GILD: Gilead Sciences Inc. – Equity Research Report
Equity Research Report
Nicholas C. LiBassi
Student Investment Management
November 12, 2013
GILEAD SCIENCES INC.
Recommendation:
BUY
Price Target:
Current Price:
Upside Potential:
$84.47
$67.51
25.1%
Healthcare Analyst
Nicholas C. LiBassi
(216) 513-8267
libassi.3@osu.edu
NASDAQ: GILD
Company Description
Gilead Sciences, Inc., is a biopharmaceutical company that
discovers, develops, and commercializes human therapeutics for
the treatment of life threatening diseases in North and South
America, Europe, and Asia Pacific. Gilead’s products are primarily
focused toward the treatment of HIV/AIDS as well as
cardiovascular disease, liver disease, respiratory disease, and
Hepatitis C to name a few. The company was founded in 1987 and
is headquartered in Foster City, California.
Investment Thesis
I am initiating coverage on Gilead Sciences Inc. with a rating of
“BUY” and a 12-month target price of $84.47. This target
represents potential upside of 25.10%. Gilead Sciences Inc.
(henceforth referred to as “Gilead”) is well positioned within the
biotechnology industry to continue growth. Gilead has strong
momentum heading into 2014 stemming from positive third
quarter earnings results, strong sales growth in existing products,
and the excitement surround the release of the revolutionary
Hepatitis drug, Stribild. Increasing competition within the biotech
sector should be countered by Gilead’s ability to consistently
innovate and produce “best in class” therapeutics.
Market Data:
Market Capitalization: $103.3B
Shares Outstanding: 1.53B
Dividend & Yield: N/A
Beta: 0.92
52 Week Range: $35.56-$73.20
Financial Data (TTM):
Revenue: $10.67B
Revenue Growth (qtrly yoy): 14.70%
Gross Margin: $7.23B
Operating Margin: 40.38%
Earnings Per Share: $1.82
Trailing P/E: $37.08
GILD Trailing 12 Month Performance
GILD
67.51
Opportunities





Imminent release of new Hepatitis C drugs Sofosbuvir
Expansion and proliferation of new and existing drugs into
underdeveloped markets
Strong research and development as well as strategic
acquisitions ability
Consistent sales growth on existing products
Strong product pipeline
GILD vs. S&P 500 YTD Growth
GILD
108%
SPX
29%
Risks




Increasing competition in the biotech space
Patent expirations and generic availability
Consistent regulatory risk from the FDA
Exchange rate risk exposure
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GILD: Gilead Sciences Inc. – Equity Research Report
Nicholas C. LiBassi
Table of Contents
Gilead Sciences Company Overview………………..……………………………………………………………………3
Business Analysis...……………………………………………………………………………………………………………..3
Recent Product Releases………………………………………………………………………………………………….4
Product Pipeline……………………………………………………………………………………………………………..4
Acquisitions……………………………………………………………………………………………………………………5
Competitive Landscape..……………………………………………………………………………………………………..5
Competitive Outlook……………………………………………………………………………………………………….6
Third Quarter Earnings Results…………………………………………………………………………………………..6
Investment Thesis………………………………….……………………………………………………..……………………..7
Opportunities………...…………………………………………………………………………………………………………..7
Risks and Risk Management………………………………………………………………………………………………..7
Financial Analysis……………………………………………………………………………………………………………….8
Equity Valuation: Comparative Multiples……………………………………………………………………………..8
Financial Analysis……………………………………………………………………………………………………………….9
Equity Valuation: Discounted Cash Flow Analysis………………………………………………………………11
Summary and Recommendation……………..…………………………………………………………..……………..12
Appendices……………………………………………………..………………………………………………………………….13
Appendix I: Income Statement Forecast……………………………………..………………………………………13
Appendix II: Itemized Forecast………………………………………………………………………..…………………14
Appendix III: Discounted Cash Flow Valuation……………………………………………………………………15
Appendix IV: Sensitivity Analysis…………………………………………...……..…………………………………...16
Appendix V: Sources…………………………………………………………………………………………………...…….17
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GILD: Gilead Sciences Inc. – Equity Research Report
Nicholas C. LiBassi
Gilead Sciences Company Overview
Gilead Sciences was originally formed in August 1987 under the name of “Oligogen Inc.” as the project of by
San Francisco venture capital firm Menlo Ventures. Gilead was established with the intention to innovate and
market antiviral drugs. Gilead went on to launch a successful IPO in 1992 and is now a leading
biopharmaceutical specializing in human therapeutics used in the treatment of HIV/AIDS, respiratory
disease, liver disease, and influenza.
Gilead has a strong history of strategic acquisitions which have led to further product development and
expansion into the treatment of a greater scope of diseases. While the majority of company revenues are
generated in the United States, Gilead has a strong presence throughout Europe and Asia as well.
Business Analysis
Gilead operates in one business segment which focuses on the discovery, development and
commercialization of biopharmaceutical therapies. All products are included in one segment due to the
majority of products sharing similar economic and other characteristics, including the nature of the products
and production processes, type of customers, distribution methods and regulatory environment.
Currently, Gilead has fifteen products on the market, with the majority of products used in the treatment of
HIV/AIDS. Further, Gilead has over twenty different biopharmaceutical therapies that are in various phases
of testing in their product pipeline. The current product offerings and their categories are shown in the table
below:
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GILD: Gilead Sciences Inc. – Equity Research Report
Nicholas C. LiBassi
The two products responsible for driving revenue are the antiviral drugs Atripla and Truvada. Combined,
these two drugs were responsible for 83% of total antiviral sales in fiscal year 2012. Antiviral sales as a whole
are the key revenue driver for the firm, with antivirals being split into two categories, HIV/AIDS and liver
diseases (Hepatitis C). Antiviral sales comprised nearly 87% of total product sales in fiscal year 2012, making
Atripla and Truvada directly responsible for 72% of product sales.
Truvada was released in 2004 as a fixed dose combination of two exisiting drugs. More recently, in July 2012,
Truvada was approved by the FDA as the first drug shown to reduce the risk of contracting HIV infection.
The recent approval has further expanded the market for Truvada as it is now prescribed as a preventative
measure for people at a high risk of contracting HIV through sexual activity. Atripla was approved by the FDA
in July 2006 as a once daily single tablet regimen for the treatment of HIV, which combined the Sustiva
(Brisol-Meyers Squibb) and Truvada into one product.
Other notable products include Tamiflu, which is the leading antiviral prescribed for the treatment of
influenza and AmBisome which is used as an intravenous treatment for systemic fungal infections. Letaris
and Ranexa are their leading non-antiviral drugs and are prescribed for the treatment of hypertension and
angina, respectively.
Recent Product Releases
In August of 2011, Gilead released Complera as a treatement for HIV-1 for patients who have never
taken medication for HIV-1 prior. One year later in August 2012, Gilead released Stribild, which is a
fixed dose combination of four drugs and also used as a treatment for HIV. Complera and Stribild are
the two current growth leaders, with Complera sales up 112% versus Q3 2012 and up 144% versus
FY 2012. Stribild is now having significant sales after its release last year, with 722% growth on the
quarter and 1,816% on the year.
Product Pipeline
Gilead currently has over twenty products throughout various stages of development. The most
promising product pending imminent release is Sofosbuvir which is used in the treatment of
Hepatitis C. Sofosbuvir is highly anticipated and is reason for much excitement for investors as the
Hepatitis C treatment market is currently wide open.
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GILD: Gilead Sciences Inc. – Equity Research Report
Nicholas C. LiBassi
Sofosbuvir a Front Runner in Untapped Hepatitis C Market,
Expected Release Early 2014
Sofosbuvir was picked up by Gilead during early phase trials with the acquisition of Pharmasset in
2011. Sofosbuvir was unanimously recommended for approval (15-0) by an FDA advisory committee in
October 2013, which made the front runner is the Hepatitis C race. The drug has a targeted final approval
date of December 8th, 2013 and is pending additional approval in the European Union, Austrailia, Canada,
New Zealand, Switzerland, and Turkey. In their recent third quarter earnings call, Gilead discussed their
preparations for the imminent release of the drug which include mobilizing sales and launch teams for the
promotion of the drug as well as ramping up manufacturing facilities to be able to handle the demand.
The market for Hepatitis C treatment is massive and widely
underserved. It is estimated that 130 million to 150 million people are infected
worldwide. In the US, there are approximately 3 million to 4 million people
infected with Hepatitis C in the US, but less than 60,000 are being treated,
according to Gilead. Current treatments take up to a year of therapy and only
help approximately 75% of patients whereas Sofosbuvir has been proven to
help up to 90% of patients in as little as 12 weeks. Initial pricing for the drug is
expected to reach $85,000 per patient per year in the United States, with sales
estimates of $1.85 billion in 2014 and peak sales estimated at $5 billion.
“Sofosbuvir has sales
estimates of $1.85
billion in 2014, and
peak sales estimated
at $5 billion.”
Sofosbuvir offers higher a higher cure rate with less toxicity and a shorter duration for treatment
than a pair of medicines from Merck and Vertex Pharmaceuticals that was approved two years ago. It is also
effective at treating more genotypes of the disease than its leading competitor, Simprevir, which is also
pending imminent release from Johnson & Johnson. Gilead holds the patent on Sofosbuvir through 2029,
avoiding all threats from possible generic proliferation in the foreseeable future.
Acquisitions
Gilead has been able sustain growth through strategic acquisitions as well as organically. Since 1999,
Gilead has acquired twelve companies which have added significant capabilities and value to the firm.
In 2006, Gilead acquired Corus Pharma, Inc. and Myogen, Inc. for roughly $2.9 billion. The acquisition
of these two firms solidified Gilead’s entry into the respiratory and cardiopulmonary treatment
arena, and led to the release of Flolan, Letaris, and Cayston. In 2009, Gilead acquired CV Therapeutics,
Inc. for $1.4 billion, adding the drugs Ranex and Lexiscan to their product offerings. From 2010 to
2011, Gilead acquired three companies in an effort to expand research and development further into
oncology. Gilead’s largest and most important acquisition was Pharmasset, Inc. in 2011 at a cost of
$10.4 billion to gain the Hepatitis C treatment Sofosbuvir.
Competitive Landscape
One of the biggest risks in the biotech and pharmaceutical industries is competition. The threat of new
entrants is low due to the strict FDA regulations, capital intensive structure, and necessary research and
development capabilities creating high barriers to entry. The power of buyers is low for new drug releases
and doesn’t increase significantly until generic drug proliferation after the expiration of twenty year patents.
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GILD: Gilead Sciences Inc. – Equity Research Report
Nicholas C. LiBassi
These factors combine to make a concentrated industry dominated by few major players. Gilead’s most
formidable competition comes directly from specific drug offerings by competing firms that have potential
to erode Gilead’s market share. In the HIV/AIDS market, Gilead is by far and away the leader in market share
and sales. GlaxoSmithKline and Bristol-Meyers Squibb also have many product offerings for the disease,
however, Gilead has commercialized all three of multiclass combination products on the market, leaving
competitors offering only single treatment drugs far behind. Additional competition occurs in the nonantiviral space that Gilead has entered with the cardiopulmonary therapies Renaxa and Letaris. Gilead faces
direct competition from both Pfizer and Roche Holdings AG, who both manufacture brand name and generic
competing drugs.
Competitive Outlook
The biggest concern as far as future competition goes is the emergence of competitors within the
Hepatitis C space. As of right now, Gilead is likely to be the first to market with a revolutionary drug
to treat the disease, Sofosbuvir. Furthermore, Sofosbuvir has proven to have a wider scope of
treatment than its competitor from Johnson & Johnson, Simprevir, which will be released to the
market soon as well. Merck is also in Phase II of a drug for Hepatitis C as well, but is a couple years
behind both Johnson & Johnson and Gilead. As the market for Hepatitis treatment is realized and
entered by additional competitors, drugs with the highest efficacy will prove to win sales.
Looking into the future of Gilead’s competition and market share, I believe Gilead will continue to
stand strong amongst its competitors. Gilead has been highly proactive about acquisitions, buying
firms with strategic advantages like intellectual property and research that allows Gilead to expand
product offerings and enter new treatment markets. Gilead’s products are also “best in class,” with
many treatments having higher success rates than competition, in addition to ease of use and
decreased side effects for patients.
Third Quarter Earnings Results
On Tuesday, October 29, 2013, Gilead filed SEC form 10-Q announcing impressive third quarter profits.
Overall, net profit was up 17% and Gilead raised its outlook for full year sales as revenue and demand for the
flagship HIV drugs exceeded expectations. Earnings per share came in at $0.52 on the quarter which beat
analyst estimates by $0.04. Sales of leading HIV drugs Atripla and Truvada rose four percent and one percent,
respectively. Further, as previously mentioned, sales of newer HIV offering, Complera, more than doubled,
and newly released Stribild has had positive reception in the market, grossing $144 million on the quarter.
In total, revenues were up 15% to $2.78 billion, beating analyst estimates of $2.72 billion. Gilead is carrying
a great deal of momentum into Q4 2013 as well as Q1 2014, with high expectations of significant growth to
be sustained throughout the coming year.
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GILD: Gilead Sciences Inc. – Equity Research Report
Nicholas C. LiBassi
Gilead Sciences Investment Thesis
Opportunities
Gilead is in prime position to capitalize on numerous growth opportunities in the coming year. The first, and
most important opportunity to come in 2014 will be the release of Sofosbuvir, which will be the first to
market and likely have massive first year sales in addition to a very positive outlook on sales growth into the
future. It is estimated that 130 to 150 million people are infected with Hepatitis C worldwide, while only 40
million are infected with HIV/AIDS, making the Hepatitis C market 3-4 times larges that the HIV/AIDS market
that Gilead currently dominates. An additional opportunity is for Gilead to expand and proliferate both new
and existing drugs into underdeveloped markets. While it is estimated that 26 million out of the 40 million
HIV/AIDS population are candidates for treatment, Gilead currently only reaches 4.2 million patients with
their current HIV/AIDS offerings. Expansion is currently underway into South Africa as well as the Middle
East, which will provide consistent organic growth to already successful products. In the future, additional
opportunities will arise for strategic acquisitions, which Gilead will have to be able to recognize and capitalize
on before competition to continue to grow the firm by expanding product offerings. Additional growth
opportunities arise from drugs currently in development, specifically in the field of oncology.
Risks and Risk Management
There are numerous risks to consider to when rating the Gilead, however, many are risks are systematic to
the healthcare sector and the biotech industry. A major risk to consider is patent expiration on intellectual
property protecting Gilead’s products. Patents on pharmaceuticals are issued with a twenty year nonrenewable term. After twenty years, the intellectual property is available for any generic drug manufacturers
to use. This risk however, is not exclusive to Gilead, and actually affects all of its competitors. Gilead mitigates
this risk by continuously innovating new drugs to improve and replace older less effective products. Gilead’s
top selling products Atripla, Truvada, Complera, and Stribild all have patent expiration occurring in 2021 or
later, creating no immediate threat to sales, pricing, or market share.
The other major systematic risk within the industry comes from the FDA regulatory procedures. Release of
drugs into the market requires years of testing and trials in order to gain approval. In order to capitalize on
new markets, opportunities have to be seen far in advance to allow time for regulatory proceedings. In
addition, large expenses are made on products that will eventually be rejected for approval due to inefficacy
or safety issues. Like intellectual property risk, FDA regulatory risk is experienced by all firms within the
industry and cannot be avoided.
Another large risk is macroeconomic in nature involving foreign exchange rates. With 40% of Gilead sales
coming from overseas, Gilead is exposed to a significant amount of exchange rate risk when repatriating
profits to the United States. However, Gilead is actively involved in various risk management operations
including exchange rate hedging and currency forward contracts.
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GILD: Gilead Sciences Inc. – Equity Research Report
Nicholas C. LiBassi
Equity Valuation: Comparative Multiples
Absolute Basis
On an absolute basis, Gilead is currently trading above all 10-year historic medians, and is close to
the historic high values of some multiples. I believe the multiples are above median values due to the
recent growth of Gilead, in addition to the anticipated growth expected through the release of
Sofosbuvir, as well as the expansion of sales of newer HIV products Stribild and Complera. While a
significant amount of future growth potential is reflected in the current stock price, I believe Gilead
still remains undervalued, as investors are risk adverse and conservative in valuing the future growth
of the firm. Gilead is arguably in the highest growth phase of the company’s existence to date. Looking
into 2014, I believe multiples will continue to rise, setting new high values and gradually increasing
the median values as large increases in sales and earnings from their high growth products are
realized and absorbed into the market.
Relative Basis
Predictably, with Gilead outperforming the S&P 500 and the Healthcare Sector since the recession in
2008-2009, Gilead multiples are above their historic medians. Gilead is part of the Biotechnology
industry, which has been the highest performing industry within the healthcare sector in the recent
past. When comparing Gilead to its industry, multiples are less inflated, either slightly above historic
medians or at and even below median values. In justification of Gilead having higher trailing P/E and
price/cash flow than the median, Gilead has outperformed most other biotech firms since the
recession. Gilead actually appears to be undervalued compared to its industry, having price/sales,
price/book and forward P/E at or below median industry values, when they should likely be well
above median given the firms performance relative to its peer group.
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GILD: Gilead Sciences Inc. – Equity Research Report
Nicholas C. LiBassi
Gilead Trailing P/E Relative to Biotechnology Industry – Trailing 10 Years
Financial Analysis
Gilead’s current financials are indicative of a firm experiencing high levels of growth. While Gilead’s current
ratio is 1.4 indicating moderate short-term ability to meet financial obligations, their quick ratio of 0.8 is
actually quite low, showing uncertainty and concerns with liquidity. Looking at closer, the firm currently has
a 35% long term debt to total capital ratio, shows that the firm is decently levered, which is expected as they
are using the leverage to sustain growth and infuse additional capital into growth-oriented operations. Gilead
is excelling with accounts receivables, with current average days in collections at 66, which is below the
historical median of 70. Inventory turnover is on par with the historical median at 1.3x. Return on equity
peaked during the financial crisis, which is expected as Healthcare tends to outperform during recessions.
However, return on equity is still quite high at 31.4%. Gilead’s gross margin is on par with competitors, while
there quarterly growth vastly exceeded all competitors, who for the majority flat lined.
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GILD: Gilead Sciences Inc. – Equity Research Report
Nicholas C. LiBassi
Gilead Return on Equity – Trailing 10 Years
Competitor and Industry Analysis
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GILD: Gilead Sciences Inc. – Equity Research Report
Nicholas C. LiBassi
Equity Valuation: Discounted Cash Flow Modeling
In order to recommend a 52-week target price, forecasts were done using historical income statements for
the trailing five years. A discount rate of 12% was used, due to the high uncertainty of future cash flows.
While it is certain that cash flows will continue to growth in the near term, the degree of growth is somewhat
less certain. A terminal growth rate of 4% was used with the expectation that Gilead will continue to innovate
new therapies and expand treatments into new categories of diseases.
My valuation differs slightly from consensus mainly due to predictions in top line revenue growth. Overall,
my earnings estimates are slightly greater than consensus, with my target price of $84.47 above the median
analyst estimate of $80.00. Sensitivity analysis of the discount rate and growth rate showed positive upside
ranging from 3% to 62% at every value within one percent of the both the discount rate and growth rate.
Please see Appendix 1-4 for detailed calculations and projections.
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GILD: Gilead Sciences Inc. – Equity Research Report
Nicholas C. LiBassi
Summary and Recommendation
To conclude, I do recommend a BUY for Gilead Sciences Inc., with an estimated 52-week target price of
$84.47 based on discounted cash flow analysis of income projections, representing 25.1% upside on the
current stock price of $67.51. My recommendation is given with the following considerations:
Opportunities





Risks
Imminent release of new Hepatitis C drugs
Sofosbuvir
Expansion and proliferation of new and
existing drugs into underdeveloped markets
Strong research and development as well as
strategic acquisitions ability
Consistent sales growth on existing products
Strong product pipeline




Increasing competition in the biotech
space
Patent expirations and generic drug
availability
Consistent regulatory risk from the FDA
Exchange rate risk exposure
GILEAD SCIENCES INC.
Price Target:
Current Price:
Upside Potential:
$84.47
$67.51
25.1%
Healthcare Equities
Nicholas C. LiBassi
NASDAQ: GILD
(216) 513-8267
nick.libassi@gmail.com
RECOMMENDATION: BUY
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Appendix 1: Income Statement Forecast
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GILD: Gilead Sciences Inc. – Equity Research Report
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Appendix 2: Itemized Forecast
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GILD: Gilead Sciences Inc. – Equity Research Report
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Appendix 3: Discounted Cash Flow Valuation
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GILD: Gilead Sciences Inc. – Equity Research Report
Nicholas C. LiBassi
Appendix 4: Sensitivity Analysis
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GILD: Gilead Sciences Inc. – Equity Research Report
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Appendix 5: Research Sources
Yahoo Finance: http://finance.yahoo.com/q?s=gild&ql=1
Securities and Exchange Commission: http://www.sec.gov/cgi-bin/browseedgar?CIK=gild&Find=Search&owner=exclude&action=getcompany
http://www.sec.gov/Archives/edgar/data/882095/000088209513000015/a2012form10-k.htm
http://www.sec.gov/Archives/edgar/data/882095/000088209513000046/q313form10-q.htm
Thomson Reuters Baseline Software
Seeking Alpha: http://seekingalpha.com/article/1815682-gilead-vs-challengers-in-the-hepatitis-c-race?source=yahoo
http://seekingalpha.com/article/1828292-will-gilead-sciences-be-able-to-continue-its-growth-trajectory?source=yahoo
http://seekingalpha.com/article/1800802-invest-in-gilead-sciences-for-long-term-hepatitis-c-franchise?source=yahoo
Motley Fool:
http://www.fool.com/investing/general/2013/11/10/mercks-exciting-anti-virus-pipeline.aspx
http://www.fool.com/investing/general/2013/11/01/gilead-sciences-and-johnson-johnson-push-vertex-ou.aspx
http://www.fool.com/investing/general/2013/10/29/1-booming-biotech-that-didnt-disappoint-this-quart.aspx
Gilead Sciences Inc.: http://www.gilead.com/
Forbes:
http://www.forbes.com/sites/edsilverman/2013/11/11/will-the-new-hepatitis-c-drugs-trigger-a-battle-overcost/?partner=yahootix
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