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Yale College Student Investment Group

Gilead Sciences Inc. (GILD)

Presented by: Sudharshan Mohanram, Frank Han

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Investment Thesis

Why is stock ‘undervalued’?• Overreaction: Gilead Sciences reported disappointing results on its hepatitis C drug GS-7977's

study, and its market capitalization fell by as much as $6 billion since the announcement. 

Why will the price rebound?• GS-7977 will likely become the leading therapy in treating Hepatitis C and new trials will be

created to allow use in Genotype 1 patients. New data on Genotype 1 patients will be released in the coming weeks.

• Firm’s HIV business is the global leader in a rapidly growing and highly profitable market, driving growth of company for the foreseeable future.

• Gradual returns from 11 billion dollar acquisition of Pharmasset• Potential FDA approval of revolutionary drugs that will create new, robust revenue streams • Company has limited risks, with a diversified portfolio of drugs as well as no major patents

expiring until 2018

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Product Line

1. HIV/AIDS• Atripla: Atripla is the first once-daily single-tablet regimen for HIV intended as a stand alone

therapy or in combination with other antiretrovirals.• Truvada: An oral formulation dosed once a day as part of combination therapy to treat HIV

infection in adults. It is a fixed-dose combination of our antiretroviral medications, Viread and Emtriva.

• Viread: An oral formulation of a nucleotide analog reverse transcriptase inhibitor, dosed once a day as part of combination therapy to treat HIV infection in patients 2 years of age and older. 

• Complera/Eviplera: The second complete single-tablet regimen for the treatment of HIV and is a fixed-dose combination of our antiretroviral medications, Viread and Emtriva, and Tibotec Pharmaceuticals’ Edurant.

• Emtriva: An oral formulation of a nucleoside analog reverse transcriptase inhibitor, dosed once a day as part of combination therapy to treat HIV infection in adults.

2. Liver Disease• Viread: An oral formulation of a nucleotide analog reverse transcriptase inhibitor, dosed once a

day for the treatment of chronic hepatitis B in adults.• Hepsera: An oral formulation of a nucleotide analog polymerase inhibitor, dosed once a day to

treat chronic hepatitis B in patients 12 years of age and older.

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Product Line (Cont.)

3. Cardiovascular• Letairis: An oral formulation of an endothelin receptor antagonist (ERA) indicated for the treatment of

pulmonary arterial hypertension.• Ranexa: An extended-release tablet for the treatment of chronic angina. • Lexiscan/Rapiscan: An injection is indicated for use as a pharmacologic stress agent in radionuclide

myocardial perfusion imaging (MPI), a test that detects and characterizes coronary artery disease, in patients unable to undergo adequate exercise stress.

4. Respiratory• Cayston: An inhaled antibiotic for the treatment of respiratory systems in cystic fibrosis (CF) patients 7

years of age and older with Pseudomonas aeruginosa (P. aeruginosa).• Tamiflu: An oral antiviral available in capsule form for the treatment and prevention of influenza A and

B.

5. Other• AmBisome: A proprietary liposomal formulation of amphotericin B, an antifungal agent to treat serious

invasive fungal infections caused by various fungal species in adults.• Vistide: An antiviral injection for the treatment of cytomegalovirus retinitis in adult patients with AIDS.• Macugen: An intravitreal injection of an anti-angiogenic oligonucleotide for the treatment of neovascular

age-related macular degeneration.

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Product Sales

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Pipeline

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Summary of Business Strategy

1. Diversify Portfolio Thru Acquisitions

2. Gain product approvals internationally

3. Extend presence in high margin markets, such as HIV/AIDS

4. Continue to maintain stellar profit margins through inexpensive manufacturing, small sales force, and selective R+D

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Financial Overview

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Financial Analysis

Income Statement

Revenue 8.39B

Revenue Growth 5.5%

Gross Margin 78.3%

Net Income 2.80B

Operating Margin 45.2%

Net Profit Margin 33.3%

Balance Sheet

Total Cash 13.30

Total Debt 10.81

Current Ratio 5.24

Debt/Equity 1.13

Market Cap 36B

EBITBA Coverage 18.8

Profitability Ratios

ROE 41.6%EPS Growth 7.3%

Tax Rate 23.61%

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Financial Analysis: Valuation Ratios

Valuation

P/E 13.30

Forward P/E 10.81

P/B 5.24

P/Sales 4.23

EV/EBITDA 8.04

EV/Revenue 3.96

PEG 0.80

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Discounted Cash Flow Analysis

We used the following assumptions to generate the weighted average cost of capital for GILD• Beta: 0.45• Risk-free rate: 3.3%• Cost of equity: 9.8%• Cost of debt: 7.0%• Conservative WACC: 8%

Our Fair Value: $61

Morningstar DCF estimates yield a similar fair value of $57.14

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Analyst Estimates

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Catalysts

• The European Association for the Study of the Liver decides that it will disclose hepatitis C clinical data online on April 4th

• Earnings reports on April 18th, announcement of the drug Quad

• Further clinical experimentation to verify the results of three clinical trials with Truvada, which suggest healthy people should take HIV drugs to prevent infection with the virus that causes AIDS

• The market for hepatitis C drugs is expected to soar to $16 billion in 2015 from $1.7 billion in 2011 in major commercial markets. Gilead has well positioned itself in the Hepatitis C drug market by acquiring Pharmasset

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Risks

1. The public announcement of data from clinical studies evaluating GS-7977 in HCV-infected patients is likely to cause significant volatility in stock price.

2. A substantial amount of generated revenue is derived from the HIV/AIDS division of the company

3. Implementation of health care reform will detrimentally affect profits

4. Operations depend on compliance with complex FDA and comparable international regulations.

5. Industry is competitive and there will be increasing competition and pricing pressures in growing/attractive markets, such as HIV.

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Conclusions

• Huge market overreaction in February to clinical trail data

1) Diversified, stable cashflow

2) Promising drug pipeline

3) Extremely attractive metrics

• In conclusion, GILD is a low beta stock that would be an excellent addition to the YSIG portfolio.