1

The Economist-Kerrisdale Capital Case Study Competition 2015

Gilead Sciences, Inc

“Incurable Future Condition”

Nicole Moutos Carder

Daniela Carvajalino

Antwon Kennedy

Kennesaw State University

"Find a Zero: Which Billion Dollar Company Will be Bankrupt by 2020"

2

Introduction...............................................................................................................................4

Background on HIV Treatment and Cure ...............................................................................4

HCV Treatment (see appendix: HCV Treatment) ...................................................................5

Gileads' HIV Drugs will become Obsolete with the release of novel HIV Treatment or HIV

Cure ...........................................................................................................................................5

Gilead’s Pipeline is Restrictive and Lacks Innovation.............................................................7

Pricing and Market Share Pressure on Gilead's HCV Drugs .................................................8

Calculation to Zero ................................................................................................................. 10

Conclusion ............................................................................................................................... 12

Appendix ................................................................................................................................. 14

AIDS Info: FDA Approved HIV Medicines .......................................................................... 14

Where The Virus Hides: HIV’s many Reservoirs .................................................................. 17

HCV Treatment ..................................................................................................................... 18

Project Market Share Competition for HCV and HIV ............................................................ 19

Pipeline ................................................................................................................................. 21

Estimated Medication Cost for Treatment of Genotype 1 Chronic HCV ................................ 24

Annual Cost Adjusted for Inflation ........................................................................................ 25

First Year Sales ..................................................................................................................... 25

Upcoming HCV Medications ................................................................................................ 26

Calculations for Product Revenue Projections ....................................................................... 27

Calculation to Zero ................................................................................................................ 29

References............................................................................................................................. 31

3

End Notes ............................................................................................................................. 36

4

Introduction

As of 2015, developments in human immunodeficiency virus (HIV) and Hepatitis C

(HCV) cure research will help undermine Gilead’s unsustainable business model of price

gouging and providing non-curative treatments for HIV. Gilead is unprepared to handle the

disruption of an HIV cure because they do not have an innovative pipeline to hedge against

declining market share and product sales. They are also burning bridges globally in their

handling of their HCV cure through price gouging, patent rights wars, and provider discontent.

These factors coupled with increased competition and the company’s mounting debt will lead to

the end of Gilead by 2020.

Gilead Sciences is a biopharmaceutical company that discovers, develops and,

commercializes therapies primarily to treat HIV and cure HCV. Founded in 1987, the company

currently has a market capitalization of over $150 billion, 7,000 employees, and over 30

locations globally. HIV treatment and HCV cure products account for approximately 90% of

their revenue. Statistically, there are approximately 35 million and 150 million potential

patients, globally affected by HIV and HCV, respectively.1 2

Background on HIV Treatment and Cure

HIV is a virus that is spread through contact with the bodily fluids of a person infected

with HIV. 3 HIV attacks one’s immune system CD4 cells “a type of white blood cell that plays a

major role in protecting the body from infection.” 4 HIV binds onto the CD4 cell and uses it to

reproduce and spread throughout the body. Once the virus has weakened a person’s immune

system by destroying CD4 cells, that person is no longer able to fight off infections.

5

The current treatment protocol for HIV is for patients to take several medications from at

least two different classes, known as antiretroviral therapy (ART), daily, for life. The classes of

HIV medicines are categorized by the HIV life cycle stage they disrupt (see appendix: AIDS

Info: FDA Approved HIV Medicines). ART cannot cure HIV, but is effective at preventing the

virus from multiplying.5 However, portions of the virus hide in reservoirs throughout the body

(see appendix: Where the Virus Hides, HIV’s many reservoirs). In these reservoirs, the virus lay

dormant and the immune system is unable to detect the latent virus. If a patient stops ART, the

dormant virus becomes active and the HIV infection starts again. Although ART is an effective

treatment, long term ART has side effects, including lipodystrophy, hyperlipidemia, and

osteoporosis. 6 Additionally, treatment is expensive, costing over a $1,000 a month.

7

HIV Cure research is focused primarily on two strategies: eliminating the viral reservoirs

and gene therapy. Gene therapy aims to modify patient’s CD4 cells, rendering them resistant to

HIV. This is similar to Tim Brown, the first person cured of HIV by receiving a bone marrow

transplant from a donor with HIV resistant CD4 cells. 8

HCV Treatment (see appendix: HCV Treatment)

Gileads' HIV Drugs will become Obsolete with the release of novel HIV Treatment or HIV

Cure

Gilead is unprepared to handle the disruption of an HIV cure. Several companies,

including Sangamo BioSciences are currently in phase II clinical trials and possess innovative

approaches to curing HIV. These approaches include eliminating HIV viral reservoirs and gene

6

therapy. Gilead on the other hand, has no research and development (R&D) in these areas and is

heavily dependent on its current HIV product line for revenue. 9

Reservoir eliminating drugs are used in a method known as “kick and kill.” These drugs

activate latent HIV from its hiding places throughout the body so that ART and a person’s

immune system can attack and kill the remaining virus. There are currently several studies in

phase I/II (accelerated studies) and phase II that are investigating known compounds that are able

to activate the latent virus. The time to completion for these trials are at best, brief, lasting a few

months. Several of the drugs being tested are FDA approved for other uses, meaning time to

market can be instantaneous. Current trial candidates include Romidepsin (Istodax), a cancer

drug; Disulfiram, a substance abuse prevention drug; and Bryostatin, a novel drug being

developed. Each drug has been shown to activate the latent virus and are currently being studied

for safety, dosage, and efficacy. 10

11

12

For the reservoir eliminating drugs, FDA approval can

happen within 6 to 10 months. At best, the reservoir drugs will enter in late 2015.

Gene therapy offers a functional cure, which does not directly eliminate the virus, but it

primes a patient’s body to be able to control and kill the infection without the use of ART.

Companies taking this approach include: Sangamo Bioscience with 3 HIV studies in phase I/II

and 2 in phase I, Calimmune with a study in phase I/II, and Takara Bio with a study in phase I.13

Sangamo’s gene therapy known as zinc finger SB-728 in clinical trials has shown that

after a single injection, this therapy is capable of killing off the virus, restoring immune function,

and eliminating the need for ART. 9 out of 9 participants, 36 months after stopping ART,

maintained a decrease in HIV reservoirs. At 16 weeks, 3 out of 7 participants had a 1 log drop in

HIV; 1 was undetectable and 1 remained undetectable a year after stopping ART. Sangamo’s

trials take, on average, 12 months to complete. 14

15

7

Sangamo’s therapy is a new way to cure HIV, which can be fast-tracked for FDA

approval in a time frame of 6 months or less.16

The majority of Sangamo’s trials are towards the

end of phase II. Phase III could span the course of 2015 and possibly into 2016. The remaining

time in 2016 would be used for FDA approval. 2017 would be the year of the mass migration

from daily tablets to an infusion of modified CD4 cells. We predict that in 2018, ART

dependency would drop significantly. The only hope for Gilead would be if Sangamo’s cost to

patients is out of reach. However, Sangamo has a long standing relationship with Shire

Pharmaceuticals. Shire would be the most likely partner to help Sangamo mass produce and

bring their cure to market at reasonable prices (see appendix Projected Market Share

Competition for HCV and HIV).

Gilead’s Pipeline is Restrictive and Lacks Innovation

Gilead is pumping billions of dollars into research and development ($2.8 billion in

2014), combining currently used HIV medicines. The problem is that none of these medicines

cure the disease and their remaining pipeline lacks the innovation needed to hedge against

declining market share and product sales (see appendix: Pipeline). 17

18

After launching their

high-profile HCV drugs, Sovaldi and Harvoni, Gilead’s pipeline has remained very weak. Other

pharmaceutical companies have significantly improved and strengthened their pipelines over the

last 18 months. Gilead currently has few drugs in phase 3, which include Idelalisib, Momelotini,

Ranolazine and GS-6615. However, none of these reflect strong pipeline prospects or

blockbuster drugs, and will take a long time to be available in the market.

At the end of 2014, Simtuzumab, one of their potential oncology candidates failed a

pancreatic cancer trial. The treatment for pancreatic cancer underperformed in its phase 2 study.

8

Momelotinib, is a phase III drug that acts as a JAK inhibitor. JAK inhibitors treat a rare and

severe bone-marrow cancer, myelofibrosis, which targets a small population. The studies have

had trouble finding new patients to participate in their Phase III clinical trials. In addition, if

approved this drug will struggle competing with Jafaki, the only FDA approved drug that has a

monopoly in the JAK2 myelofibrosis market. Idelalisib is prescribed only after a cancer patient

has not responded to two prior therapies. Gilead’s pipeline is very restricted to HIV and HCV

and therefore their profits are restricted as well. The release of treatments or cures of these

diseases at competitive prices will cause a sharp decline in their top-selling drugs and

consequently affect 90% of their business. In addition to that, their patents for AmBisome,

Macugen, Tamiflu, Letairis, Viread, and Ranexa will be expiring within four years. Gilead’s

rapid growth and high levels of revenue, witnessed in the past couple years, have led to a

comfort zone and a lack of innovation in their pipeline.

Pricing and Market Share Pressure on Gilead's HCV Drugs

In 2013, Gilead released Sovaldi, a breakthrough therapy used to cure patients with HCV.

In 2014, Gilead recorded $12.4 billion, which accounted for approximately 50% of their total

revenues, from their new HCV drug line. Although this may appear to be a wonderful gain for

the drug company, Gilead is quickly burning bridges in its handling of their HCV cure, with

price gouging, patent rights wars, and backlash from the private and public sector. In addition,

Gilead faces a significant decline in market share due to battles with current comparative drugs

and new competitive drugs on the horizon, resulting in significant declines in revenue over the

coming years.

9

Gilead is currently charging $84,000 for a 12-week regimen of Sovaldi, however, it must

also be coupled with other drugs in order to be effective, increasing the overall costs to a range

of $94,500 to $300,000 (see appendix: Estimated Medication Cost for Treatment of Genotype 1

Chronic HCV). These prices are not unheard of for a specific class of specialty drugs used to

treat rare medical conditions, which only affect a small population. Sovaldi, on the other hand, is

a drug that is intended to treat a mass-market with approximately 3.2 million people infected

with HCV in the United States alone. According to Visante, a healthcare consultancy firm,

Sovaldi is priced higher than any other breakthrough drug at their time of launch, including

specialty and mass-market drugs (see appendix: Annual Cost, Adjusted for Inflation and First-

Year Sales). 19

Members of congress, insurance companies, and Medicaid officials are fighting to have

the drug price lowered. At its current price tag, Sovaldi will essentially bankrupt the healthcare

system. Due to the short treatment time, the costs are coming all at once, instead of being spread

out over a longer time horizon. This is a huge shock to the healthcare system and it is not

sustainable.20

In light of this, Express Scripts, the largest U.S. drug benefits manager started a

price war over the HCV cure by denying coverage of Sovaldi and replacing it with its competitor

Viekira Pak by Abbvie.21

Insurance companies are reacting by limiting coverage to patients with

advanced liver disease, which only account for between 5 and 20% of HCV patients.22

As a

result, Gilead is currently facing many lawsuits and price investigations.23

24

25

It was recently

discovered that the original price of the drug was supposed to be set at $36,000 per treatment, a

significant 57% discount to where the drug is currently priced in the United States. 26

In

addition, one week ago, Gilead agreed to sell the drug for $46,000 in Europe, noting a 45%

discount from U.S. prices.27

India, on the other hand, denied Gilead’s patent all together.28

10

Gilead is also facing pricing and market share pressure from their current and future

competitors. Merck Pharmaceuticals will submit their HCV cure to the FDA for new drug

approval in 2015, which has a 98% cure rate compared to Gilead’s 94%.29

30 In addition, there

are currently 15 other drugs in Phase 3 trials, which are likely to hit the market in 2015 or 2016

(See Appendix: Upcoming HCV Medications). 31

The introduction of these drugs to the market

will put further pressure on the price and market share of Gilead’s Sovaldi. It appears that

Gilead is giving into the pressure already. According to an article published by Barron’s, Gilead

intends to reduce its pricing of Sovaldi in the U.S. by 46% in 2015.32

Calculation to Zero

To find Gilead’s point zero, we calculated Gilead’s net income from 2015 until the end of

2019. We used historical data to develop ranges and percentages to guide projections. First, we

started with the product’s revenues. For all non-HIV and non-HCV products (Letairis, Ranexa,

AmBisome, Zydelig, Cayston, and Hepsera), we calculated the last two years revenue growth,

took the average and used it as the yearly growth rate. Other Antiviral revenue was left at the

2014 rate. Royalties from 2009-2014 were averaged and the result was used as royalty revenue

for future projections. However, royalty revenue was reduced in line with reductions in HIV and

HCV product revenues. For all other medicines, except Sovaldi and Harvoni, the last two years

growth, 2013 to 2014 and 2012 to 2013, was averaged and used to calculate future growth.

Complera was calculated using 2013 to 2014 growth, since it was recently introduced into the

market. The growth rate for Sovaldi and Harvoni (since the medicines are taken together) was

determined by Bloomberg estimates for Sovaldi for 2015 and 2016, which was around 7%.

Growth rates were reduced as new entrants for HCV and HIV entered the market in 2015 and

11

2016, respectively. We predict that in 2015, Gilead would experience a 50% drop in revenue for

HCV products and a 50% drop in revenue for HIV products in 2016. The percent is

representative of new HCV competition and HIV patients stopping ART after receiving the

reservoir eliminating drugs. Additionally, from 2016 forward, another 90% drop year over year

in HCV revenue will occur. Once Sangamo enters the market in 2017, HIV product revenue will

decline 90%, followed by 99% in 2018 and revenues will be 0 in 2019. The reasoning behind the

90 to 99 % drop is because Sangamo is a cure for HIV. This same revenue drop was witnessed

by Vertex Pharmaceuticals and Merck, when the HCV cure rendered their treatments irrelevant

after one year.33

Growth rates were reduced 85% as patents expired for Letairis in 2018 and

Ranexa in 2019.

Next, we calculated net income by first factoring in cash on hand in 2014 of $11.7

billion, marketable securities of $1.4 billion, and outstanding debt of $18.8 billion. Using

historical data from Gilead’s 10ks from 2009-2014, we calculated percentages of each expense in

relation to revenue to guide projections on sales, general and administration; interest expense and

other income expense. Selling and administration was given a cost floor of $1,699 million based

on 2013 values to account for the acquisition of Pharmasset and over 30 global locations

currently in operation. Year-over-year spending growth for R&D was initially used, which came

to 35%. However, in 2016 we reduced R&D spending to 2014 levels and stopped them

completely once net income became negative. Cost of revenue for 2015 was a combination of the

average historical revenue percentage (2009 - 2014) of 24.8%. In 2014, the ratio of revenue costs

to revenue was 15%. This equated to 19.9%. We estimate Gilead's outstanding contractual

obligations, per their 2013 10k, of about $5 billion. Next, we factored in their marketable

securities from the 2014 third quarter 10k of about $1.4 billion. No change was made in

12

consideration for lease contracts since they are all non-cancelable and run 10 years. Interest

expense was grown until 2016 and then left constant. This was to account for the issuance of

notes due in 2016, 2021 and 2041.

Our calculations show that based on new entrants and disruptive technology in HCV and

HIV care, that Gilead will default on bond and lease obligations in 2017 and will be roughly $2

billion in debt. By 2020, with continued operations, not factoring late fees and penalties, Gilead

is facing $6.2 billion in debt (see appendix: Calculations for Product Revenue Projections and

Calculation to Zero).

Conclusion

We predict that within months, competition for HCV cure market share will devour

Gilead’s HCV revenue by about 50% in 2015 and 90% in 2016 and each year thereafter; based

on the number of HCV drugs in phase II/III clinical trials. Revenue will drop from $24 billion in

2014 to $9 billion in 2016.

Starting in late 2015, reservoir eliminating drugs will change the way HIV is treated.

2016 will see patients stopping ART therapy as Gilead’s HIV revenues drop 50%. In 2017,

Sangamo will deploy its zinc finger technology, thus curing the remaining HIV patients on ART,

effectively reducing Gilead’s HIV revenue to zero by 2019. Calculations show that by 2020,

Gilead will be $6 billion in debt with bond obligations and facility leases in limbo.

There are no viable options for Gilead to survive outside of the red zone. With HIV being

cured, Gilead will hold a library of worthless HIV patents. Investors at the announcement of a

cure will send the company’s market cap crashing down to zero as they dump shares. Gilead can

reduce R&D and lay off staff, but because of its lease obligations and bond payments, which

13

create cost floors, the company will not be able to reduce costs fast enough. Without R&D

spending, their product line is stalled. Its debt and defaults on bond payments, in 2017, will bar it

from receiving additional capital. In terms of mergers, taking over a company with $6 billion in

debt, worthless patents, and a billion dollars in the red of net income a year is not appealing and

no company will want to acquire Gilead. Their only option will be to file bankruptcy.

This paper has shown that Gilead is unprepared to handle the financial disruption of an

HIV cure. Their pipeline lacks the innovation needed to stave off bankruptcy and that the

company has soured relationships with healthcare providers, insurers and governments,

worldwide. On top of the chaos, sits Gilead’s mounting debt, the key factor that makes Gilead

the next company to go to zero by 2020.

14

Appendix

AIDS Info: FDA Approved HIV Medicines

Drug Class Generic Name

(Other names and acronyms)

Brand

Name

FDA

Approval

Date

Nucleoside Reverse Transcriptase Inhibitors (NRTIs)

NRTIs block reverse transcriptase, an

enzyme HIV needs to make copies of

itself.

abacavir

(abacavir sulfate, ABC)

Ziagen December 17,

1998

didanosine

(ddI, ddI EC)

Videx October 9,

1991

Videx EC

(enteric-

coated)

October 31,

2000

emtricitabine

(FTC)

Emtriva July 2, 2003

lamivudine

(3TC)

Epivir November 17,

1995

stavudine

(d4T)

Zerit June 24, 1994

tenofovir disoproxil

fumarate

(tenofovir DF, TDF)

Viread October 26,

2001

zidovudine

(azidothymidine, AZT, ZDV)

Retrovir March 19,

1987

Non-Nucleoside Reverse Transcriptase Inhibitors (NNRTIs)

NNRTIs bind to and later alter reverse

transcriptase, an enzyme HIV needs to make copies of itself.

delavirdine

(delavirdine mesylate, DLV)

Rescriptor April 4, 1997

efavirenz

(EFV)

Sustiva September 17,

1998

etravirine

(ETR)

Intelence January 18,

2008

nevirapine

(NVP)

Viramune June 21, 1996

Viramune

XR

(extended

release)

March 25,

2011

rilpivirine (rilpivirine hydrochloride, RPV)

Edurant May 20, 2011

15

Protease Inhibitors (PIs)

PIs block HIV protease, an enzyme HIV

needs to make copies of itself

atazanavir

(atazanavir sulfate, ATV)

Reyataz June 20, 2003

darunavir

(darunavir ethanolate, DRV)

Prezista June 23, 2006

fosamprenavir

(fosamprenavir calcium, FOS-

APV, FPV)

Lexiva October 20,

2003

indinavir

(indinavir sulfate, IDV)

Crixivan March 13,

1996

nelfinavir

(nelfinavir mesylate, NFV)

Viracept March 14,

1997

ritonavir

(RTV)

Norvir March 1, 1996

saquinavir

(saquinavir mesylate, SQV)

Invirase December 6,

1995

tipranavir

(TPV)

Aptivus June 22, 2005

Fusion Inhibitors

Fusion inhibitors block HIV from

entering the CD4 cells of the immune

system.

enfuvirtide

(T-20)

Fuzeon March 13,

2003

Entry Inhibitors

Entry inhibitors block proteins on the

CD4 cells that HIV needs to enter the

cells.

maraviroc

(MVC)

Selzentry August 6,

2007

Integrase Inhibitors

Integrase inhibitors block HIV integrase, an enzyme HIV needs to make copies of

itself.

dolutegravir (DTG)

Tivicay August 13, 2013

elvitegravir

(EVG)

Vitekta September 24,

2014

raltegravir

(raltegravir potassium, RAL)

Isentress October 12,

2007

Pharmacokinetic Enhancers

Pharmacokinetic enhancers are used in

HIV treatment to increase the

effectiveness of an HIV medicine

included in an HIV regimen.

cobicistat

(COBI)

Tybost September 24,

2014

Combination HIV Medicines

Combination HIV medicines contain two

or more HIV medicines from one or

abacavir and lamivudine

(abacavir sulfate / lamivudine, ABC /

Epzicom August 2,

2004

16

This fact sheet is based on information from the following sources:

From FDA: Antiretroviral Drugs Used in the Treatment of HIV Infection

From the National Institute of Allergy and Infectious Diseases: Drugs That Fight HIV-1

more drug classes. 3TC)

abacavir, dolutegravir, and lamivudine

(abacavir sulfate / dolutegravir sodium /

lamivudine, ABC / DTG / 3TC)

Triumeq August 22,

2014

abacavir, lamivudine, and zidovudine

(abacavir sulfate / lamivudine /

zidovudine, ABC / 3TC / ZDV)

Trizivir November 14,

2000

efavirenz, emtricitabine, and tenofovir

disoproxil fumarate

(efavirenz / emtricitabine / tenofovir,

efavirenz / emtricitabine / tenofovir DF,

EFV / FTC / TDF)

Atripla July 12, 2006

elvitegravir, cobicistat, emtricitabine,

and tenofovir disoproxil fumarate

(QUAD, EVG / COBI / FTC / TDF)

Stribild August 27,

2012

emtricitabine, rilpivirine, and tenofovir

disoproxil fumarate

(emtricitabine / rilpivirine hydrochloride

/ tenofovir disoproxil fumarate,

emtricitabine / rilpivirine / tenofovir,

FTC / RPV / TDF)

Complera August 10,

2011

emtricitabine and tenofovir disoproxil

fumarate

(emtricitabine / tenofovir, FTC / TDF)

Truvada August 2,

2004

lamivudine and zidovudine

(3TC / ZDV)

Combivir September 27,

1997

lopinavir and ritonavir

(ritonavir-boosted lopinavir, LPV/r,

LPV / RTV)

Kaletra September 15,

2000

17

Where The Virus Hides: HIV’s many Reservoirs

(Topla)

18

HCV Treatment

Hepatitis C is a contagious liver disease spread through contact with the blood of a person who is

already infected. It is estimated that approximately 3.2 million Americans have HCV. If left

untreated hepatitis C can eventually lead to cirrhosis of the liver, liver failure, and/or liver

cancer. According to the CDC, for every 100 people infected with hepatitis C, approximately 75-

85 people will develop chronic hepatitis C. Of the people with chronic hepatitis C, 60-70 will

develop liver disease, 5-20 will develop cirrhosis of the liver over a 20 to 30 year time frame,

and 1-5 will die from liver failure or liver cancer.34

There are six different genotypes of the

hepatitis C virus classified by their RNA genetic material. Infected persons usually only carry

one genotype, however the virus has the ability to quickly mutate and become resistant to drugs.

Genotype one is the most widespread effecting 70% of hepatitis C patients.35

Until recently, there were only ways to treat the disease, but no way of curing it. Traditionally,

treating the disease came from three types of drugs; interferons, purine nucleotides, and protease

inhibitors36

. In late 2013, a breakthrough cure emerged called a nucleotide analog inhibitor.

Nucleotide inhibitors effectively elongate the RNA primer strand of the virus, causing chain

termination.37

Currently, nucleotide inhibitors are being heavily debated over because of their

egregious price tag of $84,000 for a 12 week regimen. Additionally, the treatment requires the

addition of interferons, purine nucleotide, and/or a protease inhibitor making the cost even more

expensive.38

Nucleotide inhibitors, when combined with other drugs, have shown a 90 to 100%

cure rate depending on the drug combination and genotype of the virus.39

19

Project Market Share Competition for HCV and HIV

Data represents projections for new disruptive entrants to enter the market

2015 2016 2017 2018 2019 2020

Hepatitis C Phase III

FDA Approval

To Market

Reservoir Drugs Phase II / III Phase III ART Protocol

FDA Approval Treatment Switch Discontinued

To Market

Sangamo Phase II / III Phase III To Market ART Protocol

FDA Approval Treatment Switch Discontinued

Projected Market Share Competition for Hepatitis C and HIV

Significant drop in market share, Hep C

Significant drop in market share, HIV

Significant drop in market share, HIV

20

(Pharmaceutical Research and Manufacturers of America)

21

Pipeline

22

23

24

Estimated Medication Cost for Treatment of Genotype 1 Chronic HCV

(Unversity of Washington)

25

Annual Cost Adjusted for Inflation

(Sanger-Katz, The Upshot)

First Year Sales

(Sanger-Katz, The Upshot)

26

Upcoming HCV Medications

(Smart + Strong)

27

Calculations for Product Revenue Projections

(in $ Millions)

Calculations for Product Revenue Projections:

1. Calculated the last two years revenue growth and took the average. The resulting percentage

was used to estimate the future growth rate of non-HIV and non-HCV products.

2. Royalties from 2009-2014 were averaged and the result was used as royalty revenue for

future projections. However, royalty revenue was reduced in line with reductions in HIV and

HCV product revenues.

Gilead Sciences Inc (GILD US) - By Measure

HIV cure and Hep C Competition

Bases FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 15 FY 2015 Est 16 FY 2016 Est 17 2017 18 2018 19 2019 20 2020

Drug Use Revenue 6,961.1 7,935.9 8,371.2 9,702.5 11,201.7 24,723.0 20,753.8 9,106.7 2,565.8 1,758.9 851.0 739.6

hep c Sovaldi 7% 0.0 139.4 10,283.0 -0.50 5,141.5 -0.90 514.2 -0.95 25.7 -0.99 0.3 -0.95 0.0 -0.99 0.0

hiv Atripla -5% 2,382.1 2,926.6 3,224.5 3,574.5 3,648.5 3,470.0 3,296.5 -0.50 1,648.3 -0.99 16.5 -0.99 0.2 -0.99 0.0 -0.99 0.0

hiv Truvada -2% 2,489.7 2,649.9 2,875.1 3,181.1 3,135.8 3,340.0 3,273.2 -0.50 1,636.6 -0.99 16.4 -0.99 0.2 -0.99 0.0 -0.99 0.0

hep c Harvoni 7% 2,127.0 -0.50 1,063.5 -0.90 106.4 -0.95 5.3 -0.99 0.1 -0.95 0.0 -0.99 0.0

hiv Complera 50% 38.7 342.2 809.5 1,228.0 1,842.0 -0.50 921.0 -0.99 9.2 -0.99 0.1 -0.99 0.0 -0.99 0.0

hiv Stribild 120% 57.5 539.3 1,197.0 2,633.4 -0.50 1,316.7 -0.99 13.2 -0.99 0.1 -0.99 0.0 -0.99 0.0

hiv Viread 12% 667.5 732.2 737.9 848.7 959.0 1,058.0 1,179.7 -0.50 589.8 -0.99 5.9 -0.99 0.1 -0.99 0.0 -0.99 0.0

other Other Antiviral 88.00$ 88.0 88.0 88.0 88.0 88.0 88.0 88.0

hep b Hepsera 0% 271.6 200.6 144.7 108.3 81.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0

hiv Emtriva 23.55$ 28.0 27.7 28.8 29.4 27.4 0.0 23.5 -0.50 11.8 -0.99 0.1 -0.99 0.0 -0.99 0.0 -0.99 0.0

heart Letairis (*2018) 20% 183.9 240.3 293.4 410.1 520.0 595.0 714.0 856.8 1,028.2 -0.85 154.2 23.1 3.5

chest pain Ranexa 17% 131.1 239.8 320.0 372.9 448.6 510.0 594.2 692.2 806.4 939.5 -0.85 140.9 21.1

fungus AmBisome 6% 298.6 305.9 330.2 346.6 351.8 388.0 409.3 431.9 455.6 480.7 507.1 535.0

cancer Zydelig 1% 23.0 23.2 23.5 23.7 23.9 24.2 24.4

lung Cayston 0% 47.5 77.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Royalty Revenue 404.13$ 491.8 546.0 268.8 304.1 398.0 416.0 404.1 202.1 4.0 4.0 0.0 0.0

Other Product 67.63$ 16.8 19.5 31.6 126.9 143.4 67.6 67.6 67.6 67.6 67.6 67.6

Hep C Competition Letairis patent expires

HIV Competition Ranexa patent expires

HIV Competition

Gilead Sciences Inc (GILD US) - By Measure

HIV cure and Hep C Competition

Bases FY 2014 15 FY 2015 Est 16 FY 2016 Est 17 2017 18 2018 19 2019 20 2020

Drug Use Revenue 24,723.0 20,753.8 9,106.7 2,565.8 1,758.9 851.0 739.6

hep c Sovaldi 7% 10,283.0 -0.50 5,141.5 -0.90 514.2 -0.95 25.7 -0.99 0.3 -0.95 0.0 -0.99 0.0

hiv Atripla -5% 3,470.0 3,296.5 -0.50 1,648.3 -0.99 16.5 -0.99 0.2 -0.99 0.0 -0.99 0.0

hiv Truvada -2% 3,340.0 3,273.2 -0.50 1,636.6 -0.99 16.4 -0.99 0.2 -0.99 0.0 -0.99 0.0

hep c Harvoni 7% 2,127.0 -0.50 1,063.5 -0.90 106.4 -0.95 5.3 -0.99 0.1 -0.95 0.0 -0.99 0.0

hiv Complera 50% 1,228.0 1,842.0 -0.50 921.0 -0.99 9.2 -0.99 0.1 -0.99 0.0 -0.99 0.0

hiv Stribild 120% 1,197.0 2,633.4 -0.50 1,316.7 -0.99 13.2 -0.99 0.1 -0.99 0.0 -0.99 0.0

hiv Viread 12% 1,058.0 1,179.7 -0.50 589.8 -0.99 5.9 -0.99 0.1 -0.99 0.0 -0.99 0.0

other Other Antiviral 88.00$ 88.0 88.0 88.0 88.0 88.0 88.0 88.0

hep b Hepsera 0% 0.0 0.0 0.0 0.0 0.0 0.0 0.0

hiv Emtriva 23.55$ 0.0 23.5 -0.50 11.8 -0.99 0.1 -0.99 0.0 -0.99 0.0 -0.99 0.0

heart Letairis (*2018) 20% 595.0 714.0 856.8 1,028.2 -0.85 154.2 23.1 3.5

chest pain Ranexa 17% 510.0 594.2 692.2 806.4 939.5 -0.85 140.9 21.1

fungus AmBisome 6% 388.0 409.3 431.9 455.6 480.7 507.1 535.0

cancer Zydelig 1% 23.0 23.2 23.5 23.7 23.9 24.2 24.4

lung Cayston 0% 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Royalty Revenue 404.13$ 416.0 404.1 202.1 4.0 4.0 0.0 0.0

Other Product 67.63$ 67.6 67.6 67.6 67.6 67.6 67.6

Hep C Competition Letairis patent expires

HIV Competition Ranexa patent expires

HIV Competition

28

3. The average for other products was taken from the periods of 2009-2014 and the result was

used for future revenue projections.

4. For all other medicines except Sovaldi and Harvoni, the last two years growth, 2013 to 2014

and 2012 to 2013 was averaged and used to calculate future growth.

5. Complera was calculated using 2013 to 2014 growth, since it was recently introduced into the

market.

6. The growth rate for Sovaldi and Harvoni (since the medicines are taken together) was

determined by Bloomberg estimates for Sovaldi for 2015 and 2016, which was around 7%.

7. Growth rates were reduced as new entrants for HCV and HIV entered the market.

8. Growth rates were also reduced as patents expired.

9. Growth rates were significantly reduced for all HIV products once Sangamo entered the

market.

29

Year over year average growth % (2009-2014) 0.2495073 Average historical tax rate (2009-2014)

Average Historical % of revenue (2009-2014) (same size inc. statement)

Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Tax rate 0.2501428 0.261625 0.2361 0.287375 0.2735266 0.1882741 0.2495073 0.249507 0.2495073 0.2495073 0.24950726 0.24950726

Revenue 7,011 7,949 8,385 9,703 11,202 24,890 20,754 9,107 2,566 1,759 851 740

Cost of revenue 24.8% 1,596 1,870 2,124 2,471 2,859 3,788 4,130 2,258 636 436 211 183

Gross Profit 5,415 6,079 6,261 7,232 8,343 21,102 16,624 6,848 1,929 1,323 640 556

(Operating expenses)

Research & Development 35% 940 1,073 1,229 1,760 2,120 2,854 3,853 2,854 2,854 0 0 0

Sales, General and admin 15.00% 947 1,044 1,242 1,461 1,699 2,942 3,113 1,699 1,699 1,699 1,699 1,699

(Total Operating Expenses) 1,887 2,117 2,471 3,221 3,819 5,796 6,966 4,553 4,553 1,699 1,699 1,699

Operating Income 3,528 3,962 3,790 4,011 4,524 15,306 9,658 2,295 (2,624) (376) (1,059) (1,143)

less Interest Expense 2.25% (70) (109) (205) (361) (307) (412) (421) (431) (431) (431) (431) (431)

Other Income (expense) 0.34% 42 60 67 (37) (9) (38) (70) (31) (9) (6) (3) (3)

Income before tax 3,500 3,913 3,652 3,613 4,208 14,856 9,166 1,834 (3,063) (813) (1,493) (1,576)

Income tax 875 1,024 862 1,038 1,151 2,797 2,287 458 (764) (203) (372) (393)

Other 0.16% 10 12 15 18 18 42 42 42 42 42 42 42

Net Income 2,635 2,901 2,805 2,593 3,075 12,101 6,921 1,418 (2,257) (568) (1,078) (1,140)

best guess Staff cuts Staff cuts

ttm

Gray areas are calculation cells Cash at end of 2014 = 11,726 Time to Liquidate Assets or File Bankruptcy

Should should be able to spread formulas across cells Long Term Debt 2014 = (13,212)

Current Liabilities 2014= (5,618)

Accumulated Cash (2014 - 2019)= 16,163

Accumulated Debt= (18,830)

Marketable securities (2014 Q3 10k)= 1,400

estimated Contract Obligations (2013 10k)= (5,000)

Difference in 2020= (6,267)

GILEAD SCIENCES REVENUE PROJECTION in $ Million

Calculation to Zero

Steps taken to calculate data:

1. Historical data from Gilead’s 10ks from 2009-2014 was used to guide projections.

2. Calculated percentages of each expense in relation to revenue to guide projections on sales,

general and admin, interest expense and other income expense.

3. Selling and admin was given a cost floor of 1699 based on 2013 values due to the acquisition

of Pharmasset and over 30 global locations currently in operation.

4. Year over year spending growth for R&D was initially used, which came to 35%, but was

reduced to 2014 levels in 2016 forward due to declining revenue and stopped completely

once net income became negative.

30

5. Cost of revenue for 2015 was a combination of the average historical percent of revenue (2009

-2014), 24.8%, and the ratio of cost of revenue in 2014 to revenue, 15%. This equated to

19.9%.

6. Estimated Gilead's outstanding contractual obligations per 2013 10k of about $5billion.

7. Factored in their marketable securities from the 2014 Q3 10k of about $1.4 billion.

8. Factored in lease contracts, which are all non-cancelable and run 10 years (no change on

projection made).

9. Interest expense was modified in 2016 and was left constant due to issuance of notes due in

2016, 2021 and 2041.

31

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33

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34

End Notes

1 (Central Intelligence Agency)

2 (Centers for Disease Control and Prevention) 3 (AIDSinfo, National Institutes of Health) 4 (AIDSinfo, National Institutes of Health) 5 (AIDSinfo, National Institutes of Health) 6 (AIDSinfo, National Institutes of Health) 7 (AIDSinfo, National Institutes of Health) 8 (Waters) 9 (Sangamo BioSciences) 10 (Bionor Pharma) 11 (ClinicalTrials.gov) 12 (ClinicalTrials.gov) 13 (Pharmaceutical Research and Manufacturers of America) 14 (Sangamo BioSciences) 15

(Sangamo BioSciences) 16 (U.S. Food and Drug Administration) 17 (Gilead Sciences, Inc) 18 (Bloomberg Finance) 19 (Sanger-Katz, The Upshot) 20 (Fischer) 21 Invalid source specified. 22 Invalid source specified. 23 (Schencker) 24 (Sanger-Katz, The Upshot) 25 (Fair Pricing Coalition ) 26 (Peterson) 27 (McDermid) 28 (Silverman) 29 (HCV New Drug Research) 30 Invalid source specified. 31 Invalid source specified. 32 (Levisohn) 33 (Loftus) 34 (Centers for Disease Control and Prevention) 35 (Drugs.com) 36

Invalid source specified. 37 (University of Washington) 38 (Cutler) 39 (Infohep)