Gilead Sciences Inc. Equity Research Hold report.pdf · Student Investment Management Analyst: Luxi...

Student Investment Management Analyst: Luxi Nie

[email protected] (614)271-0553 March 27, 2015

Gilead Sciences Inc. Equity Research

Company Description

Gilead Sciences, Inc., founded in 1987 in Foster

City, California, is a research-based

biopharmaceutical company that discovers,

develops, and commercializes therapeutics to

advance the care of patients suffering from

life-threatening diseases. The Company's primary

areas of focus include HIV/AIDS, liver disease and

serious cardiovascular and respiratory conditions.

Gilead is engaged in addressing unmet medical

needs for patients living with life-threatening

diseases around the world.

Investment Thesis

I recommend a “HOLD” rating for Gilead Science

with a target price $108.39. With the successful

sales of Sovaldi and Harvoni as treatment for liver

diseases, Gilead more than doubled their revenue

and expects continuing and further sales in foreign

areas. Nearly one fourth of their active clinical

studies are in Phase 3, which may be launched to

the market in the near future. On the other hand,

Gilead is stuck in several litigations which may lead

to invalid of patents and facing with increasing

pressure of pricing.

Opportunities

Further growth of existing products

Strong research and clinical study emphasis

Well-organized distribution channel

Risks

Revenue depends on sales of certain products

Pricing pressure from governments

Threats from introduction of alternative drugs

Patent expiration and lawsuit

Recommendation: Hold

Ticker: NASDAQ: GILD

Price Target: $108.39

Current Price: $101.51

Potential Upside/Downside: 6.78%

Market Data

Market Capitalization: 145.95B

Diluted Shares Outstanding: 1.65B

Dividend Yield: -

Beta: 1.02

52 Week Price Range: $63.5- $116.83

Financial Data

Revenue: 24.89B

Revenue Growth: 122.2%

Gross Margin: 84.78%

Operating Margin: 61.33%

Earnings Per Share: 7.35

Trailing P/E: 13.33

GILD trailing 12 month Performance

Gilead Sciences (GILD) Equity Research Report Luxi Nie

March 27, 2015 2

Table of Contents

Company Overview……………………………………………………………………………………………3

Business Analysis……………………………………………………………………………………………….3

Products ……………………………………………………………………………………………………………….3

Company Strategy……………………………………………………………………………………………….…5

Recent Events……………………………………………………………………………………………………..…7

Comparative Advantages…………………………………………………………………………………….…7

Investment Thesis…………………………………………………………………………………..…………9

Fundamental Drivers………………………………………………………………………………………….…9

Economic Analysis…………………………………………………………………………………………………9

Financial Analysis…………………………………………………………………………………………………10

Valuations……………………………………………………………………………………………………...….…12

Relative Valuation………………………………………………………………………………………...…12

Multiple Valuation………………………………………………………………………………………..…12

DCF Valuation…………………………………………………………………………………………...……13

Sensitivity Analysis…………………………………………………………………………………………13

Risks & Considerations…………………………………………………………………………..………14

Summary and Recommendation…………………………………………………………………15

Appendices…………………………………………………………………………………………………...……16

Appendix I: Income Statement Forecast………………………………………………………………16

Appendix II: Discounted Cash Flow Valuation………………………………………………………17

Appendix III: Sources……………………………………………………………………………………….…18


March 27, 2015 3

Gilead Science Company Overview

Gilead Sciences, Inc. (Gilead) is a research-based biopharmaceutical company that discovers,

develops, and commercializes therapeutics to advance the care of patients suffering from

life-threatening diseases. The Company's primary areas of focus include HIV/AIDS, liver disease

and serious cardiovascular and respiratory conditions. Gilead Sciences, Inc., incorporated in

Delaware in 1987, is research-based biopharmaceutical companies that discovers, develops and

commercializes innovative medicines in areas of unmet medical need with headquarter in Foster

City, California.

Business Analysis

Products

Gilead primary areas of focus include HIV/AIDS, liver disease and serious cardiovascular and

respiratory conditions.

Exhibit 1: Gilead current marketed products

Gilead Current Marketed Products

HIV/AIDS

Liver

Diseases

Hematology/

Oncology

Cardiovascular Inflammation/

Respiratory

Other

Atripla

Complera

Emtriva

Stribild

Truvada

Tybost

Viread

Vitekta

Harvoni

Hepsera

Sovaldi

Viread

Zydelig

Letairis

Lexiscan

Ranexa

Cayston

Tamiflu

AmBisome

Macugen

Gilead’s antiviral products including products in HIV and liver diseases areas accounts for 91%

of total revenues in 2014. In addition, during the year 2014, sales of Sovaldi and Harvoni for the

treatment of HCV, accounted for approximately 50% of total product sales.

The following table Exhibit 2 shows the percentage of total revenue and market shares of main

products of Gilead. In Liver disease area, the Sovaldi almost dominates in certain area. And the

total HIV products occupy nearly 40% of market share, which makes Gilead able to impact the


March 27, 2015 4

whole market.

Exhibit 2: Percentage of total revenue and market shares of main products of Gilead

Product Candidates

Gilead has 225 active clinical studies by the end of year 2014, of which more than 54 were Phase

3 clinical trials. These product candidates are highly likely to be commercialized, which may

become marketed products. In addition, one product for treatment for HIV disease is under

marketing application pending phase, which is expect to introduced to the market in the near

future.

R&D accounts for a significant component in the development of Gilead biotechnology company.

Gilead R&D strategy is to develop best-in-class drugs that improve safety or efficacy for unmet

medical needs. The company has research scientists in Foster City, Fremont, San Dimas and

Oceanside, California; Connecticut; Washington and Canada. From the following Exhibit 3, R&D

expense over the last five years shows increasing the percentages of sales. Even the R&D

expense accounts for 11.47% of sales in 2014, which should be considered with that the sales of

2014 more than doubled that of 2013.

But the high level of R&D also leads Gilead to higher risk exposure. The clinical studies can be

ceased if the study result is not favorable. The suspension of clinical trials can also be caused by

unaffordable cost, government policies or introduction of products from competitor firms. In this

case, some of the product of clinical trials probably cannot generate revenue for Gilead.


March 27, 2015 5

Exhibit 3: Gilead R&D expenditure as percentage of net sales

In 2015, Gilead is going to increase its R&D expenses over 2014 to support the expansion of our

clinical studies in various therapeutic areas including liver disease, HIV and oncology.

Company Strategy

Strategy Overview

Gilead basic operating strategies focus on the clinical studies on current product candidates and

improve the application and sales of marketed products. The company will continue to invest in

R&D progress for the clinical trials and identify most likely commercialized study results. For the

current marketed products such as Sovaldi, which generated the most revenue compared to

others, Gilead is going to improve the accessibility to more regions. The company emphases

increasing the access of patients who need the treatment rather than whether the products are

affordable for them.

Patient Access

In the U.S., Gilead has patient assistance programs that help certain individuals and provide

necessary financial resources. And also, the company has collaborated with AIDS Drug

Assistance Programs (ADAPs) for a long time and provide HIV drugs with lower price. In

countries outside of U.S, especially in developing countries, Gilead works with World Health

Organization and regional business partners to provide medicines in the prices that reasonable

for certain countries. Those assistance programs help improve the reputation of Gilead

worldwide.

Global Business

By the end of 2014, Gilead has operations in more than 30 countries worldwide and Sovaldi is

now available in over 40 countries. During 2014, the company signed agreement with


March 27, 2015 6

India-based generic drug companies to manufacture Sovaldi and Harvoni for distribution in 91

developing countries. Beside this, Gilead also signed agreement with Medicines Patent Pool (the

MPP) for distribution for certain drugs in 112 countries. Those will increase the number of

patients for certain drugs and extend the revenue base.

On the other hand, global business also makes Gilead subject to uncertainty of income taxes in

different foreign countries. With the change of macroeconomic policies, the tax policies,

especially the tax rates can be changed over time, of which some could be beneficial or hurtful.

Acquisition

Gilead has a strong acquisition activity in the last few years, which consists with Gilead’s product

strategy that “continuing add to our existing portfolio of products through our internal discovery

and clinical development programs and through a product acquisition and in-licensing strategy”.

Just as the Exhibit 3 shows, most of acquisitions aimed for certain products from target

companies. Some of the acquisitions are for manufacturing purposes, which the acquired

companies will instead manufacture the drug product to provide additional amount of products

or to replace old manufacturing places.

Exhibit 3: Gilead’s acquisitions from 2006

Year Target

companies

Price Notes

2006 Corus Pharma,

Inc.

$365 million with drug aztreonam lysine in the respiratory

arena

2006 Myogen, Inc. $2.5 billion With two drugs in development (ambrisentan and

darusentan), and one marketed product (Flolan)

for pulmonary diseases

2006 Raylo

Chemicals, Inc.

$148 million The site is used for both clinical studies and

commercial products.

2007 Nycomed fr.

Altana - Cork

$47 million The site is used for commercial manufacturing

site by Gilead.

2009 CV

Therapeutics,

Inc.

$1.4 billion With Ranexa and Lexiscan as commercial

products for cardiovascular area with Gilead’s

cardiovascular franchise.

2010 CGI

Pharmaceuticals

$120 million Help to broaden Gilead's research in kinase

biology and chemistry area.

2010 Arresto

Biosciences, Inc.

$225 million With developmental-stage research in fibrotic

diseases area.


March 27, 2015 7

2011 Calistoga

Pharmaceuticals

$375 million For oncology and inflammation area.

2011 Pharmasset, Inc $10.4 billion This acquisition helps Gilead take the lead in HCV

with 7977 (Sofosbuvir).

2013 YM Biosciences,

Inc

$510 million This acquisition brings drug candidates for

myeloproliferative diseases, inflammatory

disorders and certain cancers.

2015 Phenex

Pharmaceuticals

$470 million Help with the research for the treatment of liver

diseases.

Recent Events

Acquisition of Phenex Pharmaceuticals

In the January, 2015, Gilead acquired Phenex’s FXR program. Phenex Pharmaceuticals is a

privately-owned and Germany based biotechnology company. Gilead acquired Phenex's

farnesoid X receptor (FXR) program comprising small molecule FXR agonists for the treatment

of liver diseases including nonalcoholic steatohepatitis (NASH), which is estimated to infect 10%

to 20% of the people in the developed world.

First Dividend Announcement

In the February, 2015, Gilead announced its first dividend that the company intended to pay

quarterly dividends of $0.43 per share, beginning in the second quarter of 2015, subject to

quarterly declarations by the Board of Directors. In addition, Gilead announced a $15 billion

common stock buyback program.

Comparative Advantages

The Exhibit 4 shows the ROE and revenue growth rate for Gilead Sciences and its main

competitors. In terms of stock return, the company enjoys the highest ROE among its main

competitor, especially in 2014, which mainly due to the acquisitions and growing revenue. So in

both fundamental driving force and stock performance, Gilead is at the top area.


March 27, 2015 8

Exhibit 4: ROE and revenue growth rate for Gilead Sciences and its main competitors

Further growth of existing products

With the success of the new drags Harvoni and Sovaldi, the total sales growth in 2014 is more

than 100%. The revenue of the new products is mostly from the US market. With more

marketing approval of Sovaldi in Japan and Europe, etc., foreign markets are expected to bring

more revenue for Gilead.

Strong research and clinical study emphasis

Gilead is active in acquisitions in the last few years, which bring in the products candidates and

clinical studies achievement for further research. As a biotechnology company, Gilead keeps its

R&D expenditure at a relatively high and reasonable level compared with peers. The current

sales achievement is mainly driven by the research and studies. With the emphasis on the clinical

studies, we expect more revenue are generate from that.

Well-organized distribution channel

In the US, Gilead’s products are distributed exclusively through the wholesale channel. In other

foreign countries, its products are marketed through its own commercial teams and/or in

conjunction with third-party distributors and corporate partners. The distribution channel is

well- organized and managed. Gilead can refer to its distribution experience in foreign markets if

it plans to enter a new market.


March 27, 2015 9

Investment Thesis

Fundamental Drivers

R&D

One of the most important fundamental drivers for biotech companies is the result from R&D.

The future of Gilead heavily relies on whether the results of clinical trials are successful and

commercialized. The company in the last few years keeps increasing its R&D expenses 20% and

35% in 2013 and 2014 respectively. In addition, the strategic acquisitions will add more value

for the existing clinical studies and products diversification.

Patent Protection

Patent is the protection of the study results for biotech companies. Gilead has a number of

patents in the US and other foreign countries related to their compounds, products and

technology. For product sales, the patents guarantee the presumption for any production and

distribution for the product drugs. However, the company cannot ensure that they will not lose

important patents in the future or the competitors cannot obtain patents that make Gilead not

exclusive.

Economic Analysis

United States Healthcare Reform

In March 2010, healthcare reform legislation was adopted in the US, which requires

pharmaceutical companies to further rebate or discount products reimbursed or paid for by

various public payers. Gilead, under this regulation, is expected to increase its expenses and fees.

The company is required to provide 50% discount products for certain patients and pay a new

industry fee (the BPD fee), etc. The BPD fee for companies Including Gilead is estimated about

$3.0 billion in 2014 through 2016, increase to $4.0 billion in 2017, increase to a peak of $4.1

billion in 2018, and then decrease to $2.8 billion in 2019 and thereafter.

Compulsory Licenses

Gilead now has business and product distribution in some developing countries. The company is

required to sign compulsory licenses under the policy in these countries to allow third parties to

sell Gilead’s products in their own version, which reduce Gilead’s revenue.

Reimbursement

Since a significant portion of Gilead’s products are for life-threatening diseases, the prices of the

drugs are relatively high. So the sales of the products heavily depend on the government

reimbursement and payment by the third party. Given the fact that the growth in National Health

Expenditures decreased from 4.1% and 3.6% in 2012 and 2013 respectively, the company is


March 27, 2015 10

subject to a reduction of reimbursement from government, which may influence the sales of

certain drugs.

Medicare spending, which represented 20 percent of national health spending in 2013, grew 3.4

percent to $585.7 billion, a slowdown from growth of 4.0 percent in 2012. This slowdown was

attributed largely to slower enrollment growth and impacts of the Affordable Care Act (ACA) and

sequestration. Per-enrollee spending in 2013 grew at about the same rate as 2012.

Financial Analysis

Income Statement Forecast

In 2014, Gilead more than doubled its revenue from $10.8 million to $24.5 million, mostly due to

the sales of its Sovaldi and Harvoni for the treatment of HCV. In December, 2013, FDA approved

Sovaldi to treat chronic hepatitis C virus (HCV) infection, which means Gilead can introduce this

drug to the market. The following table shows the income statement projects for Gilead for the

next three years. It is hard for Gilead to remain such a high sales growth in during 2014. But

considering that Gilead got approvals to market Sovaldi in Europe, Japan and several other

countries recently, the projected sales growth rate for the next three years are 17%, 10% and

8.5% respectively, which is similar to the consensus projections .

The estimated Earnings per Share are 8.77, 9.40, and 10.20 for the next three years, which are a

little lower than the consensus.

Profitability Analysis

The Exhibit 4 shows Gilead’s Profitability indexes from 2010 to 2014. After decline for four years,

return on equity of Gilead rebounded up to 90.31%, which is a really good performance and at

the top of ROE in peer firms. The EBITDA margin increased from 43.47% to 65.55%, which is

even much better than four years ago. The average of EBITDA margin of peer firms is 39.46%,

which is 25% lower than Gilead’s. Therefore, Gilead’s profitability is rebounded and expected to

keep in this level and generally higher than peers.

Exhibit 5: Gilead’s Profitability indexes from 2010 to 2014

12 Months Ending FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

ROE 47.44 44.49 32.31 29.74 90.31

ROA 27.25 19.40 13.44 14.03 42.27

Gross Margin 76.48 74.67 74.53 74.48 84.78

EBITDA Margin 53.18 48.80 44.20 43.47 65.55

Operating Margin 49.84 45.20 41.33 40.39 61.33

Net Income Margin 36.50 33.43 26.71 27.45 48.62


March 27, 2015 11

Efficiency Analysis

Gilead accounts receivable and inventory turnover increased significantly during FY 2014 and

slightly exceed the peers average. All the increased turnover ratios are associated with the

growing sales mainly due to the new drags.

Exhibit 6: Gilead’s Efficiency index from 2010 to 2014


Accounts Receivable Turnover 5.28 4.69 5.24 5.70 7.30

Inventory Turnover 1.66 1.64 1.58 1.66 2.46

Accounts Payable Turnover 2.51 2.30 2.23 2.26 3.29

Liquidity Analysis

Exhibit 7 shows Gilead’s Liquidity index from 2010 to 2014. The current ratio increased to 3.07,

which is above the average 2.84. In the past four years, acquisitions taken by the company

reduced the cash, which lowered the current ratio. In year 2014, the outstanding sales rapidly

increase the cash in the balance sheet, which makes the almost tripled current ratio.

Exhibit 7: Gilead’s Liquidity index from 2010 to 2014


Current Ratio 2.32 5.53 1.45 1.09 3.07

Quick Ratio 1.51 4.71 0.85 0.67 2.56

Leverage Analysis

Exhibit 8 shows Gilead’s Leverage index from 2010 to 2014. During 2014, the difference

between long-term debt/equity and total debt/equity decreased from 0.23 down to 0.03, which

shows that Gilead has repaid a large amount of short term debt. In 2014, Gilead issued senior

unsecured notes for a total aggregate principal amount of $8.0 billion, which may be used to

support the upcoming share repurchase program in 2015.

Exhibit 8: Gilead’s Leverage index from 2010 to 2014


Long-Term Debt/Equity 46.37 110.75 73.99 33.54 75.36

Total Debt/Equity 46.37 110.75 86.25 56.50 78.41

Total Debt/Capital 31.68 52.55 46.31 36.10 43.95


March 27, 2015 12

Valuations

Relative Valuation

The Exhibit 9 shows the price and EV multiples about Gilead and its main competitors in

biotechnology and pharmaceuticals sectors. Gilead has three below average price multiples P/E,

P/B and P/CF. Considering that the total sale of Gilead in 2014 is more than doubled, the P/S

may have not adjusted completely. Those price multiples show that Gilead is likely to be slightly

undervalued. In addition, the company has low EV/EBITDA multiple compared to the average

and all peers except Pfizer.

Exhibit 9: Selected Multiples for Gilead and main competitors

Multiples Average Gilead AbbVie Pfizer Amgen Biogen Idec

P/E 22.98 18.61 20.65 17.49 23.57 34.59

P/S 6.49 7.77 5.11 4.15 6.38 9.06

P/B 12.07 11.72 21.50 14.25 4.78 8.10

P/CF 18.13 15.35 18.55 12.10 15.19 29.46

EV/ EBITDA 14.99 12.36 16.55 10.47 15.85 19.71

Multiples Valuation

The relative valuation generally indicates that Gilead’s price multiples are lower than average

and peers. As Exhibit 10 shows, I estimated the target multiple that the company potentially

could reach with the consideration of industry average performance and Gilead specific company

strategy. The Target price range is $106.60-$118.84, which is above the current price $101.51.

From the multiple valuation, it is can be inferred that Gilead stock has the potential to go

upward.

Exhibit 10: Multiple Valuation for Gilead’s stock price

Absolute

Valuation

Current

Multiple

Target

Multiple

Target/

Current

Expected

EPSTarget Price

P/E 18.68 21.25 1.14 $4.49 $118.84

P/B 11.76 12.00 1.02 $106.60

P/S 7.80 8.00 1.03 $107.15

P/EBITDA 12.40 13.20 1.06 $111.21


March 27, 2015 13

Discount Cash Flow Model Valuation

Appendix II shows Discount Cash Flow Model (DCF) based on my forecast over the next ten

years. Considering that Gilead sales are largely driven by its clinical research and successfully

commercialized products for life-threatening diseases, I use the terminal growth rate at 4.5%.

This growth rate doubles the US GDP growth rate 2.2% and is also higher than the industry

growth rate. The increasing R&D expenditure indicates that Gilead expects its research and

studies can further promote sales.

As a biotechnology company, Gilead is cyclical, different feature “defensive” of the whole

healthcare sector. Therefore, the discount rate that I use in the model is 11%, which means the

stock is “riskier” than other stocks. The implied price for Gilead is $108.39 and has a potential up

with an upside of 6.78%.

Sensitivity Analysis

The Exhibit 11 shows the sensitivity table about the discount rate and terminal growth rate.

With the bearish scenario which Gilead will not be able to maintain its current market share and

sales base and commercialize fewer its new clinical results to introduce to the market in the

future. The company may have 4.0% growth rate or even less, which indicates its implied price

may drop down to $100 or lower. On the other hand, if Gilead can further promote its clinical

studies and commercialized more product candidates and receive the government approval for

marketing certain product candidates, its implied stock price has potential to reach $120 or so.

Exhibit 11: Sensitivity table for DCF model

From all the valuations above, the relative valuation indicates a price range $106.60-$118.84 and

DCF model shows an implied price $108.39 as well as the multiple valuation suggests a slightly

undervalued situation. The three methods are generally consistent with the suggestion that

Gilead stock has potential to go up with an upside of 5.0% to 17.1%

9.5% 10.0% 10.5% 11.0% 11.5% 12.0%

3.0% 119.48 110.80 103.28 96.71 90.92 85.77

3.5% 125.34 115.63 107.30 100.08 93.77 88.21

4.0% 132.27 121.25 111.93 103.94 97.01 90.95

4.5% 140.59 127.91 117.34 108.39 100.72 94.07

5.0% 150.76 135.89 123.72 113.58 104.99 97.62

5.5% 163.47 145.65 131.39 119.71 109.97 101.72

6.0% 179.81 157.85 140.76 127.07 115.86 106.51

Discount Rate

Term

inal

Gro

wth

Rate


March 27, 2015 14

Risks and Concerns

Pricing Pressure

Gilead is currently under pricing pressure from US government and foreign developing countries.

Within the US, a letter from FDA raised concerns about Gilead’s approach to pricing Sovaldi,

which accounts for about half of sales in 2014, its affordability and its impact on federal

government spending and public health. In addition, many countries in the European Union have

increased discounting level on Gilead products to manage healthcare expenditures.

Potentially unattained approval

Gilead’s product candidates face the risk that cannot obtain the marketing approval from FDA or

foreign department such as European Commission. As of the end of 2014, its marketing

application for one product candidate is under pending status and may never be commercialized

without the approval. In this case, the incurred cost will not generate sales revenue for Gilead.

Acquisition

Gilead has active acquisition activities in the past few years, aiming to obtain the products or

products candidate or clinical studies achievement from acquired firms. In the future, Gilead is

likely to have more acquisitions for the same purpose to improve its pipeline. These acquisitions

may dilute existing shareholders’ shares.

Litigation

Currently, Gilead sticks into several litigations with competitors, distributors or business

partners. Most of the litigations are related to the patent that Gilead owns. For example, in

February 2012, Gilead received notice from the U.S. Patent and Trademark Office (USPTO) that

there is interference between one patent of the Idenix Pharmaceuticals, Inc. and one of Gilead.

Idenix’s interference aimed to determine that who is the first to invent the compounds, which is

related to Sovaldi. If the results of such litigations is unfavorable for Gilead, then Gilead may lose

the right to produce or sell certain products, which may heavily influence its future revenue.


March 27, 2015 15

Investment Summary

I recommend a “Hold” with an implied price $108.39 with an upside of 6.78%. The share price

currently traded at $101.51, which is slightly undervalued. Although Gilead is not likely to

maintain the sales growth rate for 2014 which is more than 100% due to the success

of hepatitis C treatment Sovaldi and Harvoni. But it is expected to at least maintain the current

market share and pricing power and commercialize more clinical results for more new drags.

Meanwhile, as a biotechnology company, Gilead bears more uncertainty related to patent

protection and expiration, lawsuit and government policies.

Recommendation: HOLD

Projected Price Range: $106.60-$118.84

DCF Implied Price: $108.39


March 27, 2015 16

Appendix I: Income Statement Forecast

USD in thousands FY 2017E FY 2016E FY 2015E FY 2014A FY 2013A

Revenues:

Product sales 24,474,000 10,803,695

Royalty revenues 416,000 383,849

Contract and other revenues - 14,144

Total revenues 34,756,272 32,033,430 29,121,300 24,890,000 11,201,688

Consensus Revenue 30,034,000 28,511,000

Costs and expenses:

Cost of goods sold 5,908,566 5,525,767 4,991,391 3,788,000 2,858,502

Research and development expenses 5,213,441 4,805,015 4,435,174 2,854,000 2,119,756

Selling, general and administrative

expenses4,518,315 4,164,346 3,512,029 2,983,000 1,699,431

Total costs and expenses 15,640,322 14,495,127 12,938,594 9,625,000 6,677,689

Operating Income 19,115,949 17,538,303 16,182,706 15,265,000 4,523,999

Interest expense (764,638) (704,735) (495,062) (412,000) (306,894)

Other income (expense), net 278,050 256,267 232,970 3,000 (8,886)

Income before provision for income

taxes

18,629,362 17,089,835 15,920,615 14,856,000 4,208,219

Provision for income taxes 3,725,872 3,417,967 3,184,123 2,797,000 1,150,933

Net income 14,903,489 13,671,868 12,736,492 12,059,000 3,057,286

Net loss attributable to noncontrolling

interest695,125 784,819 777,539 42,000 17,522

Net income attributable to Gilead 15,598,615 14,456,687 13,514,030 12,101,000 3,074,808

Net income per share attributable to Gilead

common stockholders basic10.20 9.46 8.84 7.92 2.01

Shares used in per share calculation basic 1,374,742 1,374,742 1,374,742 1,528,620 1,528,620

Net income per share attributable to Gilead

common stockholders diluted10.12 9.38 8.77 7.35 1.81

Consensus EPS 10.55 9.66 8.78

Shares used in per share calculation diluted

interest1,540,869 1,540,869 1,540,901 1,647,000 1,694,747

Year Ended December 31,

Gilead Income Statement Forecast


March 27, 2015 17

Appendix II: Discounted Cash Flow Valuation

Year Ended December 31 Terminal Discount Rate 11.0% Terminal Growth Rate 4.5%

USD in thousands FY 2014A FY 2015E FY 2016E FY 2017E FY 2018E FY 2019E FY 2020E FY 2021E FY 2022E FY 2023E FY 2024E

Revenue 24,890,000 29,121,300 32,033,430 34,756,272 36,841,648 38,499,522 40,232,000 42,042,441 43,934,350 45,911,396 47,977,409

% growth 122.2% 17.0% 10.0% 8.5% 6.0% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5%

Operating Income 15,265,000 16,182,706 17,538,303 19,115,949 18,973,449 19,827,254 20,719,480 21,651,857 22,626,190 23,644,369 24,708,366

Operating Margin 61.3% 55.6% 54.8% 55.0% 51.5% 51.5% 51.5% 51.5% 51.5% 51.5% 51.5%

Interest and Other (409,000) (262,092) (448,468) (486,588) (515,783) (538,993) (563,248) (588,594) (615,081) (642,760) (671,684)

Interest % of Sales -1.6432% -0.9% -1.4% -1.4% -1.4% -1.4% -1.4% -1.4% -1.4% -1.4% -1.4%

Taxes 2,797,000 3,184,123 3,417,967 3,725,872 4,614,416 4,822,065 5,039,058 5,265,816 5,502,777 5,750,402 6,009,170

Tax Rate 18.8% 20.0% 20.0% 20.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%

Net Income 12,101,000 13,514,030 14,456,687 14,903,489 13,843,249 14,466,195 15,117,174 15,797,447 16,508,332 17,251,207 18,027,511

% Growth 11.7% 7.0% 3.1% -7.1% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5%

Add Depreciation&Amortization 1,050,000 1,106,609 928,969 868,907 921,041 962,488 1,005,800 1,051,061 1,098,359 1,147,785 1,199,435

% of Sales 4.2% 3.8% 2.9% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%

Plus/(minus) Changes of WC (2,840,111) 2,471,102 983,653 158,129 368,416 384,995 402,320 420,424 439,344 459,114 479,774

% of Sales -11.4% 8.5% 3.1% 0.5% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Subtract Cap Ex 557,000 728,033 800,836 868,907 921,041 962,488 1,005,800 1,051,061 1,098,359 1,147,785 1,199,435

% of sales 2.2% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%

Free Cash Flow 15,434,111 11,421,505 13,601,168 14,745,361 13,474,833 14,081,200 14,714,854 15,377,023 16,068,989 16,792,093 17,547,737

% Growth -26.0% 19.1% 8.4% -8.6% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5%

NPV of Cash Flows 84,334,015 282,113,623

NPV of terminal value 99,356,039

Projected Equity Value 183,690,054 6.2%

Free Cash Flow Yield 9.0%

15.65

Current P/E 14.22 12.73 11.90

Projected P/E 15.18 13.59 12.71 10.95

Current EV/EBITDA 10.64 10.04 9.40

Projected EV/EBITDA 11.35 10.71 10.03

Shares Outstanding 1,694,747

Current Price 101.51

Implied equity value/share 108.39

Upside/(Downside) to DCF 6.78%

Debt 13,210,000

Cash 11,730,000

Cash/share 6.92

Gilead Discount Cash Flow Valuation

Termial Value

Free Cash Yield

Terminal P/E

Terminal EV/EBITDA


March 27, 2015 18

Appendix III: Reference Sources

GileadSciences_10K_20150225. (2015, February 25). Retrieved March 21, 2015, from

http://investors.gilead.com/phoenix.zhtml?c=69964&p=irol-sec

Bloimberg website

Gilead Sciences Announces 43 Cents Quarterly Dividend Program and $15 Billion Share Buyback

Program. (n.d.). Retrieved March 26, 2015, from

http://www.marketwatch.com/story/gilead-sciences-announces-43-cents-quarterly-dividend-p

rogram-and-15-billion-share-buyback-program-2015-02-03

Gilead to Purchase Liver Disease Program from Phenex - Analyst Blog. (n.d.). Retrieved March 27,

2015, from

http://www.nasdaq.com/article/gilead-to-purchase-liver-disease-program-from-phenex-analys

t-blog-cm430543#ixzz3Vu8vNTOP

Gilead Sciences. (n.d.). Retrieved March 24, 2015, from

http://en.wikipedia.org/wiki/Gilead_Sciences

Press Releases. (n.d.). Retrieved March 25, 2015, from

http://www.gilead.com/news/press-releases/2015/1/gilead-sciences-announces-acquisition-o

f-phenex-pharmaceuticals-development-program-for-nonalcoholic-steatohepatitis-nash-and-oth

er-liver-diseases#sthash.xm9AwXs4.dpu

Gilead Sciences Inc. Equity Research Hold report.pdf · Student Investment Management Analyst: Luxi...

Documents

Transcript of Gilead Sciences Inc. Equity Research Hold report.pdf · Student Investment Management Analyst: Luxi...