2. 1
Demand Analysis
Country Population HBV HCV HIV GDPPer Capita
United States 320,334,000 1,601,670 5,766,012 1,922,004 53,041.98
Canada 35,675,834 178,379 35,676 107,028 51,958.38
Japan 127,020,000 2,540,400 2,921,460 127,020 36,654.00
European Union 507,416,607 7,103,832 2,537,083 2,943,016 35,438.49
South Korea 50,423,955 6,050,875 857,207 50,424 33,791.00
Russia 146,270,033 7,313,502 2,925,401 1,462,700 14,611.70
Brazil 203,836,000 4,076,720 5,299,736 6,115,080 11,208.08
Mexico 121,005,815 1,210,058 847,041 242,012 10,307.28
China 1,368,040,000 164,164,800 41,041,200 1,368,040 6,807.43
India 1,266,430,000 37,992,900 22,795,740 3,799,290 1,498.87
Africa (Developed)** 359,865,000 7,197,300 7,197,300 2,159,190 1,722.92
TOTALS / AVGs 4,506,317,244 239,430,436 92,223,855 20,295,804
World Bank, IMF, CIA** This includes Libya, Mauritus, Seychelles, Tunisia, Algeria, Botsw ana,
Egypt, Gabon, South Africa, Cape Verde, Namibia, Morocco, Ghana,
Democratic Republic of Congo, Zambia, Sao Tome and Principe, Equatorial
Guinea
Infected Population
30
40
50
60
70
80
90
100
110
120
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
GILD Historical Prices 2010-2015
Closing Price
Current
Price
11.86%
$114.78
$102.61
Investment Summary
We issue a BUY recommendation on Gilead Sciences (GILD) with a price target of $114.78.
The above target price is estimated based on the Discounted Free Cash Flow Model to the
Firm with a per product sales projections, that we have tested using Monte Carlo 100,000
simulation. With a closing price of $102.61 on 2/20/2014, our projections suggest 11.86%
upside in GILD’s stock. As a market leader in HIV and Hepatitis drugs, Gilead is capitalizing
on their supreme quality products, while working on diversifying their portfolio of drugs
based on medical needs and differentiating from others. Gilead continues to position itself as a
biopharmaceutical research company with best in class assets, strong pipeline of drugs,
successful acquisition strategy and mission to address unmet medical needs.
Main price growth drivers:
We anticipate strong financial performance from Harvoni, HCV drug that has been
recently approved and has generated $2.1B in sales its first quarter with a growing
demand both domestically and internationally, as well as Zydelig, recently approved
oncology drug with superior to its class characteristics and competitive price.
Consistently strong and healthy financial statements, with large cash reserves can provide
additional flexibility to the company in terms of portfolio expansion. Gilead’s EBITDA
margin was at 65% and 85% gross margin in 2014, while industry averages were 33.5%
and 73% respectively.
Consistently low R&D costs relative to its competitors and strength of the pipeline
products are going to ensure smooth transition through patent expiration in 2018-2019.
Main investment risks:
Negative outcomes in current litigations around HCV patents and pricing both
domestically and internationally can hurt Gilead’s ability to maintain its profitability and
level of sales.
Growth of competition and “discount war” among Hepatitis products from Gilead and
AbbVie could negatively impact sales and profit margins.
With the above industry margins, numerous large biopharmaceutical companies are
developing new drugs to enter the market that would result in intensification of current
competition and pose a threat to sales and margins.
California State University East Bay Student Research
This report is published for educational purposes only by
students competing in the CFA Institute Research Challenge.
[Healthcare: Biotechnology]
Gilead Sciences, Inc.
Date: 2/23/2013
Ticker: GILD
Current Price: 102.61 USD Recommendation: BUY
Target Price: 114.78 USD
Market Profile
52-week
price range
63.5-116.83
Average
daily volume
17,196,000
Beta 0.91
Stock price
growth in
2014
25.5%
Market
Capitalization
183B
Shares
Outstanding
1.5B
EPS 7.35
P/E 13.91
ROE 87%
EBITDA 16.17B
Profit Margin 65%
Institutional
Holdings
94%
Source: Team estimates, Yahoo Finance
3. 2
Business Description
Gilead Sciences is an American biopharmaceutical company specialized on discovery,
development and commercialization of innovative medicine. Since the inception in 1987
company’s primary focus has been antiviral products that treat incurable diseases. Currently
Gilead Sciences has one of the most successful portfolios of HIV and Hepatitis drugs, as well
as several products that treat cardiovascular and pulmonary conditions. In addition, the
company is working on diversifying its sources of revenue by venturing into oncology (cancer
treatment) drugs.
HIV Portfolio of medications:
Atripla - A single regimen cocktail pill that combines drugs of Gilead and Bristol-Myers
Squibb (BMY), and has an 82% success rate in reducing viral load to undetectable. Atripla’s
main competitor is Triumeq from ViiV Healthcare, which is priced at 26,488/yr. Atripla
comprises 15.45% of sales or $3,470M.
Truvada - works to prevent HIV cells from altering the genetic material of healthy cells in the
body, which keeps the virus from replicating, as well as decreasing the levels of the virus
already in the body. Truvada’s main competitor is ViiV’s Tivicay that is priced at $14,000 as
well. Truvada makes up 15% of sales or $3,340M.
Complera/Eviplera - Complera (Eviplera in Europe) is a cocktail drug made up of Viread,
Emtriva (GILD) and Johnson & Johnson’s (JNJ) Edurant. It is used to treat HIV patients who
are at the beginning stages of their HIV treatment, or patients with low viral load. Complera
has achieved an 86% success rate in reducing viral load to undetectable levels after a 48 week
regimen. Complera currently does not have a competing drug in production. It comprises
5.67% of sales or $1,228M.
Striblid - is a single regimen HIV pill made up of combined products from Gilead, which
attacks the disease by preventing affected cells from multiplying. In addition to that, Striblid
reduces the breakdown of antivirals in the liver. Striblid’s main competitor is ViiV’s Tivicay
which is also a single regimen drug that is priced at $14,000. Striblid comprises 5.63% of
sales or $1,197M.
Viread - is a single regimen drug that is used to treat HIV and Hepatitis B patients. Viread has
a unique feature: the ingredients of the drug are chemically preactivated, which requires less
processing by the body before they become active. A generic alternative is expected to reach
the market in 2018, as its U.S. patents expire in 2017. There are no competitors currently on
the market. Viread makes up 4.73% of sales or $1,058M.
Tybost - is a standalone pharmacokinetic enhancer that works to make other medications,
primarily HIV, more effective by boosting them in the blood. Tybost has been recently
approved (9/25/2014) resulting in limited information available.
Vitekta - is an integrase inhibitor that helps block HIV DNA from entering the healthy DNA
of a cell. Vitekta can be used in combination with other HIV medications. Pricing and sales
data is not available for Vitekta as it was approved in Q3 of 2014.
Hepatitis Medication
Sovaldi - is a single regimen daily drug that treats hepatitis C, as well as those who are co-
infected with HIV. The drug treats patients in genotypes 1-6, with a 91% cure rate in
genotypes 1, 4, 5 and 6. Viekira Pak from AbbVie is Sovaldi’s direct competitor. Sovaldi
makes up 48% of sales or $10,283M.
Figure 1: Gilead Product Statistics (Q3)
Product Price
YOY
Growth
% of
Sales
Atripla $24,960/yr -5% 14.17%
Truvada $14,000/yr 7% 13.65%
Complera $13,500/yr 52% 5.01%
Striblid $16,650/yr 122% 4.89%
Viread $8,000/yr 10% 4.30%
Sovaldi $84,000/12wk 729% 42.02%
Harvoni $94,000/12wk N/A 8.69%
Letairis $57,600/yr 2% 2.43%
Ranexa $200/60 units 2% 2.08%
Zydelig $86,400/yr N/A 0.09%
Other - - 2.27%
Source: Company Financials
Figure 2: Gilead Product Sales Forecast
Product
2014
(millions)
2015E
(millions)
Patent
Exp.
Atripla $3,470.00 $3,300.69 2019
Truvada $3,340.00 $3,540.40 2019
Complera $1,228.00 $1,426.46 2020
Striblid $1,197.00 $1,375.35 2018
Viread $1,058.00 $1,121.48 2018
Sovaldi $10,283.00 $6,996.24 2028
Harvoni $2,127.00 $11,626.60 2029
Letairis $595.00 $535.50 2015
Ranexa $510.00 $561.00 2019
Zydelig $23.00 $541.39 2023
Tybost - $10.06 2029
Vitekta - $8.23 2024
TAF - $300.00 2029
Figure 3: Approvals of Biopharmaceutical
Drugs by FDA 2000-2011
Year
New Drugs
Approved
Annually
Cumulative
Approvals Since
2000
2000 29 29
2001 29 58
2002 24 82
2003 27 109
2004 36 145
2005 20 165
2006 22 187
2007 18 205
2008 24 229
2009 25 254
2010 21 275
2011 30 305
4. 3
Harvoni - is a single regimen drug, which has an astounding 94-99% cure rate, and does not
need to be taken with interferon and ribivarin (both of which cause flu like side effects).
Viekira Pak from AbbVie and in-house Sovaldi are Harvoni’s direct competitor. Being only
for 1 quarter on the market, Harvoni comprised 8.69% of sales in Q4 of 2014, or $2,127M.
Cardiovascular Medication
Letairis - A cardiovascular medication that combats the thickening of blood vessels in the lung
and heart caused by pulmonary arterial hypertension (PAH), and lowers the blood pressure in
the lungs to allow the heart to pump blood more efficiently and effectively. Letairis’s patents
are set to expire in 2015; the drug makes up 2.43% of Gilead’s total sales or $595M.
Ranexa - is used to treat chronic angina (pain of the chest), works to assist the heart in
pumping blood more efficiently and improves blood flow. Ranexa’s generic competitor is
Isosorbide sells at $38 for 60 units, though generic drug is a lot weaker. Ranexa comprised
2.04% of total sales or $510M.
Oncology Medication
Zydelig - is an oncology drug for treating lymphocytic leukemia with 81% response rate.
Zydelig is able to hold off growth of cancer for 10.7 month. Currently there is only one
competitor on the market from Roche, Rituxan with 13% response and $20,000 per round (4-
12 rounds per year). Even though it has been recently approved and generated only $23 or
0.09% of total sales in Q4 of 2014, its direct competitor Rituxan made $1,100M in 2014.
Pipeline Highlights
Gilead’s acquisition of Phenex Pharmaceutical’s Farnesoid X Receptor (FXR) program
comprising small molecule FXR agonists for the treatment of liver diseases including
nonalcoholic steatohepatitis (NASH) that could be used against obesity has a strong economic
potential, since economic effect of obesity just in US is estimated at $100B. The drug is
currently in phase II of clinical trials.
Upon approval, TAF will replace the tenofovir molecule in Gilead’s HIV drugs and help
prevent side-effects for bones and kidneys. Based on historical approval of breakthrough
drugs by FDA, TAF should be approved in Q3 2015. This would help to beat the adverse
situation created for HIV drugs with expiring patents.
Idealisib, is a potential treatment for Frontline Chronic Lymphocytic Leukemia (CLL) and
Indolent non-Hodgkin’s Lymphoma- both kinds of blood cancers. Idealisib is in phase III of
clinical trials and has been granted breakthrough therapy designation for CLL by FDA. This
indicates that it could be a significant improvement over the current treatments for leukemia.
Simtuzumab is a compound in phase II and is a monoclonal antibody that is highly selective
for LOXL2, an enzyme that modifies the extracellular matrix by promoting the cross-linking
of collagen fibers. LOXL2 plays an important role in tumor progression and metastasis. It also
has a potential to treat the development of fibrotic diseases of liver (for example NASH) and
lungs.
Industry Overview and Competitive Positioning
The Biotechnology Industry
Biotechnology uses biological processes at the cellular level to create better products to
improve lives. Modern biotechnology has helped produce breakthrough products that have
varied applications like treating life-threatening diseases; using sustainable forms of energy;
making industrial processes more efficient; etc. Biopharmaceuticals are products of biological
origin that are made by pharmaceutical companies to treat, diagnose or immunize living
beings against diseases.
Figure 4: Potential First-in-Class
Biopharmaceutical Medicines in
Development as of 2013
Phase
I
Phase
II
Phase
III
Approved
Number
of
Potential
First-in-
Class
Medicines
2,356 2,602 498 48
Number
of Total
Medicines
3,025 3,764 1,099 94
Source: PhRMA.org
Vedroprevir
GS-4774
GS-9620
Tenofovir…
Simtuzumab
Entospletinib
Momelotinib
Idelalisib
GS-4059
GS-4997
GS-6615
Simtuzumab
GS-5806
Gilead Pipeline Products
Phase III Phase II
5. 4
Biopharmaceutical Research in the United States
The United States surpasses the world in biopharmaceutical research and also has the largest
pharmaceutical market. The outstanding biopharmaceutical R&D has helped develop a varied
pipeline of drugs which have the potential to (1) treat diseases having no previously approved
therapies; (2) be first-in-class; (3) treat orphan and neglected diseases; (4) be genetically
engineered to tailor the treatment according to each individual; (5) act as supporting
technology to support future therapies. Pharmaceutical companies in the United States own
the intellectual property rights (IPR) of most of the new drugs coming into the lucrative
market.
The industry though does face challenges in getting the drugs approved because of the long,
risky and rigorous process that each drug goes through to prove its safety and efficacy. The
whole process (consisting of R&D, preclinical non-human trials, clinical human trials from
phase I to III, FDA approval and any more phase IV trials required by FDA) can take about
10-15 years and may cost over $1billion. Out of tens of thousands of drugs screened, only one
is approved. For example in the year 2013, the biopharmaceutical research companies
received approvals for only 34 new medicines. The biopharmaceutical industry is very R&D
intensive and invests more than 10 times the amount of R&D per employee compared to all
manufacturing industries combined. (Source: PhRMA.org)
Contribution of Biotechnology to Pharmaceuticals
Today, large pharmaceutical companies buy innovation from small biotechnology companies
rather than investing in in-house research and development (R&D). From 1998-2007, 34% of
new drug approvals by FDA came from biotechnology companies or from technologies that
these companies bought from research universities. About 48% of scientifically novel drug
approvals and 58% of drugs for orphan diseases come from the biotechnology sector. (Source:
Biotechnology- Bringing Innovation to Neglected Disease R&D- A Joint Report by BVGH and
BIO)
Biopharmaceutical Products and the Market
The drugs produced by the biopharmaceutical industry are biologics derived from proteins
(for example, antibodies) and nucleic acids (DNA, RNA, antisense oligonucleotides). These
products may be used as therapies or in diagnostic procedures.
Today, diversifying into biologics is sought after and big pharmaceutical companies acquire
biotech companies or get licensed to use their methods in order to achieve that. The
companies not only have to prove safety and efficacy of the drugs, but also have to achieve
certain levels of quality and reasonable pricing in the market. In spite of rigorous trials that
new drug goes through, the US FDA provides special attention and ensures faster approvals of
breakthrough drugs, making United States a very favorable environment to invest in
breakthrough pharmaceutical R&D.
Competitive Positioning of Gilead Sciences, Inc.
Ease of entry for new participants in the market
Currently Gilead’s HIV drugs have exclusivity because they are the only single regimen HIV
tablets available in the market. While GlaxoSmithKline’s HIV drug Tivicay is not a single
tablet regimen, with expiration of Truvada patents in 2018, the company will be able to
introduce a Truvada/Tivicay single tablet. Thus, Gilead might lose exclusivity on the single
regimen drugs in the near future. Beyond 2021, Atripla, another HIV drug from Gilead, may
have it generic versions produced by new entrants due to patent expiration. On a positive note
though, patents of the HIV drugs Complera and Stribild go into the 2020s and may manage to
sustain Gilead’s leading position in the HIV competition. Also, Complera and Stribild are
expected to bring in greater revenues in the future if Gilead’s pipeline drug, TAF, gets FDA
approval. TAF will replace tenofovir (a nucleotide analog) used as a component in Gilead’s
HIV single tablet regimens. TAF is expected to overcome the bone and renal side-effects
Figure 5: R&D Costs of Gilead Sciences and
Competitors from 2012-2014
Figure 6: Ratios of R&D Cost: Revenue of Gilead
and Competitors from 2012-2014
0 2 4 6 8 10
Gilead Sciences, Inc
Merck & Co. Inc
AbbVie Inc
Roche Holding AG
Johnson & Johnson
GlaxoSmithKline
Pfizer Inc
Bristol-Myers Squibb
Company
Amgen Inc
R&D Cost in Billions of Dollars
2012
2013
2014
0 0.1 0.2
Gilead Sciences, Inc
Merck & Co. Inc
AbbVie Inc
Roche Holding AG
Johnson & Johnson
GlaxoSmithKline
Pfizer Inc
Bristol-Myers Squibb
Company
Amgen Inc
Ratio of R&D Cost : Revenue
2012
2013
2014
6. 5
tenofovir. The recent FDA approval of the combination drug Prezcobix (Janssen’s Prezista
and Gilead’s booster cobicistat- also found in Tybost) strengthens Gilead’s position in the
HIV market. As a result, Gilead has more than one single-tablet HIV regimens out in the
market, which results in product differentiation and backup HIV drugs for patients who may
develop drug resistance. In spite of some threats from patent expirations in the near future,
Gilead has the potential to maintain its position as the leader in the HIV market.
In the Hepatitis C (HCV) market, Gilead is the only company that has produced oral
treatments. There is potential threat from Merck’s aquisition of Idenix, which is expected to
produce an oral hepatitis treatment with shorter treatment durations. But the drug is only its
second phase of development and will not be out in the market by 2017 at least. AbbVie and
Bristol-Myers Sqibb could be potential threats too in the HCV space. Gilead has managed to
have a strong hold on this market with skyrocketing sales during 2013 and 2014 mainly
contributed by its blockbuster drug Sovaldi.
Number and activity of Gilead’s rivals
Gilead has many rivals that are big, established companies. The established nature of rivals
with good R&D and marketing potential is a competition threat for Gilead. In the HIV Market,
Gilead faces competition from companies like ViiV and Bristol Myers Squibb. In the HCV
market Gilead faces most competition from AbbVie and Merck. In the cancer treatment
market Johnson and Johnson’s Imbruvica poses a threat to Gilead’s newly approved Zydelig
because of dangerous side effects to the liver. Gilead’s Tamiflu faces competition from
GlaxoSmithKline’s Relenza. Other rivals are Pfizer, Merck, Roche Pharmaceuticals,
AstraZeneca, etc. In spite of having big competitors, Gilead’s strong mission of addressing
unmet medical needs for life-threatening diseases and a strong R&D focused on introducing
breakthrough, first-in-class drugs to the market are huge strengths to sustain in the highly
competitive environment.
New drugs coming to the market and eroding profits from Gilead’s established drugs
AbbVie’s Viekira Pak has been a strong competitor for Gilead’s Sovaldi and Harvoni and has
been eating into Gilead’s potential profits in the HCV market. Although Harvoni is much
superior in terms of (1) having to take only one pill daily versus many pills to manage in the
case of Viekira Pak; (2) complete elimination of the side-effects contributor, ribavirin which is
still present in Viekira Pak’s regimen; and (3) cure rates of 97-99% as compared to 95% cures
rates of Viekira Pak; Harvoni and Sovaldi still continue to face competitive threats from
Viekira Pak mainly because of pricing issues.
Bargaining power of the consumers
Gilead tends to price its superior products exorbitantly, especially in the HIV and HCV
markets. The reason for higher pricing is pretty obvious that the products are superior and first
in their class. Not everyone can afford these drugs and thus health service companies in the
United States act like the voice of the consumers and lure the pharmaceutical companies into
making exclusivity deals. In these deals, the pharmaceutical companies get exclusivity for
selling only their products to the customers of the particular health service companies. This
comes at a cost though because the health service companies expect the pharmaceutical
companies to price their drugs at a discount. Consumers therefore have a great bargaining
power in the drugs market and that hurts the revenues and profits of the pharmaceutical
companies. Gilead has been pulled into this pricing war in the HCV market recently.
In the Indian market, Gilead has faced rejection of its Sovaldi patent on grounds that the drug
is not effective enough and does not have any improved properties over the Hepatitis C drugs
they are already aware of. Also the pricing is much higher than what it would be if India
manufactures generic forms of Sovaldi called sofosbuvir. If Gilead loses the battle of having
Sovaldi enter the Indian market, their agreements with the seven Indian drug makers helping
them to make and commercialize Sovaldi in about 91 developing countries will no longer
make sense. Also, Indian drug makers are capable of producing generic versions of Sovaldi
for as low as $1 per pill. This is nowhere close to the $1000 per 12 week regimen price that
Gilead has offered for selling Sovaldi if the agreement with India goes through. Gilead is
7. 6
facing threats from gaining entry into a huge emerging market like India for its largest drug
franchise. This is a negative competitive factor.
In Europe, global health charity Medecins du Monde (MdM) has challenged Gilead’s
European patent for Sovaldi on grounds that it is effective but not sufficiently innovative.
Also, the high price makes it inaccessible to most people, even in rich countries like France.
Good management decisions for acquisitions
Gilead has shown good decision making with regards to acquiring the right companies or
drugs and that gives a great competitive edge to Gilead Sciences. For example, acquiring
Pharmasett in 2011 lead to blockbusters like Sovaldi and Harvoni leading to Gilead’s
performance surpassing the industry average.
Availability of R&D resources
R&D across the biotechnology industry is getting more efficient and maintaining standards
and strategy for R&D is a competitive factor. Gilead uses a bottoms-up approach to assign its
R&D budget across projects. The budgeting is based on the uniqueness and success of
projects. The R&D focuses on addressing unmet medical needs and life threatening diseases.
In 2011 Gilead invested more than $670M in R&D of HIV treatment and devoted one third of
its R&D budget to R&D of Hepatitis C.
Corporate Governance
Executive compensation for the CEO of Gilead Sciences, John Martin, totaled almost $180
million in 2013. His salary accounted for only $15.4 million but he cashed in on stock options
that netted him an additional $158.9 million while another $4.8 million came from shares that
vested last year. Furthermore, Martin’s overall compensation has been increasing considerably
over the last few years. Gilead’s CEO received about $53.2 million in 2010, $54.5 million in
2011, and $95.8 million in 2012. According to Bloomberg Billionaires Index, John Martin has
a net worth of $1.2 billion. In addition to being CEO, John Martin is also the Chairman of the
Board. He has been with Gilead since 1990 and has a great deal of influence at the company.
John Martin seems to be strongly entrenched at Gilead considering his position at the
company and the incredible growth experienced by Gilead the last few years.
With regards to political influence, the pharmaceutical and healthcare industry is very
persuasive. The size and profitability of the industry ensure that their requests will be listened
to and, in many cases, taken care of. As one of the industry’s biggest names, Gilead Sciences
are no exception. Last year, Gilead spent $2.89 million on lobbying costs while the industry as
a whole spent $227.81 million. While the industry’s lobbying expenses have been steadily
decreasing since 2009, Gilead’s lobbying expenses have more than doubled in the same time
span. We believe that this big increase in lobbying is to help relieve some of the pressure the
company has been facing in response to its exorbitant prices. Gilead is facing a hard time with
patent challenges in other countries, but they are determined to maintain its pricing strategy in
the U.S. where three-quarters of their revenues come from.
Social Responsibility
In the past, Gilead Sciences has participated in the CDP (formerly the Carbon Disclosure
Project). The CDP is a non-profit organization that aims to bring about company transparency
and to help companies develop strategic goals that will help reduce greenhouse gas emissions
and better protect the environment. In 2012 Gilead ranked second in the healthcare sector by
receiving a carbon disclosure score of 96. However, Gilead has not participated in the CDP
the last two years. This comes as a surprise considering that Gilead has performed splendidly
in the CDP. Furthermore, industry peers such as Amgen, Celgene and Biogen Idec have
released sustainability reports that describe their environmental, social and governance
business practices.
With regards to corporate social responsibility, Gilead Sciences has performed mediocre
according to CSRHub, which is the world’s largest CSR and sustainability ratings and
Figure 7: Annual Health Lobbying on
Pharma/Healthcare Products
Figure 8: Annual Lobbying by Gilead
Sciences
$0
$50
$100
$150
$200
$250
$300
98 00 02 04 06 08 10 12 14
Total(inmillions)
Year
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
01 03 05 07 09 11 13
Total(inmillions)
Year
8. 7
information database. CSRHub gave Gilead a score of 52 on governance with an overall score
of 50.
Investment Risks
Risk in HCV portfolio: In our opinion, the biggest investment risk that Gilead is facing is in
the Hepatitis segment of its business, which generated more than half of its total revenue last
year. According to the most recent report, discounts are going to increase to an average of
46% from 22% last year and, therefore, we should expect a subsequent drop in margins from
the current 85% to about 80%. Gilead should take particular steps as a result of the “price
war” that emerged with the approval of Viekira Pak by AbbVie. While having slightly worse
characteristics, AbbVie sells its new drug at a $10,000 discount to Harvoni and at a price
similar to Sovaldi. Both companies are now involved in a discounting competition in their
race for market share both domestically and internationally. In the US, Gilead was able to sign
exclusive deals with Aetna, UnitedHealth and CVS Health versus only Express Scripts for
AbbVie. Internationally, the situation looks a bit more complicated. While Gilead has
managed to sign several large exclusive deals in the EU (Germany, France, Spain and Italy)
and in Egypt, we think that Gilead will receive a patent refusal from India. A deal that would
provide a HCV regimen to 91 developing countries at a price of $1000 is being stalled by
Indian officials on grounds that the patent cannot be granted for a drug unless changes make it
significantly more effective and innovative. India’s Patent Office has recently rejected
Gilead’s application for Sovaldi and the company is currently challenging the decision. India
has a long history of patents and intellectual property rights issues and we think that Gilead is
going to lose in their attempt to monopolize developing countries. A similar situation
happened to Pfizer’s cancer drug, Sutent, in 2012, forcing the company to leave the deal with
the Indian companies. As a result, remaining European, Middle Eastern and some big South
American countries will receive an increase in the bargaining power achieving lower prices
from Gilead’s blockbuster drug.
Talking about Sovaldi with Gilead’s Vice President of Investment Relations, Patrick O’Brien,
we understand that the HCV positions are expected to be challenged with Merck’s own HCV
drug MK-5172A (grazoprevir) that was developed by Idenix, a company that Merck has
acquired in Q3 2014. Merck’s drug is currently in Phase 2 and has shown higher cure rates in
as little as 4 weeks, which is less than Sovaldi (12 weeks) and Harvoni (8 weeks). Taking into
consideration special treatment from the FDA for breakthrough drugs in terms of timing, as
well as historical time spent on R&D per stage for Hepatitis drugs, we think that Merck’s drug
should come out in Q1-Q2 2017.
Patents expirations: With the threat of fast approaching patent expirations for five of their
core drugs: Atripla, Truvada, Striblid, Viread and Ranexa in 2018-2019, Gilead finds itself in
the position of needing new products in the market place. However, Gilead does have a
significant number of products in the pipeline and it boasts above average success rates in
R&D for the industry. In addition, the firm has proven itself as successful in integration of its
acquisitions. Because of these factors, we think Gilead is poised to overcome the concern of
expiring patents with minimal turbulence. Furthermore, recent approval of Tybost and Vitekta
will help strengthen and provide a smooth transition in their HIV portfolio after its 2018-2019
patents expire. We also believe that the FDA will approve TAF by Q3 2015. TAF is a
component that can reduce bone and renal side effects, which will further strengthen Gilead’s
HIV position. Furthermore, Gilead’s spokesperson said they are looking at TAF as a substitute
for Viread.
Risks associated with R&D: As for the high R&D costs, they serve as an additional barrier to
entry for competitors that want to join a high gross margin pool. Although Gilead enjoys some
of the lowest R&D costs among its peers, it should be noted that subpar employee morale
could trigger an exodus of pertinent staff and result in an increase of its R&D costs.
Risk with foreign currency exchange rates: As a company that operates on a global scale,
Gilead is exposed to foreign currency exchange rates. While some currencies do not fluctuate
that much, others like the Egyptian pound, Indian rupee and Japanese Yen have had some
significant changes in their prices compared to the USD. Patrick O’Brien, Vice President of
Gilead’s Investment Relations, said that they have a team that hedges currency risks with 18-
Figure 9: Gilead Sales by Market
Source: Team estimates, GILD earnings release
HIV
46%
Hep C
48%
Cardio
vascul
ar
5%
Other
1%
9. 8
month projections, however, if a partnering developing country experiences a spike in its
currency’s volatility then that could result in a value drop of long-term contracts.
Litigations: Concerning risks, it is important to highlight current and potential litigation
issues. With the high density of patents in the biopharmaceutical industry, lawsuits based on
patent infringements are rather common. We think that a potential threat is carried from
Idenix, which has been recently acquired by Merck. This litigation is about HCV patents’
infringements in both the US and the EU that could negatively impact Sovaldi. In addition,
Philadelphia’s Transportation Authority has a filled a lawsuit against Gilead for high prices on
Sovaldi on the grounds of “unjust enrichment” that violates antitrust laws, which also brings a
negative image for a company whose goal is to cure people from life-threatening disease, as
well as possible price cuts on Sovaldi that is priced at $84,000 and contributed 42% of total
sales last year. Similar lawsuits have been filed in Europe as well. Doctors of the World, a
charity organization from France, states in its filings that Gilead is behaving like a monopoly
and abusing its position as a patent-holder to demand intolerably high prices.
Intellectual Property risks: Intellectual property rights and its protection is a core segment of
the biotech industry. While we do not anticipate any intellectual property violations, Gilead
has had a negative experience with Viread in Brazil. Local government officials rejected
Gilead’s patent so they could allow a Brazilian company to manufacture a generic drug based
on the core ingredient, tenofovir. Brazilian officials stated that Viread is not significantly more
effective or innovative. So there is always a potential threat associated with intellectual
property violations in the biopharmaceutical business.
In our opinion, Gilead has low short-term investment risk that is well priced in the models. By
analyzing the company’s pipeline of drugs, we can see that they are working to diversify their
streams of revenue by introducing new oncology drugs. Currently, Sovaldi and Harvoni
comprise almost half of Gilead’s revenues. Since all of Gilead’s products are in the “life
threatening disease” category, pricing and, as a result, profitability could be adversely affected
by potential health care reforms. Based on high gross margins, Gilead currently has 85%
margins but project 87-90% margins in Q1 2015. Concerning profitability, there is a potential
threat from high-tech companies like Google and its Calico project entering the
biopharmaceutical segment. However, in our opinion, it is more of a hypothetical than an
empirical risk. High infrastructure costs that include levels of expertise, time and capital make
biopharmaceutical choices rather costly. Based on success rates of R&D stages, time and
opportunity costs decisions in this industry are very expensive and potential entrants will need
to have strong technological base, patents and large capital in order to challenge positions of
companies like Gilead.
Overall, we think our model accurately accounts for company specific risks while taking a
conservative approach on individual drug sales forecasts.
Financial Analysis
Beta Calculation
The beta was calculated using the covariance of the excess returns of both US Gilead Sciences
Inc. (GILD), listed on the NASDAQ, and the S&P 500 Index (^GSPC) Index. This was
divided by the variance of the index excess returns. The model is based on monthly time-
series of 22 years. The first beta model gave us a beta of 0.907, and a single regression of the
stock and market excess returns gave us a beta of 0.906. Both of the betas were comparable to
the estimates on the streets.
The risk-free rate was calculated with the 3-month treasury rates averaged over the 22-year
time period (3.07%). We then subtracted the risk-free rate from the risk premium of 13.57%.
After applying the CAPM model, we got a cost of equity of 15.44%. Next, we added the size
premium (1.53%) from the Fama-French model, which gave us a cost of equity of 17.0%.
Discounted Cash Flows to the Firm Model Assumptions
10. 9
Core items on the financial statements were based on sales forecast of individual product
lines discounted by the WACC of 11.1%.
We obtained the tax rate (18.3%) by reviewing the company’s 2014 SEC 8-K report. This
is referred by Gilead in the SEC report. This could change depending on the firm’s
earnings growth.
Financial statements where forecasted using growth rates, revenue base ratios and
averages over three to five year periods. The property, plant and equipment and capital
expenditure items were used to calculate the free cash flows to the firm.
Depreciation and amortization was calculated using the last five years D&A/Sales. From
2010 to 2014 D&A was between 2.9% to 3.6%. We decided to take the geometric mean
of the five percentages giving us 3.3%.
We calculated the terminal value using the forecasted EBITDA (2024E). The exit
multiple we used, was calculated using the averaged exit multiples of the biotech
industry.
We then forecasted the diluted shares outstanding by reviewing the change over time.
This gave us diluted outstanding shares of 1,647,000,000.
We calculated the WACC using a debt-to-value ratio of 41.0% and equity-to-value ratio
of 59.0%. We also used a market risk premium of 13.57%, size premium of 1.53% and
cost of equity of 17.0%. This gave us a WACC of 11.1%.
Estimating growth of sales, we calculated the projected sales per product using historical
performance, 5 year CAGR, current news, availability of competitors and their
competitive positions, patent expirations and risk assumptions discussed above. We used
conservative approach assuming terminal value of zero for the products in their expiration
year. Projections on the pipeline product were based on historical performance of the
substitute.
Our confidence in the assumptions is provided by the calculated implied perpetuity growth
rate of 2.8%, which is between 2% inflation rate and 3% GDP growth rate. We also calculated
an implied EV/EBITDA using the last twelve months of the EBITDA and the enterprise value
giving us a multiple of 9.1x. We calculated an implied exit multiple of 12.6x. These factors
provided us with confidence in using 12.0x exit multiple, which is an average exit multiple of
the biotech industry.
Monte Carlo Method
We used Monte Carlo approach with a 100,000 sample, testing various uncertainties and
possible bias associated with growth of sales, projections of EBITDA, EBIT, EBIAT, free
cash flows, terminal value and price per share to support our investment objective.
We assumed no change in weighted average cost of capital and number of outstanding
diluted shares.
Using stochastic system, on a 100,000 sample we tested NPV of free cash flows and came
up with a mean value $69,620M which almost perfectly aligns with the projected
$69,634M and standard deviation of approximately $17M (please refer to appendix 7 for
full statistical data)
We then tested Terminal value by using random sample of 100,000 EBITDA in 2024,
with historical standard deviation and predicted mean value, and we also included
sensitivity test on exit multiple between 11.00 and 13.00.
Using above calculations and our initial assumption, we did sensitivity analysis on share
price. While the mean value of price per share was $109.52 and standard deviation of
$34.73 in Monte Carlo simulation, our projected value of $114.78 is very close to the
simulation and lies within 1 standard deviation.
Since mean values of stochastic Monte Carlo 100,000 simulations lay perfectly close to our
projected values, we are confident in our Discount Cash Flow model to the Firm with per
product sales projections.
16. 15
Appendix 6: Beta Regression
Beta Regression
Regression Statistics
Multiple R 0.248196158
R Square 0.061601333
Adjusted R Square 0.058188974
Standard Error 0.171680142
Observations 277
ANOVA
df SS MS F Significance F
Regression 1 0.532078302 0.532078302 18.05241965 2.94496E-05
Residual 275 8.105369571 0.029474071
Total 276 8.637447873
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.008561174 0.01282459 0.667559271 0.504974769 -0.016685671 0.033808019 -0.016685671 0.033808019
Market Risk Premium 0.906782784 0.213420216 4.248813911 2.94496E-05 0.486637798 1.326927769 0.486637798 1.326927769
17. 16
Descriptive Statistics on Per Share Price
Mean 109.52
Standard Error 0.109831
Median 109.27
Standard Deviation 35
Sample Variance 1,206
Kurtosis 0.010631
Skewness 0.026013
Range 304
Minimum 0.0
Maximum 304
Sum 10,952,205
Count 100,000
Confidence Level(95.0%) 0.215268
Descriptive Statistics on NPV of FCF
Mean 69,620,499
Standard Error 17,357
Median 69,614,780
Standard Deviation 5,488,735
Sample Variance 30,126,214,064,202
Kurtosis 0
Skewness 0
Range 44,117,867
Minimum 48,137,195
Maximum 92,255,062
Sum 6,962,049,878,357
Count 100,000
Confidence Level(95.0%) 34,019
Gilead, Monte Carlo Test 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
E Sales 29,392,818 30,862,459 31,171,084 30,859,373 28,359,764 22,120,616 20,129,760 19,727,165 19,135,350 17,030,462
Std dev 6,334,571
Sales (Sensitivity) 23,306,801 12,133,628 36,791,271 15,488,114 18,623,008 18,810,899 20,902,930 29,103,176 28,350,930 16,687,891
E EBITDA 19,092,434 15,373,059 15,590,625 15,821,194 15,027,933 11,254,058 10,262,166 10,103,672 9,847,173 8,770,537
std dev 4,726,817
EBITDA (sensitivity) 22,463,155 21,768,087 10,056,724 8,160,804 19,817,954 10,493,105 12,358,072 5,478,966 16,846,830 11,888,731
E EBIT 6,121,332 14,556,284 14,701,847 14,554,828 13,375,887 10,433,192 9,494,205 9,304,321 9,025,191 8,032,420
std dev 4,484,067
EBIT (sensitivity) 6,829,646 13,949,866 17,553,882 22,123,494 17,259,276 9,034,430 6,256,482 -235,132 14,331,595 9,981,037
E EBIAT 12,792,550 13,432,178 13,566,500 13,430,835 12,342,937 9,627,491 8,761,017 8,585,796 8,328,223 7,412,118
std dev 3,769,740
EBIT (sensitivity) 12,676,553 10,690,645 8,356,141 13,358,242 7,060,792 11,478,368 11,749,884 8,309,975 5,536,334 436,987
E Free Cash Flow 12,617,025 13,402,394 15,662,410 14,492,846 12,941,776 9,366,565 9,168,245 9,043,025 8,933,274 6,416,576
std dev 2,842,697
Free Cash Flow (sensitivity) 12,539,585 13,297,306 8,840,637 10,698,099 15,191,157 7,293,952 8,241,820 11,381,195 13,594,537 8,562,829
WACC 11.1%
NPV of FCF 69,620,499
Appendix 7: Monte Carlo Simulation
18. 17
Demand Projections
2014 2015 2016 2017 2018
United States
HBV 1,601,670 1,616,405 1,631,276 1,646,284 1,661,430
HCV 5,766,012 5,819,059 5,872,595 5,926,623 5,981,147
HIV 1,922,004 1,616,405 1,631,276 1,646,284 1,661,430
Canada
HBV 35,675,834 179,985 181,604 183,239 184,888
HCV 35,676 35,997 36,321 36,648 36,978
HIV 107,028 107,991 108,963 109,943 110,933
Japan
HBV 2,540,400 2,489,592 2,439,800 2,391,004 2,343,184
HCV 2,921,460 2,863,031 2,805,770 2,749,655 2,694,662
HIV 127,020 124,480 121,990 119,550 117,159
European Union
HBV 7,103,832 7,119,461 7,135,124 7,150,821 7,166,553
HCV 2,537,083 2,542,665 2,548,258 2,553,865 2,559,483
HIV 2,943,016 2,949,491 2,955,980 2,962,483 2,969,000
South Korea
HBV 6,050,875 6,070,842 6,090,876 6,110,976 6,131,142
HCV 857,207 860,036 862,874 865,722 868,579
HIV 50,424 50,590 50,757 50,925 51,093
Russia
HBV 7,313,502 7,276,203 7,239,094 7,202,175 7,165,444
HCV 2,925,401 2,910,481 2,895,638 2,880,870 2,866,177
HIV 1,462,700 1,455,241 1,447,819 1,440,435 1,433,089
Brazil
HBV 4,076,720 4,128,087 4,180,101 4,232,770 4,286,103
HCV 5,299,736 5,366,513 5,434,131 5,502,601 5,571,934
HIV 6,115,080 6,192,130 6,270,151 6,349,155 6,429,154
Mexico
HBV 1,210,058 1,223,611 1,237,315 1,251,173 1,265,186
HCV 847,041 856,528 866,121 875,821 885,630
HIV 242,012 244,722 247,463 250,235 253,037
China
HBV 164,164,800 164,887,125 165,612,628 166,341,324 167,073,226
HCV 41,041,200 41,221,781 41,403,157 41,585,331 41,768,306
HIV 1,368,040 1,374,059 1,380,105 1,386,178 1,392,277
India
HBV 37,992,900 38,547,596 39,110,391 39,681,403 40,260,751
HCV 22,795,740 23,128,558 23,466,235 23,808,842 24,156,451
HIV 3,799,290 3,854,760 3,911,039 3,968,140 4,026,075
Africa (Developed)**
HBV 7,197,300 7,377,233 7,561,663 7,750,705 7,944,473
HCV 7,197,300 7,377,233 7,561,663 7,750,705 7,944,473
HIV 2,159,190 2,213,170 2,268,499 2,325,211 2,383,342
TOTALS HBV 274,927,891 240,916,140 242,419,874 243,941,874 245,482,380
HCV 92,223,855 92,981,881 93,752,763 94,536,681 95,333,820
HIV 20,295,804 20,183,039 20,394,042 20,608,539 20,826,589
PERCENT OF TOTAL HBV 6.10% 5.30% 5.29% 5.28% 5.26%
HCV 2.05% 2.05% 2.05% 2.04% 2.04%
HIV 0.45% 0.44% 0.44% 0.45% 0.45%
Infected Population
Appendix 8: Demand Analysis
19. 18
HCV Infection Population and Percent ( Region x Genotype )
Region Regional HCV
N ( '000 ) Percent % N ( '000 ) Percent % N ( '000 ) Percent % N ( '000 ) Percent % N ( '000 ) Percent % N ( '000 ) Percent % N ( '000 )
North America and Caribbean
Caribbean 450.0 92.6 15.0 3.2 17.0 3.5 4.0 0.8 0.0 0.0 0.0 0.0 486.0
High-income North American 3,595.0 75.8 567.0 12.0 492.0 10.4 55.0 1.2 6.0 0.1 26.0 0.6 4,742.0
Europe
Central Europe 1,548.0 89.2 1.0 0.1 164.0 9.4 22.0 1.3 0.0 0.0 0.0 0.0 1,736.0
Eastern Europe 4,023.0 65.1 270.0 4.4 1,881.0 30.4 6.0 0.1 0.0 0.0 0.0 0.0 6,181.0
Western Europe 3,169.0 59.0 583.0 10.8 1,332.0 24.8 262.0 4.9 26.0 0.5 2.0 0.0 5,374.0
Africa
Central Sub-Saharan Africa 37.0 1.7 17.0 0.8 0.0 0.0 2,145.0 97.6 0.0 0.0 0.0 0.0 2,198.0
Eastern Sub-Saharan Africa 1,187.0 37.3 294.0 9.2 288.0 9.1 978.0 30.7 436.0 13.7 0.0 0.0 3,183.0
North Africa and Middle East 3,808.0 27.3 115.0 0.8 884.0 6.3 9,118.0 65.3 47.0 0.3 0.0 0.0 13,971.0
Southern Sub-Saharan Africa 399.0 26.5 18.0 1.2 107.0 7.1 98.0 6.5 887.0 58.8 0.0 0.0 1,508.0
Western Sub-Saharan Africa 4,427.0 65.7 1,550.0 23.0 0.0 0.0 761.0 11.3 5.0 0.1 0.0 0.0 6,743.0
Asia
Central Asia 2,100.0 66.6 148.0 4.7 906.0 28.7 0.0 0.0 0.0 0.0 0.0 0.0 3,155.0
East Asia 32,082.0 58.0 8,444.0 15.3 5,762.0 10.4 40.0 0.1 0.0 0.0 8,982.0 16.2 55,311.0
High-income Asia Pacific 1,926.0 74.9 629.0 24.5 15.0 0.6 0.0 0.0 0.0 0.0 0.0 0.0 2,571.0
South Asia 12,889.0 23.2 1,333.0 2.4 39,706.0 71.6 1,413.0 2.5 80.0 0.1 55.0 0.1 55,475.0
Southeast Asia 4,910.0 57.0 1,572.0 18.2 1,331.0 15.4 77.0 0.9 0.0 0.0 729.0 8.5 8,619.0
Oceania
Australasia 388.0 54.2 34.0 4.7 280.0 39.2 9.0 1.3 0.0 0.0 3.0 0.5 715.0
Latin America
Andean Latin America 1,003.0 90.9 17.0 1.5 83.0 7.6 0.0 0.0 0.0 0.0 0.0 0.0 1,103.0
Central Latin America 2,796.0 71.7 754.0 19.3 330.0 8.5 16.0 0.4 2.0 0.0 0.0 0.0 3,899.0
Southern Latin America 876.0 87.0 58.0 5.7 65.0 6.5 5.0 0.5 4.0 0.4 0.0 0.0 1,008.0
Tropical Latin America 1,802.0 69.3 89.0 3.4 699.0 26.9 7.0 0.3 3.0 0.1 0.0 0.0 2,600.0
TOTALS 83,415.0 1,193.0 16,508.0 165.2 54,342.0 316.4 15,016.0 225.7 1,496.0 74.1 9,797.0 25.9 180,578.0
Totals (Excludes Oceania) 83,413.4 46.2 16,509.0 9.1 54,345.0 30.1 15,014.5 8.3 1,496.3 0.8 9,798.6 5.4 180,576.8
Genotype 6Genotype 1 Genotype 2 Genotype 3 Genotype 4 Genotype 5
Appendix 9: HCV Population and Percent
20. 19
Worldwide Prevalence of Hepatitis C Virus 2013-14
Region
Africa Prevalence of HCV
Sub-Saharan Africa 2.2% (0.1%–13.8%)
Central Africa 6.0%
West Africa 2.4%
Southern and East
Africa
1.6%
Americas
North America
Canada 0.7%
United States 1.3%
Latin America
Argentina, Brazil,
Mexico, Puerto Rico,
Peru and Venezuela
1.4–2.5%
Asia and Oceania
South Asia
India 3.4%
Southeast Asia
Vietnam 2–2.9%
East Asia
Taiw an 4.4%
China 1–1.9%
Australasia (Australia
and New Zealand)
2.7%
Melanesia,Micronesia,
and Polynesia Regions
2.6%
Eastern Mediterranean
Egypt 15.0%
Pakistan 4.9%
Europe
Central Europe
Czech Republic,
Poland, Romania, and
Hungary
≤0.5%
Romania ≥3%
Western Europe
France, Germany,
Greece, Italy, Norw ay,
Portugal, Spain,
Sw eden, Sw itzerland,
and UK
≤ 0.5%
Rural Areas in Greece and Italy ≥ 3.0%
Eastern Europe
Russia ≤0.5%
Parts of Russia ≥3%
Appendix 10: HCV Prevalence rates
21. 20
Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this
company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of
interest that might bias the content or publication of this report.
Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue.
Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or
advisory board member of the subject company.
Market making: The author(s) does not act as a market maker in the subject company’s securities.
Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public
and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or
implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment
decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of
an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated
with CFA Society San Francisco, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.
CFA Institute Research Challenge
![1
Demand Analysis
Country Population HBV HCV HIV GDPPer Capita
United States 320,334,000 1,601,670 5,766,012 1,922,004 53,041.98
Canada 35,675,834 178,379 35,676 107,028 51,958.38
Japan 127,020,000 2,540,400 2,921,460 127,020 36,654.00
European Union 507,416,607 7,103,832 2,537,083 2,943,016 35,438.49
South Korea 50,423,955 6,050,875 857,207 50,424 33,791.00
Russia 146,270,033 7,313,502 2,925,401 1,462,700 14,611.70
Brazil 203,836,000 4,076,720 5,299,736 6,115,080 11,208.08
Mexico 121,005,815 1,210,058 847,041 242,012 10,307.28
China 1,368,040,000 164,164,800 41,041,200 1,368,040 6,807.43
India 1,266,430,000 37,992,900 22,795,740 3,799,290 1,498.87
Africa (Developed)** 359,865,000 7,197,300 7,197,300 2,159,190 1,722.92
TOTALS / AVGs 4,506,317,244 239,430,436 92,223,855 20,295,804
World Bank, IMF, CIA** This includes Libya, Mauritus, Seychelles, Tunisia, Algeria, Botsw ana,
Egypt, Gabon, South Africa, Cape Verde, Namibia, Morocco, Ghana,
Democratic Republic of Congo, Zambia, Sao Tome and Principe, Equatorial
Guinea
Infected Population
30
40
50
60
70
80
90
100
110
120
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
GILD Historical Prices 2010-2015
Closing Price
Current
Price
11.86%
$114.78
$102.61
Investment Summary
We issue a BUY recommendation on Gilead Sciences (GILD) with a price target of $114.78.
The above target price is estimated based on the Discounted Free Cash Flow Model to the
Firm with a per product sales projections, that we have tested using Monte Carlo 100,000
simulation. With a closing price of $102.61 on 2/20/2014, our projections suggest 11.86%
upside in GILD’s stock. As a market leader in HIV and Hepatitis drugs, Gilead is capitalizing
on their supreme quality products, while working on diversifying their portfolio of drugs
based on medical needs and differentiating from others. Gilead continues to position itself as a
biopharmaceutical research company with best in class assets, strong pipeline of drugs,
successful acquisition strategy and mission to address unmet medical needs.
Main price growth drivers:
We anticipate strong financial performance from Harvoni, HCV drug that has been
recently approved and has generated $2.1B in sales its first quarter with a growing
demand both domestically and internationally, as well as Zydelig, recently approved
oncology drug with superior to its class characteristics and competitive price.
Consistently strong and healthy financial statements, with large cash reserves can provide
additional flexibility to the company in terms of portfolio expansion. Gilead’s EBITDA
margin was at 65% and 85% gross margin in 2014, while industry averages were 33.5%
and 73% respectively.
Consistently low R&D costs relative to its competitors and strength of the pipeline
products are going to ensure smooth transition through patent expiration in 2018-2019.
Main investment risks:
Negative outcomes in current litigations around HCV patents and pricing both
domestically and internationally can hurt Gilead’s ability to maintain its profitability and
level of sales.
Growth of competition and “discount war” among Hepatitis products from Gilead and
AbbVie could negatively impact sales and profit margins.
With the above industry margins, numerous large biopharmaceutical companies are
developing new drugs to enter the market that would result in intensification of current
competition and pose a threat to sales and margins.
California State University East Bay Student Research
This report is published for educational purposes only by
students competing in the CFA Institute Research Challenge.
[Healthcare: Biotechnology]
Gilead Sciences, Inc.
Date: 2/23/2013
Ticker: GILD
Current Price: 102.61 USD Recommendation: BUY
Target Price: 114.78 USD
Market Profile
52-week
price range
63.5-116.83
Average
daily volume
17,196,000
Beta 0.91
Stock price
growth in
2014
25.5%
Market
Capitalization
183B
Shares
Outstanding
1.5B
EPS 7.35
P/E 13.91
ROE 87%
EBITDA 16.17B
Profit Margin 65%
Institutional
Holdings
94%
Source: Team estimates, Yahoo Finance](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)