Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management Charles Schaller [Charles-Schaller@uiowa.edu] Gilead Sciences (GILD) March 3rd, 2016

Healthcare – Branded Biopharmaceuticals Stock Rating Buy

Investment Thesis Target Price $115-120 We issue a BUY recommendation for Gilead Sciences. We believe that high sales, a robust pipeline, low costs and the potential for M&A will cause Gilead to outperform market expectations. Drivers of Thesis x Gilead is transitioning from a growth stock to a value stock. This has

spooked some investors. Not knowing what to expect has led the market to undervalue the stock. We forecast that short term revenues will fall by about 2% per year before leveling off in 2020 and entering a continuing growth of 0.5%.

x Falling Costs amidst Rising Sales: As most of Gilead’s costs are related to patents, intellectual property and R&D their COGS has decreased as a percentage of sales while sales have risen significantly. This has led to low costs and high margins which we forecast to continue. Our model reflects this assumption with COGS at 10% of sales.

x Strong pipeline of upcoming drugs: Gilead is expected to release 4 drugs this year and 3 more shortly after 2020. Expected this year is a HBV treatment which is as effective as Harvoni at curing the disease. We forecast that these drugs will make up 11% of Gilead’s revenue for 2016 growing to 54% by 2020.

Risks to Thesis x Competitors Pipelines: More than 50% of Gilead’s revenue comes from

Hepatitis C medications. Their biggest threat to profitability is Merck’s new HCV drug. We modeled this impact through reduced HCV drug revenues due to lower prices in response to competition and lost sales due to customers switching to Merck.

x Government Intervention: Through forced price ceilings and truncated patent periods the government could have a significant impact on Gilead’s profitability. The news should be monitored for congressional policy changes related to pricing, patents and biosimilars (generic biopharmaceuticals)

Henry Fund DCF $118.23 Henry Fund DDM $92.73 Relative Multiple $138.79 Price Data Current Price $88.03 52wk Range $81.89 – 123.37 Consensus 1yr Target $116.20 Key Statistics Market Cap (B) $121.9 Shares Outstanding (M) 1,367 Institutional Ownership 81.4% Three Year Beta 1.042 Dividend Yield 1.92% Est. 5yr Growth -9.41% Price/Earnings (TTM) 7.5 Price/Earnings (FY1) 7.3 Price/Sales (TTM) 4.2 Price/Book (mrq) 6.8 Profitability Operating Margin 66.4% Profit Margin 55.5% Return on Assets (TTM) 34.9% Return on Equity (TTM) 94.7%

Earnings Estimates Year 2013 2014 2015 2016E 2017E 2018E EPS $2.01 $8.33 $12.37 $10.92 $11.21 $11.22

growth 17.55% 314.40% 48.43% -11.73% 2.65% 0.01% 12 Month Performance Company Description

Gilead Sciences is a biopharmaceutical company focused on research and development of innovative medicines for uncured diseases. Gilead’s current product line focuses on treating HIV/AIDS, Hepatitis C, several types of Cancer as well as inflammatory and respiratory diseases. Gilead has had a stellar 3 year run, seeing triple-digit revenue growth in 2014. Much of its success is due to two star drugs: Solvadi and Harvoni.

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

M A M J J A S O N D J F

GILD S&P 500

7.5

94.7

23.0 24.8

40.6

19.40

20

40

60

80

100

P/E ROE

GILD Industry Sector

Source: GILD 2015 10K

Source: GILD 2015 10K

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EXECUTIVE SUMMARY

We give a buy recommendation for Gilead Sciences. Speculation as to future growth and new competition paired with market volatility has led the market to undervalue Gilead, as evidenced by its forward PE of 7.3 (Compared to an industry average of 23).

Gilead has seen astronomical revenue growth in the last 3 years. While their revenue growth has been incredible, they are not expected to continued growth at this rate, which has driven down the price of their stock. While Gilead still maintains a fairly broad product line (18 active drugs) nearly all of their growth since 2012 has been from two Hepatitis C drugs: Sovaldi (2013) and Harvoni (2014).

Just as Gilead owes its newfound revenue to HCV drugs, likewise Gilead’s future revenue stability will be dependent on the continued success of these drugs. HIV/AIDS medication has provided a solid and reliable 33% of revenue however it has not provided the blockbuster numbers of Sovaldi and Harvoni.

We believe that creative pricing strategies paired with a strong pipeline and future M&A activity will position Gilead to outperform current market expectations.

COMPANY DESCRIPTION

California based Gilead Sciences, Inc. is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need. Gilead was founded in 1988 and currently employs 7,900 employees. Gilead has traded on the NASDAQ since 1992 under symbol: GILD.

In 2009 Gilead was recognized as one of the Fastest Growing Companies from Fortune, the same year they were rated as one of America’s Top Companies to work for by Forbes.1 In 2012 Gilead released Truvada, the first drug shown to reduce the risk of HIV infection.

Gilead was chosen by CVS Health as their main option for patients on its commercial drug list. This softens the blow felt from Express Scripts Holding Co, the largest pharmacy benefit manager to choose Gilead’s competitor AbbVie’s Hep C drug as the exclusive treatment option for patients on its main commercial plan in December of 2014.2

Gilead’s current portfolio of drugs chiefly centers around treating 4 types of diseases: Liver Disease (Hep B and C), HIV/AIDS, Cancer and heart disease. Additionally Gilead has a number of drugs which do not fit into a specific category and are labeled “other.” The following list contains their drug line, type and expiration date of patents in the US and Europe.

Gilead Product Line

Drug Name Disease Treated US Patent Expiration

EU Patent Expiration

Sovaldi Liver Disease 2029 2028 Harvoni Liver Disease 2030 2030 Atripla HIV/ AIDS 2021 2018 Truvada HIV/ AIDS 2021 2018 Complera/Eviplers HIV/ AIDS 2023 2022 Stribild HIV/ AIDS 2029 2027 Genvoya HIV/ AIDS 2029 2028 Viread HIV/AIDS/HCV 2017 2018 Letairis Heart Disease 2018 2020 Ranexa Heart Disease 2019 2023 Lexiscan Heart disease 2022 2025 Zydelig Cancer 2025 2025 Tamiflu Other (Antiviral) 2017 2016 AmBisome Other (Anti-Fungal) 2016 2008 Macugen Other (Blindness) 2017 2017 Cayston Other (C. Fibrosis) 2021 2021 Viteka Other (Anti-Viral) 2023 2028 Tybost Other (Anti-Viral 2029 2027

Source: GILD 2015 10K

Gilead’s drug portfolio may seem broad but in reality their key operations are HIV/AIDS and Hepatitis C (HCV) antivirals. A look at Gilead’s 2015 sales numbers shows that 93.74% of their revenue came from HIV/AIDS and HCV drugs.

Source: GILD 2015 10K

30.62%

59.53%

3.59%

4.01% 0.41% 1.84%

2015 Revenue Breakdown

HIV/AIDS

Liver Disease

HIV/AIDS/Liver

Heart Disease

Cancer

Other

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Revenue Breakdown by Drug Type – 2015 Drug Name Drug Type 2015 Rev % of rev Hepsera Liver Disease 0 0 Sovaldi Liver Disease 5,276 16.41% Harvoni Liver Disease 13,864 43.12%

Total Liver Disease 19,140 59.53% Emtriva HIV/ AIDS 0 0 Atripla HIV/ AIDS 3,134 9.75% Truvada HIV/ AIDS 3,459 10.76% Complera/Eviplers HIV/ AIDS 1,427 4.44% Stribild HIV/ AIDS 1,825 5.68% Genvoya HIV/ AIDS 45 0.14% Viread HIV/AIDS/HCV 1,108 3.45%

Total HIV / AIDS 10,998 34.22% Letairis Heart Disease 700 2.18% Ranexa Heart Disease 588 1.83% Zydelig Cancer 132 .041% AmBisome Other (Anti-Fungal) 350 1.09% Tamiflu

Other

243

0.75%

Macugen Cayston Viteka Tybost Lexiscan

Total Other 2,013 5.89% Total Revenue 32151 100%

Source: GILD 2015 10K

In light of Gilead’s heavy reliance on HIV/AIDS and HCV medication, Gilead’s future value creation will lie in one of the following strategies:

x Maintaining competitive advantage in the Biopharma space through patent exclusivity of drugs. This will be difficult in light of recent developments that will be noted later in this report.

x Development of new drugs that make competitor HIV/AIDS and HCV offerings obsolete. This will be an important strategy for Gilead as we forecast continued R&D spending of over $3 Billion per year (about 11% of sales).

x Developing or acquiring drug patents that will expand them into the treatment of other diseases. We forecast a high likelihood of this as well.

A cursory understanding of the main diseases Gilead drugs treat will aid in understanding the market they are currently facing.

Hepatitis C Virus (HCV)

Hepatitis C medication provides the largest portion of Gileads annual revenue. Hepatitis C is a virus which causes inflammation of the liver, with an estimated 80% of those infected developing Chronic hepatitis. People infected with Hepatitis can develop cirrhosis (scarring of the liver and some may also develop liver cancer. Infection rates have been stable over the past 5 years.3

HCV is spread primarily through contact with infected blood. It can also be spread through unprotected sex and childbirth, although this is less common. Unlike Hepatitis B there is no vaccine to prevent HCV. About 3.2 million people in the U.S. are chronically infected with HCV, with many showing no symptoms. HCV can take between 10 – 40 years to cause serious damage to the liver.4

There are at least 6 genetic variations of HCV (genotypes 1-6). Genotypes 1 and 5 make up the 75% of all HCV infections, making them the most focused on genotypes for treatment. Genotype important when considering treatment options as certain genotypes are resistant or even immune to specific drugs.

Source: InfoHep.org

Gilead drug Sovaldi treats genotypes 1-4. Harvoni treats 1, 3, and 4 and has a higher cure rate with fewer side effects than Sovaldi. Genotypes 5 and 6 are negligible as a percentage of total population, constrained to geographic areas like Hong Kong and Panama.

Infection rates are high (>3.5% of population) in Central and East Asia. They are intermediate (1.5 – 3.5%) in South and Southeast Asia as well as sub-Saharan Africa, Latin

75.00%

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Prevalence of HCV Genotypes

Geno 1

Geno 2

Geno 3

Geno 4

Geno 5

Geno 6

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America, Europe, and Oceania. They are low (<1.5%) in Asia Pacific, Latin America and North America.

Source: Wikipedia

Until recently there were limited options for treatment of HCV. Daily interferon injections were the best hope for a cure and they carried heavy side effects (intense flu-like symptoms) with a less than 50% cure rate.5 Recent breakthrough drugs by Gilead and competitor Merck boast 85 – 100% cure rates for the disease in pill form.

HCV Medications makes up the majority of Gilead’s Liver drug catalogue, and as such they have invested heavily in their HCV pipeline. This was not always the case. Until 2013 HCV/HVB medications only made up about 5% of sales. That number is now nearly 90%.

Source: GILD 10K

Hepatitis B Virus (HBV)

HBV is far more prevalent than HCV. It is estimated that 2 Billion, either currently have HBV or have had it in their lives. Like HCV it can cause serious damage to the liver leading to cirrhosis, cancer and liver failure. However, HBV has some notable differences from HBV.

x HBV is Vaccine-preventable. In the United States HBV Vaccines are mandatory for involvement in public school. In spite of this there are 1.25 million HBV carriers in the US.6

x HBV is less likely to develop into a chronic condition. Among adults with HBV less than 2% fail to clear the virus within 6 months of infection. However, chronic infection rates are much higher for newborns (80%) and children (20%)7

In spite of these facts HBV is extremely dangerous. Hepatitis B is second only to tobacco as a cause of cancer, leading to an estimated 600,000 deaths annually.8Another notable difference is that there is not currently an effective cure for HBV. While HBV is less likely to develop into a chronic liver disease a cure would be in high-demand as it would not only eliminate short term (6 month) symptoms but also eliminate the possibility of long term infection.

Gilead’s Viread has been their best option for treating the disease although the drug’s website clearly states that it does not cure the disease. A new drug: TAF (nucleotide reverse transcriptase inhibitor) has recently passed the 3rd round of the FDA approval process and expected to be released for sale in the next 6 months. This drug has been shown to show the same results as current leading HBV drugs with a significant decrease in bone density reduction, which can be caused by HBV drugs.9

It is notable that HCV drugs have not shown themselves to be effective against HBV. Because of this Gilead has not seen much income from HBV medication. This also means that if Gilead were able to develop an effective HBV cure as they have with Truvada and Solvadi they would enter a market with significant profit potential without cannibalizing their HCV drug sales.

While there is profitability to be found in an HBV cure it would most likely not be as lucrative as HCV drugs have shown to be. This is largely due to how many HBV sufferers live in the developing world and in countries too poor to afford much healthcare. Another complication to marketing a HBV cure globally is the fact that many emerging economies with higher rates of infection (China, Russia, India) have complex drug patent laws, often producing their own versions of generic for much lower prices.

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HCV / HBC Drug Revenue (M)

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Source: Wikipedia

HCV / HBV Pipeline

The number and type of drugs in a company’s research pipeline are a clear indicator of the company’s plan for future profitability. Of their 38 drug patents currently in FDA testing 10 of them are HCV / HBV drugs.

Gilead’s current research pipeline of drugs. Drugs in the submission stage

should be released for sale within 1 year, Phase 3 drugs may see release in 5-10 years. Phase 2 and Phase 1 are in early phase of testing and may not advance

to the next phase, although each phase can take 1-2 years.

Of those drugs the most exciting prospect is STR of Sofosbuvir. STR is a pan-genotypic (designed to treat every genotype of HCV. In a 12-week study of 624 patients a remarkable 99% showed aviremia (no presence of virus in blood) at the end of the study. This drug has passed all 3 phases of testing and has been fast-tracked by the FDA (meaning the final approval process is likely to last 5-6 months rather than 10-12. We forecast that this drug will

play a significant role in Gilead’s future earning potential, generating $1.1 billion in revenue (3.5% of sales) in 2016 increasing to $5.5 billion (18.75% of sales) in 2020.

We forecast that HCV / HBV medications will steadily produce about 52% of revenues through 2020. Within the category we forecast that Gilead’s upcoming HBV drug will grow as a portion of revenues by 3% per year, making up 15% of revenues ($4.25B) by 2020. HBV currently contributes a negligible amount to revenues.

HIV / AIDS

Human Immunodeficiency virus (HIV) is a virus that attacks the immune system, specifically the CD4 cells (T cells), which help the immune system fight off infections. This makes the patient more likely to develop infections or infection-related cancers. Over time, HIV can destroy so many of these cells that the body cannot fight off infections and disease. These opportunistic infections take advantage of a very weak immune system and signal that the person has AIDS, the last stage of HIV infection.10

Unlike most viruses the human body is unable to rid itself completely of the HIV virus. Once a person is infected with HIV they will have it for the rest of their life. Furthermore there is no cure HIV. Although there is no cure, there have been significant advances in treatment options for HIV over the last 2 decades. In the 80’s a diagnosis of HIV was effectively a death sentence. Now with proper treatment a person diagnosed with HIV will live nearly as long as a person without the disease.11

HIV / AIDS drugs have been a mainstay of Gilead’s product line for close for over a decade. From the early 2000’s up through 2013 they made up about 80% of Gilead’s total revenues.12 Although HVC drugs have the lion’s share of sales this should not be interpreted as a decline in HIV/AIDS drugs. In fact Gilead has seen an average of 12% annual growth in HIV/AIDS drugs over the last 5 years.

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

HIV / AIDS Drug Revenue (M)

Source: Gilead Company Website

Source: Gilead Company Website

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While developments have been encouraging, the process of HIV treatment is complicated and has historically required a complex cocktail of drugs, each with its own side effects and potential harmful interactions with other drugs the patient might be taking. In late 2015 Gilead began sales of Genvoya, a once-daily HIV/AIDS treatment. The first of its kind, Genvoya’s single pill dose reduces the risk of negative drug interactions or side effects. We forecast its sales potential to offset the loss of revenue incurred when the patent for anti-viral Viread ($1.1B in sales for 2015) expires in 2018. We forecast Genvoya’s revenues to grow from $600 million in 2016 (1.95% of total revenues) to $2.4 billion in 2020 (8.1% of total revenues).

Epidemiologically, HIV/AIDS is a global pandemic. About 37 million people worldwide have HIV with about 2 million new infections occurring each year. More than half of total infected are woman and 2.6 million are less than 15 years old. Aids results in about 1.2 million deaths per year.13

As seen in the map below, Sub-Saharan Africa contains the highest number of infections. It is estimated that two-thirds of all infections (and two-thirds of all deaths) occur in this region. South and South East Asia have the second highest number of infections.

In the United States there are approximately 1.2 million people living with HIV. Approximately 18,000 people die from the disease annually.

Source: Wikipedia

HIV / AIDS Pipeline:

Gilead’s HIV / AIDS pipeline is noticeably smaller than those of their other drug offerings. We do not expect Gilead to cease their development of HIV / AIDS drugs and as such expect that further drug development may be done through M&A activity. Notably Gilead has 2 drugs that have passed the final round of FDA testing and are expected to reach the market later this year. We have factored their future sales into our revenue modeling.

Gilead’s current research pipeline of HIV / AIDS drugs.

We forecast HIV/ AIDS drug sales to continue to make up about 30% of total sales through 2020. New Drugs STR of R/F/TAF will grow as a % of revenues by about 0.5% per year totaling 2.5% ($750M) and F/TAF will grow as a % of sales by 1.5% per year totaling 6.8% ($2B).

Cancer / Other

Due to diversity of cancer types and the reality that they make up such a small portion of Gilead’s drug sales they will not receive the background or epidemiology that Hepatitis and HIV/AIDS have received. However, in spite of their relatively low revenue historical revenue generation, Gilead seems to be setting their R&D sights on developing a number of new cancer drugs. Five drugs are in Phase 3 of FDA testing and are expected to launch some time after 2021 (Phase 3 can take up to 10 years).

Source: Gilead Company Website

Page 7

Gilead’s current research pipeline of HIV / AIDS drugs.

We forecast cancer drugs to continue to play a minimal role in contributing to Gilead’s total revenue. Cancer drugs contribute 0.41% of total revenues. We forecast rates to increase by 0.40% per year, totaling 2.9% of sales ($849M) by 2020.

RECENT DEVELOPMENTS

To accurately understand Gilead’s current situation it is important to understand the last 3 years of growth for the company. Between 2008 and 2013 growth steadily climbed from $5 to $9 Billion by about $1 Billion per year. Gilead’s main money makers were HIV/AIDS drugs (About 85% of sales). Liver drugs made up a slim 5-8% of total sales. This entire model was turned on its head with the release of breakthrough drug Sovaldi

2014 – The year of Sovaldi

Sovaldi was a breakthrough in the treatment of HCV. Prior to Sovaldi the only effective treatment was interferon. This required daily patient injections with a less than 50% success rate.14 Sovaldi entered in late 2013 and took the market by storm. It’s 90%15 cure rate made Sovaldi the obvious drug of choice for HCV. As a result it commanded a premium price: roughly $84,000 for a 12-week treatment. Gilead saw their revenues grow from $10.8B to $24.4B16, with (75% of that growth attributed to Sovaldi). Even as Sovaldi took off it was known that Gilead

was working on an even better HCV medicine, Harvoni. In light of that many patients postponed treatment.

Source: GILD 2015 10K

2015 – The Year of Harvoni

Harvoni, released in late 2014 was an even bigger success than Sovaldi. Harvoni boasted an even higher cure rate (100% for certain genotypes) as well as fewer side effects. Harvoni functioned as a standalone HCV medication whereas Sovaldi required additional medications which had adverse side effects.

The resulting sales were remarkable. In 2015 Gilead took in $13.8 Billion in revenue from Harvoni, offsetting a $5 billion drop in resulting Sovaldi sales. To put this in perspective Harvoni alone was responsible for more revenue than Gilead’s entire product line in 2013. This was largely due to two factors:

x The superiority of the drug: Harvoni was far and away the most effective treatment for a chronic and life threatening disease. In terms of drug efficacy there was little competition.

x The premium price: Gilead priced Harvoni at $94,500 for a twelve week treatment supply of drugs. This extremely high price paired with relatively low fixed costs and a strong competitive advantage through patents and FDA approval time made 2015 the most profitable year in Gilead’s history. 60% of revenue was from Sovaldi and Harvoni.

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Net Revenue vs. Net Income (M)

Net Revenue Net Income

Source: Gilead Company Website

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2016 – A Major Threat Emerges

In late 2015 Merck Pharmaceuticals received final FDA approval to begin production of its new HCV drug, Zepatier. The emergence of this drug was not a surprise to Gilead as the FDA process is public and can take a decade to complete. There was however much speculation as to how Merck would price the drug in response to Gilead’s extremely high prices.

Merck ultimately priced Zepatier at $54,600 for a 12 week treatment. This is $30,000 cheaper than Sovaldi and $40,000 cheaper than Harvoni.

The drugs are not perfectly comparable: Zepatier treats genotypes 1 and 4. Harvoni treats 1, 3, and 4. Sovaldi treats 1, 2, 3, 4. As stated previously, Genotypes 1 and 5 make up about 75% of HCV infections. This means that about 75% of Gilead’s market for HCV is potentially at stake. Gilead will be forced to respond with lower prices or lose the majority of their most profitable market to Merck.

Merck vs. Gilead Hep C. Drug Comparison Drug Name Price Genotypes Treated Zepatier (Merck) $54,600 1 4 Sovaldi (Gilead) $84,000 1 2 3 4 Harvoni (Gilead) $94,500 1 3 4

Source: Hepatitis Foundation

We constructed our model with the assumption that Gilead’s strategy in response to Merck’s new drug would be one of the most significant determinants of their continued competitive advantage. We forecast that Gilead will reduce the price of their older HCV drugs, Sovaldi to position it against Zepatier. Additionally they will maintain the higher priced Harvoni at its current level.

INDUSTRY ANALYSIS

A relatively new entrant to the healthcare sector, the Biotech industry began in the 1970’s. It has since grown from a handful of companies to over 1,200 in the US alone. Companies in the Biotech space are focused on developing, patenting and marketing new drugs. The United States leads the world in Biotech, with revenues exceeding US$60 billion and an industry market value in 2014 of $360 billion.17

Biotech pharmaceuticals is a sub-division of the larger biotech category. Biotechnology is the process of genetic

manipulation of microorganisms for practical use and as such has many non-pharmaceutical applications such as livestock feed, chemicals and medical devices. For the duration of this report the term “biotech” will refer specifically to the pharmaceutical applications of biotechnology.

Biotech is a high risk, high reward industry inside the fairly stable defensive sector of health care. Every year hundreds of companies race to develop “star drugs” that will devour market share while sitting safely behind an FDA approved patent. Many compete and few succeed. Those firms that do succeed tend to continue succeeding as tens of millions of dollars of revenue are channeled into R&D annually. Some estimates state that only 1 out of every 5,000 – 10,000 potential drug candidates will make it to market. Beyond that only 20% of marketed drugs are profitable. Most firms make the majority of their profits from a handful of drugs.

Biotech shares an ambiguous border with the broader industry of “pharmaceuticals”. The two share many of the same drivers, with many companies having both pharmaceutical and biotechnology divisions. Due to these blurred lines and the fact that the technical distinction between the two is the molecular composition and size of their ingredients they are often merged into the broader (and unofficial) title of Biopharmaceuticals. It is expected in coming years the category will become an official industry within healthcare.

Patents & FDA Approval

Patents are king in the Biotech industry. A company with a successful patent can enjoy near monopolistic profit levels until the patent expires or a competing drug is produced that does not violate the existing patent. Patents have traditionally lasted for 20 years from the time of patent issuance. While this may seem like a lengthy window of profit opportunity it is deceptive. Patents are filed in the earliest stages of a drug’s engineering. The subsequent R&D paired with arduous FDA approval process can last up to 10 years.

Before a drug can be marketed to the public it must first pass 3 phases of FDA approval.

Phase I: 30 healthy volunteers test the safety profile of the drug to ensure it is not harmful to humans.

Page 9

Phase II: A few hundred patients are used to test the drugs dosing and efficacy in treating the illness. These patients are tested against a control group given a placebo drug.

Phase III: In the longest (and most expensive) phase several thousand participants are used to test the drugs efficacy, safety and fine tune the proper dosing.

Once the drug has successfully passed all 3 phases (which typically costs millions of dollars) the firm presents a New Drug Application to the FDA. These documents can be over 50,000 pages long. It is worth noting that at any phase in the process the FDA can decline to approve the drug even after years of testing and millions in expenses.

Once the patent expires other companies are free to use the chemical recipe to produce generics (referred to as “biosimilars” in the biotech industry). The US government recently passed legislation shortening biotech patents to 12 years. This is because biosimilars (unlike generics) must go through their own FDA approval process, making them much harder to replicate in a generic format.

Porter’s Five Forces:

Threat of Entry: Medium. A company can enter the market fairly easily. Success hinges on high amounts of R&D capital and creating patents. Many firms enter, few succeed.

Supplier Power: Low. The true value in Biotech Pharmaceuticals lies in their patents. Drug components are often simply commodities purchased from a highly fragmented market. This significantly increases profitability for Biotech Pharmaceuticals companies.

Extent of Rivalry: Extremely High. Due to limited demand (not everyone needs Biotech Pharmaceuticals) and a small number of large companies competing for a limited but highly profitable market the Biotech Pharmaceuticals industry has extremely high competition. A rival drug patent being passed may reduce a companies’ selling price by 50%.

Substitutes: Low: As Biotech Pharmaceuticals are typically used to treat diseases with no existing cure customers with life threatening illnesses face the real possibility of death if they stop using the product. This unique position lends to the high profitability of the Biotech Pharmaceuticals industry.

Buyer Power: Low (could rise): Biotech industry has a unique structure that adds to the complexity of its economics. A number of significant factors result in significant competitive advantage for biotech companies.

Most significant is the fact that in biotechnology the end users are typically purchasing the product to treat life-threatening illnesses with no known cure. In light of this there are very few substitutions to biotech products and end users have very little buyer power over how much they will pay for the drugs. Additionally the majority of the value in the industry is in intellectual capital (patented drug formulas). The actual ingredients of the formulas tend to be commoditized, leading to low supplier power.

This weak buyer power is balanced by another uniqueness of the healthcare industry. While millions of people may be taking a particular drug there are a very small (a few dozen) number of payers. The vast majority of money that exchanges hands in the biotech industry happens between the firm and two groups: Insurance companies and the U.S. government. It is from these two giants that the majority of patient advocacy and cost negotiations come from. Insurance companies frequently bargain for lower costs and the U.S. Government has the power to use regulation to limit company pricing or at least lessen the duration of its patents.

Recent high profile pharmaceutical controversies such as Martin Shkreli’s hyperinflation of an AIDS related drug have raised public cries for increased regulation of healthcare costs.

012345Buyer

Supplier

SubstitutesRivalry

New Entrants

Porter's Five Forces Analysis: Biopharma Industry

Source: Henry Fund Research

Page 10

Research and Development

Biotech is one of the most research-intensive industries in the United States18 According to a 2014 report by PR Newswire, biotech companies in the US have invested more than $600 billion in R&D since the year 2000. It is not uncommon for a firm to spend 15-30% of revenues on R&D. Biotech is a constant race to stay ahead of the pack and develop the next big drug, as such R&D dollars spent is one of the most telling items on an income statement with regards to future prospects of a firm.

INDUSTRY TRENDS

Mergers and Acquisitions

2015 was the year of M&A for Biotech companies. The first 6 months saw $59.3 billion in deals (a 94% increase over the same period in 2014). This has led some experts to speculate that some major players are beginning to rely more on M&A than R&D, which has traditionally been done in house, allowing smaller companies to develop high potential drugs and then purchasing them and implementing them into their product line19 Immuno-

oncology was one of the key drivers to mergers in 2015, which also saw a high value on diabetes treatment drugs.20

AbbVie-Pharmacyclic

Abbvie, one of the largest players in the Biotech industry purchased cancer treatment company Pharmacyclics for $21 billion. This move gives Abbvie a scientific and commercial present in the oncology research space as well as gaining the patent to Imbruvica a first-in-class treatment for hematological cancers (a $24 billion global market).21

Pfizer-Allergen (Canceled)

One of the most notable M&A proposals of 2015 was the merger of Pfizer and Allergen would have formed the world’s biggest drug company by sales. While the major incentive for the merger was taxes (Pfizer would have moved from US to Irish tax rates) the newly merged company would have had annual sales of over $65 Billion and would, no doubt impact the biotech landscape.22

Impact of M & A

Mergers and acquisitions have the potential of upsetting some of the balance in the industry by making long-term strategic forecasting more difficult. Traditionally if a company were developing a new drug it would spend years in the approval process, during which other firms would be able to monitor the progress and brace for any competitive threat. Under an M & A model a larger company could scoop up a smaller company at the point of patent granting and proceed to market and produce the drug using their economies of scale and infrastructure, leading it to be a much greater competitive threat than if it were a smaller company with fewer resources.

Mergers and Acquisitions also further consolidate the power of a few top firms in an industry that tends to be dominated by a few powerhouse firms.

Gilead’s M&A Prospects.

We forecast a high likelihood of M&A in the next 10 years for Gilead. With revenues nearly 5 times what they were in 2010 Gilead faces the question of what to do with their new cash reserves. Variable costs are quite low (COGS has dropped from 20% of revenue to 10% in light of economies of scale) and margins are quite high (profit margin forecasted to be 49%, up from 27% in 2013). Surely a

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R&D Spending as % of Revenue

GILD AMGN ABBV CELG BIIB MRK

Source: Factset

Source: Factset

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significant portion will be reinvested in R&D to ensure the vibrant pipeline which is vital to their future success. Another portion will be paid out to stockholders in the form of dividends as Gilead seeks to keep investors happy with their value in the absence of previous extreme growth. We forecast dividends to increase by about $0.11 annually in keeping with revenue forecasts.

In spite of these costs Gilead still has more money than they know what to do with. In 2015 they purchased $10 Billion in long-term marketable securities. We forecast that the next 10 years will show Gilead making acquisitions as they seek to pursue more immediate growth opportunities than their 5-10 year pipeline can provide.

PEER COMPARISONS

While there are over 1,000 existing firms that would classify themselves as biotech the majority of profitability and market share in the industry is consolidated amongst a smaller number of large firms. A study of the competitive landscape gives a picture of potential future profitability.

Several large firms may be in the same space but offering different treatments for different diseases. This could allow major companies to excel in the biotech industry without and direct rivalry. Rivalry happens when two companies market similar drugs against each other. Profit margins can run anywhere from 20 – 50% so a price war can significantly limit profitability. In the absence of government regulation a look at the future pipeline for any potential competing drugs are on their way can be an indicator of trouble on the horizon.

The past 5 years have been very lucrative for major Biopharma companies. Revenues have been steadily growing amidst major developments in the biotech space such as HCV cures and preventative HIV medication. Gilead’s growth has been far out of proportion with the current trends, seeing growth at a far greater rate.

Merck Pharmaceuticals

Merck represents the largest competitive threat to Gilead’s current position. While not operating exclusively in the Biotech industry, Merck’s has risen to the forefront of Gilead’s competitors with their new HCV drug, Zepatier. Throughout 2014 and 2015 Harvoni and Sovaldi were the only effective HCV cures on the market, commanding significant profits. Investors are now speculative that Gilead can maintain strong profits with a comparable product being offered at a nearly $20,000 discount. The majority lowered target prices by analysts is due to their suspicions that Gilead’s profitability was dependent on a near monopoly and that Zepatier will spell the end of their run of profits.

Interestingly enough, Merck is the only one of Gilead’s major peers we reviewed that has seen drops in revenues over the past 4 years.

Abbvie Inc.

Abbvie Inc. formed in 2013 after separating from Abbott Laboratories. AbbVie specializes in forming advance therapies for complex and serious illnesses. 23 AbbVie, one of the largest firms in the industry became even larger in 2015 when it acquired Pharmacyclic for $21 billion, giving it further reach into developing and marketing therapies for blood cancer. Being one of the largest players in the industry means AbbVie is more likely to experience heightened rivalries over competing drugs. Notable

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GILD MRK AMGN ABBV CELG BIIBSource: Factset

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skirmishes were AbbVie beating out Gilead for preferred status from Express Scripts and the introduction of a competing Hep C drug in 2016 that will directly compete with Gilead’s Sovaldi, likely leading to a lowered price on Gilead’s biggest money maker. Express Scripts is the nation’s largest PBM and in losing them to Abbvie Gilead lost out on 28% of the national PBM market.

Celgene Corporation

Celgene specializes in manufacturing cancer and inflammatory disorder therapies.24 Significant drugs in their product line include Revlimid, Pomalyst/Imnovid and Abraxane which has found broad use in breast, lung and pancreatic cancers in the United States. Celgene is another leader that has slowed their investment in R&D, seeing their R&D growth slow from 29.1% in 2013 down to 9.2%, although this should not be viewed as a sign that they are not investing in their future pipeline. In 2014 In April of 2015 Celgene made news when they announcd they would begin a collaboration with Astrazenica to study their Phase III cancer drug candidate, MEDI4736. Later that same month Celgene acquired Quanticel for about $485 million. Celgene is using mergers and acquisitions to position themselves as a leader in cancer drug development. Celgene and Gilead have competed in the past in the HIV/AIDS and cancer drug markets. More recently Celgene’s purchase of drug company Avila could bring them into the HCV market (Avila has two HCV drugs in the research pipeline). Amgen Inc.

Amgen Inc, based in California has grown to become one of the world’s largest independent biotech companies. It’s total revenues in the first quarter of 2015 were $5.03 Billion, (up 11% from 2014). It owns the patent to Enbrel, Prolia, Epogen, Sensipar, and Xgeva. In spite of a strong year changing foreign exchange rates negatively influenced their product sales growth25. Amgen leads the industry in sales but their revenue growth was some of the lowest among the top 8 (7.5%, explained in part but not completely by their high revenue numbers from previous years). They are also greatly slowed their R&D investment growth (a 5% increase in 2014 vs. 21% in 2013). We feel this could be a sign of problems down the line as Amgen

could be riding the tide of their star drugs while not assigning an appropriate amount to R&D. Biogen Inc Biogen develops therapies for neurological autoimmune and hematological disorders.26 One of Biogen’s star drugs is Tecfidera, a treatment for multiple sclerosis. Tecfidera’s revenues totaled $825 million, part of Biogen’s total MS product line sales of $2.1 Billion. Although one of the smaller players in the top 8 in terms of market cap Biogen has seen strong revenue growth, seeing revenues increase by 32% in 2013 and 46% in 2014. Peer Comparison – Notable Items

It bears repeating that the Biotech Industry is one in which a small number of companies profit while many others fail. Because of that the small number of industry leaders should not be considered the norm within the industry.

Gilead’s P/E (both trailing and forward) are notably lower than their peers. This is largely due to investor speculation as to whether Gilead’s growth has been a “flash in the pan” and is unsustainable.

EPS P/E FY15 P/E FY16E GILD 11.91 7.53 7.03 MRK 1.56 36.45 15.00 AMGN 9.06 16.26 12.07 ABBV 3.13 18.02 9.39 BIIB 15.34 17.57 13.11 CELG 1.94 53.74 14.18

Data Source: Yahoo Finance

Gilead’s ROA is extremely high, nearly twice as high as their nearest competitor (BIIB). Gilead’s ROE is over 100%. This towers over most competitor ROE’s which average around 28% with the exception of Abbvie, which boasts a 155% ROE for 2015.

Gilead has the strongest profit margin of its peers, over 50%. These strong profit margins are indicative of the premium prices that they have been charging over the last 2 years for HCV drugs as well as the efficient economies of scale and low costs of drug production once patents have been attained and R&D is complete.

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ROA ROE Profit Mar. GILD 32.17% 103.61% 55.48% MRK 5.14% 9.53% 11.25% AMGN 7.73% 25.77% 32.03% ABBV - 155.76% 22.50% CELG 11.53% 26.92% 17.31% BIIB 18.54% 35.60% 32.95%

Data Source: Yahoo Finance

One troubling note of comparison: R&D. While Gilead leads its peers in revenue their R&D investments for 2015 are decidedly middle-of-the-pack. Amgen invested $4.3B in R&D for 2015, Abbvie invested $3.3B. Gilead only invested $2.9B, nearly on par with Celgene (who only saw $7.6B in revenue). R&D investment is the heart of a vibrant pipeline. Gilead’s lower relative investment in R&D could signal expectations of growth through M&A in the coming years.

Revenue R&D R&D/ Rev GILD 24,890,000 2,854,000 11% MRK 39,498,000 6,704000 17% AMGN 20,063,000 4,297,000 21% ABBV 19,960,000 3,297,000 17% CELG 7,670,400 2,430,666 32% BIIB 8,507,935 1,893,422 22%

Data Source: Yahoo Finance (figures are in thousands)

ECONOMIC OUTLOOK

GDP Growth

Prescription drugs (which include biotech drugs) have a fairly strong correlation with the healthcare sector which itself shares a strong correlation with the US GDP. An analysis of the last 6 years of financial data shows that Healthcare has consistently hovered at about 17.4% of the GSP while prescription drugs have amounted to an average of 9.6% of healthcare costs. This allows us to forecast prescription drug expenditures as 1.6% of GDP. Using government forecasts for GDP growth we can forecast prescription drug expenditures steadily growing by 4% (about $350 million) annually into the future.27

Data Source: Bureau of Economic Analysis

Data Source: Bureau of Economic Analysis

CATALYSTS FOR GROWTH

Population change.

More people in a given market logically increases the need for medicine. According to the United Nation’s world Population Prospects report the world population is growing by approximately 74 million people per year. By these estimates the world population will reach 9.0 Billion by 2020 and 11 Billion by 2050.

It should be noted that while the bulk of this growth will be in less developed regions, a notable exception is the United States, with an expected increase of 95 million people in the next 30 years (31% growth)28

Increasing Wealth

The wealthier people are the more health care they tend to consume. The economic development of emerging economies is of specific interest in this area as it will yield

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an increase in healthcare consumption in markets that may not currently be pursued.

Demographic Shifts

Aging populations consume more medication. The US census department forecasts that by 2050 the number of Americans over the age of 65 will increase from 43.1 Million to 83.7 million.29

An additional demographic is the increase in obesity. The CDC reports that 34.9% of US adults are obese30, leading to conditions like heart disease, type 2 diabetes and certain types of cancer. The market for diabetes related biotech presents significant opportunities.

Cures for Untreatable / Incurable Diseases

Biotech offers the potential to treat and cure diseases that currently offer no effective treatment options. The exciting advances in biotech offer the potential to introduced wholly unique offerings to this market facing no competition. For example, if an effective HIV/AIDS vaccination were developed every major government in the world would purchase hundreds of millions of copies. These speculations may seem to border on science fiction but in light of the direction medical science is taking claims for “miracle” drugs coming down major company pipelines should be investigated and considered.

Number of People with Private Health Insurance.

An increase in health insurance increases the purchasing power of potential customers which will likely have a positive impact on Gilead’s sales. The Affordable Care Act of 2010 greatly impacted the Healthcare industry. The ACA sought to lower healthcare prices through increasing competition by creating a number of federal and state health insurance exchanges. Additionally the ACA mandated the purchase of private health insurance. Individuals faced a tax penalty for not having private insurance by 2015.31

As a result the number of uninsured Americans has seen a marked drop. According to studies conducted by the National Health Interview Survey the number of uninsured Americans fell by about 8% to 41 million people in the first quarter of 2014. This drop represents 3.8 million Americans gaining private health insurance.32

INVESTMENT POSITIVES

x Projected to maintain high levels of revenue into the future.

x Low costs deliver strong margins. x Robust pipeline is forecasted to deliver a more diverse

product line by 2020, protecting against future situations like the Zepatier rivalry Gilead is facing.

x High levels of cash reserves create opportunity for increased dividends, R&D and M&A to expand product line.

INVESTMENT NEGATIVES

x Gileads most valuable brands are under attack from substitutes. Unless Gilead is able to produce a new drug far superior to Zapatier it is unlikely that their high priced HCV drugs can run unchecked as they have in the past.

x Gilead’s high prices have attracted negative attention from the government. They are in the process of being sued by the state of New Hampshire for their high prices. If the government chooses to step in and assert price limits on a pharma company this year Gilead’s HCV drug pricing have given them a fairly large target on their back.

VALUATION

For our valuation model we used a 3 Year stock Beta of 1.362. We feel the past 3 years of market data best represent the future firm and market conditions that will create volatility for Gilead. We then calculated a WACC of

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8.54%. We assume a CV growth of 0.5% annually beginning in 2021.

Revenue Growth:

Revenue growth over the next 5 years will be based on a complex relationship between expiring product patents, new drug debuts and competitive pricing. We forecast that Gilead’s strong growth period is likely over but value is poised to remain mostly stable, yielding between $28-30 billion in annual profit through 2020. We forecast that revenue, averaging about 2% annually before stabilizing in CV and continuing at .5% growth. We base this model on the following 3 upcoming major factors facing Gilead.

1. Price Adjustments in Response to Merck

Gilead must adjust its pricing model to compete with Merck’s Zepatir or risk losing up to 75% of its market share. We forecast the following actions on Gillead’s part:

Lowering the price of Sovaldi to match Zepatier

We expect that Gilead will lower the price of Sovaldi to $54,000 for a 12-week treatment to match the price of Zepatier. This will diffuse much of the danger of losing market share to Merck, specifically with insurance companies moving to a cheaper HCV drug. This will yield a 35% reduction in sales revenue from Sovaldi. This price drop may have favorable consequences for Gilead as well. We predict a 10% increase in sales due to the new lower cost. We also predict a 13% boost in Sovaldi sales due to switchers from Harvoni (a 20% increase at 65% of the original Sovaldi price yields an increase of 13%). This will lead to a total revenue drop of $1.2B from Sovaldi revenue (about 12%) in 2016. This is supported by recent action by Gilead. In February of 2016 Gilead announced they would

be offering discounts and rebates up to 46% (though it’s likely that not all discounts will be that significant).33

Gilead will keep Harvoni priced high at $94,500 for a 12-week treatment.

Harvoni will remain the premier drug of choice for Genotypes 2, 3, 5, and 6 (which Zepatier cannot treat). This protects at least 25% of their sales from loss to Zepatier. We predict a 20% drop in sales as customers move from Harvoni to Sovaldi in response to the lower prices. This is unfortunate but preferable than losing them to Merck. This will yield total revenue drops of $2.2B of Harvoni revenue about 20%) in 2016.

2. Upcoming Drug Launches

In the next year Gilead will release an All-Genotype Drug that will capture major market share.

As mentioned earlier, one of the most exciting drugs in Gilead’s pipeline is STR of Sofosbuvir, which just passed the 3rd round of testing and is in the final stages of FDA review. STR has shown a nearly 100% cure rate in all 6 variants of HCV. This drug will quickly become a top seller. As a result Sovaldi and Harvoni sales will fall in 2017 (STR will likely launch in 4Q of 2016). In spite of this Gilead stands a good chance to recapture lost market share from Merck as STR boasts a higher cure rate than Zepatier. This drug could be priced at two levels:

x The first option is a broad, wide selling drug billed as the “magic bullet” for all variants of HCV. Priced somewhere between Sovaldi and Harvoni’s current prices.

x The second option is as an ultra-high premium pill prescribed for the 2-5% of HCV patients for whom all other dugs will be ineffective due to their HCV being caused by the 5 and 6 variants of HCV.

In light of the fact that most cases of genotypes 5 and 6 occur in developing countries the more likely pricing position is option 1.

Upcoming new HIV/AIDS medication will lead to moderate (but not blockbuster) profits.

The final two drugs that have passed 3rd round testing and are currently in the FDA licensing process are F/TAF and STR of R/F/TAF. Until Sovaldi/Harvoni, HIV/AIDS drugs made up about 75% of total sales. That number has

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dropped to a steady 33% in 2014 and 2015. We forecast those percentages will remain steady into the future. These new drugs will cover the lost revenues due to patent expirations of Emtriva 2021) and the European expiration of Atrilpla and Truvada (both in 2018). Additionally Genvoya ill gain sales starting in 2016, extending the profitability that would have been lost with the expiration of Viread 2017).

3. Long-term Value of Once-a-Day Pills

Three major development in the treatment of HIV, HCV, and HBV are the recent release of Genvoya (HIV) and the future releases of TAF (HBC) and STR (HCV). These pills consolidate an entire daily cocktail of drugs into a single pill. From a financial perspective this is very advantageous for Gilead. Traditionally HIV patients take 3 or more pills per day. These pills could each be made by a different company. In producing a one-a-day treatment pill Gilead guarantees that the will provide 100% of this patients drug needs. This is a better position for them than providing all three of the individual drugs, as they are able to take advantage of economies of scale.

Finally through treating chronic illness they maintain revenue streams from customers on a long-term basis. While a single patient taking Harvoni may pay a premium price of $84,000 it is a one-time interaction with the company as they will not need treatment again. The lifetime value for HIV/HBV customers can prove to be higher, even if the per pill price is much lower.

Operating Expenses Assumptions:

Between 2007 and 2012 COGS made up an average of 20% of revenue34, 2014 and 2015 saw that percentage fall to 10% (revenues in contrast increased by over 100%).35 This is due to relatively inexpensive drug ingredients and significant economies of scale. We expect this to remain constant into the future and forecast COGS to remain at 10% of revenues. We expect R&D to remain a consistent 11% of revenue as Gilead’s pipeline of future drugs will play a vital role in their future profitability. SGA will remain consistent at 15.5% as it has for the last several years. Capex will remain a low 2.5% of revenue as most of Gilead’s costs are R&D and most of their assets are intangibles.

Source: GILD 2015 10K

Profit Margin Forecasts

Gilead will enjoy Gross Margins of 90%, EBIT Margins of 59% and profit margins of 46.5%. This allows some room for reduced prices in the face of increasing competition but Gilead will need to offset these reductions by increased sales volume to sustain revenues.

Source: GILD 2015 10K

Transition from growth to value

Gilead has begun the transition from a growth stock to a valued stock. This is evidenced by their decision to issue their first ever dividend in 2015. Further growth at the current rate would be nearly impossible (to match 2014’s growth rate Gilead would need to see $74 billion in

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revenue in 2016). Additionally increased competition will remove some of the premium pricing power that Gilead has enjoyed on its HCV drugs. Gilead’s merit as a growth stock will be dependent on their maintaining their approximately $30 billion in annual sales in the years to come.

Model Results

Our DCF/EP results reveal that according to our model the market’s current price of $87.83ii is under-valuing GILD by about $30 per share. This means Gilead has significant upside. Our DDM gives a lower price of $92.73. While both indicate undervaluation by the market we have opted to use DCF/EP as our target price as Gilead only has a one-year history of dividends. This makes it difficult to forecast amounts and frequency of dividend increases and leads to a less reliable forecast. Additionally we believe our Relative P/E value of $138.79 is too high as it does not take into consideration external factors such as speculation on future earnings and competition.

Our Forecast vs. Analyst Consensus

Our target price of $118.23 and LT Growth rate of 0.5% are similar to a consensus of analysts with the general direction of Gilead’s future, however we adapt a more optimistic outlook. An aggregate of 26 analyst opinions gives Gilead a buy rating with a target price of $116.19 and a LT Growth Rate of 0.1%. We account for that difference price to our slightly higher CV growth rate (0.5% vs 0.1%) a lower average tax rate (17% vs 17.5%) and slightly lower COGS (10% vs 11.33%). We believe that Gilead’s HBV drug and the potential for M&A will give Gilead a higher rate of growth (albeit still low) than the average analyst estimate. Additionally our EPS is 5% lower than estimates. This is because we are slightly more conservative with the number of share repurchases Gilead will make over the coming years.

KEYS TO MONITOR

x Medical breakthroughs by competitors. Specifically in the areas of HCV/HBV, HIV/AIDS and Cancer. A more effective treatment or cure designed by a competing company would certainly have an adverse effect on Gilead’s revenue.

x Government legislation. Congressional legislation pertaining to price ceilings, patent life changes and relaxed biosimilar regulations would also have a

significant impact on the profitability of Gilead’s products.

x Success of Zepatier. Zepatier’s success will come chiefly at the expense of Gilead’s Harvoni/Sovaldi sales. Conversely, any setbacks that Zepatier would have will positively impact Gilead. For example, a recall of the drug could lead to an unexpected surge for Gilead.

x Gilead’s 2016 revenue numbers. If Gilead appears to be slipping considerably, specifically in the HCV medication segment, it could be cause for concern.

REFERENCES

1. Wikipedia: Gilead Sciences. https://en.wikipedia.org/wiki/Gilead_Sciences

2. Mergent: Biotech Industry Analysis 2015. P.4 3. Hepatitis Foundation: About Hepatitis

http://www.hepatitisfoundation.org/HEPATITIS/Hepatitis-C.html

4. Ibid. 5. Hepatitis C Society: Harvoni vs. Sovaldi

http://esofosbuvir.com/harvoni-medicine-even-better-sovaldi/harvoni-vs-sovaldi/

6. Hepatitis B Foundation: Hep B epidemiology. 7. Ibid. 8. Gilead Investor Website 9. Pharma Times: “EU Reviews Gilead’s TAF for Hep B

Infection” http://www.pharmatimes.com/Article/16-02-26/EU_reviews_Gilead_s_TAF_for_hep_B_infection.aspx

10. AIDS.Gov: HIV/AIDS Basics 11. Ibid. 12. GILD 2015 10K 13. Wikipedia: HIV/AIDS Epidemiology

https://en.wikipedia.org/wiki/HIV/AIDS#Epidemiology 14. Hepatitis C Society: Harvoni vs. Sovaldi

http://esofosbuvir.com/harvoni-medicine-even-better-sovaldi/harvoni-vs-sovaldi/

15. Ibid. 16. GILD 2015 10K 17. Mergent: Biotech Industry Analysis 2015. P.10 18. Mergent: Biotech Industry Analysis 2015. P.11 19. Forbes: Are M&A Replacing R&D in Pharma?

http://www.forbes.com/sites/nicolefisher/2015/04/22/are-ma-replacing-rd-in-pharma/#5babfd0cb576

20. NatureReviews: Biopharma deal-making in 2015: Changing the Pharma Landscape. http://www.nature.com/nrd/journal/v15/n2/full/nrd.2016.10.html

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21. Street Insider: AbbVie (ABBV) Announces Completion of Pharmacyclics Acquisition http://www.streetinsider.com/Corporate+News/AbbVie+(ABBV)+Announces+Completion+of+Pharmacyclics+Acquisition/10594347.html

22. Fortune: Pfizer, Allergan Confirm $160 Billion Merger Deal. http://fortune.com/2015/11/23/pfizer-allergan-merger/

23. Wikipedia: AbVie 24. Mergent: Biotech Industry Analysis 2015. P.4 25. Ibid. 26. Mergent: Biotech Industry Analysis 2015. P.5 27. Bureau of Economic Analysis: Healthcare Spending,

Prescription Spending, GDP Growth Forecasts. http://www.bea.gov/

28. United Nations: World Population Estimates http://esa.un.org/unpd/wpp/

29. US Census Website: An Aging Nation: The Older Population in the United States https://www.census.gov/prod/2014pubs/p25-1140.pdf

30. Centers for Disease Control and Prevention: Adult Obesity Facts.http://www.cdc.gov/obesity/data/adult.html

31. IBISWorld 32. New York Times: “Number of Americans Without

Health Insurance Falls” http://www.nytimes.com/2014/09/16/us/number-of-americans-without-health-insurance-falls-survey-shows.html?_r=0

33. Market Watch: Gilead to Discount its Pricey Sovaldi Drug http://www.marketwatch.com/story/gilead-to-discount-its-pricey-sovaldi-drug-2015-02-04

34. GILD 2015 10K 35. GILD 2015 10K

1 Wikipedia: Gilead S ciences https://e n.wikipedia. org/wiki/Gilead_S ciences 2 Mergent p.4 3 http://www.he patitisfoundation.org /HEPATITIS/H epatitis-C.ht ml 4 EBID 5 Esofbuvir 6 HepB. org 7 Hepatitisfoundation.org 8 Gilead Investor Relations Website. 9 http://www.pharmati mes. com/Article/1 6-0 2-2 6/EU_reviews_Gilead_ s_TAF_for_hep_B_i nfe ction.a spx 10 AIDS.gov 11 AIDS.gov 12 GILD 10 K 13 https://e n.wikipedia. org/wiki/HIV/AIDS#Epi demi ology 14http://esofosbuvir.com/harvoni -me dicine-eve n-better-soval di/harvoni -vs -sovaldi/ 15 http://esofosbuvir.com/harvoni-me dicine -even-better-sovaldi /harvoni -vs-sovaldi/ 16 GILD 201 5 10K 17 Mergent p. 10 18 Mergent p.11

19http://www.forbes.com/sites/nicolefisher/2015/04/22/are-ma-replacing-rd-in-pharma/#5babfd0cb576

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

20 http://www.nature.com/nrd/journal/v15/n2/full/nrd.2016.10.html 21 http://www.streetinsider.com/Corporate+News/AbbVie+(ABBV

GileadSciencesRevenueDecomposition

FiscalYearsEndingDec.31 DrugType ExpirationYr(US) ExpirationYr(EU) 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

AntiViralsSovaldi LiverDisease 2029 2028 139 10,283 5,276 4,200 3,800 3,000 2,975 2,775Atripla HIV/AIDS 2021 2018 3,648 3,470 3,134 2,900 2,500 2,250 1,850 1,575Truvada HIV/AIDS 2021 2018 3,136 3,340 3,459 3,500 3,200 2,600 2,000 1,825Harvoni LiverDisease 2030 2030 - 2,127 13,864 10,000 8,000 7,200 4,800 2,800Hepsera LiverDisease 2014 2016 - - - - - - - -Complera/Eviplers HIV/AIDS 2023 2022 810 1,228 1,427 1,500 1,425 1,250 1,225 1,200Emtriva HIV/AIDS 2021 2016 - - - - - - - -Stribild HIV/AIDS 2029 2027 539 1,197 1,825 2,000 2,100 2,050 2,000 1,950Viread HIV/AIDS&LiverDisease 2017 2018 959 1,058 1,108 1,150 1,100 350 250 150Genvoya - - 45 600 1,200 1,800 2,400 3,000OtherAntivirals 111 88 69 60 65 70 75 80PIPELINE:F/TAF(SubmittedforApproval) HIV/AIDS - - - 750 1,250 1,500 1,800 2,000PIPELINE:STRofR/F/TAF(SubmitedforApproval) HIV/AIDS - - - 300 450 600 750 750PIPELINE:STRofSofosbuvir(SubmittedForApproval) LiverDisease(HCV) - - - 1,100 2,200 3,300 4,400 5,500PIPELINE:TAF(SubmittedforApproval) LiverDisease(HBV) - - - 800 1,600 2,400 3,100 4,250PIPELINE:Idelalisib(Phase3,ETA2021) Cancer - - - - - - - -PIPELINE:Momelotinab(Phase3,ETA2022) Cancer - - - - - - - -PIPELINE:GS-5745(Phase3,ETA2021) Cancer - - - - - - - -TotalAntiviralProduts 9,342 22,791 30,207 28,860 28,890 28,370 27,625 27,855

OtherProducts - - -Letairis HeartDisease 2018 2020 520 595 700 750 775 650 300 100Ranexa HeartDisease 2019 2023 449 510 588 625 650 675 700 250AmBisome Antibiotic 2016 2008 352 388 350 300 100 75 50 25Zydelig Cancer 2025 2025 - 23 132 250 500 650 750 850Other 141 167 174 175 180 185 190 195TotalOtherProducts 1,462 1,683 1,944 2,100 2,205 2,235 1,990 1,420TotalProductSales 10,804 24,474 32,151 30,960 31,095 30,605 29,615 29,275

RevenueGrowth 14.96% 126.53% 31.37% -3.70% 0.44% -1.58% -3.23% -1.15%

AntiViralsSovaldi LiverDisease 2029 2028 1.29% 42.02% 16.41% 13.57% 12.22% 9.80% 10.05% 9.48%Atripla HIV/AIDS 2021 2018 33.77% 14.18% 9.75% 9.37% 8.04% 7.35% 6.25% 5.38%Truvada HIV/AIDS 2021 2018 29.03% 13.65% 10.76% 11.30% 10.29% 8.50% 6.75% 6.23%Harvoni LiverDisease 2030 2030 - 8.69% 43.12% 32.30% 25.73% 23.53% 16.21% 9.56%Hepsera LiverDisease 2014 2016 - - - - - - - -Complera/Eviplers HIV/AIDS 2023 2022 7.50% 5.02% 4.44% 4.84% 4.58% 4.08% 4.14% 4.10%Emtriva HIV/AIDS 2021 2016 - - - - - - - -Stribild HIV/AIDS 2029 2027 4.99% 4.89% 5.68% 6.46% 6.75% 6.70% 6.75% 6.66%Viread HIV/AIDS&LiverDisease 2017 2018 8.88% 4.32% 3.45% 3.71% 3.54% 1.14% 0.84% 0.51%Genvoya HIV/AIDS&LiverDisease 0.14% 1.94% 3.86% 5.88% 8.10% 10.25%OtherAntivirals 1.03% 0.36% 0.21% 0.19% 0.21% 0.23% 0.25% 0.27%PIPELINE:F/TAF(SubmittedforApproval) HIV/AIDS - - 0.00% 2.42% 4.02% 4.90% 6.08% 6.83%PIPELINE:STRofR/F/TAF(SubmitedforApproval) HIV/AIDS - - 0.00% 0.97% 1.45% 1.96% 2.53% 2.56%PIPELINE:STRofSofosbuvir(SubmittedForApproval) LiverDisease(HCV) - - 0.00% 3.55% 7.08% 10.78% 14.86% 18.79%PIPELINE:TAF(SubmittedforApproval) LiverDisease(HBV) - - 0.00% 2.58% 5.15% 7.84% 10.47% 14.52%PIPELINE:Idelalisib(Phase3,ETA2021) Cancer - - - - - - - -PIPELINE:Momelotinab(Phase3,ETA2022) Cancer - - - - - - - -PIPELINE:GS-5745(Phase3,ETA2021) Cancer - - - - - - - -TotalAntiviralProduts 86.47% 93.12% 93.95% 93.22% 92.91% 92.70% 93.28% 95.15%

OtherProducts - - - - -Letairis HeartDisease 2018 2020 4.81% 2.43% 2.18% 2.42% 2.49% 2.12% 1.01% 0.34%Ranexa HeartDisease 2019 2023 4.16% 2.08% 1.83% 2.02% 2.09% 2.21% 2.36% 0.85%AmBisome Antibiotic 2016 2008 3.26% 1.59% 1.09% 0.97% 0.32% 0.25% 0.17% 0.09%Zydelig Cancer 2025 2025 - 0.09% 0.41% 0.81% 1.61% 2.12% 2.53% 2.90%Other 1.31% 0.68% 0.54% 0.57% 0.58% 0.60% 0.64% 0.67%TotalOtherProducts 13.53% 6.88% 6.05% 6.78% 7.09% 7.30% 6.72% 4.85%

TotalProductSales 100% 100% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

HIV/AIDS 75.28% 37.73% 30.62% 35.37% 35.13% 33.49% 32.50% 31.77%LiverDisease 1.29% 50.71% 59.53% 52.00% 50.17% 51.95% 51.58% 52.35%HIV/AIDS&LiverDisease* 8.88% 4.32% 3.59% 5.65% 7.40% 7.02% 8.95% 10.76%HeartDisease 8.97% 4.51% 4.01% 4.44% 4.58% 4.33% 3.38% 1.20%Cancer - 0.09% 0.41% 0.81% 1.61% 2.12% 2.53% 2.90%Antibiotics 3.26% 1.59% 1.09% 0.97% 0.32% 0.25% 0.17% 0.09%Other-Antiviral 1.03% 0.36% 0.21% 0.19% 0.21% 0.23% 0.25% 0.27%Other-Misc 1.31% 0.68% 0.54% 0.57% 0.58% 0.60% 0.64% 0.67%Total 100% 100% 100% 100% 100% 100% 100% 100%

RevenueDecomposition(Region)$SalesUnitedStates 6,695 18,182 21234 20,141.69 20,229.52 19,910.74 19,266.67 19,045.48Europe 3,614 5,442 7528 7,140.75 7,171.89 7,058.87 6,830.53 6,752.11OtherCountries 893 1,266 3877 3,677.56 3,693.60 3,635.39 3,517.80 3,477.41TotalRevenues 11,202 24,890 32639 30,960.00 31,095.00 30,605.00 29,615.00 29,275.00

RevenueDecomposition(Region)%ofSalesUnitedStates 59.77% 73.05% 65.06% 65.06% 65.06% 65.06% 65.06% 65.06%Europe 32.26% 21.86% 23.06% 23.06% 23.06% 23.06% 23.06% 23.06%OtherCountries 7.97% 5.09% 11.88% 11.88% 11.88% 11.88% 11.88% 11.88%TotalRevenues 100% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

TotalForeignSales 40.23% 26.95% 34.94% 34.94% 34.94% 34.94% 34.94% 34.94%

RevenueDecomposition(SalesDollars)

RevenueDecomposition(%ofSales)

RevenueDecomposition(TreatmentType)

*Oneproductismarketedtowardsboth.Thisisnotamergingofbothofthebroadercategories

GileadSciencesIncomeStatement

FiscalYearsEndingDec.31 2013 2014 2015 2016E 2017E 2018E 2019E 2020ERevenues Product sales 10,804 24,474 32,151 30,960 31,095 30,605 29,615 29,275 Royalty, contract and other revenues 398 416 488 311.15 312.50 307.58 297.63 294.21 Royalty revenues - - -- - - - - Contract and other revenues - - -- - - - -Total revenues 11,202 24,890 32,639 31,271 31,408 30,913 29,913 29,569Costs and Expenses Cost of goods sold (2,514) (2,738) (2,908) (3,096) (3,110) (3,061) (2,962) (2,928) Depreciation Expense (103) (125) (161) (241) (299) (351) (396) (434) Amortization Expense (242) (925) (937.00) (819.76) (754.18) (693.84) (638.34) (587.27) Research and development expenses (2,120) (2,854) (3,014) (3,440) (3,455) (3,400) (3,290) (3,253) Selling, general and administrative expenses (1,699) (2,983) (3,426) (4,847) (4,868) (4,791) (4,636) (4,583) Purchased in-process research and development - - - - - - - -Total costs and expenses (6,678) (9,625) (10,446) (12,443) (12,485) (12,297) (11,923) (11,785)Income / loss from operations 4,524 15,265 22,193 18,828 18,922 18,616 17,990 17,785Interest expense (307) (412) (688) (478) (397) (338) (331) (345)Other income / expense, net (9) 3 154 - - - - -Minority Interest in joint venture - - - - - - - -Income / loss before provision for income taxes 4,208 14,856 21,659 18,350 18,526 18,278 17,659 17,440Provision for income taxes (1,151) (2,797) (3,553) (3,119) (3,149) (3,107) (3,002) (2,965)Net income / loss 3,057 12,059 18,106 15,230 15,376 15,170 14,657 14,475Net loss / income attributable to noncontrolling interest 18 42 2 14 14 14 14 14Net income attributable to Gilead 3,075 12,101 18,108 15,244 15,390 15,184 14,671 14,489BasicEarningsPerShare(EPS) 2.01 8.33 12.37 10.92 11.21 11.22 11.02 11.07NumberofSharesOutstanding 1,529 1,452 1,422 1,396 1,373 1,353 1,332 1,308AnnualDividendsperShare - - 1.29 1.40 1.51 1.62 1.73 1.84

GileadSciencesBalanceSheet

FiscalYearsEndingDec.31 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020EAssetsCurrentAssets Cash, cash equivalents and marketable securities - - - Cash and cash equivalents 1,804 2,824 10,027 12,851.00 17,641.73 27,034 37,331 47,539 56,726 Short-term marketable securities 59 19 101 1,756 1,786 1,817 1,848 1,879 1,911 Accounts receivable, net 1,751 2,182 4,635 5,854 6,611 6,640 6,535 6,324 6,251 Inventories 1,745 1,697 1,386 1,955 1,876 1,884 1,855 1,795 1,774 Deferred tax assets 263 331 508 828 907 911 896 867 858 Prepaid taxes 348 398 391 773 407 408 402 389 384 Prepaid expenses 102 166 194 240 403 405 399 386 381 Other current assets 84 91 472 506 250 251 247 239 237 Total current assets 6,156 6,997 17,714 24,763 29,882 39,351 49,513 59,418 68,522 Property, plant and equipment, net 1,100 1,166 1,674 2,276 2,823 3,316 3,744 4,102 4,413 Long-term portion of prepaid royalties 176 199 466 400 625 628 618 598 591 Long-term deferred tax assets 131 190 236 324 313 314 309 299 296 Long-term marketable securities 720 439 1,598 11,601 1,564 1,570 1,546 1,496 1,478 Intangible assets, net 11,736 11,900 11,073 10,247 9,427 8,673 7,979 7,341 6,754 Goodwill 1,061 1,169 1,172 1,172 1,172 1,172 1,172 1,172 1,172 Other long-term assets 159 519 731 1,056 639 642 632 611 604Total assets 21,240 22,579 34,664 51,839 46,445 55,666 65,513 75,038 83,831

Liabilities and Stockholders' EquityCurrent Liabilities Accounts payable 1,327 1,256 955 1,178 1,251 1,256 1,237 1,197 1,183 Accrued government and other rebates 745 1,018 2,316 4,118 2,814 2,827 2,782 2,692 2,661 Accrued compensation and employee benefits 205 243 316 380 360 361 355 344 340 Income taxes payable 13 11 105 65 39 39 39 38 37 Other accrued liabilities 675 1,071 1,452 2,727 2,170 2,180 2,145 2,076 2,052 Deferred revenues 103 111 134 440 138 138 136 132 130 Current portion of long-term debt and other obligations, net 1,169 2,697 483 983 1183 4 4 499 499 Total current liabilities 4,238 6,407 5,761 9,891 7,955 6,805 6,698 6,977 6,902 Long-term debt, net 7,055 3,939 11,921 21,195 7,611 7,489 7,333 7,144 6,991 Long-term income taxes payable 116 162 562 1,243 457 459 451 437 432 Long-term deferred tax liabilities 10 83 51 1.4 60 80 60 80 60 Other long-term obligations excluding long-term deferred tax liabilities 250 179 535 394 582 585 575 557 550 Equity component of currently redeemable convertible notes 7 64 15 2 15 15 15 15 15 Long-term deferred revenues 21 - - - - - - - - Other long-term obligations - - - - - - - - - Stockholders'Equity Preferred stock - - - - - - - - - Common stock and Additional Paid-in capital 5,643 5,388 2,393 445 617 790 962 1,065 1,065 Treasury Stock -3000 -6000 -9000 -12000 -15000 Accumulated other comprehensive income / loss (46) (124) 301 88 301 301 301 301 301 Retained earnings / accumulated deficit 3,705 6,106 12,732 18,001 31,254 44,536 57,496 69,827 81,865 Total Gilead stockholders' equity 9,303 11,370 15,426 18,534 29,173 39,627 49,759 59,193 68,232 Noncontrolling interest 241 375 393 579 593 607 621 635 649 Total stockholders’ equity 9,544 11,745 15,819 19,113 29,766 40,234 50,380 59,828 68,881Total liabilities and stockholders’ equity 21,240 22,579 34,664 51,839 46,445 55,666 65,513 75,038 83,831

GileadSciencesCashFlowStatement

FiscalYearsEndingDec.31 2006 2007 2008 2009 2010 2011 2012 2013 2014

OperatingActivities Net income / loss (1,190) 1,576 1,970 2,626 2,890 2,789 2,574 3,057 12,059 Adjustments to reconcile net income / loss to net cash provided by op activities Depreciation expense 28 37 52 65 67 72 83 103 125 Amortization expense 20 64 104 148 198 230 195 242 925 Purchased in-process research and development expense 2,394 - 11 - - - - - - Stock-based compensation expense 134 185 153 181 200 192 209 252 360 In-process research and development impairment charges - - - - 136 27 - - - Excess tax benefits from stock-based compensation (95) (76) (192) (80) (82) (41) (114) (279) (482) Tax benefits from exercise and vesting of stock-based awards 128 111 210 88 82 37 113 285 484 Deferred income taxes (9) 113 (25) (42) 12 64 (39) (98) (236) Change in fair value of contingent consideration - - - - - 8 69 59 22 Other - - - - - 48 (3) 46 79 Changes in operating assets and liabilities Accounts receivable, net (184) (138) (257) (356) (349) (376) 198 (315) (2,578) Inventories (358) (35) (331) (75) (161) (201) (350) (343) 143 Prepaid expenses and other assets 19 (252) 10 (66) (70) (14) (129) (170) (371) Accounts payable 264 (78) 313 204 (4) 429 117 (98) (289) Income taxes payable (69) 77 (24) 166 (186) 111 (68) 30 533 Accrued liabilities 39 80 136 109 120 292 317 312 2,013 Deferred revenues 4 13 25 49 (30) (29) 23 22 31 Minority interest 61 - - - - - - - - Net cash provided by operating activities 1,218 1,669 2,143 3,080 2,834 3,639 3,195 3,105 12,818

Investing Activities Purchases of marketable securities (2,601) (3,502) (3,273) (2,614) (5,503) (5,128) (1,245) (257) (2,107) Proceeds from sales of marketable securities 3,254 2,134 3,026 1,441 3,034 8,650 528 494 807 Proceeds from maturities of marketable securities 457 195 194 436 684 788 45 78 52 Other investments (9) (5) - - - - (25) - (18) Acquisitions, net of cash acquired (2,736) (46) (11) (1,248) (91) (589) (10,752) (379) - Capital expenditures (105) (79) (115) (230) (62) (132) (397) (190) (557) Net cash used in / provided by investing activities (1,739) (1,302) (179) (2,216) (1,938) 3,590 (11,846) (254) (1,823)

Financing Activities Proceeds from debt financing, net of issuance costs 1,276 - - 400 2,963 4,661 2,144 - 7,932 Proceeds from credit facilities, net of issuance costs - - - 400 - - - - - Proceeds from convertible note hedges - - - - - 36 214 2,774 2,543 Proceeds from sale of warrants 235 - - - 155 - - - - Purchases of convertible note hedges (379) - - - (363) - - - (26) Repayments of debt and other obligations (202) (99) (4) (406) (506) (688) (1,839) (4,440) (4,779) Repayments of debt financing - - - (400) (500) (686) - - - Repayments of credit facility - - - (400) - - - - - Repayments of other long-term obligations - (99) (4) (6) (6) (2) - - - Payments to settle warrants - - - - - - - (1,040) (4,093) Proceeds from issuances of common stock 168 243 246 223 221 212 466 313 331 Repurchases of common stock (545) (488) (1,970) (998) (4,023) (2,383) (667) (582) (5,349) Payments of dividends - - - - - - - - - Extinguishment of long-term debt - - - (305) - - - - - Excess tax benefits from stock-based compensation 95 76 192 80 82 41 114 279 482 Payment of contingent consideration - - - - - - - - (101) Contributions from / distributions to noncontrolling interest - 96 61 (45) 132 (115) 131 152 35 Net cash provided by / used in financing activities 649 (171) (1,475) (1,051) (1,339) 1,764 563 (2,544) (3,025) Effect of exchange rate changes on cash and cash equivalents (20) (44) 1 1 77 (17) 8 2 (56)

Net change in cash and cash equivalents 108 152 491 (186) (365) 8,976 (8,080) 309 7,914 Cash and cash equivalents at beginning of period 708 816 968 1,459 1,273 908 9,884 1,804 2,113 Cash and cash equivalents at end of period 816 968 1,459 1,273 908 9,884 1,804 2,113 10,027

Supplemental disclosure of cash flow information Interest paid, net of amounts capitalized (16) (7) (7) (9) (16) (62) (249) (238) (330) Income taxes paid (490) (565) (496) (746) (1,130) (621) (1,101) (1,051) (2,060.00)

GileadSciencesCashFlowStatement

Cash Flows from Operating Activities (Forecasted) 2015 2016E 2017E 2018E 2019E 2020E18,106 15,244 15,390 15,184 14,671 14,489

1,098.00 1,060.56 1,052.88 1,044.68 1,034.47 1,021.24

(1,219) (757) (29) 105 211 73 (569) 79 (8) 30 60 21 (462) 459 (5) 17 34 12

223.00 72.85 5.45 (19.80) (40.00) (13.74) 1,339.00 (577.16) 11.03 (40.04) (80.90) (27.78)

Stock based compensation expense641.00 (812.45) 2.36 (7.75) (15.91) (5.48) 306.00 (302.41) 0.60 (2.18) (4.40) (1.51)

(408.00) (67.57) (5.32) 19.30 39.00 13.39 Increase in accrued government and other rebates 1,802.00 (1,303.60) 12.27 (44.54) (90.00) (30.91) Increase in prepaid royalties 66.00 (225.42) (2.73) 9.90 20.00 6.87 Increase in LT Deferred Tax Liabilities (49.60) 58.60 20.00 (20.00) 20.00 (20.00) Change in other long-term assets (325.00) 416.82 (2.79) 10.12 20.44 7.02

(141.40) 188.45 2.54 (9.21) (18.61) (6.39) 20,407 13,534 16,445 16,276 15,860 15,537

(1,655) 183 (31) (31) (32) (32) Decrease in long-term investments (10,003) 10,037 (7) 25 50 17

(441) (788) (791) (779) (754) (745) 111 - - - - -

Long term debt payment 500 200 (1,179) - 495 - (11,488) 9,632 (2,008) (785) (240) (760)

9,274 (13,584) (122) (156) (188) (154) Increase in Additional Paid in Capital (1,948) 172 172 172 103 - Issuance of Common Stock

(1,873) (1,991) (2,108) (2,225) (2,340) (2,451) (13) 13 - - - - (1) (3,000) (3,000) (3,000) (3,000) (3,000)

Change in non-controlling interest 186 14 14 14 14 14 5,625 (18,375) (5,044) (5,194) (5,411) (5,590)

14,543.92 4,790.73 9,392.67 10,296.51 10,208.41 9,186.39

10,027 12,851 17,642 27,034 37,331 47,539

24,570.92 17,641.73 27,034.40 37,330.91 47,539.33 56,725.71

Net Increase in Cash

Cash, Beginning of the Year

Cash, End of Year

Net Cash provided by operating activities

Cash Flows From Investing Activities

Net cash provided by financing activities

Capital expenditures Capitalization of intangible assts

Net cash used for investing activities

Cash Flows from Financing Activities Change in debt

Payment of dividends

Repurchases of common stock Equity Component of Currently Redeemable Convertible Notes

Increase in receivables

Net IncomeAdjustments to reconcile net income to net cash Add: Depreciation and Amortization Allowance for doubtful accountsChanges in working capital accounts

Decrease in short-term investments

Increase in inventories Increase in preapaid expenses and other current assets Increase in accounts payable Increase in accrued compensation and other liabilities

Increase in income taxes payable Increase in defferred revenue Increase in deferred taxes

Increase in other non-current liabilities

GileadSciencesCommonSizeIncomeStatement

FiscalYearsEndingDec.31 2013 2014 2015 2016E 2017E 2018E 2019E 2020ERevenues: Product sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Royalty, contract and other revenues 3.68% 1.70% 1.52% 1.01% 1.01% 1.01% 1.01% 1.01%Total revenues 103.68% 101.70% 101.52% 101.01% 101.01% 101.01% 101.01% 101.01%CostsandExpenses Cost of goods sold -23.27% -11.19% -9.04% -10.00% -10.00% -10.00% -10.00% -10.00% Depreciation Expense -0.95% -0.51% -0.50% -0.78% -0.96% -1.15% -1.34% -1.48% Amortization Expense -2.24% -3.78% -2.91% -2.65% -2.43% -2.27% -2.16% -2.01% Research and development expenses -19.62% -11.66% -9.37% -11.11% -11.11% -11.11% -11.11% -11.11% Selling, general and administrative expenses -15.73% -12.19% -10.66% -15.66% -15.66% -15.66% -15.66% -15.66% Purchased in-process research and development 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total costs and expenses -61.81% -39.33% -32.49% -40.19% -40.15% -40.18% -40.26% -40.25%Income / loss from operations 41.87% 62.37% 69.03% 60.81% 60.85% 60.83% 60.75% 60.75%Interest expense -2.84% -1.68% -2.14% -1.54% -1.28% -1.10% -1.12% -1.18%Other income / expense, net -0.08% 0.01% 0.48% 0.00% 0.00% 0.00% 0.00% 0.00%Income / loss before provision for income taxes 38.95% 60.70% 67.37% 59.27% 59.58% 59.72% 59.63% 59.57%Provision for income taxes -10.65% -11.43% -11.05% -10.08% -10.13% -10.15% -10.14% -10.13%Net income / loss 28.30% 49.27% 56.32% 49.19% 49.45% 49.57% 49.49% 49.45%Net loss / income attributable to noncontrolling interest 0.17% 0.17% 0.01% 0.05% 0.05% 0.05% 0.05% 0.05%Net income attributable to Gilead 28.46% 49.44% 56.32% 49.24% 49.49% 49.61% 49.54% 49.49%

GileadSciencesCommonSizeBalanceSheet

FiscalYearsEndingDec.31 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

AssetsCurrentAssets Cash and cash equivalents 19.56% 40.97% 0.00% 56.98% 86.94% 121.98% 160.52% 193.77% Short-term marketable securities 0.18% 0.41% 5.46% 5.77% 5.84% 6.04% 6.35% 6.53% Accounts receivable, net 20.20% 18.94% 18.21% 21.35% 21.35% 21.35% 21.35% 21.35% Inventories 15.71% 5.66% 6.08% 6.06% 6.06% 6.06% 6.06% 6.06% Deferred tax assets 3.06% 2.08% 2.58% 2.93% 2.93% 2.93% 2.93% 2.93% Prepaid taxes 3.68% 1.60% 2.40% 1.31% 1.31% 1.31% 1.31% 1.31% Prepaid expenses 1.54% 0.79% 0.75% 1.30% 1.30% 1.30% 1.30% 1.30% Other current assets 0.84% 1.93% 1.57% 0.81% 0.81% 0.81% 0.81% 0.81% Total current assets 64.76% 72.38% 77.02% 96.52% 126.55% 161.78% 200.64% 234.06% Property, plant and equipment, net 10.79% 6.84% 7.08% 9.12% 10.66% 12.23% 13.85% 15.07% Long-term portion of prepaid royalties 1.84% 1.90% 1.24% 2.02% 2.02% 2.02% 2.02% 2.02% Long-term deferred tax assets 1.76% 0.96% 1.01% 1.01% 1.01% 1.01% 1.01% 1.01% Long-term marketable securities 4.06% 6.53% 36.08% 5.05% 5.05% 5.05% 5.05% 5.05% Intangible assets, net 110.14% 45.24% 31.87% 30.45% 27.89% 26.07% 24.79% 23.07% Goodwill 10.82% 4.79% 3.65% 3.79% 3.77% 3.83% 3.96% 4.00% Other long-term assets 4.80% 2.99% 31.87% 30.45% 27.89% 26.07% 24.79% 23.07%Total assets 208.99% 141.64% 161.24% 150.02% 179.02% 214.06% 253.38% 286.36%

Liabilities and Stockholders' EquityCurrent Liabilities Accounts payable 11.63% 3.90% 3.66% 4.04% 4.04% 4.04% 4.04% 4.04% Accrued government and other rebates 9.42% 9.46% 12.81% 9.09% 9.09% 9.09% 9.09% 9.09% Accrued compensation and employee benefits 2.25% 1.29% 1.18% 1.16% 1.16% 1.16% 1.16% 1.16% Income taxes payable 0.10% 0.43% 0.20% 0.13% 0.13% 0.13% 0.13% 0.13% Other accrued liabilities 9.91% 5.93% 8.48% 7.01% 7.01% 7.01% 7.01% 7.01% Accrued royalties 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other accrued liabilities excluding accrued royalties 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Deferred revenues 1.03% 0.55% 1.37% 0.44% 0.44% 0.44% 0.44% 0.44% Current portion of long-term debt and other obligations, net 24.96% 1.97% 3.06% 3.82% 0.01% 0.01% 1.68% 1.70% Total current liabilities 59.30% 23.54% 30.76% 25.69% 21.89% 21.89% 23.56% 23.58% Long-term debt, net 36.46% 48.71% 65.92% 24.58% 24.08% 23.96% 24.12% 23.88% Long-term income taxes payable 1.50% 2.30% 3.87% 1.47% 1.47% 1.47% 1.47% 1.47% Long-term deferred tax liabilities 0.77% 0.21% 0.00% 0.19% 0.26% 0.20% 0.27% 0.20% Other long-term obligations excluding long-term deferred tax liabilities 1.66% 2.19% 1.22% 1.88% 1.88% 1.88% 1.88% 1.88% Equity component of currently redeemable convertible notes 0.59% 0.06% 0.01% 0.05% 0.05% 0.05% 0.05% 0.05% Long-term deferred revenues 0.22% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other long-term obligations 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Minority interest 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Stockholders'Equity Preferred stock 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Common stock & Additional Paid-in Capital 49.87% 9.78% 1.38% 1.99% 2.54% 3.14% 3.60% 3.64% Accumulated other comprehensive income / loss -1.15% 1.23% 0.27% 0.97% 0.97% 0.98% 1.02% 1.03% Retained earnings / accumulated deficit 56.52% 52.02% 55.99% 100.95% 143.23% 187.87% 235.78% 279.64% Total Gilead stockholders' equity 105.24% 63.03% 57.65% 94.23% 127.44% 162.59% 199.88% 233.07% Noncontrolling interest 3.47% 1.61% 1.80% 1.92% 1.95% 2.03% 2.14% 2.22% Total stockholders’ equity 108.71% 64.64% 59.45% 96.14% 129.39% 164.61% 202.02% 235.29%Total liabilities and stockholders’ equity 208.99% 141.64% 161.24% 150.02% 179.02% 214.06% 253.38% 286.36%

GileadSciencesValueDriverEstimationFiscalYearsEndingDec.31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

NetOperatingProfitLessAdjustedTaxes(NOPLAT) 3233 12144 18101 15628 15731 15462 15003 14769InvestedCapital(IC) 14724 16306 15136 17146 16928 16614 16214 15916ReturnonInvestedCapital(ROIC) 22.8% 82.5% 111.0% 103.3% 91.7% 91.3% 90.3% 91.1%FreeCashFlot(FCF) 2688 10563 19271 13618 15949 15776 15404 15066EconomicProfit(EP) 2,022 10,886 16,708 14,335 14,266 14,016 13,584 13,383

TaxRatesStatutoryRate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%+StateTaxes,netoffed.Benefit 0.5% 0.60% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%+ForeignEarningsatdifferentrates -6.6% -16.9% -18.5% -18.5% -18.5% -18.5% -18.5% -18.5%MarginalTaxRate 28.9% 18.7% 17.00% 17.00% 17.00% 17.00% 17.00% 17.00%

CalculatingNOPLATOperatingRevenues 11202 24890 32639 31271 31408 30913 29913 29569-CostofGoodsSold -2514 -2738 -2908 -3096 -3110 -3061 -2962 -2928-SGAExpenses -1699 -2983 -3426 -4847 -4868 -4791 -4636 -4583-Depreciation -103 -125 -161 -241 -299 -351 -396 -434-AmortizationofNon-GoodwillIntangibles -242 -925 -937 -820 -754 -694 -638 -587-ResearchandDevelopmentExpenses -2120 -2854 -3014 -3440 -3455 -3400 -3290 -3253-OtherOperatingExpenses 0 0 0 0 0 0 0 0+ImpliedInterestonOperatingLeases 8 9 12 12 13 14 16 17

AdjustedEBITA 4,532 15,274 22,205 18,840 18,935 18,630 18,005 17,801

AdjustedTaxesIncomeTaxProvision 1,151 2,797 3,553 3,119 3,149 3,107 3,002 2,965Add:TaxShieldonInterestExpense 88.72 77.04 116.96 81.26 67.42 57.45 56.25 58.60Add:TaxonImpliedLeaseInterest 2 2 2 2 2 2 3 3Add:TaxShieldonAmortizedGoodwill - - - - - - - -Less:TaxonInterest(orInvestment)Income (3) 1 26 - - - - -

AdjustedTaxes 1,245 2,875 3,646 3,203 3,219 3,167 3,061 3,026

Plus:ChangeinDeferredTaxAssets/LiabilitiesCurrentYearDeferredTaxAssets 521 744 1,152 1,220 1,225 1,206 1,167 1,153CurrentYearDeferredTaxLiabilities 83 51 1 60 80 60 80 60PreviousYearDeferredTaxAssets 394 521 744 1,152 1,220 1,225 1,206 1,167PreviousYearDeferredTaxLiabilities 10 83 51 1 60 80 60 80ChangeinDeferredTaxes (54) (255) (458) (9) 15(1) 59(7)

EBITA 4,532 15,274 22,205 18,840 18,935 18,630 18,005 17,801-Adjustedtaxes (1,245) (2,875) (3,646) (3,203) (3,219) (3,167) (3,061) (3,026)+ChangeinDefferedTaxes(t-1) (54) (255) (458) (9) 15 (1) 59 (7)NOPLAT 3,233 12,144 18,101 15,628 15,731 15,462 15,003 14,769

InvestedCapitalComputationOperatingCurrentAssets:NormalCash(5%ofRevenue) 560 1,245 1,632 1,564 1,570 1,546 1,496 1,478AccountsReceivable,Net 2,182 4,635 5,854 6,611 6,640 6,535 6,324 6,251Inventory 1,697 1,386 1,955 1,876 1,884 1,855 1,795 1,774PrepaidExpenses&OperatingCurrentAssets 257 666 746 654 656 646 625 618TotalOperatingCurrentAssets 4,696 7,932 10,187 10,704 10,751 10,581 10,239 10,122

OperatingCurrentLiabilities:AccountsPayable 1,256 955 1,178 1,251 1,256 1,237 1,197 1,183IncomeTaxesPayable 11 105 65 39 39 39 38 37EmployeeCompensation&Withholdings 243 316 380 360 361 355 344 340DeferredRevenue 111 134 440 138 138 136 132 130AccruedGovtRebates 1,018 2,316 4,118 2,814 2,827 2,782 2,692 2,661OtherAccountsPayable&AccruedLiabilities 1,071 1,452 2,727 2,170 2,180 2,145 2,076 2,052TotalOperatingCurrentLiabilities 3,710 5,278 8,908 6,772 6,801 6,694 6,478 6,403

TotalOperatingCurrentAssets 4,696 7,932 10,187 10,704 10,751 10,581 10,239 10,122Less:TotalOperatingCurrentLiabilities 3,710 5,278 8,908 6,772 6,801 6,694 6,478 6,403NetOperatingWorkingCapital 986 2,654 1,279 3,932 3,949 3,887 3,761 3,718

NetPPE 1,166 1,674 2,276 2,823 3,316 3,744 4,102 4,413

OtherOperatingAssetsOtherIntangibleAssets,net 11,900 11,073 10,247 9,427 8,673 7,979 7,341 6,754Long-termPortionofPrepaidRoyalties 199 466 400 625 628 618 598 591OtherLong-termAssets 519 731 1,056 639 642 632 611 604PVofOperatingLeases 197 258 274 295 319 344 372 401OtherOperatingAssets 12,815 12,528 11,977 10,987 10,262 9,574 8,922 8,350

OtherOperatingLiabilitiesTotalOtherLong-TermLiabilities 243 550 396 597 600 590 572 565LongTermDeferredRevenues - - - - - - - -OtherOperatingLiabilities 243 550 396 597 600 590 572 565

InvestedCapital:Add:NetOperatingWorkingCapital 986 2,654 1,279 3,932 3,949 3,887 3,761 3,718Add:NetPPE 1,166 1,674 2,276 2,823 3,316 3,744 4,102 4,413Add:OtherOperatingAssets 12,815 12,528 11,977 10,987 10,262 9,574 8,922 8,350Less:OtherOperatingLiabilities (243) (550) (396) (597) (600) (590) (572) (565)TotalInvestedCapital 14,724 16,306 15,136 17,146 16,928 16,614 16,214 15,916

ReturnOnInvestedCapitalNOPLAT/ 3,233 12,144 18,101 15,628 15,731 15,462 15,003 14,769BeginningInvestedCapital 14,179 14,724 16,306 15,136 17,146 16,928 16,614 16,214ROIC 22.8% 82.5% 111.0% 103.3% 91.7% 91.3% 90.3% 91.1%

EconomicProfitBeginningInvestedCapital 14,179 14,724 16,306 15,136 17,146 16,928 16,614 16,214ROIC 22.8% 82.5% 111.0% 103.3% 91.7% 91.3% 90.3% 91.1%WACC 8.54% 8.54% 8.54% 8.54% 8.54% 8.54% 8.54% 8.54%EconomicProfit(BegIC*(ROIC-WACC)) 2,022 10,886 16,708 14,335 14,266 14,016 13,584 13,383

FCFNOPLAT 3,233 12,144 18,101 15,628 15,731 15,462 15,003 14,769Add:BegInvestedCapital 14,179 14,724 16,306 15,136 17,146 16,928 16,614 16,214Less:CurrentInvestedCapital (14,724) (16,306) (15,136) (17,146) (16,928) (16,614) (16,214) (15,916)FCF 2,688 10,563 19,271 13,618 15,949 15,776 15,404 15,066

GileadSciencesKeyManagementRatios

FiscalYearsEndingDec.31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

LiquidityRatiosCurrentRatio(CurrentAssets/CurrentLiabilities) 1.09 3.07 2.50 3.76 5.78 7.39 8.52 9.93OperatingCashFlowRatio(OperatingCF/CurrentLiabilities) 0.48 2.22 2.06 1.70 2.42 2.43 2.27 2.25QuickRatio(Currentassets-Inventories)/CurrentLiabilities 0.83 2.83 2.31 3.52 5.51 7.11 8.26 9.67

ActivityorAsset-ManagementRatiosAssetTurnoverRatio(sales/totalassets) 50% 72% 63% 67% 56% 47% 40% 35%InventoryTurnoverRatio(Sales/TotalInventory) 6.6 18.0 16.7 16.7 16.7 16.7 16.7 16.7ReceivablesTurnoverRatio(Sales/AverageAccts.Receivable) 5.7 7.3 6.2 5.0 4.7 4.7 4.7 4.7

FinancialLeverageRatiosDebttoEquityRatio(TotalDebt/TotalEquity) 60% 82% 121% 31% 20% 15% 14% 12%EquityRatio(ShareholdersEquity/TotalAssets) 0.52 0.46 0.37 0.64 0.72 0.77 0.80 0.82InterestCoverage(EBIT/InterestExpense) 13.71 36.06 31.48 38.39 46.71 54.09 53.37 50.59

ProfitabilityRatiosReturnonAssets(NetIncome/TotalAssets) 13.5% 34.8% 34.9% 32.8% 27.6% 23.2% 19.5% 17.3%ReturnonEquity(Netincome/ShareholdersEquity) 26.0% 76.2% 94.7% 51.2% 38.2% 30.1% 24.5% 21.0%GrossMargin(Revenue-Cogs)/Revenue 77.6% 89.0% 91.1% 90.1% 90.1% 90.1% 90.1% 90.1%EBITmargin(EBIT/SALES) 37.6% 59.7% 66.4% 58.7% 59.0% 59.1% 59.0% 59.0%ProfitMargin(NetIncome/Sales) 27.5% 48.6% 55.5% 48.7% 49.0% 49.1% 49.0% 49.0%

PayoutPolicyRatiosTotalPayoutRatio(Dividendspaid+Repurchases)/NI 19% 44% 27% 33% 33% 34% 36% 38%

GileadSciencesWeightedAverageCostofCapital(WACC)Estimation

WACC 8.54%CostofEquity 9.40%CostofDebt 4.51%CostofPreferredStock 0MarketValueofEquity(Millions) 125,705MarketValueofTotalDebt(Millions) 22,452MarketValueofPreferredStock 0MarketValueofFirm 148,157MarginalTaxRate 17.00%

Equations:EquityMarketRiskPremium 5.00%xBeta 1.326+RiskfreeRate 2.77%CostofEquity 9.40%

CalculatingCostofEquitySharesOutstanding(Millions) 1,422xCurrentPrice 88.4EquityValue 125,705TotalValueofEquity 125,705CalculatingCostofDebtMarketValueoftotaldebt 22,452 FairValueofDebt 22,178

- PVofoperatingLeases 274TotalValueofDebt 22,452 ValueofTotalDebt 22,452

InterestIncome(returnoninvestments)

GileadSciencesDiscountedCashFlow(DCF)andEconomicProfit(EP)ValuationModelsKeyInputs:CVGrowth 0.50%CVROIC 21%WACC 8.54%CostofEquity 9.40%

FiscalYearsEndingDec.31 2016E 2017E 2018E 2019E 2020E

DCFModelDiscountPeriod 1 2 3 4 5NOPLAT 15,628 15,731 15,462 15,003 14,769BeginningIC 15,136 17,146 16,928 16,614 16,214EndingIC 17,146 16,928 16,614 16,214 15,916ΔinInvestedCapital 2,010 (218) (313) (401) (297)

NOPLAT 15,628 15,731 15,462 15,003 14,769Less:ΔinInvestedCapital (2,010) 218 313 401 297FreeCashFlow 13,618 15,949 15,776 15,404 15,066ContinuingValue 179,274PVocContinuingValue 129,156PVoffreecashflows 12,547 13,537 12,336 11,098

ValueofOperations 178,674+ShortTermInvestments 1,756+ExcessCash 12,208-TotalDebt (22,178)-PVofOperatingLeases (274)-PVofEmployeeStockOptions (2,408)-PVofUnderfundedPension&RetirementLiabilities -ValueofEquity 167,778SharesOutstanding 1,441IntrinsicValue(pershare) 116.42PriceToday2/26/16 118.86

EPModelPeriodstoDiscount 1 2 3 4 5EconomicProfit 14,335 14,266 14,016 13,584 13,383ContinuingValue 163,060PVofTerminalYearEP 117,474.68PVofEconomicProfit 13,207 12,109 10,960 9,786 8,883SumofEP 163,538Add:BeginningInvestedCapitalCV 15,136ValueofOperations 178,674+ShortTermInvestments 1,756+ExcessCash 12,208-TotalDebt (22,178)-PVofOperatingLeases (274)-PVofEmployeeStockOptions (2,408)-PVofUnderfundedPension&RetirementLiabilities -ValueofEquity 167,778SharesOutstanding 1,441IntrinsicValue(pershare) 116.42PriceToday2/26/16 118.86

GileadSciencesDividendDiscountModel(DDM)orFundamentalP/EValuationModel

FiscalYearsEndingDec.31 2016E 2017E 2018E 2019E 2020E

EPS 10.92$ 11.21$ 11.22$ 11.02$ 11.07$

KeyAssumptionsCVgrowth 0.50%CVROE 21.10%CostofEquity 9.40%

FutureCashFlowsP/EMultiple(CVYear) 10.97EPS(CVYear) 11.07$FutureStockPrice 121.47$DividendsPerShare 1.40$ 1.51$ 1.62$ 1.73$FutureCashFlows 1.40$ 1.51$ 1.62$ 1.73$ 121.47$Periods 1 2 3 4 4DiscountedCashFlows 1.29$ 1.28$ 1.27$ 1.25$ 87.51$

IntrinsicValue(12/31/15) 91.31$PriceToday 93.83$

GileadSciencesRelativeValuationModels

EPS EPSTicker Company Price 2016E 2017E P/E15 P/E16GSK GlaxoSmithKline $19.55 $2.47 $2.61 7.9 7.5AMGN Amgen $147.60 $10.83 $12.14 13.6 12.2ABBV Abbvie $56.00 $5.03 $5.98 11.1 9.4CELG Celgene $103.37 $5.69 $7.26 18.2 14.2

Average 12.7 10.8

GILD GileadSciences $88.10 10.92 11.21 8.1 7.9

ImpliedValue:RelativeP/E(EPS15) $138.79RelativeP/E(EPS16) 121.19$

VALUATIONOFOPTIONSGRANTEDINESOP

TickerSymbol GILDCurrentStockPrice $88.99RiskFreeRate 1.71%CurrentDividendYield 1.92%AnnualizedSt.Dev.ofStockReturns 9.78%

Average Average B-S ValueRangeof Number Exercise Remaining Option ofOptionsOutstandingOptions ofShares Price Life(yrs) Price GrantedRange1 39.144 22.63 3.80 61.52$ 2,408$Total 39 22.63$ 3.80 67.78$ 2,408$

PresentValueofOperatingLeaseObligations(2015) PresentValueofOperatingLeaseObligations(2014) PresentValueofOperatingLeaseObligations(2013) PresentValueofOperatingLeaseObligations(2012)

Operating Operating Operating OperatingFiscalYearsEndingDec.31 Leases FiscalYearsEndingDec.31 Leases FiscalYearsEnding Leases FiscalYearsEnding Leases2016 66 2015 58 2014 49 2013 472017 63 2016 53 2015 46 2014 432018 51 2017 49 2016 41 2015 382019 43 2018 36 2017 32 2016 272020 31 2019 33 2018 25 2017 19Thereafter 63 Thereafter 73 Thereafter 32 Thereafter 40TotalMinimumPayments 317 TotalMinimumPayments 302 TotalMinimumPayments 226 TotalMinimumPayments 214Less:Interest 43 Less:Interest 44 Less:Interest 29 Less:Interest 29PVofMinimumPayments 274 PVofMinimumPayments 258 PVofMinimumPayments 197 PVofMinimumPayments 185

CapitalizationofOperatingLeases CapitalizationofOperatingLeases CapitalizationofOperatingLeases CapitalizationofOperatingLeases

Pre-TaxCostofDebt 4.51% Pre-TaxCostofDebt 4.51% Pre-TaxCostofDebt 4.51% Pre-TaxCostofDebt 4.51%NumberYearsImpliedbyYear6Payment 2.0 NumberYearsImpliedbyYear6Payment 2.2 NumberYearsImpliedbyYear6Payment 1.3 NumberYearsImpliedbyYear6Payment 2.1

Lease PVLease Lease PVLease Lease PVLease Lease PVLeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 66 63.2 1 58 55.5 1 48.976 46.9 1 47.007 45.02 63 57.7 2 53 48.5 2 46.345 42.4 2 42.947 39.33 51 44.7 3 49 42.9 3 41.384 36.3 3 37.566 32.94 43 36.0 4 36 30.2 4 32.482 27.2 4 26.648 22.35 31 24.9 5 33 26.5 5 25.204 20.2 5 19.211 15.46&beyond 31 47.3 6&beyond 33 54.6 6&beyond 25.204 24.4 6&beyond 19.211 30.2PVofMinimumPayments 273.7 PVofMinimumPayments 258.2 PVofMinimumPayments 197.3 PVofMinimumPayments 185.1

EffectsofESOPExerciseandShareRepurchasesonCommonStockBalanceSheetAccountandNumberofSharesOutstanding

NumberofOptionsOutstanding(shares): 27.41AverageTimetoMaturity(years): 3.60ExpectedAnnualNumberofOptionsExercised: 8

CurrentAverageStrikePrice: 22.63$CostofEquity: 9.40%CurrentStockPrice: $89.66

2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025EIncreaseinSharesOutstanding: 8 8 8 5 0 0 0 0 0 0AverageStrikePrice: 22.63$ 22.63$ 22.63$ 22.63$ 22.63$ 22.63$ 22.63$ 22.63$ 22.63$ 22.63$IncreaseinCommonStockAccount: 172 172 172 103 - - - - - -

ChangeinTreasuryStock 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000ExpectedPriceofRepurchasedShares: 89.66$ 98.09$ 107.31$ 117.40$ 128.43$ 140.50$ 153.71$ 168.16$ 183.97$ 201.26$NumberofSharesRepurchased: 33 31 28 26 23 21 20 18 16 15

SharesOutstanding(beginningoftheyear) 1,422 1,396 1,373 1,353 1,332 1,308 1,287 1,268 1,250 1,233Plus:SharesIssuedThroughESOP 8 8 8 5 0 0 0 0 0 0Less:SharesRepurchasedinTreasury 33 31 28 26 23 21 20 18 16 15SharesOutstanding(endoftheyear) 1,396 1,373 1,353 1,332 1,308 1,287 1,268 1,250 1,233 1,219

8.54% 7.4% 8.4% 9.4% 10.4% 11.4%2.5% 6.59% 7.44% 8.29% 9.14% 9.99%3.5% 6.72% 7.57% 8.42% 9.26% 10.11%4.5% 6.84% 7.69% 8.54% 9.39% 10.24%5.5% 6.97% 7.82% 8.67% 9.52% 10.36%6.5% 7.10% 7.94% 8.79% 9.64% 10.49%

118.86$ 11% 21% 31% 41% 51%-3.5% 109.86 100.33 97.02 95.29 94.25-1.5% 112.65 107.75 106.05 105.16 104.620.5% 116.82 118.86 119.57 119.94 120.162.5% 123.75 137.32 142.04 144.49 145.984.5% 137.5315 174.0408 186.7391 193.3402 197.3526

118.86$ 8% 11% 15.5% 17% 20%6.0% 143.11 136.76 127.24 124.06 117.718.0% 138.92 132.57 123.05 119.87 113.53

10.0% 134.73 128.38 118.86 115.68 109.3412.0% 130.54 124.19 114.67 111.49 105.1514.0% 126.35 120.00 110.48 107.30 100.96

118.86$ 2% 5% 8% 11% 14%1.00% 122.52 121.46 120.69 120.16 119.855.00% 121.64 120.57 119.80 119.27 118.9610.58% 120.70 119.63 118.86 118.33 118.0215.00% 120.15 119.09 118.32 117.79 117.4820.00% 119.72 118.65 117.88 117.35 117.04

8.54% 17,500 20,000 22,452 25,000 27,000105,000 8.71% 8.62% 8.54% 8.46% 8.40%115,000 8.71% 8.62% 8.54% 8.46% 8.40%125,278 8.71% 8.62% 8.54% 8.46% 8.40%135,000 8.71% 8.62% 8.54% 8.46% 8.40%145,000 8.71% 8.62% 8.54% 8.46% 8.40%

118.86$ 1.5% 2.0% 2.5% 3.0% 3.5%6.50% 160.43 160.43 160.43 160.43 160.437.50% 137.06 137.06 137.06 137.06 137.068.54% 118.90 118.90 118.90 118.90 118.909.50% 105.85 105.85 105.85 105.85 105.8510.50% 94.90 94.90 94.90 94.90 94.90

118.86$ 1.0% 3.0% 5.0% 7.0% 9.0%35.00% 93.05 92.90 92.75 92.60 92.4526.00% 106.20 106.05 105.90 105.75 105.6017.00% 119.16 119.01 118.86 118.71 118.568.00% 131.93 131.78 131.63 131.48 131.331.00% 141.74 141.58 141.43 141.28 141.13

118.86$ (0.11)$ -$ 0.11$ 0.22$ 0.33$1,000,000,000 171.29 171.29 171.29 171.29 171.291,200,000,000 142.75 142.75 142.75 142.75 142.751,441,180,186 118.86 118.86 118.86 118.86 118.861,600,000,000 107.06 107.06 107.06 107.06 107.061,800,000,000 95.16 95.16 95.16 95.16 95.16SharesOutstanding

YearlyDividendGrowth($)

MarginalTaxRate

NormalCashLevels

ImpactofChangesinMarketValueofDebt/EquityonWACC

MarketValueofEquity

MarketValueofDebt

Capexas%ofSales

WACC

SensitivityAnalysisCostofDebt

CostofEquity

ImpactofChangesinCostsofEquity/DebtonWACC

CVofROIC

CVofGrowth

Dep.as%ofNetPPE

Amortizationas%ofNetIntang.

SGAas%ofSales

COGSas%ofSales