San Jose State University – Team Gold

recommendat

ion

BUY$101.77 $120.96

15.86%

2015 2016

• Emerging Leader in Hepatitis C Market

• Market Leader in the HIV Market

• Robust drugs pipeline

2

Gilead Sciences

Business DescriptionGilead Sciences, Inc. (GILD) is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need.

HIV/AIDS

Oncology

HBV/HCV

Cardiovascular

Respiratory

Other

Market ProfileClosing Price ($) $101.77

52 week Range ($)

$99.92 - $116.83

Daily Volume

Shares Outstanding

1.49 Billion

Market Cap ($)

Forward P/E

P/B

EV/EBITDA

0

20

40

60

80

100

120

0

500

1000

1500

2000

2500

Stock Price Movement

GILD S&P

3

Company Strategies

Research and Development

Collaborative Relationships

Patent Protection

• Medical Research Institutions • Assist in Development & Commercialization

• Bottoms up approach• Best-in-class drugs

• Preserve trade secrets• Defend against infringement

4

Revenue Breakdown

Product Portfolio

Ranexa®

Letairis® Complera®

Truvada®

Atripla®

Harvoni®Stribild®

Sovaldi®

51%42%

7%Product Revenue

HCV

HIV/Aids

Other Products

Figure 3 Product Revenue Breakdown (Company Data)

5

Revenue BreakdownUnited States and Europe Region =

89% of product Revenue

USAHarvoni ($2 billion)

Solvaldi ($8.5 billion)

Atripla ($2.4 billion)

Truvada ($1.8 billion)

Europe Harvoni ($0.1 billion)

Solvaldi ($1.5 billion)

Atripla ($0.8 billion)

Truvada ($1.3 billion)

US69% = $16,859 billion 20% = $4,841 billionEU

Macroeconomic Data

GDP (USD/Ca

pita)

GDP Expected

growth rate (%)

Net National Income

(USD/Capital)

Household disposable

income Annual Growth Rate

(%)

Health Spending (USD/Ca

pita)

Health Spending

(%) of GDP

Life expectancy

at birth (Years)

Overweight or obese

population

Pharmaceutical spending

(USD/Capita)

United States

$46,930 3% 44461 2.1% 7662 16.9% 78.7 63.5% 885

Italy $33,893 1% 28525 -4.4% 2477 9.2% 82.3 46% 397

Turkey $14,495 4% N/A N/A 728 5.4% 74.6 52% N/A

Spain $32,804 1.9% 27133 -5.2% 2424 9.3% 82.5 52.7% 399

7

Population Size

Hepatitis C VirusWorldwide 130 million chronically infected

HIV/AIDSWorldwide 35 million

living with HIV

United StatesInfected: 3.2 million

Infection Rate: 16,500/year

European RegionInfected: 8.6 million

Infection Rate: 30,607/year

United StatesInfected: 1.2 millionInfection Rate: 50,000/year

European RegionInfected: 1.72 millionInfection Rate: 136,235/year

Threat of New Entrants

Bargaining Power of Buyers

Bargaining Power of SuppliersThreat of Substitutes

Rivalry

0

5

8

Competitive Positioning

Strong earnings potential

Aggregate market share of 11%

Compounded growth rate of 27% over previous

8 years

Robust pipeline

9

Competitive Positioning –

Hepatitis C

5.63%

2.25%

1499 million

8 yrs

28.80%

61.20%

10.00%

U.S. Market Share

Sovaldi Harvoni Other

10

Competitive Positioning – HIV

5.63%

2.25%

1499 million

8 yrs

11

Competitive Positioning – Insurance

Providers

Exclusivity Contracts

Must Cultivate Relationships

12

Competitive Positioning – Expansion into

Europe

HCV market penetration Europe

Product pricing Strategies

Estimated market

share1 Million

Mergers &

Acquisitions

NeXstar Pharmaceuticals $550M

2006

1999

2003

2007

2009

2010

2011

2013

2015

Triangle Pharmaceuticals $464M

Corus Pharma Inc. $365M

Myogen, Inc. $2.5B

Raylo Chemicals, Inc. $148M

Nycomed fr. Atlanta – Cork $47M

CV Therapeutics, Inc. $1.4B

CGI Pharmaceuticals $120M

Arresto Biosciences, Inc. $225M

Calistoga Pharmaceuticals $375M

Pharmasset, Inc. $10.4B

YM Biosciences, Inc. $510M Phenex

Pharaceuticals $470M

Timeline & Price

14

ValuationMethod: Discounted FCFF Valuation Model

Strong growth in short term but since

the treatment is curable, no impact on the long term

revenues and growth rate.

Stable source of revenue fro Gilead. Historically a

market leader in the segment and trend is expected to continue.

A steady growth of revenues fro Gilead. A small percentage but a

stable one

Largely determined by HIV drugs market and other

products in the portfolio. Impact of Hepatitis C market is very little.

Hepatitis C HIV Other drugs Terminal Value

The assumptions of the revenues for these sources are based on the team estimates and

computations.

15

Key AssumptionsBased on team estimates and market data

WACCDescriptions. The WACC is computed by estimating the cost of debt based on the most recently issued 10 year bond by Gilead. The cost of equity is computed using the CAPM model and the beta is estimated using the regression method.

Long term growth rate

Descriptions. The long term real growth rate for US is estimated to be 2% and that of EU as 2.5%. The growth rate for Gilead is the average of these two rates since these are the biggest markets for them.

Weighted Avg Shares

Descriptions. This data is sourced from Yahoo Finance as of 02/22/2015.

Short term growth rate period

Descriptions. The short term growth rate period of 8 years is based on the time it is estimated to saturate the Hepatitis C market. This is computed based on the number of patients expected to be treated with Gilead’s drugs.

5.63%

2.25%

1,499 million

8 yrs

16

Revenue Estimations ( Data)Revenue estimates ( YOY predictions for first stage FCFF model)

Growth Rate Explanation

2014 2015 2016 2017 2018 2019 2020 2021 2022 20230

2000

4000

6000

8000

10000

12000

14000

16000

0

5000

10000

15000

20000

25000

1088812076 12596

13899 13884

1097412210

1364012239

6892

1176 1216 1257 1300 1344 1390 1437 1486 1536 1588

12410 12629 1344514930

1713718293

2001222107 21444 20800

HIV Remaining Products HCV

17

FCFF CalculationsProjecting the target stock price

Growth Rate Explanation

Firm Value 198261.4

MV Debt 16102

Equity Value 182159.4

Shares Outstanding 1499

Target Price 121.5206

Increased Free Cash Flow Paid Down Debt

Share Repurchase Program

Declared Dividends

Free Cash Flow

Financial Analysis

DuPont ROE

Industry Average: 22.6%

Asset Turnover Ratio

Profit MarginIndustry Average: 41.7% Levera

ge (Assets

/Equity)

2014 2015 2016 2017 2018 2019 2020 2021 2022 202345%

47%

49%

51%

53%

55%

2014 2015 2016 2017 2018 2019 2020 2021 2022 20230.00

0.50

1.00

1.50

2.00

2.50

3.00

2014 2015 2016 2017 2018 2019 2020 2021 2022 20230.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

2014 2015 2016 2017 2018 2019 2020 2021 2022 20230%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Financial Analysis

2014 2015 2016 2017 2018 2019 2020 2021 2022 20230%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Gross margins Operating margin Net Profit

Profitability

Liquidity

Solvency

2014 2015 2016 2017 2018 2019 2020 2021 2022 20230.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Quick Ratio Current Ratio Cash Ratio

2014 2015 2016 2017 2018 2019 2020 2021 2022 20230

0.10.20.30.40.50.60.70.80.9

Debt/Equity Debt/Assets

Investment RisksRisk Matrix

Market RiskPricing Caps in International Markets

Restricted Growth in International Markets

Foreign Exchange Volatility

Exclusivity Contracts

Operational RiskProduct Pipeline Failure

M&A Execution

Dividend Payout Risk

Legal RiskLitigation Risk

Patent Infringement Risk

Regulatory RIskHealthcare Reform Risk

Dividend Payout Risk

Litigation Risk

Restricted Growth in

International Markets

Pricing Caps in International

Markets

Foreign Exchange Volatility

Healthcare Reform Risk

Exclusivity Contracts

M&A Execution

Product Pipeline Failure

Patent Infringement

Risk

Risk Severity

Risk

Pro

babi

lity

Final Recommendation

Recommendation

BUY$101.77 $120.96

15.86%

2015 2016

• Market Leader in the HIV & HCV Market

• Strong Earnings Potential

• Robust drugs pipeline

APPENDIX

24

FCFF AssumptionsRevenue estimates

Growth Rate ExplanationFCFF Inputs Adjustments

EBIT The revenue from HCV segment is slashed by 85%. Remaining revenues are expected to grow at the long term growth rate

Tax Rate Tax Rate is assumed to be constant throughout the valuation based on the most recent 10K

D&A % of revenues

WC ( DELTA) Balance sheet estimates

CapEx % of the revenue

FCFF FCFF is computed at WACC of 5.63%

PV of FCFF Total Firm Value

25

Revenue Estimates ( First Stage FCFF)Short Term Growth Rate Assumptions & Computations

Growth Rate Explanation

Product Growth Rate Explanation

Harvoni & Sovaldi -

Revenue estimates are based on the number of patients treated per year. The numbers are based on the 2014 data and our estimates

Atripla 8 Historical CAGR for last 5 years

Truvuda 6 Historical CAGR for last 5 years

Viread 10 Historical CAGR for last 5 years

Complera 15 High growth rates since it’s a key product in the segment.

Stribild 20 High growth rates since it’s a key product in the segment.

Letaris 26 Historical CAGR for last 5 years

Other Products 3 Based on historical growth rates ( CAGR for last 5 years)

Note: The growth rates are applicable till the patent expiration year. Once the patent expires, the revenues are slashed by 85% next year and expected to remain constant thereafter.

26

HCV Population in European Region

CountryTotal Population

SizeAnti-HCV positive

individuals (number)

Italy 60,053,442 3,122,779

Turkey 71,517,100 1,072,757

Spain 45,858,172 916,563

France 64,351,000 836,563

Romania 21,498,616 752,452

Poland 38,135,876 724,582

United Kingdom

61,634,599 431,442

Germany 82,050,000 328,200

Greece 11,257,285 112,573

Bulgaria 7,606,551 98,885

Netherlands 16,486,587 65,946

Belgium 10,754,528 64,527

Sweden 9,256,347 37,025

Total

8,564,294

60% of HCV population in Europe is in

Italy, Turkey, and Spain

2.7x HCV patients in Europe than the

US