Ticker:
GILD
Industry: Biotech industry
Recommendation:
WATCH
I.
Company Overview
Pricing
Closing Price
52-wk High
52-wk Low
$ 40.37
$ 50 (7/30/09)
$ 39.9 (4/21/10)
Market Data
Market Cap
Total assets
$36.4B
$33B
Valuation
EPS (ttm)
P/E (ttm)
$3.11
12.95
Profitability & Effectiveness (ttm)
ROA
27.19%
ROE
47.15%
Profit Margin 38.35%
Oper Margin 52.36%
ANALYST NAME
Anh Phan
anpx93@mail.missouri.edu
Recommendation for GILEAD SCIENCES
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.
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.
I.
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.
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.
The company operates in one reportable segment with 11 approved products including Atripla,
Viread, Emtriva, Truvada, AmBisome, Hepsera, Vistide, DaunoXome, Tamiflu and Macugen.
II.
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.
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.
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.
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.
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.
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.
Market Share
Market
Major Player
Range
Pfizer, Incorporated
Merck
&
Incorporated
Share
17.0% (2009)
Company,
12.0% (2009)
Johnson & Johnson
12.0% (2009)
GlaxoSmithKline PLC
7.0% (2009)
Other
52.0% (2009)
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.
III.
SWOT Analysis
Strength
A leading position in the HIV market, driven by three products: Viread, Truvada, and key growth
driver, Atripla.
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.
Weaknesses
Despite diversification into cardiovascular, Gilead’s portfolio is still heavily reliant on one
disease area: HIV
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.
Opportunities
Letairis sales growth and darusentan offering therapy area diversity
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.
Elvitegravir’s promising launch candidate should add to dominant HIV franchise as an add-on
therapy, hence limiting sales cannibalization.
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)
Threats
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.
VALUATION
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.
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.
SHORT-TERM SOLVENCY RATIOS (LIQUIDITY)
Net Working Capital Ratio
30.32
Current Ratio
2.6
Quick Ratio (Acid Test)
1.6
Liquidity Ratio (Cash)
0.89
Receivables Turnover
5.8
Average Collection Period
62
Working Capital/Equity
46.2
Working Capital pS
3.27
Cash-Flow pS
3.17
Free Cash-Flow pS
1.78
FINANCIAL STRUCTURE RATIOS
Altman's Z-Score Ratio
Financial
Leverage
(Assets/Equity)
10.41
Ratio 1.5
Debt Ratio
34.4
Total Debt/Equity (Gearing Ratio)
0.20
LT Debt/Equity
0.20
LT Debt/Capital Invested
19.2
LT Debt/Total Liabilities
37.3
Interest Cover
51.4
Interest/Capital Invested
0.89
Patent Expiration
U.S. Patent
European Patent
Products
Expiration
Expiration
Vistide
2010
2012
Hepsera
2014
Letairis
2015
2015
AmBisome
2016
2008
Tamiflu
2016
2016
Macugen
2017
2017
Viread
2017
2018
2011
Ranexa
2019
Lexiscan
2019
2019
2020
Emtriva
2021
2016
Truvada
2021
2018
Atripla
2021
2018
Cayston
2021
2021
Sales by Drugs
% of
% of
% of
Total
Total
Total
Product
Product
Product
2009
Sales
2008
Sales
2007
Sales
$ 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%
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%
Antiviral products:
Truvada
Total
antiviral
products
Total
sales
product
$ 6,469,311
100%
$ 5,084,796
100%
$ 3,733,109
100%
Sources:
Data Monitor reports
Yahoo Finance
Google Finance
Morning star reports
Bigcharts.marketwatch.com