Gilead Sciences, Inc. · pharmaceutical company to sign an agreement with the Medicines Patent Pool, which is working to increase global access to high-quality, low-cost antiretroviral

Student Investment Management

Gilead Sciences, Inc. November 13, 2016

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Gilead Sciences, Inc.

Company overview

Gilead Sciences, Inc. is a research-based biopharmaceutical

company that discovers, develops and commercializes innovative

medicines in areas of unmet medical need. Gilead strives to

transform and simplify care for people with life-threatening illnesses

around the world. Gilead's portfolio of products and pipeline of

investigational drugs includes treatments for HIV/AIDS, liver

diseases, cancer, inflammatory and respiratory diseases, and

cardiovascular conditions.

Investment thesis

We are placing a BUY rating on GILD with a price target of $92.00, a 20.4% upside to the current trading

price. This represents a 22.8% total return and is based on the following catalysts and reasons:

GILD is fundamentally undervalued; GILD is very cheap at P/E of 7-8x 2017E EPS

HCV upside will come with increased certainty and stabilization of the HCV business

Continual innovation and expansion beyond HIV and HCV

Significant near term cash generation, and aggressive share repurchase and dividend programs

coupled with a conservative M&A strategy will create long-term shareholder value

Risks

The following factors could negatively affect GILD’s business and valuation:

HIV generics entrance in 2018

HCV drug prices cut in the EU due to the entrance of competitive treatments

Lackluster pipeline developments and M&A opportunities

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10.0%

Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16

12-Month trading performance

Fund Manager Royce West, CFA

614-227-2948 [email protected]

Analyst

Andrew Jasen 301-300-0702

[email protected]

Current share price: $72.64

52 wk range: $71.76 - $108.13

Market cap: $99.9bn

P/E: 6.8x

Diluted shares out.: 1.3bn

Last dividend (9/4/2016): $0.47

Dividend yield: 2.4%

Beta: 0.94

EV/EBITDA: 4.8x

EV/Sales: 3.1x

NASDAQ: GILD BUY $92.00

The Fisher College of Business Student Investment Management Program is initiating coverage on Gilead Sciences with a BUY rating. Our target price is $92.00. Our implied P/E for 2016E is 7.9x versus consensus 6.5x. Our 2017 and 2018 estimates are 8.8x and 9.5x, respectively.

GILD

(25.5%)

XBI

(3.0%)

S5HLTH

1.4%

S&P

7.0%



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Table of Contents

COMPANY OVERVIEW ............................................................................................................... 3

MANAGEMENT OVERVIEW ............................................................................................................. 3

BUSINESS SEGMENTS .................................................................................................................. 4

PIPELINE ANALYSIS ...................................................................................................................... 7

M&A OPPORTUNITIES ................................................................................................................... 8

EXISTING AND TARGETED DISEASE MARKETS OVERVIEW ................................................................ 9

HEALTHCARE OVERVIEW AND TRENDS ........................................................................................ 10

INVESTMENT THESIS ............................................................................................................... 12

GILEAD’S VALUE WITHIN THE BIOTECHNOLOGY SECTOR ............................................................... 12

Q3 2016 UPDATE AND 2016 OUTLOOK ....................................................................................... 13

COMPANY FINANCIALS ............................................................................................................... 14

VALUATION AND PRICE TARGET .................................................................................................. 15

RISKS TO RECOMMENDATION ............................................................................................... 17

CONCLUSION ............................................................................................................................ 17

APPENDICES ............................................................................................................................. 18

REFERENCES ........................................................................................................................... 19



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Company overview

Gilead was founded in 1987 in Foster City, California. The company has grown to become one of the world’s

largest biopharmaceutical companies, with more than 8,000 employees across six continents (with

operations in 30 countries). Gilead completed its initial public offering raising $86.25mm on 1992. In 2015,

revenues and market capitalization exceeded $32bn and $179bn, respectively.

Gilead has signed non-exclusive licenses with multiple generic manufacturers, granting them rights to

produce generic versions of certain medicines for HIV/AIDS and hepatitis B and C (HBV and HCV). Partners

have also been granted rights to produce generic versions of new Gilead therapies once they receive U.S.

regulatory approval. Gilead has licensed generic manufacturers to provide treatments to 101 resource-

constrained countries. Those countries have over 100mm people with chronic HCV. Gilead was the first

pharmaceutical company to sign an agreement with the Medicines Patent Pool, which is working to increase

global access to high-quality, low-cost antiretroviral therapy through the sharing of patents. The Patent Pool

has been granted similar licensing terms for Gilead HIV medicines as the generic manufacturing partners.

Patient access programs are increasing business development success. Gilead is actively involved in

several community partnerships. In 2010, Gilead launched the FOCUS Program, which partners with

healthcare providers, government agencies and community organizations to develop programs to routinize

HIV screening and linkage to care. Gilead is now expanding the FOCUS model to hepatitis B and C, with

the goal of expanding to other markets and abroad. These programs ultimately help Gilead with new patient

starts by getting potential patients into their treatment pool as fast as possible.

In the United States, Gilead has put in place comprehensive patient access programs. This includes

providing medicines to eligible patients at no charge and offering a co-pay coupon program for patients with

private insurance, regardless of income.

Management overview

John F. Milligan, PhD: President and CEO

Dr. Milligan has led teams that have developed, manufactured and commercialized more than 20 new

therapies for significant unmet needs. He has managed multiple transformative acquisitions, licensing

agreements and financings, helping the company grow into a worldwide organization reaching more than

10 million patients.

John C. Martin, PhD: Executive Chairman

Dr. Martin served as Chairman and Chief Executive Officer from June 2008 through March 2016 and

President and Chief Executive Officer from 1996 through May 2008. Prior to joining Gilead, he held several

leadership positions at Bristol-Myers Squibb and Syntex Corporation.

Norbert W. Bischofberger, PhD: EVP, R&D CSO

Dr. Bischofberger joined Gilead Sciences in 1990 and has served as Executive Vice President for Research

and Development since 2000 and Chief Scientific Officer since 2007. Prior to joining Gilead he was a Senior

Scientist in Genentech’s DNA Synthesis Group from 1986 until 1990.

Kevin Young, CBE: COO

Mr. Young served as EVP of Commercial Operations from 2004 through 2014, and from 2014 to 2016

served as senior advisor to the company. Prior to Gilead, he spent more than 20 years in the

biopharmaceutical industry, first with ICI Pharmaceuticals and subsequently with Amgen, holding numerous

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



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Business segments

Gilead derives revenues from product sales and royalty, contract, and other revenues.

Products

This segment is further split into antiviral and other products. Antiviral products treat viral infections rather

than bacterial ones. The commercial portfolio of antiviral products focuses on HIV, liver diseases,

hematology/oncology, cardiovascular, inflammatory/respiratory, and other treatments. In 2015, 34% of

product sales were generated outside the US.

HCV

Slowing HCV patient treatments in the US,

Europe and Japan, since Harvoni was launched,

is indicative of the rapid initiation of treatment for

many warehoused patients. In addition, lower

average net selling prices for HCV products is

primarily a result of a shift towards payer

segments in the US that receive higher rebates

and discounts and towards countries with lower

average net selling prices in Europe. A continued

gradual trend toward shorter duration of HCV

treatments is expected and a decline in market

share due to increased competition in the future

is eminent.

Harvoni - sales accounted for 46% and 9% of total antiviral product sales for 2015 and 2014,

respectively. In the United States, the decrease was primarily due to lower sales volume compared

to Harvoni’s early launch levels during the prior year and a lower average net selling price. The

number of patients that started treatment with Harvoni in the United States peaked in the first half

of 2015, as many warehoused patients initiated treatment after the product launch. Cheaper

genotype 1 treatments by AbbVie and Merck have forced Gilead to boost discounts.

Sovaldi - sales accounted for 17% and 45%, of total antiviral product sales for 2015 and 2014,

respectively. Net product sales decreased primarily due to volume declines in the United States

with patients being prescribed Harvoni instead of Sovaldi. That decline was partially offset by

volume increases in Japan and Europe as Sovaldi is still being launched in various countries.

Epclusa - sales for the three and nine months ended September 30, 2016 accounted for 9% and

3% of total antiviral product sales, respectively. Epclusa was launched in the United States and

Europe in June and July 2016, respectively.

HIV

Continued strength in HIV and other product sales is primarily driven by the continued uptake of tenofovir

alafenamide (TAF)-based products, Genvoya, Descovy and Odefsey. Favorable revisions to the rebate

reserves, primarily related to our tenofovir disoproxil fumarate (TDF)-based products aid results. TAF

treatments have proven increased efficacy and decreased toxicity to current drugs in the market.

62 5947 52 54 53

3726

2930 29 21

14 35 31 1915

60 52 30 3333

31

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016

HCV patient starts

US Europe Japan RoW



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Atripla – sales accounted for 10% and 15% of total antiviral product sales for 2015 and 2014,

respectively. The decrease was primarily due to a decline in sales volume as doctors prescribed

newer regimens, including TDF- and TAF-based regimens (Complera/Eviplera and Stribild). A

generic version introduced by BMS has a gross margin of 0% and will be introduced into the US in

2017, which might add to pricing pressure, however Atripla is a superior treatment.

Complera/Eviplera – sales accounted for 5% of total antiviral product sales in both 2015 and 2014.

Sales jumped due to an increase in sales volume in the US and Europe. The increase was primarily

due to a favorable revision to rebate reserves of $89 million. However, lower sales volume as a

result of the continued launch of our new TAF-based products partially offset the volume increase.

In the US, it captured 9% of naïve HIV patient share and is the fourth most prescribed HIV regimen.

Stribild – sales accounted for 6% and 5% of total antiviral product sales for 2015 and 2014,

respectively. Sales jumped due to an increase in sales volume in the US and Europe. In the US,

sequential and YoY increases reflect a one-time favorable adjustment of rebate reserves partially

offset by switches to Genvoya. It is able to capture 13% of naïve HIV patient share and was the

number two most prescribed HIV regimen across all treated patients.

Viread – sales accounted for 4% and 5% of total antiviral product sales for 2015 and 2014,

respectively. Sales increased due to increased sales volume in the US and other international

locations. Outlook is wary due to new TAF-based regimens that have less toxicity.

Truvada - sales accounted for 11% and 15% of total antiviral product sales for 2015 and 2014,

respectively. The overall increase was primarily driven by a higher average net selling price and

higher sales volume, primarily driven by increased usage for PrEP. Truvada is currently the only

drug promoted by the CDC to treat PrEP, which helps it capture 10% and 23% of naïve HIV patient

share in the US and Europe, respectively.

TAF (Genvoya, Descovy, Odefsey) - sales of the recently launched TAF-based regimens for the

three and nine months ended September 30, 2016 accounted for 10% and 6% of our total antiviral

product sales, respectively. Genvoya was launched in the United States and Europe in November

2015. Descovy was launched in the United States and Europe in April 2016 and is the first HIV

backbone approved in more than a decade. Odefsey was launched in the United States in March

2016 and launched in Europe in July 2016.

76%

62%

30%

13% 10% 9% 6% 4% 2%

0%

20%

40%

60%

80%

100%

On a GileadHIV product

Gilead STR Genvoya Stribild Truvada Complera Odefsey Atripla Descovy

US share in HIV treatment naive patients

Q2 2014 Q2 2015 Q2 2016



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The market’s receptiveness to TAF treatments is obvious, shown with Genvoya’s success. Stribild, Atripla,

and Complera are all blockbuster drugs, and over the past 11 months, Genvoya has outpaced the number

of patient starts and new prescriptions per month. This only further enhances the HIV business in the long-

term, exemplifying Gilead’s hold on the HIV market.

Royalty, contract, and other

Royalty, contract and other revenues primarily includes royalty revenues from Roche for sales of Tamiflu.

This sometimes-blockbuster drug is the only approved drug for fighting influenza.

Product competition

HCV

Harvoni and Sovaldi compete with Viekira Pak marketed by AbbVie, Zepatier marketed by Merck,

Daklinza marketed by Bristol-Myers Squibb (BMS), and Olysio marketed by Janssen.

HIV

Genvoya, Stribild, Complera/Eviplera, Atripla and Truvada all compete primarily with products from

ViiV Healthcare, which markets fixed-dose combination products.

Generic versions of Sustiva, a component of Atripla, entered Canada and Europe. Some pricing

pressure related to the Sustiva component of Atripla has weighed on margins. Anticipated

competition from generic efavirenz will be introduced in the US in December 2017.

HBV and others

Viread and Hepsera face competition from Baraclude marketed by BMS.

Other products compete with Tyzeka/Sebivo marketed by Novartis.

Tamiflu competes with Relenza marketed by GSK and products sold by generic competitors.

AmBisome competes with Vfend marketed by Pfizer and a product developed by Merck that is

marketed as Cancidas in the United States and as Caspofungin elsewhere. There are also at least

three lipid formulations that claim similarity to AmBisome.



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Pipeline analysis

The portfolio of marketed

products includes a number of

category firsts, including

complete treatment regimens

for HIV infection available in a

once-daily single pill and the

first oral antiretroviral pill

available to reduce the risk of

acquiring HIV infection in

certain high-risk adults.

Gilead’s TAF alternative to

TDF has increased antiviral

efficacy and improved

laboratory markers of renal

and bone safety. In November,

Genvoya, the first TAF-based

STR for HIV, was approved by

the FDA and European

Commission (EC). Odefsey,

Gilead’s second TAF-based

STR, received FDA approval

in March 2016 and has been

submitted for regulatory review

to the EC. Three other TAF-

based HIV treatments are in

development including

F/TAF—a potential new HIV

treatment backbone to be

used in combination with other

antiretroviral medicines—was

submitted for regulatory review

to the FDA and EC in 2015.

Lastly, Gilead initiated a Phase

III program for GS-9883, the

company’s proprietary

integrase inhibitor, combined in an STR with F/TAF. This will complement strong projected TAF growth and

partly help address intermediate-term top line concerns.

GS-9620 (TLR-7) for HBV is a large factor in Gilead’s longer term outlook. Phase II data in treatment-naïve

patients is expected in 1Q17, which, if positive, could support a potential Phase III program and improve

sentiment on Gilead shares.

Given what management views as a limited area for future innovation, it is clear that development going

forward will be away from HCV— potentially in HBV (which could be meaningful), oncology (which is less

clear), NASH and inflammation.

Announced that the EC granted marketing authorization for Truvada to reduce the risk of sexually acquired

HIV among uninfected adults at high risk, a strategy known as pre-exposure prophylaxis, or PrEP. Truvada

was approved by the European Medicines Agency in 2005 for use in combination with other antiretroviral

agents for the treatment of HIV and is currently the most prescribed antiretroviral medicine in Europe as

part of combination therapy.

EU Regulatory Submission



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The European Commission granted marketing authorization for Epclusa, the first pan-genotypic, STR for

the treatment HCV. Epclusa is also the first STR approved for the treatment of patients with HCV, without

the need for RBV. Physicians also have the flexibility to consider the addition of RBV. The marketing

authorization followed an accelerated review procedure by the European Medicines Agency, reserved for

medicinal products expected to be of major public health interest.

Gilead also announced topline Phase II results for Selonsertib in NASH, PAH, and DKD. Selonsertib

demonstrated anti-fibrotic activity in an open-label Phase II clinical trial. Gilead plans to initiate the Phase

III study in 1Q17.

Ultimately, Gilead’s internal pipeline is robust, and their work with CROs and past commercialization efforts

have been rather successful. All of these indications have large markets and Gilead currently has drugs in

Phase III trials or are entering Phase III trials in 2017. A vital aspect of these developments to note, is that

out of the 11 drugs that are in Phase III trials already or that have been submitted for approval, over 70%

are for previously untargeted indications. Investor concerns heavily lay on HCV uncertainty, lower than

expected growth, and potential price cuts. Introductions to these new indications will assuage investor

concerns over growth areas and Gilead’s ability to continually generate monster cash flows.

US pertinent patent expiration schedule

M&A and opportunities

April 4, 2016: Gilead acquired Nimbus Apollo (a wholly-owned subsidiary of Nimbus Therapeutics) for a

$400mm upfront payment with $800mm in potential milestone value. Nimbus Apollo is developing the

leading ACC inhibitor program, which, if successful, would greatly complement Gilead’s existing NASH

treatment research.

Gilead priced $10bn of multi-tranche debt in September 2015, from management’s perspective to aid the

share repurchases, but a “side” use is for M&A capabilities to build up cash piles.

Gilead is operating a “string of pearls” M&A strategy. Management

is focused on acquiring small, early-phase drugs at the right price,

instead of looking at potential large, portfolio-changing transactions.

With the recent discontinuation of the Ulcerative Colitis (UC) and

Crohn’s programs and recent update on NASH, clarity on the

external M&A strategy might have emerged. Strategic acquisitions

in those fields, NASH or later stage oncology assets, are probable,

but it is clear that the price must be right.

Gilead’s HCV cash flows are declining and R&D (both internal and

in the form of external milestone payments which increased Q2

2016 by $200mm) commitments are starting to taper, signifying that

management may be gearing up for a significant acquisition after

all. This financial move is clearly to make room on their balance

sheet and income statement. In addition, share buybacks have been

front-loaded so far in 2016.

Stribild

Tamiflu

2014 2030 2022

AmBisome Viread

Atripla

Truvada Complera

Sovaldi

Sovaldi

Genvoya Harvoni

$713 $779 $769

$1,040 $981

$0

$200

$400

$600

$800

$1,000

$1,200

Q32015

Q42015

Q12016

Q22016

Q32016

R&D spend



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Existing disease markets outlook

HIV

The HIV market remains highly attractive in terms

of global, novel drugs. Asian manufacturers are

circumventing US and EU patent laws. Prices are

bound to decrease with the entry of such

manufacturers, thereby potentially increasing the

volume of therapeutics in the market. The North

American HIV market is the highest valued market

globally and occupies more than 50% of the global

revenue generated from HIV antiviral products; this

is followed by the EU at 30%. Growth in these

regions is mainly attributed to high affordability of

drugs along with a range of health insurance

coverage. Developing markets large and growing

population sizes are promising targets, however

unavailability of affordable drugs is the key

hindrance to proliferation. On the other hand, the

recent uptick in the Asia-Pacific is a positive sign.

HCV

North America is one of the fastest growing HCV drug markets across the world with more than 40% share

of the total revenue generated in 2015; the US is the largest revenue contributor. Government funding for

drug development will continue to play an essential role in the growth of US HCV treatments. Europe was

the second major market for HCV in 2015. Global demand for HCV drugs was valued at $11.8bn in 2015

and is expected to reach $27.6bn by 2021.

HBV

The value of the global HBV therapeutics market will increase modestly over the next 6 years, from almost

$3 billion in 2014 to $3.5 billion by 2021, representing a 2.3% CAGR. The US, which has one of the largest

shares of the HBV treatment market, will see considerable migration from high-prevalence countries, such

as the Philippines, China, and Vietnam. While immigration will enlarge the patient pool, HBV treatment

market expansion will be restricted by prophylactic vaccination in the US and much of Europe. Overall low

diagnosis and treatment rates due to the asymptomatic nature of the condition and a lack of awareness,

coupled with current drugs serving the market adequately, further growth is hindered. Leading brands

treating the condition are also facing competition from generic drugs as major patents approach expiry.

Targeted disease markets outlook

NASH - the NASH therapeutics market is expected to reach $20.3bn by 2025. NASH is becoming

much more common due to increasing American obesity. In the past few years, the rate of obesity

has almost doubled in adults and tripled in children. Obesity also adds to diabetes and high blood

cholesterol, which can further complicate the health of people suffering from NASH. Diabetes and

high blood cholesterol are also becoming more common among Americans.

Oncology – a sustained surge in innovative therapies has driven the global oncology market to

$107bn in 2015. Growth in global spending on oncology therapeutics and supportive care drugs

increased 11.5%. Annual global growth in the oncology drug market is expected to be 7.5–10.5%

through 2020, reaching $150bn. Wider utilization of new products—especially immunotherapies—

will drive much of the growth.

Chronic Lymphocytic Leukemia (CLL) – the CLL market is expected to grow at a 19.2% CAGR

from 2016 – 2020. Development of combination therapies is expected to boost market growth. A

key growth driver is the special regulatory designations offered to certain drugs (i.e. Orphan drug

1,218

1,062

838

659

0

200

400

600

800

1,000

1,200

1,400

HIV infected Diagnosed Onantiretroviral

treatment

On a GileadHIV product

(Estim

ate

d p

atients

in thousands)

US HIV market dynamics

87%

Up 9%



P a g e 10 | 20

and fast-track approval statuses). A small number of patients imply a smaller addressable market

for these drugs, therefore covering R&D costs profitably could prove arduous.

Ulcerative Colitis and Chron’s – Approximately 1.9bn patients have been diagnosed with UC

globally, with 1.5bn patients currently receiving treatment. Traditional therapies have yielded

$4.2bn in annual global sales, a figure expected to increase to $6.9bn by 2022 with the approval of

various pipeline drugs. CD has a smaller global prevalence, with only 1.3mm patients diagnosed

and 0.8mm who currently receive treatment. Still, traditional therapies have resulted in an

impressive $3.2bn in annual global sales which is predicted to increase to $4.2bn by 2022.

Rheumatoid Arthritis (RA) – Over the 2013–2020 forecast period, the global RA market is

expected to increase at a 4.1% CAGR, from $14.3bn to just over $19.0bn. Market growth is

projected to vary considerably across the eight major regulatory zones. It is estimated to affect

approximately 4.9 million people across those major markets.

Gastric cancer – the treatment market will experience rapid growth, from $1.1bn in 2014 to $4.4bn

by 2024, representing an impressive 14.6% CAGR. It is likely that there will be over 410k cases of

gastric cancer in 2024, rising from just over 350k in 2014, due to an aging population.

Myelfibrosis

Long QT-3 Syndrome

All of the existing and targeted indications have favorable fundamental drivers backing their growth. Global

patient access is increasing and Gilead will be able to leverage their global salesforce as well as European

and Asian manufacturing and licensing partners to take full advantage. The market has been extremely

excited and bullish on opportunities within NASH and Oncology. As those are likely areas to increase R&D

efforts (and more likely through acquisition), the pipeline will provide more upside than the market is pricing

into Gilead’s depressed stock price. Although a lot of Gilead’s targeted indications aim at existing treatment

markets the new antiviral and other product sales will aid their overall portfolio volatility.

Healthcare Overview and Trends

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

Q12015

Q22015

Q32015

Q42015

Q12016

Q22016

Q32016

Healthcare industry breakdown: historical EV/EBITDA

Large Pharma Managed Care

Hospitals Supply Chain

Medical Devices Biotech

10.0x

15.0x

20.0x

25.0x

30.0x

35.0x

Q12015

Q22015

Q32015

Q42015

Q12016

Q22016

Q32016

Healthcare industry breakdown: historical P/E

Large Pharma Managed Care

Hospitals Supply Chain

Medical Devices Biotech

S&P S5HLTH Delta (Healthcare Index – S&P)

Median Current Median Current Median Current

P/E 19.18x 20.11x P/E 20.60x 19.04x P/E 1.42x (1.07x)

P/B 2.79x 2.81x P/B 3.70x 3.54x P/B 0.91x 0.73x

P/S 1.87x 1.92x P/S 1.72x 1.65x P/S (0.14x) (0.27x)

EV/EBITDA 12.54x 13.13x EV/EBITDA 13.65x 13.07x EV/EBITDA 1.11x (0.06x)

Relative Valuation YTD



P a g e 11 | 20

Demographic trends provide a foundation for strong future earnings and growth for health-care companies.

A 2015 study by the U.S. Census Bureau found that, with global populations aging, the developed world is

aging the quickest. Long-term care spending as a percentage of GDP will increase and therefore provide

more opportunity for Gilead to capitalize. The proliferation of chronic diseases is having serious

repercussions in both developed and emerging countries. Meanwhile, the fight against communicable

diseases continues, especially in developing countries. Also, population access to health care clinicians,

facilities and treatments varies widely around the globe – from simplistic as infrastructure basics, to complex

as issues with cost containment. Underlying market forces to decrease costs remain strong and increased

competition within categories will elicit pricing pressure earlier in the life cycle of newly introduced drugs.

However, creating competitive pressure to lower prices takes longer time. Patient group backlash, further

consolidation among buyers and employer insistence that PBM’s manage absolute, not relative, costs

would further increase pricing pressure. A bright spot in this trend is that breakthroughs and new drugs will

experience a much more diluted competitive environment.

President-Elect Donald J. Trump

Throughout the past 18 months, Hillary Clinton and Bernie Sanders have been strong adversaries for

biotechnology stocks, as they promised to cap drug prices and lower healthcare payers’ drug costs, placing

enormous topline headwinds to biotechnology and other pharmaceutical companies. Some of Clinton’s

suggested policies included removing tax reductions for drug marketing, shorter exclusivity periods for

biologics, and granting Medicare negotiating power just to name a few. This gave added fire to state

propositions, but California saw the most impactful. Proposition 61, which was ultimately voted against,

proposed to allow consumers to pay the same prices for drugs and pharmaceutical products as members

of the VA (which pay an extreme discount to normal retail prices). As a result of these proposals alongside

separate public pressure seen from companies like Mylan, the industry saw a selloff as Clinton strode into

election-day as a favorite to take the Presidency. This can be seen with the peak valuations in 2015 and

sharp declines since. The markets were reacting to the pending changes to the market dynamics for the

healthcare industry and biotech’s in particular as they would face major, yet uncertain, headwinds.

However, on November 8th, the country spoke and Donald J. Trump emerged as President-Elect. It is

premature to predict how the new administration will reshape the healthcare system, however, we can rely

on certain pledges and literature published during the campaign as a fallback. Trump has backed Medicare

negotiation and reimportation (although reimportation remains impractical), but has been rather inactive on

drug price inflation. This will relieve short-term margin pressure. Since Election Day, a major biotech ETF

(XBI) has risen ~15% due to Trump’s pending and ultimate victory. Throughout the campaign Trump

promised to completely repeal Obamacare, however, in recent days, he has mentioned maintaining non-

specified aspects of the legislation. If he does follow through with the repeal, the risk of declining patient

volumes will be a major problem until the administration can come up with “something better”. The general

lower corporate tax and ability to repatriate dollars at a 10% tax rate will also help pad companies with large

international operations bottom-lines. Trump also aims to make the process of garnering FDA approval for

indications that target an area of unmet need or is potential life-saving easier and faster. Trump’s general

business-friendly policies mean potential tailwinds for industry profits.

Ultimately, a Trump presidency seems advantageous for healthcare and biotechnology companies. To

reiterate, it is hard to predict what legislation his transition team pushes through to Congress, however,

relying on previous sentiment, biotech’s stand to not necessarily benefit, but at least recover to pre-

campaign levels. Gilead’s major presence in the specialty drug and disease market, mixed with unique

treatments that have plenty of time until patent expiration, signifies that it is positioned well to garner more

favorable market sentiment than it has faced since the election.



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Investment thesis

Gilead’s value within the biotechnology sector

Biotech drugs continue to gain traction in the life sciences sector. Treatments for RA, HCV, and cancer

generate the most sales. Biotech drug sales estimated $289bn in 2014 and are projected to grow to $445bn

by 2019. In addition, biotech’s share of worldwide prescription drug and OTC pharma sales is projected to

increase from 23% in 2014 to 26% in 2019. With the significant growth of specialty drugs, biotech

companies are seeing increasing investment activity.

Generics and manufacturers

Demand for generic drugs should continue to rise as payers pursue avenues to reduce costs. In the US,

generic drugs already comprise about 70% of the pharma market by volume. Generics are taking a larger

share of total global medicine spend, increasing from 27% ($261bn) in 2012 to 36% ($421bn) by 2017.

Generics challenge branded drug companies — who face revenue and market share loss— and generic

drug manufacturers—who may have difficulty expanding their production capacity to meet demand—will

pose a risk to those who fail to include generics in their own portfolios. A challenge for generic pharma

companies is that emerging market firms are growing at an increasing rate. Development and sales of

biosimilars, are beginning to accelerate as well. The worldwide biosimilars market is expected to reach $25

- $35bn by 2020.

Biotechnology equity performance

Biotech stocks, while struggling this year, were a main driver of the broader health-care sector’s rise in the

past eight years. The Nasdaq Biotechnology Index has climbed 256%. The gains were a result of increased

commercialization and marketing, innovation, and new drug approvals by the FDA. The FDA approved 45

novel drugs in 2015 and 41 in 2014, compared with an average of 25 annually from 2005 to 2013. As of

mid-May in 2016, US biotechs’ cumulative market value had fallen by nearly a third from its peaks in 2015.

Global biotechnology revenues rose 13% in 2015 to $133bn, versus an 18% increase in 2014. Meanwhile,

biotech R&D spend increased 16% to $40bn, only slightly below its 17% jump in 2014. The R&D expense

growth is significant because it suggests an increasing willingness to bet on developing internal pipelines.

The market was overly-bullish on the sector’s ability to maintain the growth (primarily driven by Gilead).

Once management teams of the biotech companies (like Gilead) started to discuss “slow-downs” in

earnings call towards the end of 2015 and beginning of 2016, the market reacted correctly and a sell-off

began. However, the sell-off was dramatic and left the sector fundamentally undervalued. Ultimately, the

(35.0%)

(30.0%)

(25.0%)

(20.0%)

(15.0%)

(10.0%)

(5.0%)

0.0%

5.0%

10.0%

Nov-15 Feb-16 May-16 Aug-16 Nov-16

1-Year trading performance of the bitoechnology sector

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

11/3 11/5 11/7 11/9 11/11

7-Day trading performance: election effects



P a g e 13 | 20

industry is now trading at unwarranted depressed levels. When those same companies that drove the

growth started to slow, the fundamentals did take a downturn, but not by the same amplitude as the sector

sell-off that occurred; and that is especially true for Gilead.

Sector maturation and consequences

With maturity comes challenges: mature, commercial-stage biotech’s are now facing the same capital

allocation and growth concerns as traditional pharma peers. They risk disruption and competition from

smaller biotech’s and information technology players that see opportunity in HCIT and managing the flow

of health data. As companies aim to better demonstrate and extract product value, the entire biopharma

industry is lurching toward more focused business models. Many believe that to compete commercially and

re-ignite growth, companies must be the dominant players in fewer indications. Gilead has historically been

the in the top echelon within HIV and HCV, and now that the rest of the market is finally starting to

commercialize competitive products in those areas, Gilead will be able to leverage its expertise into other

markets and commercialization efforts to compete with the other biotech’s and large pharma’s.

The industry’s largest players are now competing with traditional pharma buyers for M&A and partnerships

more intensely than ever before. Many large biotech’s, like Gilead through its blockbuster drug Sovaldi, are

stockpiling cash. Low-cost borrowing (biotech companies raised over $71bn in capital in 2015) and

favorable credit ratings has equipped the sector to innovate despite the downturn in the capital markets by

retaining enormous cash reserves. Increased transaction premiums, which drive up market valuations are

fighting with overall market and biotech stock gyrations. The market volatility has deflated biotech startups

value, leaving them vulnerable for acquisition. Favorable tax policies, repatriation of dollars, as well as

strong balance sheets all give large pharma and biotech companies, especially Gilead who has been

extremely proactive in raising cheap capital, an advantage moving forward.

Gilead’s capital allocation strategy is not explicit, but is becoming increasingly clear. The Board of Directors

has announced aggressive share buyback and dividend programs to help create short- and long-term value

attracting investors who depend on dividends amongst a volatile market. This capital allocation plan also

helps Gilead compensate for ambiguous performance projections and ultimately ambiguous growth, and

maintains the flexibility to act quickly on attractive M&A opportunities.

Q3 update and 2016 outlook

Financial results

Gilead's 3Q16 revenues slipped further, primarily as a result of Harvoni and Sovaldi declines. Diminishing

HCV patient volumes added to a longer “patient journey” has slowed total HCV growth and nominal

performance. Revenue surprises from new TAF treatments (specifically Eclipsa) helped the top-line.

Epclusa revenues will continue to be a positive offset, however it can cannibalize in the long term.

$0

$1,000

$2,000

$3,000

$4,000

Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016

HIV and other antiviral product sales

US Europe Other Int'l One-time Adj.

$0

$1,000

$2,000

$3,000

$4,000

$5,000

Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016

HCV sales

US Europe Japan Other Int'l



P a g e 14 | 20

Research and product updates

Vemlidy, TAF, a HBV treatment, received approval from the FDA and EC. GS4997, a potential NASH

treatment, was proposed to undergo an ambitious trial. Stimtuzumab, the promising NASH therapeutic at

the time, has officially been discontinued after received negative trial results. The EC approved Gilead's

new HCV product Epclusa. The marketing authorization allowed Gilead to commercialize Epclusa in all 28

countries of the EU following approval from the FDA in June 2016. Gilead received European marketing

authorization for Truvada as well.

Capital allocation

YTD, 98% of free cash flow has been returned to shareholders in some form of share repurchases,

dividends, or Q3 2016 warrant settlements. In January 2015, the Board approved a 5-year $15bn stock

repurchase program. In February 2016, Gilead entered into a $5bn ASRP to finish the previously

announced program, and went on to announce a new $12bn share repurchase program which will finish

once the 2015 program is complete. This is on top of an announced $0.47 quarterly dividend.

Outlook

Management reiterated 2016 guidance, seemed oddly optimistic on the 2017 HCV portfolio, but did not

have too many specific data points, and the kicker is an unclear 2018. In the short term, Gilead is exploring

growth opportunities outside the HCV franchise with its promising pipeline. A strong balance sheet

($31.6bn) allows the company the potential for M&A transactions and to acquire the possible needed growth

to improve investor expectations and sentiment.

Company financials

Gilead is financially healthy. Its historical blockbuster drugs are also the drugs that have the highest margins

helping them scale while maintaining tight cost controls. Gilead’s margins have only steadied over time and

are poised to increase due to lower expected branded prescription drug fees. It has levered-up to a cash

flow to debt level that the credit agencies are comfortable with and has been able to increase marketing

and commercialization efforts, vitally bolstering cash flows. Overall, despite low-expectations for the

company and the HCV business, GILD is trading at unfairly distressed levels. GILD is a low-expectations,

low-valuation, and high-cash flow generating (10-15% FCF yield) company that is returning capital to

shareholders. Over the next 12-18 months, investors will gain confidence in GILD’s base business capability

of generating large and durable cash flows, and that the company will deploy capital to create long-term

shareholder value.

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

-20%

0%

20%

40%

60%

80%

100%

Operational excellence among peers

Gross profit margin Operating margin

0%

20%

40%

60%

80%

100%

2011 2012 2013 2014 2015 2016E

Gilead's historical operational excellence

Gross profit margin Operating margin



P a g e 15 | 20

Valuation

Intrinsic

A discounted cash flows analysis at a 10% discount and 8.5x exit multiple, gives Gilead a 20.4% upside

from its current trading price. We believe it is more appropriate to value Gilead using an exit multiple rather

than a perpetuity growth rate because the company and industry are still maturing. Looking at traditional

capital structure and cost of capital calculations (see Appendix A) Gilead has a very low cost of capital

Terminal value (multiple method)

Multiple 8.5x

Terminal value 56,734

Sum of PV of FCF 81,208

Enterprise value 137,943

Net debt 15,297

Equity value 122,646

Diluted shares outstanding (mm) 1,335

Implied share price $92.00Current share price $76.42

Implied upside / (downside) from current 20.4%

Implied upside / (dow nside) from 52-w eek high (17.1%)

Free Cash Flow Yield 15.43%Terminal Value 56,734

Unlevered Free Cash Yield 23.1%

Terminal unlevered P/E 4.3x

2016E 2017E 2018E

Current P/E 6.5x 7.3x 7.9x

Projected P/E 7.9x 8.8x 9.5x

Current EV/EBITDA 5.9x 5.5x 6.1x

Projected EV/EBITDA 6.9x 7.5x 8.2x

Terminal value (Gordon-Growth) method) 1

Multiple 8.5x 2.00%

Terminal value 69,532

Sum of PV of FCF 81,208

Enterprise value 150,741

Net debt 15,297

Equity value 135,444

Diluted shares outstanding (mm) 1,335

Implied share price $101.00Current share price $76.42

Implied upside / (downside) from current 32.2%

Implied upside / (dow nside) from 52-w eek high (9.0%)

Free Cash Flow Yield 15.4%Terminal Value 69,532

Unlevered Free Cash Yield 18.9%

Terminal unlevered P/E 5.3x

2016E 2017E 2018E

Current P/E 6.5x 7.3x 7.9x

Projected P/E 8.6x 9.6x 10.4x

Current EV/EBITDA 5.9x 5.5x 6.1x

Projected EV/EBITDA 7.5x 8.1x 9.0x

Implied share price sensitivity

Exit multiple

9200.00% 7.5x 8.0x 8.5x 9.0x 9.5x

8.00% $100 $103 $106 $109 $112

9.00% $93 $96 $99 $101 $104

10.00% $87 $90 $92 $95 $97

11.00% $81 $84 $86 $88 $90

12.00% $76 $78 $80 $82 $84

Implied upside / (downside) to current share price

Exit multiple

7.5x 8.0x 8.5x 9.0x 9.5x

8.00% 30.9% 34.8% 38.7% 42.6% 46.6%

9.00% 21.7% 25.6% 29.5% 32.2% 36.1%

10.00% 13.8% 17.8% 20.4% 24.3% 26.9%

11.00% 6.0% 9.9% 12.5% 15.2% 17.8%

12.00% (0.5%) 2.1% 4.7% 7.3% 9.9%

WA

CC

WA

CC

Implied share price sensitivity

Exit multiple

######## 1.0% 1.5% 2.0% 2.5% 3.0%

8.00% $125 $130 $137 $144 $153

9.00% $109 $112 $117 $122 $127

10.00% $96 $98 $101 $105 $109

11.00% $85 $87 $90 $92 $95

12.00% $77 $78 $80 $82 $84

Implied upside / (downside) to current share price

Exit multiple

1.0% 1.5% 2.0% 2.5% 3.0%

8.00% 63.6% 70.1% 79.3% 88.4% 100.2%

9.00% 42.6% 46.6% 53.1% 59.6% 66.2%

10.00% 25.6% 28.2% 32.2% 37.4% 42.6%

11.00% 11.2% 13.8% 17.8% 20.4% 24.3%

12.00% 0.8% 2.1% 4.7% 7.3% 9.9%

WA

CC

WA

CC

Discounted cash flows analysis

(in millions, except per share data)

2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Total revemues 30,179$ 28,309$ 26,456$ 26,074$ 25,903$ 26,214$ 26,660$ 27,140$ 27,655$ 28,208$

% growth -7.5% -6.2% -6.5% -1.4% -0.7% 1.2% 1.7% 1.8% 1.9% 2.0%

Operating income 19,533 17,701 15,957 15,110 14,647 15,085 15,475 15,889 16,191 16,515

Operating margin 64.7% 62.5% 60.3% 58.0% 56.5% 57.5% 58.0% 58.5% 58.5% 58.5%

Depreciation & amortization 1,073 1,051 937 924 918 903 891 880 869 859

% of sales 3.6% 3.7% 3.5% 3.5% 3.5% 3.4% 3.3% 3.2% 3.1% 3.0%

EBITDA 19,987 18,439 16,773 15,878 14,782 15,988 16,366 16,770 17,061 17,374

EBITDA margin 66.2% 65.1% 63.4% 60.9% 57.1% 61.0% 61.4% 61.8% 61.7% 61.6%

Taxes 3,843 3,467 3,189 3,022 2,929 3,017 3,095 3,178 3,238 3,303

Tax rate 16.4% 18.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%

EBIAT 15,690 14,234 12,768 12,088 11,718 12,068 12,380 12,711 12,953 13,212

Plus: depreciation & amortization 1,073 1,051 937 924 918 903 891 880 869 859

Less: capital expenditures 555 552 545 466 476 482 490 499 509 519

% of sales 1.8% 2.0% 2.1% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8%

Less: Inc./(Dec.) in NWC 466 563 191 403 376 189 412 393 200 436

Unlevered free cash flow 15,741 14,169 12,969 12,143 11,784 12,300 12,370 12,699 13,114 13,116



P a g e 16 | 20

because of its balance sheet strength, cash flow generation, and relatively defensive nature of its business.

The market, due to the uncertainty as well as consensus Street estimates, use a higher WACC around

10%, which may be more realistic.

An exit multiple of 8.5x terminal EBITDA seems low due its relative valuations (below), however Gilead is

trading currently at an EV/EBITDA of under 5x, whereas its peers are trading at over 13x and precedent

transactions suggest a value under 28x. Every comp however has a positive PEG and higher P/E, and

although Gilead is trading at a discount, some discount is deserved given management's inability to provide

visibility into and beyond 2017 for HCV business.

Relative

Relative to its comp set, Gilead is being severely punished for its uncertain growth outlook. On a free cash

flow, earnings, EBITDA, and revenue basis, Gilead is undervalued by 14, 16, 8, and almost 2 turns,

respectively. It is necessary to stress that Gilead, despite its growth concerns, should be valued much

higher due to its large cash flow generation ability and exciting pipeline.

Relative to precedent transactions, there are currently no transactions that can properly gauge a value for

Gilead as its enterprise value is over 3x larger than the largest transaction. Also, these transaction

valuations are extremely high, proving that the space may have been overvalued and large pharma and

biotech are competing for deals.

We performed a 10-year DCF to place more emphasis on the enormous value of the cash flows that Gilead

will continue to be able to generate for the long-term. Looking at the public markets for relative valuation,

on a P/E, EV/sales, and EV/EBITDA basis Gilead is trading at an 18x, 2x, and 8x discount to its peer group.

This massive divide is not warranted, but some discount is. Gilead is the only one of its peers with a negative

PEG ratio and increasing forward looking valuation multiples. Despite Gilead’s current lack of growth

visibility, their businesses will stabilize in a few years and be able to continue to generate tremendous cash

flows will validate a higher earnings multiple. 7x 2017 EPS is pitiful for a company able to generate the

amount of cash flow it does with relatively little risk until its major drug patents expire in 2029 and 2030.

Precedent transactions analysis

(Figures in millions, except per share data) Announced

Announce Date Acquirer Name Target Name Total Value EBITDA Revenue Market Cap

Jan-16 Shire PLC Baxalta Inc $35,563 25.4x 5.8x 1.3x

Mar-15 AbbVie Inc Pharmacyclics Inc $19,777 156.0x 27.1x 2.1x

Feb-15 Valeant Pharmaceuticals Salix Pharmaceuticals Ltd $13,413 - 11.8x 1.8x

Feb-15 Pfizer Inc Hospira Inc $16,807 23.2x 3.8x 1.6x

Nov-14 Allergan plc Allergan Inc/United States $65,024 31.2x 9.3x 1.2x

Sep-14 Merck KGaA Sigma-Aldrich Corp $16,395 19.9x 6.0x 1.4x

Feb-14 Allergan plc Forest Laboratories Inc $20,781 60.4x 6.2x 1.3x

Nov-11 Gilead Sciences Inc Gilead Pharmasset LLC $10,606 - - 1.7x

May-11 Takeda Pharmaceutica Nycomed A/S $13,733 - - -

Mean $23,567 52.7x 10.0x 1.6x

Median $16,807 28.3x 6.2x 1.5x

Transaction Value

Public comparables analysis

(Figures in millions, except per share data)

Name Ticker Mkt Cap Dividend Yield FCF Earnings EBITDA Revenue

Roche ROG 205,495$ 3.5% 20.3x 22.0x 11.3x 4.5x

Pfizer PFE 197,768 3.7% 15.4x 16.5x 12.8x 4.3x

Merck MRK 176,319 2.9% 18.9x 24.5x 13.8x 4.7x

Amgen AMGN 110,874 2.7% 13.0x 14.8x 9.5x 4.8x

Glaxosmithkline GSK 94,286 6.5% 25.5x 251.6x 29.3x 3.5x

Celgene CELG 92,598 N/A 27.5x 32.6x 27.6x 9.3x

Biogen BIIB 69,445 N/A 20.8x 17.3x 11.3x 6.0x

Regeneron REGN 44,275 N/A 52.4x 62.1x 32.3x 9.0x

Mean 3.8% 24.2x 55.2x 18.5x 5.8x

Median 3.5% 20.6x 23.2x 13.3x 4.8x

Gilead GILD 100,680 2.4% 6.0x 6.8x 4.7x 3.1x

Enterprise valuePrice



P a g e 17 | 20

Investment risks

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

HIV generics entrance in 2018 could threaten margins and patient volumes for new TAF

regimens, which are expected to help Gilead keep a hold on the HIV market.

Relationship changes with manufacturers could cause inventory shortages, product shipment

delays, regulatory approval declines, etc.

Litigation with generic manufacturers has increased expenses and as more current drugs near

patent expiration, these could continue to rise.

Over a third of sales come from outside the US. This poses potential credit risk issues as well as

margin pressure that could come from lower drug prices in those emerging markets.

Management’s inability to successfully push treatments and research through clinical trials and

FDA approval in the long-term could prove fatal to its top-line.

Continued inability to predict demand for various business segments, especially HCV, will cause

investors to continually hold a bearish view on Gilead as a large portion of their growth and cash

flows come from HCV drugs.

Healthcare reforms could pose a threat. If less people are covered, prices get capped, drug

approvals decrease, the increased Branded Drug Prescription fee increases, etc. financial

performance will be greatly hindered.

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

89% of sales come from three wholesalers (McKesson, Cardinal Health, and AmeriSource

Bergen). If an event harms the business of one of these companies, Gilead’s sales strategy

would be negatively impacted, at least in the short-term.

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

Inability to defend patents and IP domestically and internationally would cause overall market

share decline

Conclusion

From the perspective of a value-focused fund—which looks for valuation discrepancies in the market—

Gilead deserves a BUY rating. Gilead skyrocketed from 2013 to 2015, driven by blockbuster HCV and HIV

drugs In the short-term, we largely agree with some bearish sentiment, however, it is unfair to assume that

Gilead will not be able to develop and innovate in the long-term given its successful track record.

GILD is fundamentally undervalued; GILD is very cheap at a P/E of 7-8x 2017E EPS. HCV upside will come

with increased certainty and stabilization of the business. Continual innovation and expansion beyond HIV

and HCV, significant near term cash generation, aggressive share repurchase and dividend programs, and

large M&A potential will create long-term shareholder value

As such, we think it deserves at least a multiple 1-2x turns higher (8-9x) – but still a few turns lower than its

peers. Based on these multiples, we derive our $92.00 per share price target (and 20.4% upside).



P a g e 18 | 20

Appendix

A) Capital structure analysis and other calculations

Capital structure benchmarks

Debt / Relevered

Company Ticker Market Cap Total cap Historical Adjusted Historical

Roche RHHBY 205,495 54.1% 0.96 0.67 0.95

Pfizer PFE 197,768 41.2% 0.78 0.59 0.83

Merck MRK 176,319 37.2% 0.76 0.59 0.83

Amgen AMGN 110,874 36.5% 0.92 0.71 1.01

GSK GSK 94,286 82.3% 1.36 0.82 1.16

Celgene CELG 92,598 72.1% 1.31 0.83 1.18

Biogen BIIB 69,445 52.4% 1.53 1.08 1.53

Regeneron REGN 44,275 8.2% 0.83 0.78 1.11

Gilead GILD 100,680 57.9% 0.94 0.64 0.91

Mean 121,305 49.1% 1.04 0.75 1.06

Median 100,680 52.4% 0.94 0.71 1.01

Discount rate summary:

Risk free rate 2.14%

Equity risk premium 6.50% 7.50%

Levered beta 0.90 1.10

Country risk premium 0% 0%

Cost of equity 7.99% 10.39%

Pre-tax cost of debt 3.36%

Post-tax cost of debt 2.69%

Debt / Total cap target 52.44%

Calculated discount rate 5.21% 6.35%

Unlevered beta

Cost of equity vs. Debt / Total cap target

Debt / Total cap

6.35% 47.44% 49.94% 52.44% 54.94% 57.44%

9.39% 6.21% 6.04% 5.87% 5.71% 5.54%

9.89% 6.47% 6.29% 6.11% 5.93% 5.75%

10.39% 6.74% 6.54% 6.35% 6.16% 5.97%

10.89% 7.00% 6.79% 6.59% 6.38% 6.18%

11.39% 7.26% 7.04% 6.83% 6.61% 6.39%Co

st

of

eq

uit

y

Cost of equity vs. Pre-tax cost of debt

Pre-tax cost of debt

6.35% 2.86% 3.11% 3.36% 3.61% 3.86%

9.39% 5.30% 5.42% 5.54% 5.66% 5.77%

9.89% 5.51% 5.63% 5.75% 5.87% 5.98%

10.39% 5.72% 5.84% 5.96% 6.07% 6.19%

10.89% 5.93% 6.05% 6.17% 6.28% 6.40%

11.39% 6.14% 6.26% 6.38% 6.49% 6.61%Co

st

of

eq

uit

y

Net debt

Short-term debt 700

Long-term debt 26,371

Preferred equity 0

Noncontrolling interest 492

Total debt 27,563

Cash & cash equivalents 9,809

Short-term marketable securities 2,457

Net debt 15,297

Diluted shares outstanding:

Number of shares outstanding (mm) 1,317.5

Share price $76.42

Security Shares Exercise price In-the-money Proceeds

Restricted stock units 11.0 $73.93 Yes $815.30

Stock options 24.7 $23.11 Yes $571.53

Performance-based restricted stock units 0.5 $85.83 No $0.00

Total $1,386.83

Number of shares vested 35.8

Number of shares repurchased 18.1

Net new (repurchased) shares 17.6

Number of current shares outstanding 1,317.5

Number of diluted shares outstanding1,335.1



P a g e 19 | 20

B) Historical and projected financials:

Income statement projections and financial projections in general for Gilead revolve mainly around

assumptions in individual drug sales projections. An important factor to consider is patent expiration, as we

assume Viread’s sales will taper to 0 by the end of this projection period. To gather individual projections

for each drug, we benchmarked the Street’s individual projections and became increasingly bearish over

time to give a conservative outlook. We also maintained depressed margins. Also, there is potential margin

erosion down the line. We were more conservative on margin growth than consensus as we anticipate

increased sector and indication competition as well as potential policy effects eating at prices or cost

controls.

References

Groenendijk, Marcel. "Equity Market Risk Premium – Research Summary." KPMG, n.d. Web.

Giovannetti, Glen T. "Biotechnology Report 2016." EY, n.d. Web. 15 Nov. 2016.

Reh, Gregory. "2016 Global Life Sciences Outlook: Moving Forward with ..." Deloitte Touche

Tohmatsu Limited, 2015. Web. 15 Nov. 2016.

"Gilead Sciences Announces Acquisition of Nimbus Therapeutics’ Acetyl-CoA Carboxylase (ACC)

Program for NASH and Other Liver Diseases." Gilead Sciences Announces Acquisition of Nimbus

Therapeutics’ Acetyl-CoA Carboxylase (ACC) Program for NASH and Other Liver Diseases |

Business Wire. N.p., 04 Apr. 2016. Web. 15 Nov. 2016.

Consolidated statement of income

(in millions, except per share data)

2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E

Product sales

Antiviral products:

Harvoni — 2,127$ 13,864$ 9,128 7,521 3,336 2,113 1,498

Sovaldi 139 10,283 5,276 4,130 2,318 1,478 835 536

Epclusa — — — 1,577 2,719 4,181 4,848 5,582

Truvada 3,136 3,340 3,459 3,455 3,367 2,869 2,629 2,435

Atripla 3,648 3,470 3,134 2,575 2,314 1,716 1,354 1,080

Stribild 539 1,197 1,825 1,886 938 1,217 812 441

Complera/Eviplera 810 1,228 1,427 1,433 1,064 819 643 540

Viread (+TAF) 959 1,058 1,108 1,170 1,892 275 2 0

Genvoya (+TAF) — — 45 1,502 2,673 3,597 2,879 2,010

Odesfey (+TAF) — — — 399 805 1,298 1,915 2,361

Descovy (+TAF) — — — 387 846 1,574 2,277 2,923

Integrase Inhibitor — — — — — 344 1,909 3,398

Other antiviral 111 88 69 73 92 115 140 168

Total antiviral products 9,342 22,791 30,207 27,906 26,994 24,300 23,747 23,967

Total other product sales 1,462 1,683 1,944 1,968 1,919 1,830 2,172 1,907

Total product sales 10,804 24,474 32,151 29,875 28,914 26,130 25,919 25,874

Royalty, Contract, and Other Revenues 398 416 488 434 448 462 476 490

Total revenues 11,202$ 24,890$ 32,639$ 30,179$ 28,309$ 26,456$ 26,074$ 25,903$

Cost of goods sold 2,859 3,788 4,006 3,749 3,588 3,315 2,965.9 2,914.2

Gross Profit 8,343 21,102 28,633 26,833 25,001 23,375 23,108 22,989

Total R&D 2,120 2,854 3,014 3,405 3,322 3,237 2,637 2,437

Selling, general, and administrative 1,699 2,983 3,426 3,620 3,467 3,083 3,177 3,253

Income from operations 4,524 15,265 22,193 19,533 17,701 15,957 15,110 14,647

EBITDA 19,987 18,439 16,773 15,878 14,782

Interest expense 307 412 688 920 885 885 835 810

Other income (expense), net 0 3 154 0 0 0 0 0

Income before provision for income taxes 4,217 14,856 21,659 19,193 17,526 16,135 15,563 15,731

Provision for income taxes 1,151 2,793 3,552 3,843 3,467 3,189 3,013 2,986

Effective income tax rate 27.3% 18.8% 16.4% 16.4% 18.0% 20.0% 20.0% 20.0%

Net income 3,066 12,063 18,107 15,592 14,011 12,953 12,742 12,721



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Documents

Gilead Sciences, Inc. · pharmaceutical company to sign an agreement with the Medicines Patent Pool, which is working to increase global access to high-quality, low-cost antiretroviral