its Sovaldi launch in December 2013, both of which are Hepatitis C drugs. In effect, Harvoni is a combination of Sovaldi and Ledipasvir and achieved cure rates of 99.1% compared to Sovaldi’s 94%. The drug brought in $2.11billion in its first quarter. Analysis of the US weekly prescription stats shows that Harvoni and Sovaldi combined are doing exceptionally well with weekly prescription rates of 10,260 compared to the nearest competition from AbbVie’s Viekira which has an average weekly prescription rate of less than 100013. At roughly $30,000 per prescription we believe that combined, Harvoni and Sovaldi will generate close to $15Billion in the US alone13.

We believe that the higher cure rates of Harvoni and Gilead’s exclusivity negotiation with major insurance payers for HCV treatment is the reason this dominant market position. We are also of the opinion that AbbVie or any other new entrant will have to offer steep discounts to eventually erode Gilead’s market share. With Merck’s drug still yet to file for approval, we expect Gilead’s dominance to continue at least into 2017.

Management announces first dividend payment in Q1 2015

For the first time in its history, the company will pay an annual dividend of $1.72 beginning in Q1, 2015 which corresponds to a yield of 1.6%. The board also approved a share repurchase of $15billion in 2015 and spread over 5

years. While we believe that the initiation of a dividend program is a clear indication of management’s confidence in its future cash flows, we also believe that the historical and proposed size of the repurchase programs means that the company will continue to use repurchases as a major vehicle to boost return for the foreseeable future. Management has also indicated its interest to grow the dividend over time and that is something that we believe will depend a lot on the performance of its HIV and HCV franchises12.

The recent earnings call also noted that management remains optimistic about the company’s performance with revenues of $26 to $27 Billion with largely flat SG&A and R&D expenses.

Gilead buys NASH treatment

Gilead acquire Phenex’s Pharmaceuticals’ Farnesoid X Receptor (FXR) program comprising small molecule FXR agonists for the treatment of liver diseases including nonalcoholic steatohepatitis (NASH) for an upfront payment of $470million. The treatment includes Px-104 which is a Phase II treatment for NASH, a disease that affects 10-20% people in the developed world and for which there areno approved therapies currently. We believe that the deal is astute as it complements Gilead’s current liver disease portfolio. Additionally, we think the management is known for making good acquisitions such as $11Billion acquisition of Pharmasset in 2011 which paved the way for Gilead’s blockbuster drugs Sovaldi which brought in close to $10.2billion in sales in 2014 alone.

INDUSTRY TRENDS

Increased focus on Emerging Markets

As growth in developed markets slows, companies are expected to continue expanding their presence in emerging markets through acquisitions and joint ventures14. Key growth drivers include an increase in wealth and income levels, increasing government and consumer awareness about the benefits of a good health care system, and a trend towards healthier lifestyles14. Additionally a bulk of the world population growth is in these regions and as one can imagine so will the human ailments. China alone for example will have a reported 45.2 million cases in 2020 growing at a CAGR of 4.3%. This represents an increased opportunity even as Hepatitis C is

Page 8: Gilead Sciences (NASDAQ: GILD)

Page 8

Source: Deloitte Global Sciences 2015

expected to be mostly eradicated in the developed world during that time. As a result we believe that companies which have strategic manufacturing and distribution partnerships in the emerging markets either to manufacture brand name drugs or generic equivalents stand a very good chance of capitalizing on this trend. Currently a major portion of Gilead’s revenues are from the United States (73%) and Europe (21%) with less than 3% coming from emerging market sales1.

We believe that the emerging markets represent an underserved market, however most of Gilead’s drugs are expensive and we believe Gilead will get into generic manufacturing agreements with local manufacturers to make these drugs available in these countries.

Innovative Drug pricing models

Global Trends are moving towards containing healthcare costs and enabling affordable access to new and improved healthcare products15. The cost of many new drugs is unsustainable for even the wealthiest countries in the world, while it might be well beyond the means of developing countries where access to healthcare is poor and insurance coverage is primitive. This has forced Big pharma to develop a specific pricing strategy for these markets. Gilead, for example has a tiered pricing model for Sovaldi and its HIV drugs based on the country’s income and prevalence of the disease. Sovaldi sells for $84,000 in the US but a generic agreement with an Indian manufacturer means that it is available for $900 in India15. Johnson & Johnson agreed to a “pay for performance” deal where for patients who did not respond to its new drug Velcade, J&J refunds the drug's cost to the NHS15.

Increased Global Pharmaceutical spending

Global pharmaceutical sales are projected to increase at a CAGR of 6.9 % during 2014-2018, outpacing the estimated global health care spending rate CAGR of 5.2 % during that same period14. In addition to oncology drugs, the cardiovascular therapeutic class will likely prosper, with 4 of the 10 projected blockbusters drugs belonging to the category. We believe with the launch of its first oncology drug, Gilead is making the right moves to capitalize on this trend. Demand for generic drugs is expected to rise as payors take advantage of patent expirations to reduce costs14. Graphic below shows the global pharma revenues and growth rates.

MARKETS AND COMPETITION

Most products in the bio-pharmaceutical space compete based on efficacy, safety, tolerability, acceptance by doctors, ease of patient compliance, patent protection, ease of use, price, insurance and other reimbursement coverage, distribution and marketing1. Gilead faces competition across its various segments with companies competing on multiple combinations of the above mentioned parameters.

Hepatitis B

Gilead’s Viread and Hepsera, face significant competition from existing and expected therapies for treating patients with HBV1. This may erode the HBV product revenues in the future. Some of the competitors include Baraclude (entecavir, an oral nucleoside analog developed by BMS) generic entecavir, Tyzeka/Sebivo (telbivudine, an oral nucleoside analog developed by Novartis, and Epivir-HBV/Zeffix (lamivudine), which was developed by GSK in collaboration with Shire plc1. Viread and Hepsera for the treatment of HBV also compete with established immunomodulatory therapies, including Intron-A (interferon alfa-2b), which is sold by Merck in major countries throughout North and South America, Europe and Asia, and Pegasys (pegylated interferon alfa-2a), sold by Roche for the treatment of HBV1.

Additionally, we anticipate a lot of action in the race for a cure for Hepatitis B. As noted previously, Gilead is currently evaluating TAF for the treatment of HBV and has completed enrollment for Phase 3 clinical trials1. It is also conducting Phase 2 clinical studies of GS-4774, a Tarmogen T cell immunity stimulator. GS-9620, an oral TLR-7 agonist, is also evaluated as a potential cure for HBV1.

Page 9: Gilead Sciences (NASDAQ: GILD)

Page 9

Gilead faces strong competition from Oncore, which aims to achieve a complete cure, ContraVir/Chimerix, which is expected to challenge Gilead on pricing and safety and Alnylam, which is developing an RNA based drug that could become the “best in class” for HBV treatment2.

Gilead is ahead in testing, with Arrowhead and ContraVir/Chimerix close behind. OnCore’s drug is in the earliest phase of study, and Alnylam is preparing for the first stage of trials2. One of the crucial factors that we feel is that Gilead has lost most of the sales executives and leadership team from its Sovaldi launch to competitors OnCore and Chimerix. However we are confident in Gilead’s ability to steer any potential breakthroughs to a successful launch.

Hepatitis C

Hepatitis C is one of Gilead’s mainstay business segments. Gilead’s HCV products, Sovaldi and Harvoni, compete with AbbVie's Viekira Pak and Janssen's Olysio (simeprevir) in the United States.

In addition to a higher cure rate, Sovaldi provides a shorter treatment duration and improved tolerability, thereby potentially reducing total treatment costs for Hepatitis C side effects. With the launch of Harvoni last year which had higher cure rates than Sovaldi, Gilead has virtually taken over the market. Despite AbbVie’s Viekira Pak high profile launch, it has failed to capture any market from Gilead. Weekly US Prescription data shows that Gilead’s Sovaldi and Harvoni combined generate atleast 10,000 new prescriptions whereas Abbvie’s Viekira Pak generates less than 1000 new prescriptions, which represents a measly 10% of the market13.

In addition to fielding a less invasive product(Harvoni is a 1 pill a day regimen whereas Viekira Pak can be upto 6 pills a day), Gilead was able to negotiate exclusive HCV deals with 8 major payers such as CVS, Humana, Aetna amongst others where the payers agreed to carry only Gilead’s HCV products in their HCV treatment.

Merck’s HCV product which is yet to be launched faces an uphill task to wrest market share from Gilead and indeed even Abbvie.

As per the earnings call, Gilead's management expects to treat over 100,000 HCV patients in 2015, having treated 32,000 in 2014 in Europe which has a total 9 million HCV patients . This number was low relative to the United

States, where 140,000 were treated with either Sovaldi or Harvoni and where management expects to treat upto 250,000 of a total 3.2 million HCV people. Gilead recently received approval for launching Sovaldi in Japan which has upto 1 million people suffering from HCV.

Taking all these factors into consideration we believe that Harvoni and Sovaldi together will generate close to $15.8Billion in sales in 2015 in the face of little to no competition.

HIV

There are 39 branded HIV drugs available in the United States, Gilead’s products primarily compete with the fixed-dose combination products in the nucleotide/nucleoside reverse transcriptase inhibitors (NRTI) class, including Combivir (lamivudine/zidovudine), Epzicom/Kivexa (abacavir/lamivudine) and Trizivir (abacavir/lamivudine/zidovudine), each sold by ViiV Healthcare (ViiV). These products compete with Stribild, Complera/Eviplera, Atripla and Truvada1. For Tybost, Gilead competes with ritonavir, marketed by AbbVie. Gilead’s HIV products also compete broadly with HIV products from AbbVie, Boehringer Ingelheim GmbH, Merck, Roche and Janssen1. In addition, Tivicay (dolutegravir), an integrase inhibitor launched in 2013 by ViiV, and Triumeq (dolutegravir/abacavir/lamivudine), a single tablet antiretroviral regimen launched in the third quarter of 2014 by ViiV, could adversely impact sales of Gilead’s HIV products1.

Gilead’s currently holds the major market share at 56% and one of the most defining characteristics of Gilead’s HIV therapy is its single tablet regimen or STRs. Of the currently approved 4 STRs for HIV 3 are Gilead’s products.

Gilead's HIV drugs have patent expirations beginning in 2018. Atripla's and Truvada's patents expire in 2021 in the U.S. and 2018 in Europe. Complera's patent protects it from competition until 2023 in the U.S. and 2022 in Europe. Stribild's patent runs through 2029 in the U.S., and till 2027 in Europe1.

We believe that Truvada is most vulnerable to competition with GSK possibly launching a generic version as early as 2018 when its patent protection ends.

As mentioned elsewhere we expect the pipeline product E/C/F/TAF to replace Viread in the market place once it is cleared for approval.

Page 10: Gilead Sciences (NASDAQ: GILD)

Page 10

Source: Thomson Reuters

Source: Capital Markets Lab

Some of Gilead’s top grossers like Sovaldi and Harvoni have a long patent lives and hence, we think, provide Gilead with a solid springboard for diversifying its product portfolio.

Peer Comparisons

The following table shows the peer comparison for Gilead:

Gilead has one of the highest net margins at 48.62% which indicates at how effective the company has been in managing its costs while turning out solid products in the past year. In comparison with AbbVie, which is a more similar company in terms of operation and size, we feel that Gilead has a really good Net margin. Additionally, Gilead has one of the lowest PE ratios and is underpriced at its current PE of 14. We believe this is the market’s expectation of reduced earnings in the future as we think that the market does not see Gilead sustaining its current dominant position in the HCV market. Additionally Gilead’s Harvoni was put on hold for release in the UK and this news might have negatively impacted the stock.

We also examine the Price to Cash Flow ratio (TTM) and again Gilead has the lowest ratio at 12.99 indicating the strength of its cash flows and its relative undervaluation. Gilead’s competitors such as Merck and Abbvie have an above average Price to Cash Flow ratio (TTM) indicating that they are overvalued.

Gilead also has a stable debt position with a debt to equity ratio of 0.8 well below the market average of 1.12. Compared to highly levered competitors like AbbVie (debt to equity of 8.62) Gilead can raise debt cheaply to capitalize on any potential acquisitions.

Gilead’s price to book ratio is above average at 9.16, but compared to its close competitor AbbVie (price to book ratio of 59) Gilead seems undervalued.

Finally Gilead was able to generate a stellar ROA of 43.58% well above the industry average of 16.77% with none of its peers even coming remotely close. The ROE also tells a similar story as Gilead’s stock experienced tremendous growth and returned 90% over the past year way above the industry average of 37.78%.

In order to put into better perspective how Gilead has been able to control its costs and generate high margins, we feel the following graphic is appropriate. It shows the revenue per number of employees, where Gilead is at $3.5million compared to the rest of the industry which is around $1.0million.

ECONOMIC OUTLOOK

We believe there are some economic issues that would affect the company’s performance.

Number of people aged above 65: Worldwide, one of the fastest growing segments of human population is the demographic of people aged above 65 years. Graph below shows the increase in percentage share of the elderly. This long term trend coupled with an increased life expectancy is expected to drive demand for cutting edge medical products and drugs

Global Currency fluctuations: Close to 73% of Gilead’s 2014 revenues were from the US with 20% from Europe. However with the recent currency

Revenue/Number of Employees

Page 11: Gilead Sciences (NASDAQ: GILD)

Page 11

fluctuations in Europe and in Japan, could affect the company’s revenues especially with the launch of the HCV drug Sovaldi in Japan. Already worldwide the drugs are priced at a discount to US prices, a further strengthening of the USD would negatively impact revenues. We feel that the currency fluctuations and hedging expenses might also cause the company’s earnings to reduce.

CATALYSTS FOR GROWTH

The core value drivers for Gilead includes the diagnosis rates of HCV,HIV and other ailments primarily in the developed markets but also to some extent in developing markets where generic versions of the drug might be sold.

Gilead has large cash reserves and an A+ rating from Moody’s. It can raise debt cheaply to fund acquisition or to boost its product portfolio.

Gilead has a strong pipeline and its management is known for making strategic acquisitions. With its experience in bringing drugs to market successfully, we believe that the company can acquire or partner with smaller firms that have drugs in late developmental stages, thereby boosting its revenues.

INVESTMENT POSITIVES

Gilead’s is the market leader in both its core segments of HIV and HCV and has a solid product pipeline that will continue to churn out top products

In its HCV segment Gilead controls close to 90% of the market and both of its blockbuster products have almost their full patent lives remaining

The company continues to diversify its product portfolio and is expected to make considerable forays in Oncology, Cardiovascular and Respiratory treatments.

INVESTMENT NEGATIVES

Gilead’s major revenue streams are its HIV and HCV segments; any changes to some or all of its drugs’ safety profile could significantly endanger its future revenues

The developed markets are expected to largely eradicate by the end of the decade and Gilead’s HCV products are sold at considerable discounts in the developing markets, so the company could face flat revenues or even decreases in revenues by 2020.

VALUATION

For Gilead we used a 2 Year stock beta of 1.107 as 2013 to 2015 is most representative of Gilead’s future revenue streams. We calculated a WACC of 7.5% for Gilead based on the above stock beta. We also assumed a continuing value of growth of 1.75%.

Revenue growth:

We have modelled a 2015 revenue of $28.9 Billion well above management’s $26 to $27 Billion guideline. This is primarily because management’s guidelines were issued in January when Harvoni was still only a quarter old and AbbVie’s Viekira Pak which was launched in December was expected to challenge Harvoni for the dominance of the HCV markets. Examining weekly scripts data ever since, Gilead’s HCV franchise alone looks set to generate $15.8 Billion and hence we feel our increased revenue estimate is justified. Our projection is slightly above the average consensus range of $28.4 Billion but well within the consensus range of $33 Billion.

We modelled a 60% drop in Sovaldi revenues and a 400% increase in Harvoni for 2015. This is after carefully examining the current weekly prescription trends where the Harvoni is 4 times more likely to be prescribed than Sovaldi. This leaves us with combined sales of $15.8 billion.

We have maintained a growth rate of 20% for Stribild and almost flat growth rates for most of the products due to lack of specific guidance. But we have modelled a slower growth rate in the HIV segments by 2017 as analysts expect the HIV market growth to slow down.

While the new drug Zydelig has the potential to be a solid performer in the long run, as per management’s guidance, we believe it is too early to factor it in our models.

Operating expenses assumptions:

For 2015, management’s guidance indicates that SG&A would be within $3 to $3.3 Billion. We have assumed the high end of this range for 2015 SG&A.

For R&D we have assumed management’s guidance of $3.1 Billion for 2015 R&D expenses.

Page 12: Gilead Sciences (NASDAQ: GILD)

Page 12

We have no specific guidance on any changes in the COGS or SG&A structure beyond 2015 and are comfortable assuming a 2 year average as a percent of each year sales, as the COGS & SG&A going forward. Fundamentally, the company’s business has remained the same and unless it plans to operate in new segments we do not see any reason to change this assumption.

Profit margin forecasts

While the firm had an extraordinary years 2013 and 2014 record sales of Sovaldi reaching a profit margin of 84% we have modelled a more conservative 79% partly due to our assumption of a 2 year average COGS. This also reduced our net margins to 56% from 59% in 2014.

We modelled a 23% y/y increase in PPE in line with the 5 year average partly because we do not have any specific guidance on the same.

Earnings estimates

We have arrived an EPS of $8.71 which is well below average analyst estimates of $9.64, but within the consensus range of $8.21 to $12.48. We believe this is partly due to our cost assumptions which are all on the very higher side of management’s guidance range

Model Results

We price Gilead’s shares at $115 to $120, primarily from tour DCF model which we believe to be the most accurate indicator. This is because it has factored in management’s latest guidance as well as the weekly prescription sales of the HCV franchise.

Our DDM gives us a price of $99 which is lower than our target price. We believe this to be the case as Gilead has just begun paying dividends and there is no guidance from management on its payout policies. Assuming a 30% payout policy gives us the $99 price.

Our Relative PE model gives us a share price of $128. This is higher than our target price as Gilead has a very low PE compared to its industry peers. Secondly we believe that some of Gilead’s peers are overvalued thereby inflating the relative value of the entire industry.

KEYS TO MONITOR

One of the essential things to monitor would be the performance of Gilead’s HCV segment and the weekly prescription rates of Harvoni and Sovaldi and compare it with a competitors’ weekly figures.

We also believe a close eye on the product pipeline and drug trials data of competitors in the HIV, HCV and HBV segment is necessary to identify any future sources of competition to Gilead’s products.

Finally, we think that the Healthcare conferences represent important an important source of product information as companies usually release detailed drug development reports which can indicate the efficacy of upcoming products. We will continue to update our Financial Model to reflect any data that Gilead releases during such conferences or otherwise.

REFERENCES

1. Gilead Sciences, 10-K 2014 Filing http://investors.gilead.com/phoenix.zhtml?c=69964&p=irol-SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTEwMTAwOTQyJkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVElPTl9FTlRJUkUmc3Vic2lkPTU3

2. Bloomberg Business: Hepatitis Quest Moves from C to B under Ex-Gilead Leaders: http://www.bloomberg.com/news/articles/2015-02-04/hepatitis-quest-moves-from-c-to-b-under-former-gilead-executives

3. Arrowhead Research: Hepatitis B Program http://www.arrowheadresearch.com/sites/default/files/press_releases/pdf/whitepaper-hbv-3-7-12.pdf

4. Gilead Investor Relations http://www.gilead.com/~/media/Files/pdfs/other/Hepatitis%20Treatment%20Expansion%20Fact%20Sheet%20%201021143.pdf

5. WHO Factsheet: http://www.who.int/csr/disease/hepatitis/whocdscsrlyo2003/en/index2.html

6. Seeking Alpha: http://seekingalpha.com/article/2281753-analyzing-the-hepatitis-c-market-size-why-it-may-have-bullish-implications-for-gilead

7. Yahoo Finance: http://finance.yahoo.com/news/primer-hepatitis-c-market-drugmakers-210800363.html

Page 13: Gilead Sciences (NASDAQ: GILD)

Page 13

8. Wikipedia: HIV http://en.wikipedia.org/wiki/HIV

9. Gilead HIV Fact Sheet: http://www.gilead.com/~/media/Files/pdfs/other/HIV%20Treatment%20Expansion%20Fact%20Sheet%2073014.pdf

10. AIDS Meds: Currently approved Drugs for AIDS/HIV, a comparative chart: http://www.aidsmeds.com/articles/DrugChart_10632.shtmlGilead

11. Seeking Alpha: Management Earnings call transcript, Q1 2015: http://seekingalpha.com/article/2880996-gilead-sciences-gild-ceo-john-martin-on-q4-2014-results-earnings-call-transcript

12. Seeking Alpha: http://seekingalpha.com/article/3062436-what-i-am-looking-for-from-gilead-sciences-earnings-release

13. Gilead Shareholders blog: http://gileadscienceshareholder.blogspot.com/

14. Deloitte’s 2015 Global life sciences outlook: http://www2.deloitte.com/content/dam/Deloitte/global/Documents/Life-Sciences-Health-Care/gx-lshc-2015-life-sciences-report.pdf

15. Huffington Post- 5 trends in Biotech: http://www.huffingtonpost.com/mark-fidelman/5-biotech-trends-to-watch-in-2015_b_6497600.html

16. Zacks: Sovaldi get Japan approval http://www.zacks.com/stock/news/169189/gileads-hepatitis-c-drug-sovaldi-gets-approval-in-japan

17. Seeking Alpha: http://seekingalpha.com/article/2758795-examining-gilead-sciences-future-pipeline

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned

securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

Page 14: Gilead Sciences (NASDAQ: GILD)

$120.08 0.90 0.95 1.00 1.05 1.10 1.15 1.20 1.25

1.25% 134.08 128.22 122.82 117.83 113.20 108.89 104.87 101.11

1.50% 139.35 133.00 127.18 121.80 116.84 112.23 107.95 103.95

1.75% 145.16 138.26 131.94 126.14 120.79 115.85 111.27 107.01

2.00% 151.61 144.06 137.18 130.89 125.11 119.80 114.88 110.32

2.25% 158.81 150.49 142.96 136.11 129.85 124.10 118.81 113.92

2.50% 166.89 157.68 149.39 141.88 135.05 128.81 123.09 117.83

2.75% 176.02 165.76 156.57 148.30 140.81 134.01 127.79 122.10

3.00% 186.44 174.89 164.64 155.47 147.22 139.76 132.97 126.79

$120.08 0.90 0.95 1.00 1.05 1.10 1.15 1.20 1.25

2.25% 145.19 138.29 131.97 126.17 120.83 115.89 111.31 107.05

2.50% 145.18 138.27 131.96 126.16 120.81 115.87 111.29 107.03

2.75% 145.16 138.25 131.94 126.14 120.79 115.85 111.27 107.01

3.00% 145.14 138.24 131.92 126.12 120.78 115.84 111.25 107.00

3.25% 145.12 138.22 131.90 126.10 120.76 115.82 111.24 106.98

3.50% 145.11 138.20 131.89 126.09 120.74 115.80 111.22 106.96

3.75% 145.09 138.19 131.87 126.07 120.73 115.78 111.20 106.95

4.00% 145.07 138.17 131.85 126.05 120.71 115.77 111.19 106.93

$120.08 11.00% 12.00% 13.00% 14.00% 15.00% 16.00% 17.00% 18.00%

11.00% 138.26 135.77 133.28 130.79 128.30 125.81 123.32 120.83

12.00% 135.77 133.28 130.79 128.30 125.81 123.32 120.83 118.34

13.00% 133.28 130.79 128.30 125.81 123.32 120.83 118.34 115.85

14.00% 130.79 128.30 125.81 123.32 120.83 118.34 115.85 113.36

15.00% 128.30 125.81 123.32 120.83 118.34 115.85 113.36 110.87

16.00% 125.81 123.32 120.83 118.34 115.85 113.36 110.87 108.38

17.00% 123.32 120.83 118.34 115.85 113.36 110.87 108.38 105.89

18.00% 120.83 118.34 115.85 113.36 110.87 108.38 105.89 103.39

$120.08 6.00% 7.00% 8.00% 9.00% 10.00% 11.00% 12.00% 13.00%

11.00% 134.13 133.97 133.80 133.64 133.46 133.28 133.10 132.92

12.00% 131.64 131.48 131.31 131.15 130.97 130.79 130.61 130.43

13.00% 129.15 128.99 128.82 128.65 128.48 128.30 128.12 127.94

14.00% 126.66 126.50 126.33 126.16 125.99 125.81 125.63 125.44

15.00% 124.17 124.01 123.84 123.67 123.50 123.32 123.14 122.95

16.00% 121.68 121.52 121.35 121.18 121.01 120.83 120.65 120.46

17.00% 119.19 119.03 118.86 118.69 118.52 118.34 118.16 117.97

18.00% 116.70 116.54 116.37 116.20 116.03 115.85 115.67 115.48

SG&A

R&D Expense

PPE Growth

R&D Expense

CV

Growth

Rate

Beta

Risk

Free

Rate

Beta

Page 15: Gilead Sciences (NASDAQ: GILD)

Gilead Sciences Inc.,Balance SheetAll figures in USD MillionsFiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

ASSETS

Cash & equivalents 1,804 2,113 10,027 16,350 22,751 27,927 33,311 38,885

Short-term marketable securities 59 19 101 103 105 107 109 111

Accounts & other current receivables, net 1,751 2,100 4,635 5,787 6,051 6,326 6,565 6,808

Inventories 1,745 2,056 1,386 3,472 3,631 3,796 3,939 4,085

Short-term deferred income taxes 263 331 508 559 615 676 744 818

Prepaid expenses & other current assets 535 656 1,057 3,472 3,631 3,796 3,939 4,085

Total current assets 6,157 7,274 17,714 29,742 36,783 42,627 48,606 54,791

Property, plant & equipment, Gross 1,524 1,668 2,294 2,822 3,471 4,269 5,251 6,458

Accumulated Depreciation (423) (502) (620) (792) (1,000) (1,253) (1,563) (1,941)

Property, plant & equipment, net 1,100 1,166 1,674 2,030 2,471 3,015 3,688 4,517

Goodwill 1,061 1,169 1,172 1,172 1,172 1,172 1,172 1,172

Other intangible assets, net 11,736 11,900 11,073 10,247 9,415 8,569 7,716 6,975

Deferred income taxes 131 155 236 260 286 314 346 380

Long-term portion of prepaid royalties 176 199 466 419 377 340 306 275

Long-term marketable securities 720 439 1,598 1,208 1,208 1,208 1,208 1,208

Other long-term assets 159 195 731 731 731 731 731 731

Total other assets 13,983 14,057 15,276 14,037 13,189 12,334 11,478 10,741

Total assets 21,240 22,497 34,664 45,809 52,443 57,976 63,772 70,049

LIABILITIES AND SHAREHOLDERS' EQUITY

Accrued government & other rebates 745 983 2,316 2,488 2,602 2,720 2,823 2,927

Current maturities of long-term debt & lease obligations 1,169 2,697 483 1,282 1,282 1,282 1,282 1,282

Accounts payable 1,327 1,256 955 2,500 2,614 2,733 2,836 2,941

Income taxes payable 13 11 105 67 87 91 94 98

Employee compensation & withholdings 237 244 316 579 605 633 656 681

Deferred Revenue 103 111 134 289 303 316 328 340

Other accounts payable & accrued liabilities 675 1,024 1,452 1,938 2,027 2,119 2,199 2,281

Total current liabilities 4,270 6,325 5,761 9,144 9,520 9,893 10,219 10,550

Long term deferred revenues 21 22 - - - - - -

Notes 8,224 6,636 12,404 12,373 12,471 12,621 12,794 13,089

Less: Current portion (1,169) (2,697) (483) (1,282) (1,282) (1,282) (1,282) (1,282)

Total long-term debt 7,055 3,939 11,921 11,091 11,189 11,339 11,512 11,807

Long term income taxes payable 116 162 562 463 484 506 525 545

Long term deferred tax liabilities - 83 51 27 27 27 27 27

Total other long-term liabilities 228 220 550 501 523 547 568 589

Total Liabilities 11,690 10,753 18,845 21,225 21,743 22,313 22,851 23,517

Common Stock, Treasury - - - (1,700) (3,200) (6,200) (9,200) (12,200)

Common Stock + Additional contributed capital 5,651 5,388 2,393 2,393 2,393 2,393 2,393 2,393

Retained earnings 3,705 6,105 12,732 23,311 30,927 38,890 47,149 55,759

Accumulated other comprehensive income (loss) (46) (124) 301 301 301 301 301 301

Total Gilead International Inc. shareholders' equity 9,310 11,369 15,426 24,305 30,421 35,384 40,643 46,253

Noncontrolling interests 241 375 393 279 279 279 279 279

Total equity 9,551 11,745 15,819 24,584 30,700 35,663 40,922 46,532

Total Liabilities & Equity 21,241 22,497 34,664 45,809 52,443 57,976 63,772 70,049

Page 16: Gilead Sciences (NASDAQ: GILD)

Gilead Sciences Inc.,Income StatementAll figures in USD MillionsFiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Net sales 9,703 11,202 24,890 28,933 30,256 31,629 32,824 34,038

Cost of Goods sold (2,193) (2,514) (2,738) (4,838) (5,059) (5,288) (5,488) (5,691)

Depreciation & Amortization Expense (278) (345) (1,050) (998) (1,040) (1,099) (1,162) (1,119)

Gross Profit 7,232 8,343 21,102 23,097 24,157 25,242 26,174 27,227

Selling, General & Administrative Expenses (1,461) (1,699) (2,983) (3,300) (4,236) (4,428) (4,595) (4,765)

Research & development expenses (1,760) (2,120) (2,854) (3,100) (4,629) (4,839) (5,022) (5,208)

Net interest expense (361) (307) (412) (449) (453) (458) (464) (475)

Total other income (expense), net (37) (9) 3 - - - - -

Net Income (loss) before income taxes 3,612 4,208 14,856 16,248 14,839 15,516 16,092 16,779

Income tax expense (1,038) (1,151) (2,797) (3,087) (3,979) (4,161) (4,315) (4,499)

Income from discontinuing operations - - - - - - - -

Net income (loss) 2,574 3,057 12,059 13,161 10,860 11,355 11,777 12,280

Less: Net income attributable to noncontrolling interests 18 18 42 21 21 21 21 21

Net income attributable to Gilead 2,592 3,075 12,101 13,182 10,881 11,376 11,797 12,300

Weighted average shares outstanding - basic 1,515 1,529 1,522 1,514 1,508 1,491 1,475 1,461

EPS basic 1.71$ 2.01$ 7.95$ 8.71$ 7.21$ 7.63$ 8.00$ 8.42$

Cash dividends declared per common share 1.72$ 2.16$ 2.29$ 2.40$ 2.52$

Payout Ratio 0.0% 0.0% 0.0% 19.7% 30.0% 30.0% 30.0% 30.0%

Page 17: Gilead Sciences (NASDAQ: GILD)

Gilead Sciences Inc.,Revenue Decomposition

All figures in USD Millions

Fiscal Years Ending Dec. 31 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Product Segment Revenue Breakdown

Antiviral

Sovaldi - - - 139.00 10,283.00 4,113.20 4,195.46 4,279.37 4,364.96 4,408.61

Atripla 2,927.00 3,225.00 3,574.00 3,648.00 3,470.00 3,608.80 3,644.89 3,681.34 3,718.15 3,755.33

Truvada 2,650.00 2,875.00 3,181.00 3,136.00 3,340.00 3,473.60 3,543.07 3,613.93 3,686.21 3,759.94

Harvoni - - - - 2,127.00 11,698.50 12,283.43 12,897.60 13,542.48 14,219.60

Complera/Eviplera - 39.00 342.00 810.00 1,228.00 1,535.00 1,688.50 1,857.35 1,950.22 2,047.73

Stribild - - 58.00 539.00 1,197.00 1,436.40 1,723.68 2,068.42 2,275.26 2,502.78

Viread 732.00 738.00 849.00 959.00 1,058.00 1,073.87 1,089.98 1,106.33 1,122.92 1,139.77

Other antiviral 228.00 173.00 138.00 111.00 88.00 88.88 89.77 90.67 91.57 92.49

Total antiviral products 6,537.00 7,050.00 8,142.00 9,342.00 22,791.00 27,028.25 28,258.78 29,595.00 30,751.77 31,926.25

Other products

Letairis 240.00 293.00 410.00 520.00 595.00 678.30 746.13 757.32 768.68 780.21

Ranexa 240.00 320.00 373.00 449.00 510.00 576.30 586.39 596.65 607.09 617.71

AmBisome 306.00 330.00 346.00 352.00 388.00 411.28 421.56 432.10 442.90 453.98

Zydelig - - - - 23.00 26.45 29.10 32.00 35.20 38.73

Other 67.00 109.00 127.00 141.00 167.00 212.09 214.21 216.35 218.52 220.70

Total other products 853.00 1,052.00 1,256.00 1,462.00 1,683.00 1,904.42 1,997.38 2,034.43 2,072.40 2,111.33

Total product sales 7,390.00 8,102.00 9,398.00 10,804.00 24,474.00 28,932.67 30,256.16 31,629.43 32,824.17 34,037.57

Product Segment Revenue Breakdown

Antiviral

Sovaldi 0.00% 0.00% 0.00% 7297.84% -60.00% 2.00% 2.00% 2.00% 1.00%

Atripla 10.18% 10.82% 2.07% -4.88% 4.00% 1.00% 1.00% 1.00% 1.00%

Truvada 8.49% 10.64% -1.41% 6.51% 4.00% 2.00% 2.00% 2.00% 2.00%

Harvoni 0.00% 0.00% 0.00% 0.00% 450.00% 5.00% 5.00% 5.00% 5.00%

Complera/Eviplera 0.00% 776.92% 136.84% 51.60% 25.00% 10.00% 10.00% 5.00% 5.00%

Stribild 0.00% 0.00% 829.31% 122.08% 20.00% 20.00% 20.00% 10.00% 10.00%

Viread 0.82% 15.04% 12.96% 10.32% 1.50% 1.50% 1.50% 1.50% 1.50%

Other antiviral -24.12% -20.23% -19.57% -20.72% 1.00% 1.00% 1.00% 1.00% 1.00%

Total antiviral products 7.85% 15.49% 14.74% 143.96% 18.59% 4.55% 4.73% 3.91% 3.82%

Other products

Letairis 22.08% 39.93% 26.83% 14.42% 14.00% 10.00% 1.50% 1.50% 1.50%

Ranexa 33.33% 16.56% 20.38% 13.59% 13.00% 1.75% 1.75% 1.75% 1.75%

AmBisome 7.84% 4.85% 1.73% 10.23% 6.00% 2.50% 2.50% 2.50% 2.50%

Zydelig 0.00% 0.00% 0.00% 0.00% 15.00% 10.00% 10.00% 10.00% 10.00%

Other 62.69% 16.51% 11.02% 18.44% 27.00% 1.00% 1.00% 1.00% 1.00%

Total other products 23.33% 19.39% 16.40% 15.12% 13.16% 4.88% 1.85% 1.87% 1.88%

Total product sales 9.63% 16.00% 14.96% 126.53% 18.22% 4.57% 4.54% 3.78% 3.70%

Page 18: Gilead Sciences (NASDAQ: GILD)

Gilead Sciences Inc.,Cash Flow StatementAll figures in USD MillionsFiscal Years Ending Dec. 31 2012 2013 2014

Operating Activities

Net Income / Starting Line 2,573.60 3,057.29 12,059.00

Depreciation and Depletion 82.85 102.64 125.00

Amortization of Intangible Assets 195.36 242.06 925.00

Deferred Taxes & Investment Tax Credit (39.39) (98.18) (236.00)

Other Adjustments 205.24 363.86 463.00

Receivables 197.99 (315.30) (2,578.00)

Inventories (349.92) (343.14) 143.00

Accounts Payable 117.49 (97.67) (289.00)

Income Taxes Payable (68.47) 30.02 533.00

Other Accruals 386.06 311.63 2,013.00

Other Assets/Liabilities (106.07) (148.21) (340.00)

Net Operating Cash Flow 3,194.72 3,104.99 12,818.00

Investing Activities

Capital Expenditures (397.05) (190.78) (557.00)

Net Assets from Acquisitions (10,751.64) (378.65) -

Sale (purchase) of Investments (697.37) 315.07 (1,266.00)

Net Investing Cash Flow (11,846.05) (254.36) (1,823.00)

Financing Activities

Change in Capital Stock (200.76) (269.28) (5,018.00)

Issuance (Reduction) of Debt, Net 521.45 (2,705.18) 5,670.00

Other Funds 242.65 430.52 (3,677.00)

Net Financing Cash Flow 563.35 (2,543.94) (3,025.00)

Page 19: Gilead Sciences (NASDAQ: GILD)

Gilead Sciences Inc.,Cash Flow StatementAll figures in USD MillionsFiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E

Net income (loss) 13182 10881 11376 11797 12300

Adjustments

Depreciation & Amortization 998 1,040 1,099 1,162 1,119

Change in deferred income tax assets (74) (82) (90) (99) (109)

Change in Accounts & other current receivables, net (1,152) (265) (275) (239) (243)

Change in Inventories (2,086) (159) (165) (143) (146)

Change in prepaid expenses & other current assets (2,415) (159) (165) (143) (146)

Change in Accounts payable, trade 1,545 114 119 103 105

Change in income taxes payable (137) 41 26 22 23

Change in Deferred tax Liabilities (24) - - - -

Change in Deferred Revenues 155 13 14 12 12

Employee compensation & witholdings 263 26 27 24 24

Other current liabilities 659 202 210 183 186

Net cash flows from operating activities 10913 11654 12177 12679 13127

Capital expenditures (528) (649) (798) (982) (1,208)

Change in goodwill - - - - -

Change in other long-term assets 47 42 38 34 31

Purchase/Sale of investments 388 (2) (2) (2) (2)

Net cash flows from investing activities (93) (609) (763) (950) (1,179)

Change in total debt (31) 98 150 173 295

Payment of dividends (2,603) (3,264) (3,413) (3,539) (3,690)

Repurchases of common stock (1,700) (1,500) (3,000) (3,000) (3,000)

Change in total other LT liabilities (49) 23 24 21 21

Change in Non controlling interests (114) - - - -

Net cash flows from financing activities (4,498) (4,644) (6,239) (6,345) (6,374)

Change in Cash 6,323 6,402 5,176 5,384 5,574

Cash at the Beginning of the year 10,027 16,350 22,751 27,927 33,311

Cash at the end of the year 16,350 22,751 27,927 33,311 38,885

Page 20: Gilead Sciences (NASDAQ: GILD)

Gilead Sciences Inc.,Value Driver EstimationAll figures in USD MillionsFiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Net Sales 9,703 11,202 24,890 28,933 30,256 31,629 32,824 34,038

Cost of Goods Sold (after Depreciation removed) (2,193) (2,514) (2,738) (4,838) (5,059) (5,288) (5,488) (5,691)

Selling, General & Administrative Expenses (1,461) (1,699) (2,983) (3,300) (4,236) (4,428) (4,595) (4,765)

Research & development expenses (1,760) (2,120) (2,854) (3,100) (4,629) (4,839) (5,022) (5,208)

Depreciation & Amortization (278) (345) (1,050) (998) (1,040) (1,099) (1,162) (1,119)

Add: Operating Lease Interest 10 10 10 10 15 53 53 53

Adjusted EBITA 4,021 4,534 15,275 16,708 15,307 16,027 16,609 17,307

Adjusted Taxes

Provision for Income Taxes 1,038 1,151 2,797 3,087 3,979 4,161 4,315 4,499

Add: Tax Shield on Interest Expense 97 82 110 120 121 123 125 127

Add: Tax Shield on Implied Lease Interest 3 3 3 3 4 14 14 14

Less: Tax Shield on Other Income (Loss) (10) (2) 1 - - - - -

Total Adjusted Taxes 1,148 1,238 2,909 3,210 4,104 4,298 4,454 4,641

Plus: Change in Deferred Tax Assets/Liabilities

Current Year Deferred Tax Assets 394 485 744 818 900 990 1,089 1,198

Current Year Deferred Tax Liabilities - 83 51 27 27 27 27 27

Previous Year Deferred Tax Assets 352 394 485 744 818 900 990 1,089

Previous Year Deferred Tax Liabilities - - 83 51 27 27 27 27

Net Change in Deferred Taxes (42) (8) (291) (98) (82) (90) (99) (109)

EBITA 4,021 4,534 15,275 16,708 15,307 16,027 16,609 17,307

Less: Total Adjusted Taxes (1,148) (1,238) (2,909) (3,210) (4,104) (4,298) (4,454) (4,641)

Add: Change in Deferred Taxes (42) (8) (291) (98) (82) (90) (99) (109)

NOPLAT 2,831 3,287 12,075 13,399 11,120 11,639 12,056 12,557

Invested Capital Computation

Operating Current Assets:

Normal Cash 90 106 501 817 1,138 1,396 1,666 1,944

Accounts Receivable, Net 1,751 2,100 4,635 5,787 6,051 6,326 6,565 6,808

Inventory 1,745 2,056 1,386 3,472 3,631 3,796 3,939 4,085

Prepaid Expenses & Operating Current Assets 535 656 1,057 3,472 3,631 3,796 3,939 4,085

Total Operating Current Assets 4,122 4,917 7,579 13,548 14,450 15,313 16,108 16,921

Operating Current Liabilities:

Accounts Payable 1,327 1,256 955 2,500 2,614 2,733 2,836 2,941

Income Taxes Payable 13 11 105 67 87 91 94 98

Employee compensation & withholdings 237 244 316 579 605 633 656 681

Deferred Revenue 103 111 134 289 303 316 328 340

Accrued govt Rebates 745 983 2,316 289 303 316 328 340

Other accounts payable & accrued liabilities 675 1,024 1,452 1,938 2,027 2,119 2,199 2,281

Total Operating Current Liabilities 3,101 3,628 5,278 5,663 5,938 6,208 6,442 6,681

Net Operating Working Capital 1,021 1,289 2,301 7,885 8,512 9,105 9,666 10,240

Net PPE 1,100 1,166 1,674 2,030 2,471 3,015 3,688 4,517

Other intangible assets, net 11,736 11,900 11,073 10,247 9,415 8,569 7,716 6,975

Long-term portion of prepaid royalties 176 199 466 419 377 340 306 275

Other long-term assets 159 195 731 731 731 731 731 731

PV of Operating Leases 167 164 175 215 265 325 400 492

Other Operating LT Assets 12,238 12,458 12,445 11,613 10,788 9,965 9,153 8,474

Total other long-term liabilities 228 220 550 501 523 547 568 589

Long term deferred revenues 21 22 - - - - - -

Other Operating LT Liabilities 249 242 550 501 523 547 568 589

Invested Capital

Add: Net Operating Working Capital 1,021 1,289 2,301 7,885 8,512 9,105 9,666 10,240

Add: Net PPE 1,100 1,166 1,674 2,030 2,471 3,015 3,688 4,517

Add: Other Operating LT Assets 12,238 12,458 12,445 11,613 10,788 9,965 9,153 8,474

Less: Other Operating LT Liabilities (249) (242) (550) (501) (523) (547) (568) (589)

Total Invested Capital 14,111 14,671 15,870 21,027 21,247 21,539 21,939 22,642

Return on Invested Capital

NOPLAT 2,831 3,287 12,075 13,399 11,120 11,639 12,056 12,557

/ Beginning Invested Capital 4,960 14,111 14,671 15,870 21,027 21,247 21,539 21,939

ROIC 57.1% 23.3% 82.3% 84.4% 52.9% 54.8% 56.0% 57.2%

Economic Profit - - -

Beginning Invested Capital 4,960 14,111 14,671 15,870 21,027 21,247 21,539 21,939

ROIC 57.1% 23.3% 82.3% 84.4% 52.9% 54.8% 56.0% 57.2%

WACC 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5%

Economic Profit [Beg IC*(ROIC-WACC)] 2,459 2,229 10,974 12,208 9,543 10,045 10,440 10,911

FCF

NOPLAT 2,831 3,287 12,075 13,399 11,120 11,639 12,056 12,557

Add: Beg Invested Capital 4,960 14,111 14,671 15,870 21,027 21,247 21,539 21,939

Less: Current Invested Capital 14,111 14,671 15,870 21,027 21,247 21,539 21,939 22,642

FCF (6,319) 2,727 10,875 8,242 10,900 11,348 11,656 11,855

Page 21: Gilead Sciences (NASDAQ: GILD)

Gilead Sciences Inc.,Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

ASSETS

Cash & equivalents 18.59% 18.86% 40.29% 56.51% 75.20% 88.29% 101.48% 114.24%

Short-term marketable securities 0.60% 0.17% 0.41% 0.36% 0.35% 0.34% 0.33% 0.33%

Accounts & other current receivables, net 18.05% 18.75% 18.62% 20.00% 20.00% 20.00% 20.00% 20.00%

Inventories 17.98% 18.35% 5.57% 12.00% 12.00% 12.00% 12.00% 12.00%

Short-term deferred income taxes 2.71% 2.95% 2.04% 1.93% 2.03% 2.14% 2.27% 2.40%

Prepaid expenses & other current assets 5.52% 5.85% 4.25% 12.00% 12.00% 12.00% 12.00% 12.00%

Total current assets 63.45% 64.93% 71.17% 102.80% 121.57% 134.77% 148.08% 160.97%

Property, plant & equipment, Gross 15.70% 14.89% 9.22% 9.75% 11.47% 13.50% 16.00% 18.97%

Accumulated Depreciation -4.36% -4.48% -2.49% -2.74% -3.31% -3.96% -4.76% -5.70%

Property, plant & equipment, net 11.34% 10.41% 6.73% 7.02% 8.17% 9.53% 11.23% 13.27%

Goodwill 10.93% 10.44% 4.71% 4.05% 3.87% 3.71% 3.57% 3.44%

Other intangible assets, net 120.96% 106.23% 44.49% 35.42% 31.12% 27.09% 23.51% 20.49%

Deferred income taxes 1.35% 1.38% 0.95% 0.90% 0.94% 0.99% 1.05% 1.12%

Long-term portion of prepaid royalties 1.81% 1.78% 1.87% 1.45% 1.25% 1.07% 0.93% 0.81%

Long-term marketable securities 7.42% 3.92% 6.42% 4.18% 3.99% 3.82% 3.68% 3.55%

Other long-term assets 1.64% 1.74% 2.94% 2.53% 2.42% 2.31% 2.23% 2.15%

Total other assets 144.12% 125.49% 61.37% 48.52% 43.59% 38.99% 34.97% 31.56%

Total assets 218.92% 200.84% 139.27% 158.33% 173.33% 183.30% 194.29% 205.80%

LIABILITIES AND SHAREHOLDERS' EQUITY

Accrued government & other rebates 7.68% 8.78% 9.30% 8.60% 8.60% 8.60% 8.60% 8.60%

Current maturities of long-term debt & lease obligations 12.05% 24.08% 1.94% 4.43% 4.24% 4.05% 3.91% 3.77%

Accounts payable 13.68% 11.21% 3.84% 8.64% 8.64% 8.64% 8.64% 8.64%

Income taxes payable 0.14% 0.10% 0.42% 0.23% 0.29% 0.29% 0.29% 0.29%

Employee compensation & withholdings 2.44% 2.17% 1.27% 2.00% 2.00% 2.00% 2.00% 2.00%

Deferred Revenue 1.06% 0.99% 0.54% 1.00% 1.00% 1.00% 1.00% 1.00%

Other accounts payable & accrued liabilities 6.95% 9.14% 5.83% 6.70% 6.70% 6.70% 6.70% 6.70%

Total current liabilities 44.01% 56.47% 23.15% 31.60% 31.46% 31.28% 31.13% 30.99%

Long term deferred revenues 0.22% 0.20% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Notes 84.77% 59.24% 49.84% 42.76% 41.22% 39.90% 38.98% 38.45%

Less: Current portion -12.05% -24.08% -1.94% -4.43% -4.24% -4.05% -3.91% -3.77%

Total long-term debt 72.71% 35.16% 47.89% 38.33% 36.98% 35.85% 35.07% 34.69%

Long term income taxes payable 1.19% 1.45% 2.26% 1.60% 1.60% 1.60% 1.60% 1.60%

Long term deferred tax liabilities 0.00% 0.74% 0.20% 0.09% 0.09% 0.09% 0.08% 0.08%

Total other long-term liabilities 2.35% 1.97% 2.21% 1.73% 1.73% 1.73% 1.73% 1.73%

Total Liabilities 120.48% 95.99% 75.71% 73.36% 71.86% 70.54% 69.62% 69.09%

Common stock, Treasury 0.00% 0.00% 0.00% -5.88% -10.58% -19.60% -28.03% -35.84%

Common Stock + Additional contributed capital 58.24% 48.10% 9.61% 8.27% 7.91% 7.57% 7.29% 7.03%

Retained earnings 38.18% 54.50% 51.15% 80.57% 102.22% 122.96% 143.64% 163.82%

Accumulated other comprehensive income (loss) -0.47% -1.11% 1.21% 1.04% 0.99% 0.95% 0.92% 0.88%

Total Gilead International Inc. shareholders' equity 95.95% 101.49% 61.98% 84.00% 100.55% 111.87% 123.82% 135.89%

Noncontrolling interests 2.49% 3.35% 1.58% 0.96% 0.92% 0.88% 0.85% 0.82%

Total equity 98.44% 104.85% 63.56% 84.97% 101.47% 112.75% 124.67% 136.71%

Total Liabilities & Equity 218.92% 200.84% 139.27% 158.33% 173.33% 183.30% 194.29% 205.80%

Page 22: Gilead Sciences (NASDAQ: GILD)

Key Inputs:

CV Growth 1.75%

CV ROIC 57.24%

WACC 7.50%

Cost of Equity 7.88%

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E

DCF Model

Discount period 1 2 3 4 5

NOPLAT 13399 11120 11639 12056 12557

Continuing Value 211,612

PV of Continuing Value 158,440

Free Cash Flow 8242 10900 11348 11656 11855

PV of free cash flows 7667 9432 9134 8727

Value of Operations 193400

Non Operating Assets

Excess Cash 15212

Value of Non Operating Assets 15212

Non Operating Liabilities

PV of Operating Leases 215

Total Debt 11091

PV of Pension Obligations 12373

PV of employee stock options 3190

Value of Non Operating Liabilities 26869

Equity Value 181743

Shares outstanding 1514

Intrinsic Share Price 120.08

EP Model

Periods to discount 1 2 3 4 5

Economic Profit 12208 9543 10045 10440 10911

PV of Terminal Year EP 145432

PV of Incremental Reinvested EP 44241

Continuing Value 189673

PV of continuing value 142013

PV of Economic Profit 11356 8257 8085 7817

Initial Invested Capital 21027

Value of Operations 198556

Non Operating Assets

Excess Cash 15212

Value of Non Operating Assets 15212

Non Operating Liabilities

PV of Operating Leases 215

Total Debt 11091

PV of Pension Obligations 0

PV of employee stock options 3190

Value of Non Operating Liabilities 14496

Equity Value 181743

Shares outstanding 1514

Intrinsic Share Price 120.08

Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Gilead Sciences Inc.,

Page 23: Gilead Sciences (NASDAQ: GILD)

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E

Periods of Discount 1 2 3 4 5

EPS 8.71$ 7.21$ 7.63$ 8.00$ 8.42$

Key Assumptions

CV growth 1.75%

CV ROE 28.13%

Net Income 12300

Average Sharholders' equity 43727

Cost of Equity 7.88%

Future Cash Flows

P/E Multiple (CV Year) 15.30

EPS (CV Year) 8.42$

Future Stock Price 128.78$

Dividends per share 2.16$ 2.29$ 2.40$ 2.52$

Future Cash Flows 128.78$

Discounted Cash Flows 2.01$ 1.98$ 1.93$ 1.89$ 89.69$

97.51$

Fraction since 12/31/2014

Intrinsic Value EOY 99.21$

Price Today 97.72$

Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Gilead Sciences Inc.,

Page 24: Gilead Sciences (NASDAQ: GILD)

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) Present Value of Operating Lease Obligations (2009)

Operating Operating Operating Operating Operating Operating

Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases

2015 58 2014 47 2013 43 2012 44 2011 46 2010 47

2016 53 2015 42 2014 36 2013 36 2012 38 2011 45

2017 49 2016 37 2015 30 2014 30 2013 30 2012 35

2018 36 2017 26 2016 23 2015 24 2014 21 2013 26

2019 33 2018 19 2017 17 2016 18 2015 19 2014 21

Thereafter 73 Thereafter 40 Thereafter 53 Thereafter 53 Thereafter 57 Thereafter 70

Total Minimum Payments 302 Total Minimum Payments 211 Total Minimum Payments 202 Total Minimum Payments 205 Total Minimum Payments 211 Total Minimum Payments 244

Less: Interest 56 Less: Interest 36 Less: Interest 38 Less: Interest 38 Less: Interest 40 Less: Interest 48

PV of Minimum Payments 246 PV of Minimum Payments 175 PV of Minimum Payments 164 PV of Minimum Payments 167 PV of Minimum Payments 171 PV of Minimum Payments 196

Capitalization of Operating Leases 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 6.00% Pre-Tax Cost of Debt 6.00% Pre-Tax Cost of Debt 6.00% Pre-Tax Cost of Debt 6.00% Pre-Tax Cost of Debt 6.00% Pre-Tax Cost of Debt 6.00%

Number Years Implied by Year 6 Payment 2.2 Number Years Implied by Year 6 Payment 2.1 Number Years Implied by Year 6 Payment 3.1 Number Years Implied by Year 6 Payment 2.9 Number Years Implied by Year 6 Payment 3.0 Number Years Implied by Year 6 Payment 3.3

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease

Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment

1 58 54.7 1 47 44.3 1 43 40.6 1 44 41.5 1 46 43.4 1 47 44.3

2 53 47.2 2 42 37.4 2 36 32.0 2 36 32.0 2 38 33.8 2 45 40.0

3 49 41.1 3 37 31.1 3 30 25.2 3 30 25.2 3 30 25.2 3 35 29.4

4 36 28.5 4 26 20.6 4 23 18.2 4 24 19.0 4 21 16.6 4 26 20.6

5 33 24.7 5 19 14.2 5 17 12.7 5 18 13.5 5 19 14.2 5 21 15.7

6 & beyond 33 49.7 6 & beyond 19 27.3 6 & beyond 17 35.2 6 & beyond 18 35.3 6 & beyond 19 38.0 6 & beyond 21 46.2

PV of Minimum Payments 245.9 PV of Minimum Payments 174.9 PV of Minimum Payments 163.9 PV of Minimum Payments 166.5 PV of Minimum Payments 171.2 PV of Minimum Payments 196.2

Page 25: Gilead Sciences (NASDAQ: GILD)

EPS EPSCompany Price 2015E 2016E P/E 15 P/E 16

GlaxoSmithKline 23.27$ $1.35 $1.41 17.19 16.49

Pfizer 34.38$ $2.10 $2.27 16.37 15.17

Roche Hldg DR 278.33$ $14.77 $16.00 18.85 17.40

AstraZeneca 68.88$ $4.18 $4.10 16.50 16.80

AbbVie 57.01$ $4.30 $4.95 13.25 11.52

Merck 57.10$ $3.39 $3.83 16.83 14.90

Shire 76.52$ $3.78 $4.41 20.25 17.33

Actelion 117.39$ $5.08 $5.48 23.12 21.43

United Therapeutics 174.73$ $9.72 $11.86 17.98 14.74

Average 17.8 16.2

Gilead Sciences Inc., $97.72 $ 7.21 $ 7.63 13.5 12.8

Implied Value:

Relative P/E (EPS15) $ 128.53

Relative P/E (EPS16) 123.60$

Gilead Sciences Inc.,Relative Valuation Models

Page 26: Gilead Sciences (NASDAQ: GILD)

Gilead Sciences Inc.,

Key Management Ratios

Fiscal Years Ending Dec. 31 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Liquidity Ratios

Current Ratio (Current Assets/ Current Liabilities) 2.32 5.53 1.44 1.15 3.07 3.25 3.86 4.31 4.76 5.19

Operating Cash Flow Ratio (Operating CF/ Current Liabilities) 1.15 1.45 0.75 0.49 1.19 1.19 1.22 1.23 1.24 1.24

Quick Ratio (current assets – inventories) / current liabilities 1.83 4.98 1.03 0.82 2.83 2.87 3.48 3.92 4.37 4.81

Activity or Asset-Management Ratios

Asset Turnover Ratio (Sales/Total Assets) 69% 48% 46% 50% 72% 63% 58% 55% 51% 49%

Inventory Turnover Ratio (Sales/Total Inventory) 6.6 6.0 5.6 5.4 18.0 8.3 8.3 8.3 8.3 8.3

Receivables Turnover Ratio (Sales/Average Accounts Receivable) 4.7 5.2 5.8 7.4 5.6 5.1 5.1 5.1 5.1

Financial Leverage Ratios

Debt-to-Equity Ratio (Total Debt/Total Equity) 0.46 1.11 0.74 0.34 0.75 0.45 0.36 0.32 0.28 0.25

Equity Ratio (Shareholders Equity/ Total Assets) 0.53 0.40 0.45 0.52 0.46 0.54 0.59 0.62 0.64 0.66

Interest Coverage (Operating Income) / (Interest Expense) 75.23 42.51 28.96 39.63 65.39 65.68 72.95 75.33 77.07 78.30

Profitability Ratios

Return on Assets (Net Income/Total Assets) 24.9% 16.1% 12.1% 13.6% 34.8% 28.7% 20.7% 19.6% 18.5% 17.5%

Return on Equity (Net Income/Shareholders Equity) 49.5% 41.6% 27.8% 27.0% 78.4% 54.2% 35.8% 32.2% 29.0% 26.6%

Gross Margin (Revenue-COGS)/COGS 76.5% 74.7% 74.5% 74.5% 84.8% 79.8% 79.8% 79.8% 79.7% 80.0%

EBIT Margin (EBIT/Sales) 48.5% 42.7% 37.6% 37.6% 59.7% 56.2% 49.0% 49.1% 49.0% 49.3%

Profit Margin (Net Income/Sales 36.3% 33.3% 26.5% 27.3% 48.4% 45.5% 35.9% 35.9% 35.9% 36.1%

Page 27: Gilead Sciences (NASDAQ: GILD)

Marginal Tax Rate 26.81%

Cost of equity Calculation

Risk Free Rate 2.51% Link

+

Beta* 1.107

Market Risk Premium 4.85%

= Cost of Equity 7.88%

WACC Calculation All figures in millions

Shares outstanding* 1,522.000

MV of share $97.72

=Total MV of Equity [E] 148,729.84$

MV of debt [D] $12,040.00

Cost of Debt 3.90% Link

MV of equity 148,729.84$

+

MV of debt 12,040.00$

= MV of the firm [V] 160,769.84$

Cost of Equity * 7.88%

(E/V) 92.51%

+

Cost of Debt * 3.90%

(1-Marginal tax Rate) 73.19%

(D/V) 7.49%

= WACC 7.50%

YTM on bonds that mature in 2041

Weighted Average Cost of Capital (WACC) Estimation

Gilead Sciences Inc.,

(30Y Treasury Yield from Treasury Website)

Page 28: Gilead Sciences (NASDAQ: GILD)

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 54,454

Average Time to Maturity (years): 6.11

Expected Annual Number of Options Exercised: 8,918

Current Average Strike Price: 45.43$

Cost of Equity: 7.88%

Current Stock Price: $97.72

2015E 2016E 2017E 2018E 2019E

Increase in Shares Outstanding: 8,918 8,918 8,918 8,918 8,918

Average Strike Price: 45.43$ 45.43$ 45.43$ 45.43$ 45.43$

Increase in Common Stock Account: 405,205 405,205 405,205 405,205 405,205

Change in Treasury Stock 1,700 1,500 3,000 3,000 3,000

Expected Price of Repurchased Shares: $97.72 105.42$ 113.73$ 122.69$ 132.35$

Number of Shares Repurchased: 17,397 14,229 26,379 24,453 22,667

Shares Outstanding (beginning of the year) 1,522,000 1,513,522 1,508,211 1,490,750 1,475,216

Plus: Shares Issued Through ESOP 8,918 8,918 8,918 8,918 8,918

Less: Shares Repurchased in Treasury 17,397 14,229 26,379 24,453 22,667

Shares Outstanding (end of the year) 1,513,522 1,508,211 1,490,750 1,475,216 1,461,468

Page 29: Gilead Sciences (NASDAQ: GILD)

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol GILD

Current Stock Price $97.72

Risk Free Rate 2.73%

Current Dividend Yield 0.00%

Annualized St. Dev. of Stock Returns 14.19%

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 43.85 7.70 62.22$ 2,435,548$

Range 2 827 51.52 0.80 47.31$ 39,128$

Range 3 14,483 49.37 2.10 49.37$ 715,026$

Total 54,454 45.43$ 6.11 59.29$ 3,189,702$

Page 30: Gilead Sciences (NASDAQ: GILD)

Gilead Sciences Inc.,Common Size Income Statement

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Net sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cost of Goods sold -22.60% -22.44% -11.00% -16.72% -16.72% -16.72% -16.72% -16.72%

Depreciation & Amortization Expense -3.50% -4.34% -13.21% -3.45% -3.44% -3.48% -3.54% -3.29%

Gross Profit 74.53% 74.48% 84.78% 79.83% 79.84% 79.80% 79.74% 79.99%

Selling, General & Administrative Expenses -15.06% -15.17% -11.98% -11.41% -14.00% -14.00% -14.00% -14.00%

Research & development expenses -18.14% -18.92% -11.47% -10.71% -15.30% -15.30% -15.30% -15.30%

Net interest expense -3.72% -2.74% -1.66% -1.55% -1.50% -1.45% -1.41% -1.40%

Total other income (expense), net -0.38% -0.08% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00%

Net Income (loss) before income taxes 37.23% 37.57% 59.69% 56.16% 49.05% 49.06% 49.02% 49.30%

Income tax expense -10.70% -10.27% -11.24% -10.67% -13.15% -13.15% -13.15% -13.22%

Income from discontinuing operations 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Net income (loss) 26.53% 27.29% 48.45% 45.49% 35.89% 35.90% 35.88% 36.08%

Less: Net income attributable to noncontrolling interests 0.19% 0.16% 0.17% 0.07% 0.07% 0.07% 0.06% 0.06%

Net income attributable to Gilead 26.72% 27.45% 48.62% 45.56% 35.96% 35.97% 35.94% 36.14%