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Gilead Sciences, Inc. November 13, 2016 Student Investment Management Gilead Sciences, Inc. November 13, 2016 Gilead Sciences, Inc. NASDAQ: GILD BUY $92.00 The Fisher College of Business Student Investment Management Program is initiating coverage on Gilead Sciences with a BUY rating. Our target price is $92.00. Our implied P/E for 2016E is 7.9x versus consensus 6.5x. Our 2017 and 2018 estimates are 8.8x and 9.5x, respectively. Company overview Gilead Sciences, Inc. is a research-based biopharmaceutical Fund Manager company that discovers, develops and commercializes innovative Royce West, CFA medicines in areas of unmet medical need. Gilead strives to 614-227-2948 transform and simplify care for people with life-threatening illnesses [email protected] around the world. Gilead's portfolio of products and pipeline of investigational drugs includes treatments for HIV/AIDS, liver Analyst diseases, cancer, inflammatory and respiratory diseases, and Andrew Jasen cardiovascular conditions. 301-300-0702 [email protected] 12-Month trading performance 10.0% S&P Current share price: $72.64 7.0% 52 wk range: $71.76 - $108.13 0.0% S5HLTH Market cap: $99.9bn 1.4% P/E: 6.8x (10.0%) XBI (3.0%) Diluted shares out.: 1.3bn Last dividend (9/4/2016): $0.47 (20.0%) GILD Dividend yield: 2.4% (25.5%) Beta: 0.94 (30.0%) EV/EBITDA: 4.8x EV/Sales: 3.1x (40.0%) Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Investment thesis We are placing a BUY rating on GILD with a price target of $92.00, a 20.4% upside to the current trading price. This represents a 22.8% total return and is based on the following catalysts and reasons: GILD is fundamentally undervalued; GILD is very cheap at P/E of 7-8x 2017E EPS HCV upside will come with increased certainty and stabilization of the HCV business Continual innovation and expansion beyond HIV and HCV Significant near term cash generation, and aggressive share repurchase and dividend programs coupled with a conservative M&A strategy will create long-term shareholder value Risks The following factors could negatively affect GILD’s business and valuation: HIV generics entrance in 2018 HCV drug prices cut in the EU due to the entrance of competitive treatments Lackluster pipeline developments and M&A opportunities P a g e 1 | 20 Student Investment Management Gilead Sciences, Inc. November 13, 2016 Table of Contents COMPANY OVERVIEW ............................................................................................................... 3 MANAGEMENT OVERVIEW ............................................................................................................. 3 BUSINESS SEGMENTS .................................................................................................................. 4 PIPELINE ANALYSIS ...................................................................................................................... 7 M&A OPPORTUNITIES ................................................................................................................... 8 EXISTING AND TARGETED DISEASE MARKETS OVERVIEW ................................................................ 9 HEALTHCARE OVERVIEW AND TRENDS ........................................................................................ 10 INVESTMENT THESIS ............................................................................................................... 12 GILEAD’S VALUE WITHIN THE BIOTECHNOLOGY SECTOR ............................................................... 12 Q3 2016 UPDATE AND 2016 OUTLOOK ....................................................................................... 13 COMPANY FINANCIALS ............................................................................................................... 14 VALUATION AND PRICE TARGET .................................................................................................. 15 RISKS TO RECOMMENDATION ............................................................................................... 17 CONCLUSION ............................................................................................................................ 17 APPENDICES ............................................................................................................................. 18 REFERENCES ........................................................................................................................... 19 P a g e 2 | 20 Student Investment Management Gilead Sciences, Inc. November 13, 2016 Company overview Gilead was founded in 1987 in Foster City, California. The company has grown to become one of the world’s largest biopharmaceutical companies, with more than 8,000 employees across six continents (with operations in 30 countries). Gilead completed its initial public offering raising $86.25mm on 1992. In 2015, revenues and market capitalization exceeded $32bn and $179bn, respectively. Gilead has signed non-exclusive licenses with multiple generic manufacturers, granting them rights to produce generic versions of certain medicines for HIV/AIDS and hepatitis B and C (HBV and HCV). Partners have also been granted rights to produce generic versions of new Gilead therapies once they receive U.S. regulatory approval. Gilead has licensed generic manufacturers to provide treatments to 101 resource- constrained countries. Those countries have over 100mm people with chronic HCV. Gilead was the first pharmaceutical company to sign an agreement with the Medicines Patent Pool, which is working to increase global access to high-quality, low-cost antiretroviral therapy through the sharing of patents. The Patent Pool has been granted similar licensing terms for Gilead HIV medicines as the generic manufacturing partners. Patient access programs are increasing business development success. Gilead is actively involved in several community partnerships. In 2010, Gilead launched the FOCUS Program, which partners with healthcare providers, government agencies and community organizations to develop programs to routinize HIV screening and linkage to care. Gilead is now expanding the FOCUS model to hepatitis B and C, with the goal of expanding to other markets and abroad. These programs ultimately help Gilead with new patient starts by getting potential patients into their treatment pool as fast as possible. In the United States, Gilead has put in place comprehensive patient access programs. This includes providing medicines to eligible patients at no charge and offering a co-pay coupon program for patients with private insurance, regardless of income. Management overview John F. Milligan, PhD: President and CEO Dr. Milligan has led teams that have developed, manufactured and commercialized more than 20 new therapies for significant unmet needs. He has managed multiple transformative acquisitions, licensing agreements and financings, helping the company grow into a worldwide organization reaching more than 10 million patients. John C. Martin, PhD: Executive Chairman Dr. Martin served as Chairman and Chief Executive Officer from June 2008 through March 2016 and President and Chief Executive Officer from 1996 through May 2008. Prior to joining Gilead, he held several leadership positions at Bristol-Myers Squibb and Syntex Corporation. Norbert W. Bischofberger, PhD: EVP, R&D CSO Dr. Bischofberger joined Gilead Sciences in 1990 and has served as Executive Vice President for Research and Development since 2000 and Chief Scientific Officer since 2007. Prior to joining Gilead he was a Senior Scientist in Genentech’s DNA Synthesis Group from 1986 until 1990. Kevin Young, CBE: COO Mr. Young served as EVP of Commercial Operations from 2004 through 2014, and from 2014 to 2016 served as senior advisor to the company. Prior to Gilead, he spent more than 20 years in the biopharmaceutical industry, first with ICI Pharmaceuticals and subsequently with Amgen, holding numerous positions in Europe and the United States, including Head of the U.S. Inflammation Business Unit. P a g e 3 | 20 Student Investment Management Gilead Sciences, Inc. November 13, 2016 Business segments Gilead derives revenues from product sales and royalty, contract, and other revenues. Products This segment is further split into antiviral and other products. Antiviral products treat viral infections rather than bacterial ones. The commercial portfolio of antiviral products focuses on HIV, liver diseases, hematology/oncology, cardiovascular, inflammatory/respiratory, and other treatments. In 2015, 34% of product sales were generated outside the US. HCV Slowing HCV patient treatments in the US, HCV patient starts Europe and Japan, since Harvoni was launched, is indicative of the rapid initiation of treatment for many warehoused patients. In addition, lower 60 52 30 33 33 average net selling prices for HCV products is 31 primarily a result of a shift towards payer 14 35 31 19 segments in the US that receive higher rebates 37 15 26 30 29 and discounts and towards countries with lower 29 21 average net selling prices in Europe. A continued 62 59 gradual trend toward shorter duration of HCV 47 52 54 53 treatments is expected and a decline in market share due to increased competition in the future Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 is eminent. US Europe Japan RoW Harvoni - sales accounted for 46% and 9% of total antiviral product sales for 2015 and 2014, respectively. In the United States, the decrease was primarily due to lower sales volume compared to Harvoni’s early launch levels during the prior year and a lower average net selling price. The number of
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