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Gilead - Home - Robert J. Trulaske, Sr. College of Business ...

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  • 1. Ticker:GILDIndustry:Biotech industryRecommendation:WATCHPricingClosing Price$ 40.3752-wk High$ 50 (7/30/09)52-wk Low$ 39.9 (4/21/10)Market DataMarket Cap$36.4BTotal assets$33BValuationEPS (ttm)$3.11P/E (ttm)12.95Profitability & Effectiveness (ttm)ROA27.19%ROE47.15%Profit Margin38.35%Oper Margin52.36%ANALYST NAMEAnh Phananpx93@mail.missouri.edu<br />
    • Company Overview
    Recommendation for GILEAD SCIENCES<br />Gilead Sciences is a good bio-technology company with their strong franchise in HIV, a growing franchise in Hepatitis and potential in cardio-vascular therapies. The company has posted strong financial ratios (ROA, ROE, Profit margin, operating margin) and growth potential over the last 3 years when its new launch of HIV products – Atripla and Truvada brought about significant increases in Gilead’s prescription pharmaceutical sales growth. Gilead's current financial and operational health can be matched by few competitors. It is growing rapidly, highly profitable, and it is generating billions in free cash flow that it is using to repurchase shares and to build up its cash position. The high risk is that approximately 80% of its revenue will be subject to patent expiration in seven or eight years. <br />However, according to the company’s management and experts’ estimates, sales and profit margins are expected to grow significantly in the next several years before the patents expire. The decision to take a position in the stock depends on whether we would want to make short term investment for price appreciation or not. At least for the time being, Gilead should be added to the watch list as a high growth stock. <br />
    • Company Overview
    Gilead Science Inc, incorporated in Delaware on June 22th 1987, is a biopharmaceutical company that discovers, develops and commercializes therapeutics. The company’s core value is Research and Development. Developing and commercializing therapeutic drugs have been its major growth driver in the past decade. Major of Gilead Science Inc’s revenue is derived from HIV treatment products (82% - 92%), of which patents will expire from 2010 to 2021. With Gilead Science’s dominant position in HIV treatment products, its sales have been growing remarkably from its inception up to date. <br />The company operates in 12 countries across the world with significant presence in the US. The company operates through 14 offices in North America, Europe and Australia.<br />The company operates in one reportable segment with 11 approved products including Atripla, Viread, Emtriva, Truvada, AmBisome, Hepsera, Vistide, DaunoXome, Tamiflu and Macugen. <br />
    • Industry landscape
    The US biotechnology market has posted robust rates of growth over the past few years however a sharp deceleration is expected in 2009. Forecasts anticipate a return to secure and stable growth in the subsequent year.<br />The US biotechnology market generated total revenues of $91.9 billion in 2008, representing a compound annual growth rate (CAGR) of 12.7% for the period spanning 2004-2008. In comparison, the European and Asia-Pacific markets grew with CAGRs of 8.5% and 10.1%, respectively, over the same period, to reach respective values of $46.1 billion and $45.1 billion in 2008.<br />The medical/healthcare segment proved the most lucrative for the US biotechnology market in 2008, generating total revenues of $61.7 billion, equivalent to 67.2% of the market's overall value. In comparison, the service provider segment generated revenues of $22.6 billion in 2008, equating to 24.6% of the market's aggregate revenues.<br />The eminent force that is growing in the industry is the power of the buyers. As a trend in the industry, the channel buyers and large hospital systems consolidated their purchase orders to be Group Purchasing Organizations. From the early 90s, the U.S. pharmaceutical industry has gone through a fundamental change. Managed Care Organizations (MCOs) started becoming an important source of pharmaceutical sales by taking market share from the traditional method of pharmaceutical companies selling directly to doctors. With the rapid growth of MCOs, Pharmacy Benefit Managers (PBMs) have emerged as the primary decision makers in the medical industry. PBMs provide numerous services to MCOs that link financial and healthcare information to make cost effective medical decisions for MCOs,among which is the choice of what pharmaceutical drugs to buy. Although not directly mandating which drugs doctors must proscribe, PBMs, through the employement of reimbursement policies could significantly influence the demand for specific drugs. <br />As the raw materials for producing drugs are mostly commodities, we do not expect a high power of suppliers in this industry. Suppliers of some rare, specific substances might have leverage over pharmaceutical companies. <br />The low growth rate of the industry will increase the rivalry within the existing firms to get a bigger chunk of a shrinking pie. The biggest players in the industry are still Pfizer and Merck & Company, followed by Johnson & Johnson, and GlaxoSmithKline. <br />Market Share<br /> Major PlayerMarket Share RangePfizer, Incorporated17.0% (2009)Merck & Company, Incorporated12.0% (2009)Johnson & Johnson12.0% (2009)GlaxoSmithKline PLC7.0% (2009)Other52.0% (2009)<br />Even though Gilead’s Atripla and Truvada continue to dominate the HIV treatment landscape, the threat of Johnson and Johnson’s entry in this segment is eminent as Johnson has just gone through some final rounds of approval from FDA. <br />
    • SWOT Analysis
    Strength<br />A leading position in the HIV market, driven by three products: Viread, Truvada, and key growth<br />driver, Atripla.<br />Gilead’s strong presence in the HIV market is currently afforded by three products, Viread, Truvada and Atripla. Atripla, which is made up of two NRTIs (Viread and Emtriva, both owned by Gilead) and one non-nucleoside reverse transcriptase inhibitor (NNRTI) (Sustiva) provided by Bristol-Myers Squibb, is the first HAART therapy available in a single, once-daily pill, a dosing regime seen as the most appealing treatment to physicians and patients alike, and, as a result, is expected become Gilead’s major growth driver out to 2013.<br />Weaknesses<br />Despite diversification into cardiovascular, Gilead’s portfolio is still heavily reliant on one disease area: HIV<br />From 2001–06 Gilead Sciences solely operated in the ID arena, particularly focused on developing and marketing HIV therapies, with 100% of its total revenues derived from this therapy area. This changed in 2007, however, with the launch of the in-licensed Letairis from Abbott (which Gilead gained through the 2006 corporate acquisition of Myogen). Gilead had to seek outside of its internal R&D in order to diversify its therapeutic area offering, and through the Myogen buy-out it developed cardiovascular interests. However, over 2007–13, ID is expected to remain Gilead’s primary focus, with 92.1% of the company’s total sales forecast to be derived from this therapy area in 2013 and as a result has less scope to spread risk across its portfolio.<br />Opportunities<br />Letairis sales growth and darusentan offering therapy area diversity<br />Until the launch of Letairis in 2007 (added to the company’s portfolio due to the 2006 corporateAcquisition of Myogen), Gilead operated solely in infectious diseases, with an overarching focus on antiretroviral therapies for HIV sufferers. Indeed, this focus on ID will remain out to 2013 due to the forecast strong performances of Atripla and Truvada, and the product launch of elvitegravir. However, Gilead’s interest in cardiovascular is set to increase out to 2013, with increasing sales of Letairis for pulmonary arterial hypertension (PAH) and the product launch of darusentan, for uncontrolled hypertension.<br />Elvitegravir’s promising launch candidate should add to dominant HIV franchise as an add-on therapy, hence limiting sales cannibalization.<br />Gilead’s elvitegravir, an oral HIV integrase inhibitor currently in Phase III clinical trials, is forecast to be Gilead’s biggest launch product. Expected to launch in 2011, total sales of elvitegravir are predicted to reach $457 million in 2013, representing a substantial sales uptake from launch and over a third of Gilead’s total launch portfolio sales growth( Data monitor report)<br />Threats<br />Gilead is open to extensive generic threat. Gilead is a pure player in small molecules with no interests in biologic therapies. Additionally Gilead has a strong presence in the US, which is the most lucrative but also the most penetratable for the small molecule generics industry as it offers the highest rewards. At present Gilead have just two, minor products which are set to lose patent expiry out to 2013; AmBisome and Hepsera. Key drugs which generate large revenues will lose this protection and as a result Gilead will lose sales. In order to combat this Gilead must constantly look to update their portfolio through various life cycle management strategies; reformulations or new use patents, in order to get the maximum returns out of their R&D costs.<br />VALUATION<br />I completed a discounted cash flow analysis, which estimated the present value of the Company’s future cash flows. Using a 90-day T Bill rate of .00147, market return of 10% and the company’s Beta of 0.35( average of Google Finance, Yahoo Finance, and other sources) I came up with the discount rate of approximately 5 %, which I believe is too low for the time being. Then I employed the standard discount rate of 10%. For the current year, to reflect the estimates of expert’s opinion about the company’s growth and the outlook of the biotech industry, I employed 10% growth rate.<br />I ran several models with growth rates for years 1-10 ranging from 0% in a conservative case to 10% for a more aggressive case. My base case utilized a growth rate of 10% for year 1 till year 5 when the company’s patents have not yet expired. Growth rate decreased from 2015 to 2019 to around 7- 8% (estimated by experts) . My second stage growth rate is estimated to be 2%. Based on my analysis, I calculated a value range of approximately $59.95 per share for Gilead. At the time of the analysis (4/28/2010), the Company’s shares were trading at $40.37, which means undervalued. <br />SHORT-TERM SOLVENCY RATIOS (LIQUIDITY) Net Working Capital Ratio30.32Current Ratio2.6Quick Ratio (Acid Test)1.6Liquidity Ratio (Cash)0.89Receivables Turnover5.8Average Collection Period62Working Capital/Equity46.2Working Capital pS3.27Cash-Flow pS3.17Free Cash-Flow pS1.78<br />FINANCIAL STRUCTURE RATIOS Altman's Z-Score Ratio10.41Financial Leverage Ratio (Assets/Equity)1.5Debt Ratio34.4Total Debt/Equity (Gearing Ratio)0.20LT Debt/Equity0.20LT Debt/Capital Invested19.2LT Debt/Total Liabilities37.3Interest Cover51.4Interest/Capital Invested0.89Patent Expiration     Products U.S. PatentExpiration European PatentExpirationVistide 2010 2012Hepsera 2014    2011Letairis 2015 2015AmBisome 2016 2008Tamiflu 2016 2016Macugen 2017 2017Viread 2017 2018Ranexa 2019    2019Lexiscan    2019    2020Emtriva 2021 2016Truvada 2021    2018Atripla 2021    2018Cayston 2021    2021<br />Sales by Drugs<br />   2009  % of Total Product Sales  2008  % of Total Product Sales  2007  % of Total Product SalesAntiviral products:                     Truvada  $2,489,682  38%  $2,106,687  41%  $1,589,229  43%Atripla   2,382,113  37%   1,572,455  31%   903,381  24%Viread   667,510  10%   621,187  12%   613,169  16%Hepsera   271,595  4%   341,023  7%   302,722  8%Emtriva   27,974  0%   31,080  1%   31,493  1%                      Total antiviral products   5,838,874  90%   4,672,432  92%   3,439,994  92%AmBisome   298,597  5%   289,651  6%   262,571  7%Letairis   183,949  3%   112,855  2%   21,020  1%Ranexa   131,062  2%   —    —     —    —  Other   16,829  0%   9,858  0%   9,524  0%                      Total product sales  $6,469,311  100%  $5,084,796  100%  $3,733,109  100%<br />Sources:<br />Data Monitor reports<br />Yahoo Finance<br />Google Finance<br />Morning star reports<br />Bigcharts.marketwatch.com<br />