1. Important disclosures appear on the last page of this report.
The Henry Fund
Henry B. Tippie School of Management
Charles Schaller [Charles-Schaller@uiowa.edu]
Gilead Sciences (GILD) March 3rd, 2016
Healthcare – Branded Biopharmaceuticals Stock Rating Buy
Investment Thesis Target Price $115-120
We issue a BUY recommendation for Gilead Sciences. We believe that high
sales, a robust pipeline, low costs and the potential for M&A will cause Gilead
to outperform market expectations.
Drivers of Thesis
Gilead is transitioning from a growth stock to a value stock. This has
spooked some investors. Not knowing what to expect has led the market
to undervalue the stock. We forecast that short term revenues will fall by
about 2% per year before leveling off in 2020 and entering a continuing
growth of 0.5%.
Falling Costs amidst Rising Sales: As most of Gilead’s costs are related to
patents, intellectual property and R&D their COGS has decreased as a
percentage of sales while sales have risen significantly. This has led to low
costs and high margins which we forecast to continue. Our model reflects
this assumption with COGS at 10% of sales.
Strong pipeline of upcoming drugs: Gilead is expected to release 4 drugs
this year and 3 more shortly after 2020. Expected this year is a HBV
treatment which is as effective as Harvoni at curing the disease. We
forecast that these drugs will make up 11% of Gilead’s revenue for 2016
growing to 54% by 2020.
Risks to Thesis
Competitors Pipelines: More than 50% of Gilead’s revenue comes from
Hepatitis C medications. Their biggest threat to profitability is Merck’s new
HCV drug. We modeled this impact through reduced HCV drug revenues
due to lower prices in response to competition and lost sales due to
customers switching to Merck.
Government Intervention: Through forced price ceilings and truncated
patent periods the government could have a significant impact on Gilead’s
profitability. The news should be monitored for congressional policy
changes related to pricing, patents and biosimilars (generic
biopharmaceuticals)
Henry Fund DCF $118.23
Henry Fund DDM $92.73
Relative Multiple $138.79
Price Data
Current Price $88.03
52wk Range $81.89 – 123.37
Consensus 1yr Target $116.20
Key Statistics
Market Cap (B) $121.9
Shares Outstanding (M) 1,367
Institutional Ownership 81.4%
Three Year Beta 1.042
Dividend Yield 1.92%
Est. 5yr Growth -9.41%
Price/Earnings (TTM) 7.5
Price/Earnings (FY1) 7.3
Price/Sales (TTM) 4.2
Price/Book (mrq) 6.8
Profitability
Operating Margin 66.4%
Profit Margin 55.5%
Return on Assets (TTM) 34.9%
Return on Equity (TTM) 94.7%
Earnings Estimates
Year 2013 2014 2015 2016E 2017E 2018E
EPS $2.01 $8.33 $12.37 $10.92 $11.21 $11.22
growth 17.55% 314.40% 48.43% -11.73% 2.65% 0.01%
12 Month Performance Company Description
Gilead Sciences is a biopharmaceutical company
focused on research and development of
innovative medicines for uncured diseases.
Gilead’s current product line focuses on treating
HIV/AIDS, Hepatitis C, several types of Cancer as
well as inflammatory and respiratory diseases.
Gilead has had a stellar 3 year run, seeing triple-
digit revenue growth in 2014. Much of its success
is due to two star drugs: Solvadi and Harvoni.
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
M A M J J A S O N D J F
GILD S&P 500
7.5
94.7
23.0 24.8
40.6
19.4
0
20
40
60
80
100
P/E ROE
GILD Industry Sector
Source: GILD 2015
10K
Source: GILD 2015 10K
2. Page 2
EXECUTIVE SUMMARY
We give a buy recommendation for Gilead Sciences.
Speculation as to future growth and new competition
paired with market volatility has led the market to
undervalue Gilead, as evidenced by its forward PE of 7.3
(Compared to an industry average of 23).
Gilead has seen astronomical revenue growth in the last 3
years. While their revenue growth has been incredible,
they are not expected to continued growth at this rate,
which has driven down the price of their stock. While
Gilead still maintains a fairly broad product line (18 active
drugs) nearly all of their growth since 2012 has been from
two Hepatitis C drugs: Sovaldi (2013) and Harvoni (2014).
Just as Gilead owes its newfound revenue to HCV drugs,
likewise Gilead’s future revenue stability will be
dependent on the continued success of these drugs.
HIV/AIDS medication has provided a solid and reliable 33%
of revenue however it has not provided the blockbuster
numbers of Sovaldi and Harvoni.
We believe that creative pricing strategies paired with a
strong pipeline and future M&A activity will position
Gilead to outperform current market expectations.
COMPANY DESCRIPTION
California based Gilead Sciences, Inc. is a research-based
biopharmaceutical company that discovers, develops and
commercializes innovative medicines in areas of unmet
medical need. Gilead was founded in 1988 and currently
employs 7,900 employees. Gilead has traded on the
NASDAQ since 1992 under symbol: GILD.
In 2009 Gilead was recognized as one of the Fastest
Growing Companies from Fortune, the same year they
were rated as one of America’s Top Companies to work for
by Forbes.1
In 2012 Gilead released Truvada, the first drug
shown to reduce the risk of HIV infection.
Gilead was chosen by CVS Health as their main option for
patients on its commercial drug list. This softens the
blow felt from Express Scripts Holding Co, the largest
pharmacy benefit manager to choose Gilead’s competitor
AbbVie’s Hep C drug as the exclusive treatment option for
patients on its main commercial plan in December of
2014.2
Gilead’s current portfolio of drugs chiefly centers around
treating 4 types of diseases: Liver Disease (Hep B and C),
HIV/AIDS, Cancer and heart disease. Additionally Gilead
has a number of drugs which do not fit into a specific
category and are labeled “other.” The following list
contains their drug line, type and expiration date of
patents in the US and Europe.
Gilead Product Line
Drug Name Disease Treated
US Patent
Expiration
EU Patent
Expiration
Sovaldi Liver Disease 2029 2028
Harvoni Liver Disease 2030 2030
Atripla HIV/ AIDS 2021 2018
Truvada HIV/ AIDS 2021 2018
Complera/Eviplers HIV/ AIDS 2023 2022
Stribild HIV/ AIDS 2029 2027
Genvoya HIV/ AIDS 2029 2028
Viread HIV/AIDS/HCV 2017 2018
Letairis Heart Disease 2018 2020
Ranexa Heart Disease 2019 2023
Lexiscan Heart disease 2022 2025
Zydelig Cancer 2025 2025
Tamiflu Other (Antiviral) 2017 2016
AmBisome Other (Anti-Fungal) 2016 2008
Macugen Other (Blindness) 2017 2017
Cayston Other (C. Fibrosis) 2021 2021
Viteka Other (Anti-Viral) 2023 2028
Tybost Other (Anti-Viral 2029 2027
Source: GILD 2015 10K
Gilead’s drug portfolio may seem broad but in reality their
key operations are HIV/AIDS and Hepatitis C (HCV)
antivirals. A look at Gilead’s 2015 sales numbers shows
that 93.74% of their revenue came from HIV/AIDS and HCV
drugs.
Source: GILD 2015 10K
30.62%
59.53%
3.59%
4.01% 0.41% 1.84%
2015 Revenue Breakdown
HIV/AIDS
Liver Disease
HIV/AIDS/Liver
Heart Disease
Cancer
Other
3. Page 3
Revenue Breakdown by Drug Type – 2015
Drug Name Drug Type 2015 Rev % of rev
Hepsera Liver Disease 0 0
Sovaldi Liver Disease 5,276 16.41%
Harvoni Liver Disease 13,864 43.12%
Total Liver Disease 19,140 59.53%
Emtriva HIV/ AIDS 0 0
Atripla HIV/ AIDS 3,134 9.75%
Truvada HIV/ AIDS 3,459 10.76%
Complera/Eviplers HIV/ AIDS 1,427 4.44%
Stribild HIV/ AIDS 1,825 5.68%
Genvoya HIV/ AIDS 45 0.14%
Viread HIV/AIDS/HCV 1,108 3.45%
Total HIV / AIDS 10,998 34.22%
Letairis Heart Disease 700 2.18%
Ranexa Heart Disease 588 1.83%
Zydelig Cancer 132 .041%
AmBisome Other (Anti-Fungal) 350 1.09%
Tamiflu
Other
243 0.75%
Macugen
Cayston
Viteka
Tybost
Lexiscan
Total Other 2,013 5.89%
Total Revenue 32151 100%
Source: GILD 2015 10K
In light of Gilead’s heavy reliance on HIV/AIDS and HCV
medication, Gilead’s future value creation will lie in one of
the following strategies:
Maintaining competitive advantage in the Biopharma
space through patent exclusivity of drugs. This will be
difficult in light of recent developments that will be
noted later in this report.
Development of new drugs that make competitor
HIV/AIDS and HCV offerings obsolete. This will be an
important strategy for Gilead as we forecast continued
R&D spending of over $3 Billion per year (about 11%
of sales).
Developing or acquiring drug patents that will expand
them into the treatment of other diseases. We
forecast a high likelihood of this as well.
A cursory understanding of the main diseases Gilead drugs
treat will aid in understanding the market they are
currently facing.
Hepatitis C Virus (HCV)
Hepatitis C medication provides the largest portion of
Gileads annual revenue. Hepatitis C is a virus which causes
inflammation of the liver, with an estimated 80% of those
infected developing Chronic hepatitis. People infected
with Hepatitis can develop cirrhosis (scarring of the liver
and some may also develop liver cancer. Infection rates
have been stable over the past 5 years.3
HCV is spread primarily through contact with infected
blood. It can also be spread through unprotected sex and
childbirth, although this is less common. Unlike Hepatitis
B there is no vaccine to prevent HCV. About 3.2 million
people in the U.S. are chronically infected with HCV, with
many showing no symptoms. HCV can take between 10 –
40 years to cause serious damage to the liver.4
There are at least 6 genetic variations of HCV (genotypes
1-6). Genotypes 1 and 5 make up the 75% of all HCV
infections, making them the most focused on genotypes
for treatment. Genotype important when considering
treatment options as certain genotypes are resistant or
even immune to specific drugs.
Source: InfoHep.org
Gilead drug Sovaldi treats genotypes 1-4. Harvoni treats 1,
3, and 4 and has a higher cure rate with fewer side effects
than Sovaldi. Genotypes 5 and 6 are negligible as a
percentage of total population, constrained to geographic
areas like Hong Kong and Panama.
Infection rates are high (>3.5% of population) in Central
and East Asia. They are intermediate (1.5 – 3.5%) in South
and Southeast Asia as well as sub-Saharan Africa, Latin
75.00%
17.98%
6.00%
1.00% 0.01% 0.01%
Prevalence of HCV Genotypes
Geno 1
Geno 2
Geno 3
Geno 4
Geno 5
Geno 6
4. Page 4
America, Europe, and Oceania. They are low (<1.5%) in
Asia Pacific, Latin America and North America.
Source: Wikipedia
Until recently there were limited options for treatment of
HCV. Daily interferon injections were the best hope for a
cure and they carried heavy side effects (intense flu-like
symptoms) with a less than 50% cure rate.5
Recent
breakthrough drugs by Gilead and competitor Merck boast
85 – 100% cure rates for the disease in pill form.
HCV Medications makes up the majority of Gilead’s Liver
drug catalogue, and as such they have invested heavily in
their HCV pipeline. This was not always the case. Until
2013 HCV/HVB medications only made up about 5% of
sales. That number is now nearly 90%.
Source: GILD 10K
Hepatitis B Virus (HBV)
HBV is far more prevalent than HCV. It is estimated that 2
Billion, either currently have HBV or have had it in their
lives. Like HCV it can cause serious damage to the liver
leading to cirrhosis, cancer and liver failure. However, HBV
has some notable differences from HBV.
HBV is Vaccine-preventable. In the United States HBV
Vaccines are mandatory for involvement in public
school. In spite of this there are 1.25 million HBV
carriers in the US.6
HBV is less likely to develop into a chronic condition.
Among adults with HBV less than 2% fail to clear the
virus within 6 months of infection. However, chronic
infection rates are much higher for newborns (80%)
and children (20%)7
In spite of these facts HBV is extremely dangerous.
Hepatitis B is second only to tobacco as a cause of cancer,
leading to an estimated 600,000 deaths annually.8
Another
notable difference is that there is not currently an effective
cure for HBV. While HBV is less likely to develop into a
chronic liver disease a cure would be in high-demand as it
would not only eliminate short term (6 month) symptoms
but also eliminate the possibility of long term infection.
Gilead’s Viread has been their best option for treating the
disease although the drug’s website clearly states that it
does not cure the disease. A new drug: TAF (nucleotide
reverse transcriptase inhibitor) has recently passed the 3rd
round of the FDA approval process and expected to be
released for sale in the next 6 months. This drug has been
shown to show the same results as current leading HBV
drugs with a significant decrease in bone density
reduction, which can be caused by HBV drugs.9
It is notable that HCV drugs have not shown themselves to
be effective against HBV. Because of this Gilead has not
seen much income from HBV medication. This also means
that if Gilead were able to develop an effective HBV cure
as they have with Truvada and Solvadi they would enter a
market with significant profit potential without
cannibalizing their HCV drug sales.
While there is profitability to be found in an HBV cure it
would most likely not be as lucrative as HCV drugs have
shown to be. This is largely due to how many HBV
sufferers live in the developing world and in countries too
poor to afford much healthcare. Another complication to
marketing a HBV cure globally is the fact that many
emerging economies with higher rates of infection (China,
Russia, India) have complex drug patent laws, often
producing their own versions of generic for much lower
prices.
0
5000
10000
15000
20000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
HCV / HBC Drug Revenue (M)
5. Page 5
Source: Wikipedia
HCV / HBV Pipeline
The number and type of drugs in a company’s research
pipeline are a clear indicator of the company’s plan for
future profitability. Of their 38 drug patents currently in
FDA testing 10 of them are HCV / HBV drugs.
Gilead’s current research pipeline of drugs. Drugs in the submission stage
should be released for sale within 1 year, Phase 3 drugs may see release in 5-10
years. Phase 2 and Phase 1 are in early phase of testing and may not advance
to the next phase, although each phase can take 1-2 years.
Of those drugs the most exciting prospect is STR of
Sofosbuvir. STR is a pan-genotypic (designed to treat every
genotype of HCV. In a 12-week study of 624 patients a
remarkable 99% showed aviremia (no presence of virus in
blood) at the end of the study. This drug has passed all 3
phases of testing and has been fast-tracked by the FDA
(meaning the final approval process is likely to last 5-6
months rather than 10-12. We forecast that this drug will
play a significant role in Gilead’s future earning potential,
generating $1.1 billion in revenue (3.5% of sales) in 2016
increasing to $5.5 billion (18.75% of sales) in 2020.
We forecast that HCV / HBV medications will steadily
produce about 52% of revenues through 2020. Within the
category we forecast that Gilead’s upcoming HBV drug will
grow as a portion of revenues by 3% per year, making up
15% of revenues ($4.25B) by 2020. HBV currently
contributes a negligible amount to revenues.
HIV / AIDS
Human Immunodeficiency virus (HIV) is a virus that attacks
the immune system, specifically the CD4 cells (T cells),
which help the immune system fight off infections. This
makes the patient more likely to develop infections or
infection-related cancers. Over time, HIV can destroy so
many of these cells that the body cannot fight off
infections and disease. These opportunistic infections
take advantage of a very weak immune system and signal
that the person has AIDS, the last stage of HIV infection.10
Unlike most viruses the human body is unable to rid itself
completely of the HIV virus. Once a person is infected with
HIV they will have it for the rest of their life. Furthermore
there is no cure HIV. Although there is no cure, there have
been significant advances in treatment options for HIV
over the last 2 decades. In the 80’s a diagnosis of HIV was
effectively a death sentence. Now with proper treatment
a person diagnosed with HIV will live nearly as long as a
person without the disease.11
HIV / AIDS drugs have been a mainstay of Gilead’s product
line for close for over a decade. From the early 2000’s up
through 2013 they made up about 80% of Gilead’s total
revenues.12
Although HVC drugs have the lion’s share of
sales this should not be interpreted as a decline in
HIV/AIDS drugs. In fact Gilead has seen an average of 12%
annual growth in HIV/AIDS drugs over the last 5 years.
0
2000
4000
6000
8000
10000
12000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
HIV / AIDS Drug Revenue (M)
Source: Gilead Company Website
Source: Gilead Company Website
6. Page 6
While developments have been encouraging, the process
of HIV treatment is complicated and has historically
required a complex cocktail of drugs, each with its own
side effects and potential harmful interactions with other
drugs the patient might be taking. In late 2015 Gilead
began sales of Genvoya, a once-daily HIV/AIDS treatment.
The first of its kind, Genvoya’s single pill dose reduces the
risk of negative drug interactions or side effects. We
forecast its sales potential to offset the loss of revenue
incurred when the patent for anti-viral Viread ($1.1B in
sales for 2015) expires in 2018. We forecast Genvoya’s
revenues to grow from $600 million in 2016 (1.95% of total
revenues) to $2.4 billion in 2020 (8.1% of total revenues).
Epidemiologically, HIV/AIDS is a global pandemic. About
37 million people worldwide have HIV with about 2 million
new infections occurring each year. More than half of
total infected are woman and 2.6 million are less than 15
years old. Aids results in about 1.2 million deaths per
year.13
As seen in the map below, Sub-Saharan Africa contains the
highest number of infections. It is estimated that two-
thirds of all infections (and two-thirds of all deaths) occur
in this region. South and South East Asia have the second
highest number of infections.
In the United States there are approximately 1.2 million
people living with HIV. Approximately 18,000 people die
from the disease annually.
Source: Wikipedia
HIV / AIDS Pipeline:
Gilead’s HIV / AIDS pipeline is noticeably smaller than
those of their other drug offerings. We do not expect
Gilead to cease their development of HIV / AIDS drugs and
as such expect that further drug development may be
done through M&A activity. Notably Gilead has 2 drugs
that have passed the final round of FDA testing and are
expected to reach the market later this year. We have
factored their future sales into our revenue modeling.
Gilead’s current research pipeline of HIV / AIDS drugs.
We forecast HIV/ AIDS drug sales to continue to make up
about 30% of total sales through 2020. New Drugs STR of
R/F/TAF will grow as a % of revenues by about 0.5% per
year totaling 2.5% ($750M) and F/TAF will grow as a % of
sales by 1.5% per year totaling 6.8% ($2B).
Cancer / Other
Due to diversity of cancer types and the reality that they
make up such a small portion of Gilead’s drug sales they
will not receive the background or epidemiology that
Hepatitis and HIV/AIDS have received. However, in spite
of their relatively low revenue historical revenue
generation, Gilead seems to be setting their R&D sights on
developing a number of new cancer drugs. Five drugs are
in Phase 3 of FDA testing and are expected to launch some
time after 2021 (Phase 3 can take up to 10 years).
Source: Gilead Company Website
7. Page 7
Gilead’s current research pipeline of HIV / AIDS drugs.
We forecast cancer drugs to continue to play a minimal
role in contributing to Gilead’s total revenue. Cancer drugs
contribute 0.41% of total revenues. We forecast rates to
increase by 0.40% per year, totaling 2.9% of sales ($849M)
by 2020.
RECENT DEVELOPMENTS
To accurately understand Gilead’s current situation it is
important to understand the last 3 years of growth for the
company. Between 2008 and 2013 growth steadily
climbed from $5 to $9 Billion by about $1 Billion per year.
Gilead’s main money makers were HIV/AIDS drugs (About
85% of sales). Liver drugs made up a slim 5-8% of total
sales. This entire model was turned on its head with the
release of breakthrough drug Sovaldi
2014 – The year of Sovaldi
Sovaldi was a breakthrough in the treatment of HCV. Prior
to Sovaldi the only effective treatment was interferon.
This required daily patient injections with a less than 50%
success rate.14
Sovaldi entered in late 2013 and took the
market by storm. It’s 90%15
cure rate made Sovaldi the
obvious drug of choice for HCV. As a result it commanded
a premium price: roughly $84,000 for a 12-week
treatment. Gilead saw their revenues grow from $10.8B
to $24.4B16
, with (75% of that growth attributed to
Sovaldi). Even as Sovaldi took off it was known that Gilead
was working on an even better HCV medicine, Harvoni. In
light of that many patients postponed treatment.
Source: GILD 2015 10K
2015 – The Year of Harvoni
Harvoni, released in late 2014 was an even bigger success
than Sovaldi. Harvoni boasted an even higher cure rate
(100% for certain genotypes) as well as fewer side effects.
Harvoni functioned as a standalone HCV medication
whereas Sovaldi required additional medications which
had adverse side effects.
The resulting sales were remarkable. In 2015 Gilead took
in $13.8 Billion in revenue from Harvoni, offsetting a $5
billion drop in resulting Sovaldi sales. To put this in
perspective Harvoni alone was responsible for more
revenue than Gilead’s entire product line in 2013. This was
largely due to two factors:
The superiority of the drug: Harvoni was far and away
the most effective treatment for a chronic and life
threatening disease. In terms of drug efficacy there
was little competition.
The premium price: Gilead priced Harvoni at $94,500
for a twelve week treatment supply of drugs. This
extremely high price paired with relatively low fixed
costs and a strong competitive advantage through
patents and FDA approval time made 2015 the most
profitable year in Gilead’s history. 60% of revenue was
from Sovaldi and Harvoni.
(5,000)
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Net Revenue vs. Net Income (M)
Net Revenue Net Income
Source: Gilead Company Website
8. Page 8
2016 – A Major Threat Emerges
In late 2015 Merck Pharmaceuticals received final FDA
approval to begin production of its new HCV drug,
Zepatier. The emergence of this drug was not a surprise to
Gilead as the FDA process is public and can take a decade
to complete. There was however much speculation as to
how Merck would price the drug in response to Gilead’s
extremely high prices.
Merck ultimately priced Zepatier at $54,600 for a 12 week
treatment. This is $30,000 cheaper than Sovaldi and
$40,000 cheaper than Harvoni.
The drugs are not perfectly comparable: Zepatier treats
genotypes 1 and 4. Harvoni treats 1, 3, and 4. Sovaldi
treats 1, 2, 3, 4. As stated previously, Genotypes 1 and 5
make up about 75% of HCV infections. This means that
about 75% of Gilead’s market for HCV is potentially at
stake. Gilead will be forced to respond with lower prices
or lose the majority of their most profitable market to
Merck.
Merck vs. Gilead Hep C. Drug Comparison
Drug Name Price Genotypes Treated
Zepatier (Merck) $54,600 1 4
Sovaldi (Gilead) $84,000 1 2 3 4
Harvoni (Gilead) $94,500 1 3 4
Source: Hepatitis Foundation
We constructed our model with the assumption that
Gilead’s strategy in response to Merck’s new drug would
be one of the most significant determinants of their
continued competitive advantage. We forecast that
Gilead will reduce the price of their older HCV drugs,
Sovaldi to position it against Zepatier. Additionally they
will maintain the higher priced Harvoni at its current level.
INDUSTRY ANALYSIS
A relatively new entrant to the healthcare sector, the
Biotech industry began in the 1970’s. It has since grown
from a handful of companies to over 1,200 in the US alone.
Companies in the Biotech space are focused on
developing, patenting and marketing new drugs. The
United States leads the world in Biotech, with revenues
exceeding US$60 billion and an industry market value in
2014 of $360 billion.17
Biotech pharmaceuticals is a sub-division of the larger
biotech category. Biotechnology is the process of genetic
manipulation of microorganisms for practical use and as
such has many non-pharmaceutical applications such as
livestock feed, chemicals and medical devices. For the
duration of this report the term “biotech” will refer
specifically to the pharmaceutical applications of
biotechnology.
Biotech is a high risk, high reward industry inside the fairly
stable defensive sector of health care. Every year
hundreds of companies race to develop “star drugs” that
will devour market share while sitting safely behind an FDA
approved patent. Many compete and few succeed. Those
firms that do succeed tend to continue succeeding as tens
of millions of dollars of revenue are channeled into R&D
annually. Some estimates state that only 1 out of every
5,000 – 10,000 potential drug candidates will make it to
market. Beyond that only 20% of marketed drugs are
profitable. Most firms make the majority of their profits
from a handful of drugs.
Biotech shares an ambiguous border with the broader
industry of “pharmaceuticals”. The two share many of the
same drivers, with many companies having both
pharmaceutical and biotechnology divisions. Due to these
blurred lines and the fact that the technical distinction
between the two is the molecular composition and size of
their ingredients they are often merged into the broader
(and unofficial) title of Biopharmaceuticals. It is expected
in coming years the category will become an official
industry within healthcare.
Patents & FDA Approval
Patents are king in the Biotech industry. A company with
a successful patent can enjoy near monopolistic profit
levels until the patent expires or a competing drug is
produced that does not violate the existing patent.
Patents have traditionally lasted for 20 years from the time
of patent issuance. While this may seem like a lengthy
window of profit opportunity it is deceptive. Patents are
filed in the earliest stages of a drug’s engineering. The
subsequent R&D paired with arduous FDA approval
process can last up to 10 years.
Before a drug can be marketed to the public it must first
pass 3 phases of FDA approval.
Phase I: 30 healthy volunteers test the safety profile of the
drug to ensure it is not harmful to humans.
9. Page 9
Phase II: A few hundred patients are used to test the drugs
dosing and efficacy in treating the illness. These patients
are tested against a control group given a placebo drug.
Phase III: In the longest (and most expensive) phase
several thousand participants are used to test the drugs
efficacy, safety and fine tune the proper dosing.
Once the drug has successfully passed all 3 phases (which
typically costs millions of dollars) the firm presents a New
Drug Application to the FDA. These documents can be
over 50,000 pages long. It is worth noting that at any
phase in the process the FDA can decline to approve the
drug even after years of testing and millions in expenses.
Once the patent expires other companies are free to use
the chemical recipe to produce generics (referred to as
“biosimilars” in the biotech industry). The US government
recently passed legislation shortening biotech patents to
12 years. This is because biosimilars (unlike generics) must
go through their own FDA approval process, making them
much harder to replicate in a generic format.
Porter’s Five Forces:
Threat of Entry: Medium. A company can enter the
market fairly easily. Success hinges on high amounts of
R&D capital and creating patents. Many firms enter, few
succeed.
Supplier Power: Low. The true value in Biotech
Pharmaceuticals lies in their patents. Drug components
are often simply commodities purchased from a highly
fragmented market. This significantly increases
profitability for Biotech Pharmaceuticals companies.
Extent of Rivalry: Extremely High. Due to limited
demand (not everyone needs Biotech Pharmaceuticals)
and a small number of large companies competing for a
limited but highly profitable market the Biotech
Pharmaceuticals industry has extremely high competition.
A rival drug patent being passed may reduce a companies’
selling price by 50%.
Substitutes: Low: As Biotech Pharmaceuticals are
typically used to treat diseases with no existing cure
customers with life threatening illnesses face the real
possibility of death if they stop using the product. This
unique position lends to the high profitability of the
Biotech Pharmaceuticals industry.
Buyer Power: Low (could rise): Biotech industry has a
unique structure that adds to the complexity of its
economics. A number of significant factors result in
significant competitive advantage for biotech companies.
Most significant is the fact that in biotechnology the end
users are typically purchasing the product to treat life-
threatening illnesses with no known cure. In light of this
there are very few substitutions to biotech products and
end users have very little buyer power over how much
they will pay for the drugs. Additionally the majority of the
value in the industry is in intellectual capital (patented
drug formulas). The actual ingredients of the formulas
tend to be commoditized, leading to low supplier power.
This weak buyer power is balanced by another uniqueness
of the healthcare industry. While millions of people may
be taking a particular drug there are a very small (a few
dozen) number of payers. The vast majority of money that
exchanges hands in the biotech industry happens between
the firm and two groups: Insurance companies and the
U.S. government. It is from these two giants that the
majority of patient advocacy and cost negotiations come
from. Insurance companies frequently bargain for lower
costs and the U.S. Government has the power to use
regulation to limit company pricing or at least lessen the
duration of its patents.
Recent high profile pharmaceutical controversies such as
Martin Shkreli’s hyperinflation of an AIDS related drug
have raised public cries for increased regulation of
healthcare costs.
0
1
2
3
4
5
Buyer
Supplier
SubstitutesRivalry
New Entrants
Porter's Five Forces Analysis:
Biopharma Industry
Source: Henry Fund Research
10. Page 10
Research and Development
Biotech is one of the most research-intensive industries in
the United States18
According to a 2014 report by PR
Newswire, biotech companies in the US have invested
more than $600 billion in R&D since the year 2000. It is
not uncommon for a firm to spend 15-30% of revenues on
R&D. Biotech is a constant race to stay ahead of the pack
and develop the next big drug, as such R&D dollars spent
is one of the most telling items on an income statement
with regards to future prospects of a firm.
INDUSTRY TRENDS
Mergers and Acquisitions
2015 was the year of M&A for Biotech companies. The
first 6 months saw $59.3 billion in deals (a 94% increase
over the same period in 2014). This has led some experts
to speculate that some major players are beginning to rely
more on M&A than R&D, which has traditionally been
done in house, allowing smaller companies to develop high
potential drugs and then purchasing them and
implementing them into their product line19
Immuno-
oncology was one of the key drivers to mergers in 2015,
which also saw a high value on diabetes treatment drugs.20
AbbVie-Pharmacyclic
Abbvie, one of the largest players in the Biotech industry
purchased cancer treatment company Pharmacyclics for
$21 billion. This move gives Abbvie a scientific and
commercial present in the oncology research space as well
as gaining the patent to Imbruvica a first-in-class
treatment for hematological cancers (a $24 billion global
market).21
Pfizer-Allergen (Canceled)
One of the most notable M&A proposals of 2015 was the
merger of Pfizer and Allergen would have formed the
world’s biggest drug company by sales. While the major
incentive for the merger was taxes (Pfizer would have
moved from US to Irish tax rates) the newly merged
company would have had annual sales of over $65 Billion
and would, no doubt impact the biotech landscape.22
Impact of M & A
Mergers and acquisitions have the potential of upsetting
some of the balance in the industry by making long-term
strategic forecasting more difficult. Traditionally if a
company were developing a new drug it would spend
years in the approval process, during which other firms
would be able to monitor the progress and brace for any
competitive threat. Under an M & A model a larger
company could scoop up a smaller company at the point
of patent granting and proceed to market and produce the
drug using their economies of scale and infrastructure,
leading it to be a much greater competitive threat than if
it were a smaller company with fewer resources.
Mergers and Acquisitions also further consolidate the
power of a few top firms in an industry that tends to be
dominated by a few powerhouse firms.
Gilead’s M&A Prospects.
We forecast a high likelihood of M&A in the next 10 years
for Gilead. With revenues nearly 5 times what they were
in 2010 Gilead faces the question of what to do with their
new cash reserves. Variable costs are quite low (COGS has
dropped from 20% of revenue to 10% in light of economies
of scale) and margins are quite high (profit margin
forecasted to be 49%, up from 27% in 2013). Surely a
0
2000
4000
6000
8000
R&D Spending Among Top Firms
GILD AMGN ABBV CELG BIIB Merck
0
10
20
30
40
R&D Spending as % of Revenue
GILD AMGN ABBV CELG BIIB MRK
Source: Factset
Source: Factset
11. Page 11
significant portion will be reinvested in R&D to ensure the
vibrant pipeline which is vital to their future success.
Another portion will be paid out to stockholders in the
form of dividends as Gilead seeks to keep investors happy
with their value in the absence of previous extreme
growth. We forecast dividends to increase by about $0.11
annually in keeping with revenue forecasts.
In spite of these costs Gilead still has more money than
they know what to do with. In 2015 they purchased $10
Billion in long-term marketable securities. We forecast
that the next 10 years will show Gilead making acquisitions
as they seek to pursue more immediate growth
opportunities than their 5-10 year pipeline can provide.
PEER COMPARISONS
While there are over 1,000 existing firms that would
classify themselves as biotech the majority of profitability
and market share in the industry is consolidated amongst
a smaller number of large firms. A study of the
competitive landscape gives a picture of potential future
profitability.
Several large firms may be in the same space but offering
different treatments for different diseases. This could
allow major companies to excel in the biotech industry
without and direct rivalry. Rivalry happens when two
companies market similar drugs against each other. Profit
margins can run anywhere from 20 – 50% so a price war
can significantly limit profitability. In the absence of
government regulation a look at the future pipeline for any
potential competing drugs are on their way can be an
indicator of trouble on the horizon.
The past 5 years have been very lucrative for major
Biopharma companies. Revenues have been steadily
growing amidst major developments in the biotech space
such as HCV cures and preventative HIV medication.
Gilead’s growth has been far out of proportion with the
current trends, seeing growth at a far greater rate.
Merck Pharmaceuticals
Merck represents the largest competitive threat to
Gilead’s current position. While not operating exclusively
in the Biotech industry, Merck’s has risen to the forefront
of Gilead’s competitors with their new HCV drug,
Zepatier. Throughout 2014 and 2015 Harvoni and Sovaldi
were the only effective HCV cures on the market,
commanding significant profits. Investors are now
speculative that Gilead can maintain strong profits with a
comparable product being offered at a nearly $20,000
discount. The majority lowered target prices by analysts
is due to their suspicions that Gilead’s profitability was
dependent on a near monopoly and that Zepatier will
spell the end of their run of profits.
Interestingly enough, Merck is the only one of Gilead’s
major peers we reviewed that has seen drops in revenues
over the past 4 years.
Abbvie Inc.
Abbvie Inc. formed in 2013 after separating from Abbott
Laboratories. AbbVie specializes in forming advance
therapies for complex and serious illnesses. 23
AbbVie, one
of the largest firms in the industry became even larger in
2015 when it acquired Pharmacyclic for $21 billion, giving
it further reach into developing and marketing therapies
for blood cancer. Being one of the largest players in the
industry means AbbVie is more likely to experience
heightened rivalries over competing drugs. Notable
-
10,000
20,000
30,000
40,000
50,000
GILD MRK AMGN ABBV CELG BIIB
Annual Growth Among Peers
2012 2013 2014 2015
0.00%
20.00%
40.00%
60.00%
80.00%
Profit Margin Operating Margin
Peer Margins
GILD MRK AMGN ABBV CELG BIIB
Source: Factset
Source: Factset
12. Page 12
skirmishes were AbbVie beating out Gilead for preferred
status from Express Scripts and the introduction of a
competing Hep C drug in 2016 that will directly compete
with Gilead’s Sovaldi, likely leading to a lowered price on
Gilead’s biggest money maker. Express Scripts is the
nation’s largest PBM and in losing them to Abbvie Gilead
lost out on 28% of the national PBM market.
Celgene Corporation
Celgene specializes in manufacturing cancer and
inflammatory disorder therapies.24
Significant drugs in
their product line include Revlimid, Pomalyst/Imnovid and
Abraxane which has found broad use in breast, lung and
pancreatic cancers in the United States. Celgene is
another leader that has slowed their investment in R&D,
seeing their R&D growth slow from 29.1% in 2013 down to
9.2%, although this should not be viewed as a sign that
they are not investing in their future pipeline. In 2014 In
April of 2015 Celgene made news when they announcd
they would begin a collaboration with Astrazenica to study
their Phase III cancer drug candidate, MEDI4736. Later
that same month Celgene acquired Quanticel for about
$485 million. Celgene is using mergers and acquisitions to
position themselves as a leader in cancer drug
development.
Celgene and Gilead have competed in the past in the
HIV/AIDS and cancer drug markets. More recently
Celgene’s purchase of drug company Avila could bring
them into the HCV market (Avila has two HCV drugs in the
research pipeline).
Amgen Inc.
Amgen Inc, based in California has grown to become one
of the world’s largest independent biotech companies. It’s
total revenues in the first quarter of 2015 were $5.03
Billion, (up 11% from 2014). It owns the patent to Enbrel,
Prolia, Epogen, Sensipar, and Xgeva. In spite of a strong
year changing foreign exchange rates negatively
influenced their product sales growth25
. Amgen leads the
industry in sales but their revenue growth was some of the
lowest among the top 8 (7.5%, explained in part but not
completely by their high revenue numbers from previous
years). They are also greatly slowed their R&D investment
growth (a 5% increase in 2014 vs. 21% in 2013). We feel
this could be a sign of problems down the line as Amgen
could be riding the tide of their star drugs while not
assigning an appropriate amount to R&D.
Biogen Inc
Biogen develops therapies for neurological autoimmune
and hematological disorders.26
One of Biogen’s star drugs
is Tecfidera, a treatment for multiple sclerosis. Tecfidera’s
revenues totaled $825 million, part of Biogen’s total MS
product line sales of $2.1 Billion. Although one of the
smaller players in the top 8 in terms of market cap Biogen
has seen strong revenue growth, seeing revenues increase
by 32% in 2013 and 46% in 2014.
Peer Comparison – Notable Items
It bears repeating that the Biotech Industry is one in which
a small number of companies profit while many others fail.
Because of that the small number of industry leaders
should not be considered the norm within the industry.
Gilead’s P/E (both trailing and forward) are notably lower
than their peers. This is largely due to investor speculation
as to whether Gilead’s growth has been a “flash in the pan”
and is unsustainable.
EPS P/E FY15 P/E FY16E
GILD 11.91 7.53 7.03
MRK 1.56 36.45 15.00
AMGN 9.06 16.26 12.07
ABBV 3.13 18.02 9.39
BIIB 15.34 17.57 13.11
CELG 1.94 53.74 14.18
Data Source: Yahoo Finance
Gilead’s ROA is extremely high, nearly twice as high as
their nearest competitor (BIIB). Gilead’s ROE is over 100%.
This towers over most competitor ROE’s which average
around 28% with the exception of Abbvie, which boasts a
155% ROE for 2015.
Gilead has the strongest profit margin of its peers, over
50%. These strong profit margins are indicative of the
premium prices that they have been charging over the last
2 years for HCV drugs as well as the efficient economies of
scale and low costs of drug production once patents have
been attained and R&D is complete.
13. Page 13
ROA ROE Profit Mar.
GILD 32.17% 103.61% 55.48%
MRK 5.14% 9.53% 11.25%
AMGN 7.73% 25.77% 32.03%
ABBV - 155.76% 22.50%
CELG 11.53% 26.92% 17.31%
BIIB 18.54% 35.60% 32.95%
Data Source: Yahoo Finance
One troubling note of comparison: R&D. While Gilead
leads its peers in revenue their R&D investments for 2015
are decidedly middle-of-the-pack. Amgen invested $4.3B
in R&D for 2015, Abbvie invested $3.3B. Gilead only
invested $2.9B, nearly on par with Celgene (who only saw
$7.6B in revenue). R&D investment is the heart of a
vibrant pipeline. Gilead’s lower relative investment in
R&D could signal expectations of growth through M&A in
the coming years.
Revenue R&D R&D/ Rev
GILD 24,890,000 2,854,000 11%
MRK 39,498,000 6,704000 17%
AMGN 20,063,000 4,297,000 21%
ABBV 19,960,000 3,297,000 17%
CELG 7,670,400 2,430,666 32%
BIIB 8,507,935 1,893,422 22%
Data Source: Yahoo Finance (figures are in thousands)
ECONOMIC OUTLOOK
GDP Growth
Prescription drugs (which include biotech drugs) have a
fairly strong correlation with the healthcare sector which
itself shares a strong correlation with the US GDP. An
analysis of the last 6 years of financial data shows that
Healthcare has consistently hovered at about 17.4% of the
GSP while prescription drugs have amounted to an
average of 9.6% of healthcare costs. This allows us to
forecast prescription drug expenditures as 1.6% of GDP.
Using government forecasts for GDP growth we can
forecast prescription drug expenditures steadily growing
by 4% (about $350 million) annually into the future.27
Data Source: Bureau of Economic Analysis
Data Source: Bureau of Economic Analysis
CATALYSTS FOR GROWTH
Population change.
More people in a given market logically increases the need
for medicine. According to the United Nation’s world
Population Prospects report the world population is
growing by approximately 74 million people per year. By
these estimates the world population will reach 9.0 Billion
by 2020 and 11 Billion by 2050.
It should be noted that while the bulk of this growth will
be in less developed regions, a notable exception is the
United States, with an expected increase of 95 million
people in the next 30 years (31% growth)28
Increasing Wealth
The wealthier people are the more health care they tend
to consume. The economic development of emerging
economies is of specific interest in this area as it will yield
0.0%
5.0%
10.0%
15.0%
20.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Health Care and Rx As a Percentage
of GDP
Health Care as % of GPD Rx as % of Healthcare
-
5,000
10,000
15,000
20,000
25,000
30,000
20162017201820192020202120222023202420252026
Projected GDP Growth
14. Page 14
an increase in healthcare consumption in markets that
may not currently be pursued.
Demographic Shifts
Aging populations consume more medication. The US
census department forecasts that by 2050 the number of
Americans over the age of 65 will increase from 43.1
Million to 83.7 million.29
An additional demographic is the increase in obesity. The
CDC reports that 34.9% of US adults are obese30
, leading
to conditions like heart disease, type 2 diabetes and
certain types of cancer. The market for diabetes related
biotech presents significant opportunities.
Cures for Untreatable / Incurable Diseases
Biotech offers the potential to treat and cure diseases that
currently offer no effective treatment options. The
exciting advances in biotech offer the potential to
introduced wholly unique offerings to this market facing
no competition. For example, if an effective HIV/AIDS
vaccination were developed every major government in
the world would purchase hundreds of millions of copies.
These speculations may seem to border on science fiction
but in light of the direction medical science is taking claims
for “miracle” drugs coming down major company pipelines
should be investigated and considered.
Number of People with Private Health
Insurance.
An increase in health insurance increases the purchasing
power of potential customers which will likely have a
positive impact on Gilead’s sales. The Affordable Care Act
of 2010 greatly impacted the Healthcare industry. The
ACA sought to lower healthcare prices through increasing
competition by creating a number of federal and state
health insurance exchanges. Additionally the ACA
mandated the purchase of private health insurance.
Individuals faced a tax penalty for not having private
insurance by 2015.31
As a result the number of uninsured Americans has seen a
marked drop. According to studies conducted by the
National Health Interview Survey the number of uninsured
Americans fell by about 8% to 41 million people in the first
quarter of 2014. This drop represents 3.8 million
Americans gaining private health insurance.32
INVESTMENT POSITIVES
Projected to maintain high levels of revenue into the
future.
Low costs deliver strong margins.
Robust pipeline is forecasted to deliver a more diverse
product line by 2020, protecting against future
situations like the Zepatier rivalry Gilead is facing.
High levels of cash reserves create opportunity for
increased dividends, R&D and M&A to expand product
line.
INVESTMENT NEGATIVES
Gileads most valuable brands are under attack from
substitutes. Unless Gilead is able to produce a new
drug far superior to Zapatier it is unlikely that their
high priced HCV drugs can run unchecked as they have
in the past.
Gilead’s high prices have attracted negative attention
from the government. They are in the process of being
sued by the state of New Hampshire for their high
prices. If the government chooses to step in and assert
price limits on a pharma company this year Gilead’s
HCV drug pricing have given them a fairly large target
on their back.
VALUATION
For our valuation model we used a 3 Year stock Beta of
1.362. We feel the past 3 years of market data best
represent the future firm and market conditions that will
create volatility for Gilead. We then calculated a WACC of
15. Page 15
8.54%. We assume a CV growth of 0.5% annually
beginning in 2021.
Revenue Growth:
Revenue growth over the next 5 years will be based on a
complex relationship between expiring product patents,
new drug debuts and competitive pricing. We forecast
that Gilead’s strong growth period is likely over but value
is poised to remain mostly stable, yielding between $28-
30 billion in annual profit through 2020. We forecast that
revenue, averaging about 2% annually before stabilizing in
CV and continuing at .5% growth. We base this model on
the following 3 upcoming major factors facing Gilead.
1. Price Adjustments in Response to Merck
Gilead must adjust its pricing model to compete with
Merck’s Zepatir or risk losing up to 75% of its market share.
We forecast the following actions on Gillead’s part:
Lowering the price of Sovaldi to match Zepatier
We expect that Gilead will lower the price of Sovaldi to
$54,000 for a 12-week treatment to match the price of
Zepatier. This will diffuse much of the danger of losing
market share to Merck, specifically with insurance
companies moving to a cheaper HCV drug. This will yield
a 35% reduction in sales revenue from Sovaldi. This price
drop may have favorable consequences for Gilead as well.
We predict a 10% increase in sales due to the new lower
cost. We also predict a 13% boost in Sovaldi sales due to
switchers from Harvoni (a 20% increase at 65% of the
original Sovaldi price yields an increase of 13%). This will
lead to a total revenue drop of $1.2B from Sovaldi revenue
(about 12%) in 2016. This is supported by recent action by
Gilead. In February of 2016 Gilead announced they would
be offering discounts and rebates up to 46% (though it’s
likely that not all discounts will be that significant).33
Gilead will keep Harvoni priced high at $94,500 for a 12-
week treatment.
Harvoni will remain the premier drug of choice for
Genotypes 2, 3, 5, and 6 (which Zepatier cannot treat).
This protects at least 25% of their sales from loss to
Zepatier. We predict a 20% drop in sales as customers
move from Harvoni to Sovaldi in response to the lower
prices. This is unfortunate but preferable than losing them
to Merck. This will yield total revenue drops of $2.2B of
Harvoni revenue about 20%) in 2016.
2. Upcoming Drug Launches
In the next year Gilead will release an All-Genotype Drug
that will capture major market share.
As mentioned earlier, one of the most exciting drugs in
Gilead’s pipeline is STR of Sofosbuvir, which just passed the
3rd
round of testing and is in the final stages of FDA review.
STR has shown a nearly 100% cure rate in all 6 variants of
HCV. This drug will quickly become a top seller. As a result
Sovaldi and Harvoni sales will fall in 2017 (STR will likely
launch in 4Q of 2016). In spite of this Gilead stands a good
chance to recapture lost market share from Merck as STR
boasts a higher cure rate than Zepatier. This drug could be
priced at two levels:
The first option is a broad, wide selling drug billed
as the “magic bullet” for all variants of HCV. Priced
somewhere between Sovaldi and Harvoni’s
current prices.
The second option is as an ultra-high premium pill
prescribed for the 2-5% of HCV patients for whom
all other dugs will be ineffective due to their HCV
being caused by the 5 and 6 variants of HCV.
In light of the fact that most cases of genotypes 5 and 6
occur in developing countries the more likely pricing
position is option 1.
Upcoming new HIV/AIDS medication will lead to
moderate (but not blockbuster) profits.
The final two drugs that have passed 3rd
round testing and
are currently in the FDA licensing process are F/TAF and
STR of R/F/TAF. Until Sovaldi/Harvoni, HIV/AIDS drugs
made up about 75% of total sales. That number has
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2013 2014 2015 2016E 2017E 2018E 2019E 2020E
Projected Revenue Growth
16. Page 16
dropped to a steady 33% in 2014 and 2015. We forecast
those percentages will remain steady into the future.
These new drugs will cover the lost revenues due to patent
expirations of Emtriva 2021) and the European expiration
of Atrilpla and Truvada (both in 2018). Additionally
Genvoya ill gain sales starting in 2016, extending the
profitability that would have been lost with the expiration
of Viread 2017).
3. Long-term Value of Once-a-Day Pills
Three major development in the treatment of HIV, HCV,
and HBV are the recent release of Genvoya (HIV) and the
future releases of TAF (HBC) and STR (HCV). These pills
consolidate an entire daily cocktail of drugs into a single
pill. From a financial perspective this is very advantageous
for Gilead. Traditionally HIV patients take 3 or more pills
per day. These pills could each be made by a different
company. In producing a one-a-day treatment pill Gilead
guarantees that the will provide 100% of this patients drug
needs. This is a better position for them than providing all
three of the individual drugs, as they are able to take
advantage of economies of scale.
Finally through treating chronic illness they maintain
revenue streams from customers on a long-term basis.
While a single patient taking Harvoni may pay a premium
price of $84,000 it is a one-time interaction with the
company as they will not need treatment again. The
lifetime value for HIV/HBV customers can prove to be
higher, even if the per pill price is much lower.
Operating Expenses Assumptions:
Between 2007 and 2012 COGS made up an average of 20%
of revenue34
, 2014 and 2015 saw that percentage fall to
10% (revenues in contrast increased by over 100%).35
This
is due to relatively inexpensive drug ingredients and
significant economies of scale. We expect this to remain
constant into the future and forecast COGS to remain at
10% of revenues. We expect R&D to remain a consistent
11% of revenue as Gilead’s pipeline of future drugs will
play a vital role in their future profitability. SGA will remain
consistent at 15.5% as it has for the last several years.
Capex will remain a low 2.5% of revenue as most of
Gilead’s costs are R&D and most of their assets are
intangibles.
Source: GILD 2015 10K
Profit Margin Forecasts
Gilead will enjoy Gross Margins of 90%, EBIT Margins of
59% and profit margins of 46.5%. This allows some room
for reduced prices in the face of increasing competition
but Gilead will need to offset these reductions by
increased sales volume to sustain revenues.
Source: GILD 2015 10K
Transition from growth to value
Gilead has begun the transition from a growth stock to a
valued stock. This is evidenced by their decision to issue
their first ever dividend in 2015. Further growth at the
current rate would be nearly impossible (to match 2014’s
growth rate Gilead would need to see $74 billion in
0%
5%
10%
15%
20%
25%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Historical Operating Costs as
Percent of Revenue
COGS Depreciation SGA
Amortization R&D
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
2013 2014 2015 2016E 2017E 2018E 2019E 2020E
Historic and Projected Margins
Gross Margin EBIT margin Profit Margin
17. Page 17
revenue in 2016). Additionally increased competition will
remove some of the premium pricing power that Gilead
has enjoyed on its HCV drugs. Gilead’s merit as a growth
stock will be dependent on their maintaining their
approximately $30 billion in annual sales in the years to
come.
Model Results
Our DCF/EP results reveal that according to our model the
market’s current price of $87.83ii is under-valuing GILD by
about $30 per share. This means Gilead has significant
upside. Our DDM gives a lower price of $92.73. While both
indicate undervaluation by the market we have opted to
use DCF/EP as our target price as Gilead only has a one-
year history of dividends. This makes it difficult to forecast
amounts and frequency of dividend increases and leads to
a less reliable forecast. Additionally we believe our
Relative P/E value of $138.79 is too high as it does not take
into consideration external factors such as speculation on
future earnings and competition.
Our Forecast vs. Analyst Consensus
Our target price of $118.23 and LT Growth rate of 0.5% are
similar to a consensus of analysts with the general
direction of Gilead’s future, however we adapt a more
optimistic outlook. An aggregate of 26 analyst opinions
gives Gilead a buy rating with a target price of $116.19 and
a LT Growth Rate of 0.1%. We account for that difference
price to our slightly higher CV growth rate (0.5% vs 0.1%) a
lower average tax rate (17% vs 17.5%) and slightly lower
COGS (10% vs 11.33%). We believe that Gilead’s HBV drug
and the potential for M&A will give Gilead a higher rate of
growth (albeit still low) than the average analyst estimate.
Additionally our EPS is 5% lower than estimates. This is
because we are slightly more conservative with the
number of share repurchases Gilead will make over the
coming years.
KEYS TO MONITOR
Medical breakthroughs by competitors. Specifically in
the areas of HCV/HBV, HIV/AIDS and Cancer. A more
effective treatment or cure designed by a competing
company would certainly have an adverse effect on
Gilead’s revenue.
Government legislation. Congressional legislation
pertaining to price ceilings, patent life changes and
relaxed biosimilar regulations would also have a
significant impact on the profitability of Gilead’s
products.
Success of Zepatier. Zepatier’s success will come
chiefly at the expense of Gilead’s Harvoni/Sovaldi
sales. Conversely, any setbacks that Zepatier would
have will positively impact Gilead. For example, a
recall of the drug could lead to an unexpected surge
for Gilead.
Gilead’s 2016 revenue numbers. If Gilead appears to
be slipping considerably, specifically in the HCV
medication segment, it could be cause for concern.
REFERENCES
1. Wikipedia: Gilead Sciences.
https://en.wikipedia.org/wiki/Gilead_Sciences
2. Mergent: Biotech Industry Analysis 2015. P.4
3. Hepatitis Foundation: About Hepatitis
http://www.hepatitisfoundation.org/HEPATITIS/Hepatitis-
C.html
4. Ibid.
5. Hepatitis C Society: Harvoni vs. Sovaldi
http://esofosbuvir.com/harvoni-medicine-even-better-
sovaldi/harvoni-vs-sovaldi/
6. Hepatitis B Foundation: Hep B epidemiology.
7. Ibid.
8. Gilead Investor Website
9. Pharma Times: “EU Reviews Gilead’s TAF for Hep B
Infection”
http://www.pharmatimes.com/Article/16-02-
26/EU_reviews_Gilead_s_TAF_for_hep_B_infection.aspx
10. AIDS.Gov: HIV/AIDS Basics
11. Ibid.
12. GILD 2015 10K
13. Wikipedia: HIV/AIDS Epidemiology
https://en.wikipedia.org/wiki/HIV/AIDS#Epidemiology
14. Hepatitis C Society: Harvoni vs. Sovaldi
http://esofosbuvir.com/harvoni-medicine-even-better-
sovaldi/harvoni-vs-sovaldi/
15. Ibid.
16. GILD 2015 10K
17. Mergent: Biotech Industry Analysis 2015. P.10
18. Mergent: Biotech Industry Analysis 2015. P.11
19. Forbes: Are M&A Replacing R&D in Pharma?
http://www.forbes.com/sites/nicolefisher/2015/04/22/are-
ma-replacing-rd-in-pharma/#5babfd0cb576
20. NatureReviews: Biopharma deal-making in 2015:
Changing the Pharma Landscape.
http://www.nature.com/nrd/journal/v15/n2/full/nrd.2016.
10.html
18. Page 18
21. Street Insider: AbbVie (ABBV) Announces Completion
of Pharmacyclics Acquisition
http://www.streetinsider.com/Corporate+News/AbbVie+(A
BBV)+Announces+Completion+of+Pharmacyclics+Acquisitio
n/10594347.html
22. Fortune: Pfizer, Allergan Confirm $160 Billion Merger
Deal.
http://fortune.com/2015/11/23/pfizer-allergan-merger/
23. Wikipedia: AbVie
24. Mergent: Biotech Industry Analysis 2015. P.4
25. Ibid.
26. Mergent: Biotech Industry Analysis 2015. P.5
27. Bureau of Economic Analysis: Healthcare Spending,
Prescription Spending, GDP Growth Forecasts.
http://www.bea.gov/
28. United Nations: World Population Estimates
http://esa.un.org/unpd/wpp/
29. US Census Website: An Aging Nation: The Older
Population in the United States
https://www.census.gov/prod/2014pubs/p25-1140.pdf
30. Centers for Disease Control and Prevention: Adult
Obesity Facts.http://www.cdc.gov/obesity/data/adult.html
31. IBISWorld
32. New York Times: “Number of Americans Without
Health Insurance Falls”
http://www.nytimes.com/2014/09/16/us/number-of-
americans-without-health-insurance-falls-survey-
shows.html?_r=0
33. Market Watch: Gilead to Discount its Pricey Sovaldi
Drug
http://www.marketwatch.com/story/gilead-to-discount-its-
pricey-sovaldi-drug-2015-02-04
34. GILD 2015 10K
35. GILD 2015 10K
1 Wikipedia: Gilead S ciences
https://en.wikipedia.org/wiki/Gilead_S ciences
2 Mergent p.4
3 http://www.hepatitisfoundation.org /HEPATITIS/Hepatitis-C.ht ml
4 EBID
5 Esofbuvir
6 HepB.org
7 Hepatitisfoundation.org
8 Gilead Investor Relations Website.
9 http://www.pharmatimes.com/Article/16-02-26/EU_reviews_Gilead_s_TAF_for_hep_B_infection.aspx
10 AIDS.gov
11 AIDS.gov
12 GILD 10K
13 https://en.wikipedia.org/wiki/HIV/AIDS#Epidemiology
14http://esofosbuvir.com/harvoni -medicine-even-better-sovaldi/harvoni -vs-sovaldi/
15 http://esofosbuvir.com/harvoni-medicine-even-better-sovaldi/harvoni -vs-sovaldi/
16 GILD 2015 10K
17 Mergent p. 10
18 Mergent p.11
19
http://www.forbes.com/sites/nicolefisher/2015/04/22/are-
ma-replacing-rd-in-pharma/#5babfd0cb576
IMPORTANT DISCLAIMER
Henry Fund reports are created by student enrolled in the
Applied Securities Management (Henry Fund) program at
the University of Iowa’s Tippie School of Management.
These reports are intended to provide potential employers
and other interested parties an example of the analytical
skills, investment knowledge, and communication abilities
of Henry Fund students. Henry Fund analysts are not
registered investment advisors, brokers or officially
licensed financial professionals. The investment opinion
contained in this report does not represent an offer or
solicitation to buy or sell any of the aforementioned
securities. Unless otherwise noted, facts and figures
included in this report are from publicly available sources.
This report is not a complete compilation of data, and its
accuracy is not guaranteed. From time to time, the
University of Iowa, its faculty, staff, students, or the Henry
Fund may hold a financial interest in the companies
mentioned in this report.
20
http://www.nature.com/nrd/journal/v15/n2/full/nrd.2016.10.
html
21
http://www.streetinsider.com/Corporate+News/AbbVie+(ABBV
![Important disclosures appear on the last page of this report.
The Henry Fund
Henry B. Tippie School of Management
Charles Schaller [Charles-Schaller@uiowa.edu]
Gilead Sciences (GILD) March 3rd, 2016
Healthcare – Branded Biopharmaceuticals Stock Rating Buy
Investment Thesis Target Price $115-120
We issue a BUY recommendation for Gilead Sciences. We believe that high
sales, a robust pipeline, low costs and the potential for M&A will cause Gilead
to outperform market expectations.
Drivers of Thesis
Gilead is transitioning from a growth stock to a value stock. This has
spooked some investors. Not knowing what to expect has led the market
to undervalue the stock. We forecast that short term revenues will fall by
about 2% per year before leveling off in 2020 and entering a continuing
growth of 0.5%.
Falling Costs amidst Rising Sales: As most of Gilead’s costs are related to
patents, intellectual property and R&D their COGS has decreased as a
percentage of sales while sales have risen significantly. This has led to low
costs and high margins which we forecast to continue. Our model reflects
this assumption with COGS at 10% of sales.
Strong pipeline of upcoming drugs: Gilead is expected to release 4 drugs
this year and 3 more shortly after 2020. Expected this year is a HBV
treatment which is as effective as Harvoni at curing the disease. We
forecast that these drugs will make up 11% of Gilead’s revenue for 2016
growing to 54% by 2020.
Risks to Thesis
Competitors Pipelines: More than 50% of Gilead’s revenue comes from
Hepatitis C medications. Their biggest threat to profitability is Merck’s new
HCV drug. We modeled this impact through reduced HCV drug revenues
due to lower prices in response to competition and lost sales due to
customers switching to Merck.
Government Intervention: Through forced price ceilings and truncated
patent periods the government could have a significant impact on Gilead’s
profitability. The news should be monitored for congressional policy
changes related to pricing, patents and biosimilars (generic
biopharmaceuticals)
Henry Fund DCF $118.23
Henry Fund DDM $92.73
Relative Multiple $138.79
Price Data
Current Price $88.03
52wk Range $81.89 – 123.37
Consensus 1yr Target $116.20
Key Statistics
Market Cap (B) $121.9
Shares Outstanding (M) 1,367
Institutional Ownership 81.4%
Three Year Beta 1.042
Dividend Yield 1.92%
Est. 5yr Growth -9.41%
Price/Earnings (TTM) 7.5
Price/Earnings (FY1) 7.3
Price/Sales (TTM) 4.2
Price/Book (mrq) 6.8
Profitability
Operating Margin 66.4%
Profit Margin 55.5%
Return on Assets (TTM) 34.9%
Return on Equity (TTM) 94.7%
Earnings Estimates
Year 2013 2014 2015 2016E 2017E 2018E
EPS $2.01 $8.33 $12.37 $10.92 $11.21 $11.22
growth 17.55% 314.40% 48.43% -11.73% 2.65% 0.01%
12 Month Performance Company Description
Gilead Sciences is a biopharmaceutical company
focused on research and development of
innovative medicines for uncured diseases.
Gilead’s current product line focuses on treating
HIV/AIDS, Hepatitis C, several types of Cancer as
well as inflammatory and respiratory diseases.
Gilead has had a stellar 3 year run, seeing triple-
digit revenue growth in 2014. Much of its success
is due to two star drugs: Solvadi and Harvoni.
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
M A M J J A S O N D J F
GILD S&P 500
7.5
94.7
23.0 24.8
40.6
19.4
0
20
40
60
80
100
P/E ROE
GILD Industry Sector
Source: GILD 2015
10K
Source: GILD 2015 10K](https://image.slidesharecdn.com/c87e03be-c99c-46ee-999a-0ce735787a43-160521193013/85/gild_s16-1-320.jpg)
