Student Investment Management , 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

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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

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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 ’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 , holding numerous positions in Europe and the United States, including Head of the U.S. Inflammation Business Unit.

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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 patients that started treatment with Harvoni in the United States peaked in the first half of 2015, as many warehoused patients initiated treatment after the product launch. Cheaper genotype 1 treatments by AbbVie and Merck have forced Gilead to boost discounts.

 Sovaldi - sales accounted for 17% and 45%, of total antiviral product sales for 2015 and 2014, respectively. Net product sales decreased primarily due to volume declines in the United States with patients being prescribed Harvoni instead of Sovaldi. That decline was partially offset by volume increases in Japan and Europe as Sovaldi is still being launched in various countries.

 Epclusa - sales for the three and nine months ended September 30, 2016 accounted for 9% and 3% of total antiviral product sales, respectively. Epclusa was launched in the United States and Europe in June and July 2016, respectively.

HIV Continued strength in HIV and other product sales is primarily driven by the continued uptake of tenofovir alafenamide (TAF)-based products, Genvoya, Descovy and Odefsey. Favorable revisions to the rebate reserves, primarily related to our tenofovir disoproxil fumarate (TDF)-based products aid results. TAF treatments have proven increased efficacy and decreased toxicity to current drugs in the market.

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Student Investment Management Gilead Sciences, Inc. November 13, 2016

US share in HIV treatment naive patients 100% 76% 80% 62% 60%

40% 30%

20% 13% 10% 9% 6% 4% 2% 0% On a Gilead Gilead STR Genvoya Stribild Truvada Complera Odefsey Atripla Descovy HIV product Q2 2014 Q2 2015 Q2 2016

 Atripla – sales accounted for 10% and 15% of total antiviral product sales for 2015 and 2014, respectively. The decrease was primarily due to a decline in sales volume as doctors prescribed newer regimens, including TDF- and TAF-based regimens (Complera/Eviplera and Stribild). A generic version introduced by BMS has a gross margin of 0% and will be introduced into the US in 2017, which might add to pricing pressure, however Atripla is a superior treatment.

 Complera/Eviplera – sales accounted for 5% of total antiviral product sales in both 2015 and 2014. Sales jumped due to an increase in sales volume in the US and Europe. The increase was primarily due to a favorable revision to rebate reserves of $89 million. However, lower sales volume as a result of the continued launch of our new TAF-based products partially offset the volume increase. In the US, it captured 9% of naïve HIV patient share and is the fourth most prescribed HIV regimen.

 Stribild – sales accounted for 6% and 5% of total antiviral product sales for 2015 and 2014, respectively. Sales jumped due to an increase in sales volume in the US and Europe. In the US, sequential and YoY increases reflect a one-time favorable adjustment of rebate reserves partially offset by switches to Genvoya. It is able to capture 13% of naïve HIV patient share and was the number two most prescribed HIV regimen across all treated patients.

 Viread – sales accounted for 4% and 5% of total antiviral product sales for 2015 and 2014, respectively. Sales increased due to increased sales volume in the US and other international locations. Outlook is wary due to new TAF-based regimens that have less toxicity.

 Truvada - sales accounted for 11% and 15% of total antiviral product sales for 2015 and 2014, respectively. The overall increase was primarily driven by a higher average net selling price and higher sales volume, primarily driven by increased usage for PrEP. Truvada is currently the only drug promoted by the CDC to treat PrEP, which helps it capture 10% and 23% of naïve HIV patient share in the US and Europe, respectively.

 TAF (Genvoya, Descovy, Odefsey) - sales of the recently launched TAF-based regimens for the three and nine months ended September 30, 2016 accounted for 10% and 6% of our total antiviral product sales, respectively. Genvoya was launched in the United States and Europe in November 2015. Descovy was launched in the United States and Europe in April 2016 and is the first HIV backbone approved in more than a decade. Odefsey was launched in the United States in March 2016 and launched in Europe in July 2016.

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Student Investment Management Gilead Sciences, Inc. November 13, 2016

The market’s receptiveness to TAF treatments is obvious, shown with Genvoya’s success. Stribild, Atripla, and Complera are all blockbuster drugs, and over the past 11 months, Genvoya has outpaced the number of patient starts and new prescriptions per month. This only further enhances the HIV business in the long- term, exemplifying Gilead’s hold on the HIV market.

Royalty, contract, and other

Royalty, contract and other revenues primarily includes royalty revenues from Roche for sales of Tamiflu. This sometimes-blockbuster drug is the only approved drug for fighting influenza.

Product competition

HCV

 Harvoni and Sovaldi compete with Viekira Pak marketed by AbbVie, Zepatier marketed by Merck, Daklinza marketed by Bristol-Myers Squibb (BMS), and Olysio marketed by Janssen.

HIV

 Genvoya, Stribild, Complera/Eviplera, Atripla and Truvada all compete primarily with products from ViiV Healthcare, which markets fixed-dose combination products.  Generic versions of Sustiva, a component of Atripla, entered Canada and Europe. Some pricing pressure related to the Sustiva component of Atripla has weighed on margins. Anticipated competition from generic efavirenz will be introduced in the US in December 2017.

HBV and others

 Viread and Hepsera face competition from Baraclude marketed by BMS.  Other products compete with Tyzeka/Sebivo marketed by .  Tamiflu competes with Relenza marketed by GSK and products sold by generic competitors.  AmBisome competes with Vfend marketed by and a product developed by Merck that is marketed as Cancidas in the United States and as Caspofungin elsewhere. There are also at least three lipid formulations that claim similarity to AmBisome.

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Student Investment Management Gilead Sciences, Inc. November 13, 2016 Pipeline analysis

The portfolio of marketed products includes a number of category firsts, including complete treatment regimens for HIV infection available in a once-daily single pill and the first oral antiretroviral pill available to reduce the risk of acquiring HIV infection in certain high-risk adults. EU Regulatory Submission Gilead’s TAF alternative to TDF has increased antiviral efficacy and improved laboratory markers of renal and bone safety. In November, Genvoya, the first TAF-based STR for HIV, was approved by the FDA and European Commission (EC). Odefsey, Gilead’s second TAF-based STR, received FDA approval in March 2016 and has been submitted for regulatory review to the EC. Three other TAF- based HIV treatments are in development including F/TAF—a potential new HIV treatment backbone to be used in combination with other antiretroviral medicines—was submitted for regulatory review to the FDA and EC in 2015. Lastly, Gilead initiated a Phase III program for GS-9883, the company’s proprietary integrase inhibitor, combined in an STR with F/TAF. This will complement strong projected TAF growth and partly help address intermediate-term top line concerns.

GS-9620 (TLR-7) for HBV is a large factor in Gilead’s longer term outlook. Phase II data in treatment-naïve patients is expected in 1Q17, which, if positive, could support a potential Phase III program and improve sentiment on Gilead shares.

Given what management views as a limited area for future innovation, it is clear that development going forward will be away from HCV— potentially in HBV (which could be meaningful), oncology (which is less clear), NASH and inflammation.

Announced that the EC granted marketing authorization for Truvada to reduce the risk of sexually acquired HIV among uninfected adults at high risk, a strategy known as pre-exposure prophylaxis, or PrEP. Truvada was approved by the European Medicines Agency in 2005 for use in combination with other antiretroviral agents for the treatment of HIV and is currently the most prescribed antiretroviral medicine in Europe as part of combination therapy.

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Student Investment Management Gilead Sciences, Inc. November 13, 2016 The European Commission granted marketing authorization for Epclusa, the first pan-genotypic, STR for the treatment HCV. Epclusa is also the first STR approved for the treatment of patients with HCV, without the need for RBV. Physicians also have the flexibility to consider the addition of RBV. The marketing authorization followed an accelerated review procedure by the European Medicines Agency, reserved for medicinal products expected to be of major public health interest.

Gilead also announced topline Phase II results for Selonsertib in NASH, PAH, and DKD. Selonsertib demonstrated anti-fibrotic activity in an open-label Phase II clinical trial. Gilead plans to initiate the Phase III study in 1Q17.

Ultimately, Gilead’s internal pipeline is robust, and their work with CROs and past commercialization efforts have been rather successful. All of these indications have large markets and Gilead currently has drugs in Phase III trials or are entering Phase III trials in 2017. A vital aspect of these developments to note, is that out of the 11 drugs that are in Phase III trials already or that have been submitted for approval, over 70% are for previously untargeted indications. Investor concerns heavily lay on HCV uncertainty, lower than expected growth, and potential price cuts. Introductions to these new indications will assuage investor concerns over growth areas and Gilead’s ability to continually generate monster cash flows.

US pertinent patent expiration schedule Sovaldi Stribild

Atripla Sovaldi Tamiflu Genvoya Harvoni AmBisome Viread Truvada Complera 2014 2022 2030

M&A and opportunities

April 4, 2016: Gilead acquired Nimbus Apollo (a wholly-owned subsidiary of Nimbus Therapeutics) for a $400mm upfront payment with $800mm in potential milestone value. Nimbus Apollo is developing the leading ACC inhibitor program, which, if successful, would greatly complement Gilead’s existing NASH treatment research.

Gilead priced $10bn of multi-tranche debt in September 2015, from management’s perspective to aid the share repurchases, but a “side” use is for M&A capabilities to build up cash piles.

Gilead is operating a “string of pearls” M&A strategy. Management R&D spend is focused on acquiring small, early-phase drugs at the right price, $1,200 instead of looking at potential large, portfolio-changing transactions. $1,040 With the recent discontinuation of the Ulcerative Colitis (UC) and $981 $1,000 Crohn’s programs and recent update on NASH, clarity on the $779 $769 external M&A strategy might have emerged. Strategic acquisitions $800 $713 in those fields, NASH or later stage oncology assets, are probable, but it is clear that the price must be right. $600 Gilead’s HCV cash flows are declining and R&D (both internal and $400 in the form of external milestone payments which increased Q2 2016 by $200mm) commitments are starting to taper, signifying that $200 management may be gearing up for a significant acquisition after $0 all. This financial move is clearly to make room on their balance Q3 Q4 Q1 Q2 Q3 sheet and income statement. In addition, share buybacks have been 2015 2015 2016 2016 2016 front-loaded so far in 2016.

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Student Investment Management Gilead Sciences, Inc. November 13, 2016 Existing disease markets outlook

HIV The HIV market remains highly attractive in terms US HIV market dynamics of global, novel drugs. Asian manufacturers are circumventing US and EU patent laws. Prices are 1,400 bound to decrease with the entry of such 1,218 manufacturers, thereby potentially increasing the 1,200 1,062 Up 9% volume of therapeutics in the market. The North 1,000 American HIV market is the highest valued market 838 800 globally and occupies more than 50% of the global 659 revenue generated from HIV antiviral products; this 600 87% is followed by the EU at 30%. Growth in these regions is mainly attributed to high affordability of 400 drugs along with a range of health insurance 200

coverage. Developing markets large and growing (Estimated patients thousands)in population sizes are promising targets, however 0 unavailability of affordable drugs is the key HIV infected Diagnosed On On a Gilead antiretroviral HIV product hindrance to proliferation. On the other hand, the treatment recent uptick in the Asia-Pacific is a positive sign.

HCV North America is one of the fastest growing HCV drug markets across the world with more than 40% share of the total revenue generated in 2015; the US is the largest revenue contributor. Government funding for drug development will continue to play an essential role in the growth of US HCV treatments. Europe was the second major market for HCV in 2015. Global demand for HCV drugs was valued at $11.8bn in 2015 and is expected to reach $27.6bn by 2021.

HBV The value of the global HBV therapeutics market will increase modestly over the next 6 years, from almost $3 billion in 2014 to $3.5 billion by 2021, representing a 2.3% CAGR. The US, which has one of the largest shares of the HBV treatment market, will see considerable migration from high-prevalence countries, such as the Philippines, China, and Vietnam. While immigration will enlarge the patient pool, HBV treatment market expansion will be restricted by prophylactic vaccination in the US and much of Europe. Overall low diagnosis and treatment rates due to the asymptomatic nature of the condition and a lack of awareness, coupled with current drugs serving the market adequately, further growth is hindered. Leading brands treating the condition are also facing competition from generic drugs as major patents approach expiry.

Targeted disease markets outlook

 NASH - the NASH therapeutics market is expected to reach $20.3bn by 2025. NASH is becoming much more common due to increasing American obesity. In the past few years, the rate of obesity has almost doubled in adults and tripled in children. Obesity also adds to diabetes and high blood cholesterol, which can further complicate the health of people suffering from NASH. Diabetes and high blood cholesterol are also becoming more common among Americans.  Oncology – a sustained surge in innovative therapies has driven the global oncology market to $107bn in 2015. Growth in global spending on oncology therapeutics and supportive care drugs increased 11.5%. Annual global growth in the oncology drug market is expected to be 7.5–10.5% through 2020, reaching $150bn. Wider utilization of new products—especially immunotherapies— will drive much of the growth.  Chronic Lymphocytic Leukemia (CLL) – the CLL market is expected to grow at a 19.2% CAGR from 2016 – 2020. Development of combination therapies is expected to boost market growth. A key growth driver is the special regulatory designations offered to certain drugs (i.e. Orphan drug

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Student Investment Management Gilead Sciences, Inc. November 13, 2016 and fast-track approval statuses). A small number of patients imply a smaller addressable market for these drugs, therefore covering R&D costs profitably could prove arduous.  Ulcerative Colitis and Chron’s – Approximately 1.9bn patients have been diagnosed with UC globally, with 1.5bn patients currently receiving treatment. Traditional therapies have yielded $4.2bn in annual global sales, a figure expected to increase to $6.9bn by 2022 with the approval of various pipeline drugs. CD has a smaller global prevalence, with only 1.3mm patients diagnosed and 0.8mm who currently receive treatment. Still, traditional therapies have resulted in an impressive $3.2bn in annual global sales which is predicted to increase to $4.2bn by 2022.  Rheumatoid Arthritis (RA) – Over the 2013–2020 forecast period, the global RA market is expected to increase at a 4.1% CAGR, from $14.3bn to just over $19.0bn. Market growth is projected to vary considerably across the eight major regulatory zones. It is estimated to affect approximately 4.9 million people across those major markets.  Gastric cancer – the treatment market will experience rapid growth, from $1.1bn in 2014 to $4.4bn by 2024, representing an impressive 14.6% CAGR. It is likely that there will be over 410k cases of gastric cancer in 2024, rising from just over 350k in 2014, due to an aging population.  Myelfibrosis  Long QT-3 Syndrome

All of the existing and targeted indications have favorable fundamental drivers backing their growth. Global patient access is increasing and Gilead will be able to leverage their global salesforce as well as European and Asian manufacturing and licensing partners to take full advantage. The market has been extremely excited and bullish on opportunities within NASH and Oncology. As those are likely areas to increase R&D efforts (and more likely through acquisition), the pipeline will provide more upside than the market is pricing into Gilead’s depressed stock price. Although a lot of Gilead’s targeted indications aim at existing treatment markets the new antiviral and other product sales will aid their overall portfolio volatility.

Healthcare Overview and Trends Relative Valuation YTD S&P S5HLTH Delta (Healthcare Index – S&P) Median Current Median Current Median Current P/E 19.18x 20.11x P/E 20.60x 19.04x P/E 1.42x (1.07x) P/B 2.79x 2.81x P/B 3.70x 3.54x P/B 0.91x 0.73x P/S 1.87x 1.92x P/S 1.72x 1.65x P/S (0.14x) (0.27x) EV/EBITDA 12.54x 13.13x EV/EBITDA 13.65x 13.07x EV/EBITDA 1.11x (0.06x)

Healthcare industry breakdown: Healthcare industry breakdown: historical EV/EBITDA historical P/E

25.0x 35.0x

20.0x 30.0x

15.0x 25.0x

10.0x 20.0x

5.0x 15.0x

0.0x 10.0x Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2015 2015 2015 2015 2016 2016 2016 2015 2015 2015 2015 2016 2016 2016

Large Pharma Managed Care Large Pharma Managed Care Hospitals Supply Chain Hospitals Supply Chain Medical Devices Biotech Medical Devices Biotech

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Student Investment Management Gilead Sciences, Inc. November 13, 2016 Demographic trends provide a foundation for strong future earnings and growth for health-care companies. A 2015 study by the U.S. Census Bureau found that, with global populations aging, the developed world is aging the quickest. Long-term care spending as a percentage of GDP will increase and therefore provide more opportunity for Gilead to capitalize. The proliferation of chronic diseases is having serious repercussions in both developed and emerging countries. Meanwhile, the fight against communicable diseases continues, especially in developing countries. Also, population access to health care clinicians, facilities and treatments varies widely around the globe – from simplistic as infrastructure basics, to complex as issues with cost containment. Underlying market forces to decrease costs remain strong and increased competition within categories will elicit pricing pressure earlier in the life cycle of newly introduced drugs. However, creating competitive pressure to lower prices takes longer time. Patient group backlash, further consolidation among buyers and employer insistence that PBM’s manage absolute, not relative, costs would further increase pricing pressure. A bright spot in this trend is that breakthroughs and new drugs will experience a much more diluted competitive environment.

President-Elect Donald J. Trump

Throughout the past 18 months, Hillary Clinton and Bernie Sanders have been strong adversaries for biotechnology stocks, as they promised to cap drug prices and lower healthcare payers’ drug costs, placing enormous topline headwinds to biotechnology and other pharmaceutical companies. Some of Clinton’s suggested policies included removing tax reductions for drug marketing, shorter exclusivity periods for biologics, and granting Medicare negotiating power just to name a few. This gave added fire to state propositions, but California saw the most impactful. Proposition 61, which was ultimately voted against, proposed to allow consumers to pay the same prices for drugs and pharmaceutical products as members of the VA (which pay an extreme discount to normal retail prices). As a result of these proposals alongside separate public pressure seen from companies like , the industry saw a selloff as Clinton strode into election-day as a favorite to take the Presidency. This can be seen with the peak valuations in 2015 and sharp declines since. The markets were reacting to the pending changes to the market dynamics for the healthcare industry and biotech’s in particular as they would face major, yet uncertain, headwinds.

However, on November 8th, the country spoke and Donald J. Trump emerged as President-Elect. It is premature to predict how the new administration will reshape the healthcare system, however, we can rely on certain pledges and literature published during the campaign as a fallback. Trump has backed Medicare negotiation and reimportation (although reimportation remains impractical), but has been rather inactive on drug price inflation. This will relieve short-term margin pressure. Since Election Day, a major biotech ETF (XBI) has risen ~15% due to Trump’s pending and ultimate victory. Throughout the campaign Trump promised to completely repeal Obamacare, however, in recent days, he has mentioned maintaining non- specified aspects of the legislation. If he does follow through with the repeal, the risk of declining patient volumes will be a major problem until the administration can come up with “something better”. The general lower corporate tax and ability to repatriate dollars at a 10% tax rate will also help pad companies with large international operations bottom-lines. Trump also aims to make the process of garnering FDA approval for indications that target an area of unmet need or is potential life-saving easier and faster. Trump’s general business-friendly policies mean potential tailwinds for industry profits.

Ultimately, a Trump presidency seems advantageous for healthcare and biotechnology companies. To reiterate, it is hard to predict what legislation his transition team pushes through to Congress, however, relying on previous sentiment, biotech’s stand to not necessarily benefit, but at least recover to pre- campaign levels. Gilead’s major presence in the specialty drug and disease market, mixed with unique treatments that have plenty of time until patent expiration, signifies that it is positioned well to garner more favorable market sentiment than it has faced since the election.

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Student Investment Management Gilead Sciences, Inc. November 13, 2016 Investment thesis

Gilead’s value within the biotechnology sector

Biotech drugs continue to gain traction in the life sciences sector. Treatments for RA, HCV, and cancer generate the most sales. Biotech drug sales estimated $289bn in 2014 and are projected to grow to $445bn by 2019. In addition, biotech’s share of worldwide prescription drug and OTC pharma sales is projected to increase from 23% in 2014 to 26% in 2019. With the significant growth of specialty drugs, biotech companies are seeing increasing investment activity.

Generics and manufacturers Demand for generic drugs should continue to rise as payers pursue avenues to reduce costs. In the US, generic drugs already comprise about 70% of the pharma market by volume. Generics are taking a larger share of total global medicine spend, increasing from 27% ($261bn) in 2012 to 36% ($421bn) by 2017. Generics challenge branded drug companies — who face revenue and market share loss— and generic drug manufacturers—who may have difficulty expanding their production capacity to meet demand—will pose a risk to those who fail to include generics in their own portfolios. A challenge for generic pharma companies is that emerging market firms are growing at an increasing rate. Development and sales of , are beginning to accelerate as well. The worldwide biosimilars market is expected to reach $25 - $35bn by 2020.

Biotechnology equity performance Biotech stocks, while struggling this year, were a main driver of the broader health-care sector’s rise in the past eight years. The Nasdaq Biotechnology Index has climbed 256%. The gains were a result of increased commercialization and marketing, innovation, and new drug approvals by the FDA. The FDA approved 45 novel drugs in 2015 and 41 in 2014, compared with an average of 25 annually from 2005 to 2013. As of mid-May in 2016, US biotechs’ cumulative market value had fallen by nearly a third from its peaks in 2015.

1-Year trading performance of the 7-Day trading performance: bitoechnology sector election effects 10.0% 30.0%

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(10.0%) 15.0% (15.0%)

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(35.0%) 0.0% Nov-15 Feb-16 May-16 Aug-16 Nov-16 11/3 11/5 11/7 11/9 11/11

Global biotechnology revenues rose 13% in 2015 to $133bn, versus an 18% increase in 2014. Meanwhile, biotech R&D spend increased 16% to $40bn, only slightly below its 17% jump in 2014. The R&D expense growth is significant because it suggests an increasing willingness to bet on developing internal pipelines. The market was overly-bullish on the sector’s ability to maintain the growth (primarily driven by Gilead). Once management teams of the biotech companies (like Gilead) started to discuss “slow-downs” in earnings call towards the end of 2015 and beginning of 2016, the market reacted correctly and a sell-off began. However, the sell-off was dramatic and left the sector fundamentally undervalued. Ultimately, the

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Student Investment Management Gilead Sciences, Inc. November 13, 2016 industry is now trading at unwarranted depressed levels. When those same companies that drove the growth started to slow, the fundamentals did take a downturn, but not by the same amplitude as the sector sell-off that occurred; and that is especially true for Gilead.

Sector maturation and consequences With maturity comes challenges: mature, commercial-stage biotech’s are now facing the same capital allocation and growth concerns as traditional pharma peers. They risk disruption and competition from smaller biotech’s and information technology players that see opportunity in HCIT and managing the flow of health data. As companies aim to better demonstrate and extract product value, the entire biopharma industry is lurching toward more focused business models. Many believe that to compete commercially and re-ignite growth, companies must be the dominant players in fewer indications. Gilead has historically been the in the top echelon within HIV and HCV, and now that the rest of the market is finally starting to commercialize competitive products in those areas, Gilead will be able to leverage its expertise into other markets and commercialization efforts to compete with the other biotech’s and large pharma’s.

The industry’s largest players are now competing with traditional pharma buyers for M&A and partnerships more intensely than ever before. Many large biotech’s, like Gilead through its blockbuster drug Sovaldi, are stockpiling cash. Low-cost borrowing (biotech companies raised over $71bn in capital in 2015) and favorable credit ratings has equipped the sector to innovate despite the downturn in the capital markets by retaining enormous cash reserves. Increased transaction premiums, which drive up market valuations are fighting with overall market and biotech stock gyrations. The market volatility has deflated biotech startups value, leaving them vulnerable for acquisition. Favorable tax policies, repatriation of dollars, as well as strong balance sheets all give large pharma and biotech companies, especially Gilead who has been extremely proactive in raising cheap capital, an advantage moving forward.

Gilead’s capital allocation strategy is not explicit, but is becoming increasingly clear. The Board of Directors has announced aggressive share buyback and dividend programs to help create short- and long-term value attracting investors who depend on dividends amongst a volatile market. This capital allocation plan also helps Gilead compensate for ambiguous performance projections and ultimately ambiguous growth, and maintains the flexibility to act quickly on attractive M&A opportunities.

Q3 update and 2016 outlook

Financial results HCV sales HIV and other antiviral product sales

$5,000 $4,000

$4,000 $3,000

$3,000 $2,000 $2,000

$1,000 $1,000

$0 $0 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016

US Europe Japan Other Int'l US Europe Other Int'l One-time Adj.

Gilead's 3Q16 revenues slipped further, primarily as a result of Harvoni and Sovaldi declines. Diminishing HCV patient volumes added to a longer “patient journey” has slowed total HCV growth and nominal performance. Revenue surprises from new TAF treatments (specifically Eclipsa) helped the top-line. Epclusa revenues will continue to be a positive offset, however it can cannibalize in the long term.

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Student Investment Management Gilead Sciences, Inc. November 13, 2016 Research and product updates Vemlidy, TAF, a HBV treatment, received approval from the FDA and EC. GS4997, a potential NASH treatment, was proposed to undergo an ambitious trial. Stimtuzumab, the promising NASH therapeutic at the time, has officially been discontinued after received negative trial results. The EC approved Gilead's new HCV product Epclusa. The marketing authorization allowed Gilead to commercialize Epclusa in all 28 countries of the EU following approval from the FDA in June 2016. Gilead received European marketing authorization for Truvada as well.

Capital allocation YTD, 98% of free cash flow has been returned to shareholders in some form of share repurchases, dividends, or Q3 2016 warrant settlements. In January 2015, the Board approved a 5-year $15bn stock repurchase program. In February 2016, Gilead entered into a $5bn ASRP to finish the previously announced program, and went on to announce a new $12bn share repurchase program which will finish once the 2015 program is complete. This is on top of an announced $0.47 quarterly dividend.

Outlook Management reiterated 2016 guidance, seemed oddly optimistic on the 2017 HCV portfolio, but did not have too many specific data points, and the kicker is an unclear 2018. In the short term, Gilead is exploring growth opportunities outside the HCV franchise with its promising pipeline. A strong balance sheet ($31.6bn) allows the company the potential for M&A transactions and to acquire the possible needed growth to improve investor expectations and sentiment.

Company financials

Operational excellence among peers Gilead's historical operational excellence 100% 100%

80% 80%

60% 60%

40% 40%

20% 20%

0% 0% 2011 2012 2013 2014 2015 2016E

-20%

Gross profit margin Operating margin Gross profit margin Operating margin

Gilead is financially healthy. Its historical blockbuster drugs are also the drugs that have the highest margins helping them scale while maintaining tight cost controls. Gilead’s margins have only steadied over time and are poised to increase due to lower expected branded prescription drug fees. It has levered-up to a cash flow to debt level that the credit agencies are comfortable with and has been able to increase marketing and commercialization efforts, vitally bolstering cash flows. Overall, despite low-expectations for the company and the HCV business, GILD is trading at unfairly distressed levels. GILD is a low-expectations, low-valuation, and high-cash flow generating (10-15% FCF yield) company that is returning capital to shareholders. Over the next 12-18 months, investors will gain confidence in GILD’s base business capability of generating large and durable cash flows, and that the company will deploy capital to create long-term shareholder value.

See Appendix B for commentary about financial projections and specific product performance.

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Student Investment Management Gilead Sciences, Inc. November 13, 2016 Valuation

Intrinsic Discounted cash flows analysis (in millions, except per share data) 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Total revemues $ 30,179 $ 28,309 $ 26,456 $ 26,074 $ 25,903 $ 26,214 $ 26,660 $ 27,140 $ 27,655 $ 28,208 % growth -7.5% -6.2% -6.5% -1.4% -0.7% 1.2% 1.7% 1.8% 1.9% 2.0% Operating income 19,533 17,701 15,957 15,110 14,647 15,085 15,475 15,889 16,191 16,515 Operating margin 64.7% 62.5% 60.3% 58.0% 56.5% 57.5% 58.0% 58.5% 58.5% 58.5% Depreciation & amortization 1,073 1,051 937 924 918 903 891 880 869 859 % of sales 3.6% 3.7% 3.5% 3.5% 3.5% 3.4% 3.3% 3.2% 3.1% 3.0% EBITDA 19,987 18,439 16,773 15,878 14,782 15,988 16,366 16,770 17,061 17,374 EBITDA margin 66.2% 65.1% 63.4% 60.9% 57.1% 61.0% 61.4% 61.8% 61.7% 61.6% Taxes 3,843 3,467 3,189 3,022 2,929 3,017 3,095 3,178 3,238 3,303 Tax rate 16.4% 18.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% EBIAT 15,690 14,234 12,768 12,088 11,718 12,068 12,380 12,711 12,953 13,212 Plus: depreciation & amortization 1,073 1,051 937 924 918 903 891 880 869 859 Less: capital expenditures 555 552 545 466 476 482 490 499 509 519 % of sales 1.8% 2.0% 2.1% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% Less: Inc./(Dec.) in NWC 466 563 191 403 376 189 412 393 200 436 Unlevered free cash flow 15,741 14,169 12,969 12,143 11,784 12,300 12,370 12,699 13,114 13,116

Terminal value (multiple method) Terminal value (Gordon-Growth) method) 1 Multiple 8.5x Multiple 8.5x 2.00% Terminal value 56,734 Terminal value 69,532 Sum of PV of FCF 81,208 Sum of PV of FCF 81,208 Enterprise value 137,943 Enterprise value 150,741 Net debt 15,297 Net debt 15,297 Equity value 122,646 Equity value 135,444 Diluted shares outstanding (mm) 1,335 Diluted shares outstanding (mm) 1,335 Implied share price $92.00 Implied share price $101.00 Current share price $76.42 Current share price $76.42 Implied upside / (downside) from current 20.4% Implied upside / (downside) from current 32.2% Implied upside / (dow nside) from 52-w eek high (17.1%) Implied upside / (dow nside) from 52-w eek high (9.0%) Free Cash Flow Yield 15.43% Free Cash Flow Yield 15.4% Terminal Value 56,734 Terminal Value 69,532 Unlevered Free Cash Yield 23.1% Unlevered Free Cash Yield 18.9% Terminal unlevered P/E 4.3x Terminal unlevered P/E 5.3x 2016E 2017E 2018E 2016E 2017E 2018E Current P/E 6.5x 7.3x 7.9x Current P/E 6.5x 7.3x 7.9x Projected P/E 7.9x 8.8x 9.5x Projected P/E 8.6x 9.6x 10.4x Current EV/EBITDA 5.9x 5.5x 6.1x Current EV/EBITDA 5.9x 5.5x 6.1x Projected EV/EBITDA 6.9x 7.5x 8.2x Projected EV/EBITDA 7.5x 8.1x 9.0x

Implied share price sensitivity Implied share price sensitivity Exit multiple Exit multiple 9200.00% 7.5x 8.0x 8.5x 9.0x 9.5x ######## 1.0% 1.5% 2.0% 2.5% 3.0% 8.00% $100 $103 $106 $109 $112 8.00% $125 $130 $137 $144 $153 9.00% $93 $96 $99 $101 $104 9.00% $109 $112 $117 $122 $127 10.00% $87 $90 $92 $95 $97 10.00% $96 $98 $101 $105 $109

WACC WACC 11.00% $81 $84 $86 $88 $90 11.00% $85 $87 $90 $92 $95 12.00% $76 $78 $80 $82 $84 12.00% $77 $78 $80 $82 $84

Implied upside / (downside) to current share price Implied upside / (downside) to current share price Exit multiple Exit multiple 7.5x 8.0x 8.5x 9.0x 9.5x 1.0% 1.5% 2.0% 2.5% 3.0% 8.00% 30.9% 34.8% 38.7% 42.6% 46.6% 8.00% 63.6% 70.1% 79.3% 88.4% 100.2% 9.00% 21.7% 25.6% 29.5% 32.2% 36.1% 9.00% 42.6% 46.6% 53.1% 59.6% 66.2% 10.00% 13.8% 17.8% 20.4% 24.3% 26.9% 10.00% 25.6% 28.2% 32.2% 37.4% 42.6%

WACC WACC 11.00% 6.0% 9.9% 12.5% 15.2% 17.8% 11.00% 11.2% 13.8% 17.8% 20.4% 24.3% 12.00% (0.5%) 2.1% 4.7% 7.3% 9.9% 12.00% 0.8% 2.1% 4.7% 7.3% 9.9% A discounted cash flows analysis at a 10% discount and 8.5x exit multiple, gives Gilead a 20.4% upside from its current trading price. We believe it is more appropriate to value Gilead using an exit multiple rather than a perpetuity growth rate because the company and industry are still maturing. Looking at traditional capital structure and cost of capital calculations (see Appendix A) Gilead has a very low cost of capital

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Student Investment Management Gilead Sciences, Inc. November 13, 2016 because of its balance sheet strength, cash flow generation, and relatively defensive nature of its business. The market, due to the uncertainty as well as consensus Street estimates, use a higher WACC around 10%, which may be more realistic.

An exit multiple of 8.5x terminal EBITDA seems low due its relative valuations (below), however Gilead is trading currently at an EV/EBITDA of under 5x, whereas its peers are trading at over 13x and precedent transactions suggest a value under 28x. Every comp however has a positive PEG and higher P/E, and although Gilead is trading at a discount, some discount is deserved given management's inability to provide visibility into and beyond 2017 for HCV business.

Relative Public comparables analysis (Figures in millions, except per share data) Price Enterprise value Name Ticker Mkt Cap Dividend Yield FCF Earnings EBITDA Revenue Roche ROG $ 205,495 3.5% 20.3x 22.0x 11.3x 4.5x Pfizer PFE 197,768 3.7% 15.4x 16.5x 12.8x 4.3x Merck MRK 176,319 2.9% 18.9x 24.5x 13.8x 4.7x Amgen AMGN 110,874 2.7% 13.0x 14.8x 9.5x 4.8x Glaxosmithkline GSK 94,286 6.5% 25.5x 251.6x 29.3x 3.5x Celgene CELG 92,598 N/A 27.5x 32.6x 27.6x 9.3x BIIB 69,445 N/A 20.8x 17.3x 11.3x 6.0x Regeneron REGN 44,275 N/A 52.4x 62.1x 32.3x 9.0x

Mean 3.8% 24.2x 55.2x 18.5x 5.8x Median 3.5% 20.6x 23.2x 13.3x 4.8x

Gilead GILD 100,680 2.4% 6.0x 6.8x 4.7x 3.1x Relative to its comp set, Gilead is being severely punished for its uncertain growth outlook. On a free cash flow, earnings, EBITDA, and revenue basis, Gilead is undervalued by 14, 16, 8, and almost 2 turns, respectively. It is necessary to stress that Gilead, despite its growth concerns, should be valued much higher due to its large cash flow generation ability and exciting pipeline.

Precedent transactions analysis (Figures in millions, except per share data) Announced Transaction Value Announce Date Acquirer Name Target Name Total Value EBITDA Revenue Market Cap Jan-16 Shire PLC Baxalta Inc $35,563 25.4x 5.8x 1.3x Mar-15 AbbVie Inc Pharmacyclics Inc $19,777 156.0x 27.1x 2.1x Feb-15 Valeant Pharmaceuticals Ltd $13,413 - 11.8x 1.8x Feb-15 Pfizer Inc Hospira Inc $16,807 23.2x 3.8x 1.6x Nov-14 plc Allergan Inc/United States $65,024 31.2x 9.3x 1.2x Sep-14 Merck KGaA Sigma-Aldrich Corp $16,395 19.9x 6.0x 1.4x Feb-14 Allergan plc Forest Laboratories Inc $20,781 60.4x 6.2x 1.3x Nov-11 Gilead Sciences Inc Gilead Pharmasset LLC $10,606 - - 1.7x May-11 Takeda Pharmaceutica Nycomed A/S $13,733 - - -

Mean $23,567 52.7x 10.0x 1.6x Median $16,807 28.3x 6.2x 1.5x Relative to precedent transactions, there are currently no transactions that can properly gauge a value for Gilead as its enterprise value is over 3x larger than the largest transaction. Also, these transaction valuations are extremely high, proving that the space may have been overvalued and large pharma and biotech are competing for deals.

We performed a 10-year DCF to place more emphasis on the enormous value of the cash flows that Gilead will continue to be able to generate for the long-term. Looking at the public markets for relative valuation, on a P/E, EV/sales, and EV/EBITDA basis Gilead is trading at an 18x, 2x, and 8x discount to its peer group. This massive divide is not warranted, but some discount is. Gilead is the only one of its peers with a negative PEG ratio and increasing forward looking valuation multiples. Despite Gilead’s current lack of growth visibility, their businesses will stabilize in a few years and be able to continue to generate tremendous cash flows will validate a higher earnings multiple. 7x 2017 EPS is pitiful for a company able to generate the amount of cash flow it does with relatively little risk until its major drug patents expire in 2029 and 2030.

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Student Investment Management Gilead Sciences, Inc. November 13, 2016

Investment risks

The following are negative risks to Gilead’s business and our investment thesis:

 HIV generics entrance in 2018 could threaten margins and patient volumes for new TAF regimens, which are expected to help Gilead keep a hold on the HIV market.

 Relationship changes with manufacturers could cause inventory shortages, product shipment delays, regulatory approval declines, etc.

 Litigation with generic manufacturers has increased expenses and as more current drugs near patent expiration, these could continue to rise.

 Over a third of sales come from outside the US. This poses potential credit risk issues as well as margin pressure that could come from lower drug prices in those emerging markets.

 Management’s inability to successfully push treatments and research through clinical trials and FDA approval in the long-term could prove fatal to its top-line.

 Continued inability to predict demand for various business segments, especially HCV, will cause investors to continually hold a bearish view on Gilead as a large portion of their growth and cash flows come from HCV drugs.

 Healthcare reforms could pose a threat. If less people are covered, prices get capped, drug approvals decrease, the increased Branded Drug Prescription fee increases, etc. financial performance will be greatly hindered.

 Reimbursement risk with new products from government agencies and other third parties.

 89% of sales come from three wholesalers (McKesson, Cardinal Health, and AmeriSource Bergen). If an event harms the business of one of these companies, Gilead’s sales strategy would be negatively impacted, at least in the short-term.

 Uncertain relationships with marketing and licensing partners, namely Roche with Tamiflu.

 Inability to defend patents and IP domestically and internationally would cause overall market share decline Conclusion

From the perspective of a value-focused fund—which looks for valuation discrepancies in the market— Gilead deserves a BUY rating. Gilead skyrocketed from 2013 to 2015, driven by blockbuster HCV and HIV drugs In the short-term, we largely agree with some bearish sentiment, however, it is unfair to assume that Gilead will not be able to develop and innovate in the long-term given its successful track record.

GILD is fundamentally undervalued; GILD is very cheap at a P/E of 7-8x 2017E EPS. HCV upside will come with increased certainty and stabilization of the business. Continual innovation and expansion beyond HIV and HCV, significant near term cash generation, aggressive share repurchase and dividend programs, and large M&A potential will create long-term shareholder value

As such, we think it deserves at least a multiple 1-2x turns higher (8-9x) – but still a few turns lower than its peers. Based on these multiples, we derive our $92.00 per share price target (and 20.4% upside).

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Student Investment Management Gilead Sciences, Inc. November 13, 2016

Appendix

A) Capital structure analysis and other calculations Capital structure benchmarks Net debt Debt / Unlevered beta Relevered Short-term debt 700 Company Ticker Market Cap Total cap Historical Adjusted Historical Long-term debt 26,371 Roche RHHBY 205,495 54.1% 0.96 0.67 0.95 Preferred equity 0 Pfizer PFE 197,768 41.2% 0.78 0.59 0.83 Noncontrolling interest 492 Merck MRK 176,319 37.2% 0.76 0.59 0.83 Total debt 27,563 Amgen AMGN 110,874 36.5% 0.92 0.71 1.01 Cash & cash equivalents 9,809 GSK GSK 94,286 82.3% 1.36 0.82 1.16 Short-term marketable securities 2,457 Celgene CELG 92,598 72.1% 1.31 0.83 1.18 Net debt 15,297 Biogen BIIB 69,445 52.4% 1.53 1.08 1.53 Regeneron REGN 44,275 8.2% 0.83 0.78 1.11 Gilead GILD 100,680 57.9% 0.94 0.64 0.91 Mean 121,305 49.1% 1.04 0.75 1.06 Median 100,680 52.4% 0.94 0.71 1.01 Discount rate summary: Risk free rate 2.14% Equity risk premium 6.50% 7.50% Levered beta 0.90 1.10 Country risk premium 0% 0% Cost of equity 7.99% 10.39% Pre-tax cost of debt 3.36% Post-tax cost of debt 2.69% Debt / Total cap target 52.44%

Calculated discount rate 5.21% 6.35%

Cost of equity vs. Debt / Total cap target Cost of equity vs. Pre-tax cost of debt Debt / Total cap Pre-tax cost of debt 6.35% 47.44% 49.94% 52.44% 54.94% 57.44% 6.35% 2.86% 3.11% 3.36% 3.61% 3.86% 9.39% 6.21% 6.04% 5.87% 5.71% 5.54% 9.39% 5.30% 5.42% 5.54% 5.66% 5.77% 9.89% 6.47% 6.29% 6.11% 5.93% 5.75% 9.89% 5.51% 5.63% 5.75% 5.87% 5.98% 10.39% 6.74% 6.54% 6.35% 6.16% 5.97% 10.39% 5.72% 5.84% 5.96% 6.07% 6.19% 10.89% 7.00% 6.79% 6.59% 6.38% 6.18% 10.89% 5.93% 6.05% 6.17% 6.28% 6.40%

Cost of equity Cost 11.39% 6.14% 6.26% 6.38% 6.49% 6.61% Cost of equity Cost 11.39% 7.26% 7.04% 6.83% 6.61% 6.39%

Diluted shares outstanding: Number of shares outstanding (mm) 1,317.5 Share price $76.42 Security Shares Exercise price In-the-money Proceeds Restricted stock units 11.0 $73.93 Yes $815.30 Stock options 24.7 $23.11 Yes $571.53 Performance-based restricted stock units 0.5 $85.83 No $0.00 Total $1,386.83 Number of shares vested 35.8 Number of shares repurchased 18.1 Net new (repurchased) shares 17.6 Number of current shares outstanding 1,317.5 Number of diluted shares outstanding1,335.1

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Student Investment Management Gilead Sciences, Inc. November 13, 2016 B) Historical and projected financials: Consolidated statement of income (in millions, except per share data) 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E

Product sales Antiviral products: Harvoni — $ 2,127 $ 13,864 9,128 7,521 3,336 2,113 1,498 Sovaldi 139 10,283 5,276 4,130 2,318 1,478 835 536 Epclusa — — — 1,577 2,719 4,181 4,848 5,582 Truvada 3,136 3,340 3,459 3,455 3,367 2,869 2,629 2,435 Atripla 3,648 3,470 3,134 2,575 2,314 1,716 1,354 1,080 Stribild 539 1,197 1,825 1,886 938 1,217 812 441 Complera/Eviplera 810 1,228 1,427 1,433 1,064 819 643 540 Viread (+TAF) 959 1,058 1,108 1,170 1,892 275 2 0 Genvoya (+TAF) — — 45 1,502 2,673 3,597 2,879 2,010 Odesfey (+TAF) — — — 399 805 1,298 1,915 2,361 Descovy (+TAF) — — — 387 846 1,574 2,277 2,923 Integrase Inhibitor — — — — — 344 1,909 3,398 Other antiviral 111 88 69 73 92 115 140 168 Total antiviral products 9,342 22,791 30,207 27,906 26,994 24,300 23,747 23,967 Total other product sales 1,462 1,683 1,944 1,968 1,919 1,830 2,172 1,907 Total product sales 10,804 24,474 32,151 29,875 28,914 26,130 25,919 25,874 Royalty, Contract, and Other Revenues 398 416 488 434 448 462 476 490 Total revenues $ 11,202 $ 24,890 $ 32,639 $ 30,179 $ 28,309 $ 26,456 $ 26,074 $ 25,903 Cost of goods sold 2,859 3,788 4,006 3,749 3,588 3,315 2,965.9 2,914.2 Gross Profit 8,343 21,102 28,633 26,833 25,001 23,375 23,108 22,989 Total R&D 2,120 2,854 3,014 3,405 3,322 3,237 2,637 2,437 Selling, general, and administrative 1,699 2,983 3,426 3,620 3,467 3,083 3,177 3,253 Income from operations 4,524 15,265 22,193 19,533 17,701 15,957 15,110 14,647 EBITDA 19,987 18,439 16,773 15,878 14,782 Interest expense 307 412 688 920 885 885 835 810 Other income (expense), net 0 3 154 0 0 0 0 0 Income before provision for income taxes 4,217 14,856 21,659 19,193 17,526 16,135 15,563 15,731 Provision for income taxes 1,151 2,793 3,552 3,843 3,467 3,189 3,013 2,986 Effective income tax rate 27.3% 18.8% 16.4% 16.4% 18.0% 20.0% 20.0% 20.0% Net income 3,066 12,063 18,107 15,592 14,011 12,953 12,742 12,721 Income statement projections and financial projections in general for Gilead revolve mainly around assumptions in individual drug sales projections. An important factor to consider is patent expiration, as we assume Viread’s sales will taper to 0 by the end of this projection period. To gather individual projections for each drug, we benchmarked the Street’s individual projections and became increasingly bearish over time to give a conservative outlook. We also maintained depressed margins. Also, there is potential margin erosion down the line. We were more conservative on margin growth than consensus as we anticipate increased sector and indication competition as well as potential policy effects eating at prices or cost controls.

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