Krause Fund

Research Fall 2015

Healthcare Gilead Sciences, Inc. (NASDAQ: GILD)

Recommendation: BUY 17 November 2015

Analysts

Alexandra Bartlett Emily Merdinger Alexandra-bartlett@uiowa.edu emily-merdinger@uiowa.edu

Siddig Siddig Shachi Vyas siddig-siddig@uiowa.edu shachi-vyas@uiowa.edu

Company Overview Gilead Sciences, Inc. (GILD) is a biopharmaceutical company developing innovative medicines to help individuals across the globe suffering from life-threatening illnesses. While the company is a leading producer of HIV/AIDS and hepatitis therapies, it is investing in therapies for cardiovascular conditions, hematology and cancer, and inflammatory diseases. New drugs come from internal development, acquisitions, and in-licensing. Treatments are marketed and distributed through its own commercial teams and/or through third-party distributors and corporate partners. Gilead has financially significant active collaborations with BMS, Janssen, and Japan Tobacco to develop and commercialize different products. The company operates in more than 30 countries worldwide and is headquartered in Foster City, California.

Current Price $103.81

Target Price $143.52

GILD Maintains Strong Pipeline

Gilead has 36 drug candidates in the pipeline across five disease indications

Strong revenue growth of 28.6% estimated from 2014 to 2015 demonstrates that Harvoni and current marketed drugs will continue to provide robust revenue.

Gilead took advantage of low interest rates to issue $10 billion in notes, which will allow share repurchasing, acquisitions, and payment of dividends.

In November 2015, the FDA approved Genvoya-one of several TAF drugs in Gilead’s pipeline. Two NDAs and marketing authorization applications for TAF-based regimens for HIV treatment could lead to approval of two new products in the next six months.

Gilead’s preexisting commitment to providing affordable care to individuals requiring treatment will decrease the effects of pressure to decrease drug prices.

Gilead has started paying a $0.43 quarterly dividend, which is atypical for a biotechnology company.

One Year Stock Performance

Stock Performance Highlights 52 week High

$123.37

52 week Low $85.95

Beta Value Average Daily Volume

1.02 11.84 m

Share Highlights Market Capitalization $149.61 b

Shares Outstanding

Book Value per share

1.522 b $10.39

EPS $7.95

P/E Ratio 64.52

Dividend Yield (2015E) 1.68%

Dividend Payout Ratio (2015E) 19%

Company Performance Highlights ROA 34.79% ROE

Sales

R&D as %of Sales

76.23%

$24.474 b

11.5%

Financial Ratios Current Ratio 3.07 Debt to Equity 5.18

2

Executive Summary After further review, we recommend a buy for Gilead

because of its robust and diverse pipeline. There are 36

drugs in the pipeline that would provide treatment for

the growing areas of oncology, cardiovascular conditions,

and infections.

In 2014, Gilead saw a 375% increase in cash from 2013.

This dramatic increase was primarily due to the $10.3

billion brought in from the company’s hepatitis C drug

Sovaldi. We predicted 2015 revenue to grow to $31.5

billion driven mostly by promising sales of Harvoni and

Sovaldi. We believe that Gilead will achieve a price of

$143 per share.

General Information Gilead Sciences, Inc. (GILD) is a global biopharmaceutical company developing innovative medicines to help individuals suffering from life- threatening illnesses. The company is a leading producer of antiviral treatments for human immunodeficiency virus (HIV), hepatitis B (HBV), and hepatitis C (HCV). Gilead invests in therapies addressing cardiovascular conditions, hematology and cancer, and inflammatory diseases. Antiviral products represented 91% of total revenues in 2014, 83% in 2013,

and 82% in 20121. While more money has been invested in growing the liver disease and oncology therapies, Gilead has maintained its dominance in the HIV market and is going to continue to spend money on R&D for drugs that address it.

Life Cycle Gilead is experiencing the growth portion of its business

cycle. It has 36 drug candidates in the pipeline across five

segments: HIV/AIDS, liver diseases,

hematology/oncology, cardiovascular, and

inflammation/respiratory3. Three of Gilead’s pipeline

candidates have submitted to the EU Commission and

two of those are awaiting U.S. FDA approval.

In 2014, four Gilead drugs—Vitecka, Tybost, Harvoni and

Zydelig—were approved by the FDA and European

Commissioni. This is quite unusual considering that a

good year for the biotechnology industry is when two

drugs are approved. There may be another year of

unusually high approval rates because Gilead has paid

$125 million for a FDA priority review voucher in

November 2014. This allows a review starting any time

after November 2015 to be cut in half, which will

decrease the time it takes to bring the drug candidate to

market32.

In May of 2015, Gilead acquired EpiTherapeutics for

$65 million in cash on hand to expand into small

molecular therapies for oncological indications. This

acquisition was supported by the company’s 375%

increase in cash last fiscal year.

Products and Markets Major drugs in the company’s portfolio along with its 2014 sales and patent expiration are shown in the following table:

Product 2014 Sales

(USD M)

U.S. Patent

Expiration Atripla 3,470 2021 Truvada 3,340 2021 Viread 1,058 2018 Complera/Eviplera 1,228 2023 Stribild 1,197 2029 Sovaldi 10,283 2029 Harvoni 2,127 2030 Letairis 595 2018 Ranexa 510 2019 Zydelig 23 2025 AmBisome 388 2016

Source: Gilead 2014 10-K

Gilead’s revenue breakdown by segment is shown in the graphic below:

2014 Sales

Source: Gilead 2014 10-K

HIV/AIDS Human immunodeficiency virus (HIV) weakens the immune system by killing T cells and can lead to acquired immunodeficiency syndrome (AIDS). The immune systems is so weakened that there is little tolerance to common microbes, cancers, and serious

infections32. In 2013, there were 35 million people living with HIV/AIDS1. Each year there are approximately 500,000 people who become infected in

the U.S. and 2.3 million worldwides. In March of 2015, there were approximately 15 million HIV positive people taking antiretroviral therapy.

4%

51%

7%

38%

3

Source: UNAIDS

There are 39 branded HIV drugs available in the U.S. as well as a number of generics. Gilead’s HIV/AIDS treatments are 50% fixed dose combination antiretrovirals, which means that the drug uses at least two medications from different drug classes. These drug classes include nucleoside reverse transcriptase inhibitors (NRTIs), non-nucleoside reverse transcriptase inhibitors (NNRTIs), CCR5 Antagonists, protease inhibitors (PIs), and integrase strand transfer inhibitors (INSTIs). Each drug class interacts with different enzymes that are important to HIV-1 replication.

Stribild, Complera/Eviplera, Atripla, and Truvada make up 36% of the available combination drug market. Gilead’s competes in this drug class with ViiV Healthcare’s Combivir, Epzicom/Kivexa, and Trizivir3. This drug class generated $9,235 or 37.8% of Gilead’s 2014 revenue. Genvoya—a combination of four drug types—was approved by the U.S. FDA on November 5, 2015 and is expected to provide higher efficacy at 1/10th

the dosage.

GlaxoSmithKline (GSK) has 60% of all NRTI drugs with Ziagen, Retrovir, and Epivir. Gilead’s NRTI products include Viread and Emtrivera, which are both coming off patent in less than 5 years. Gilead has focused its R&D money on combination drugs as 80% of its pipeline

drugs are combination type3.

In the INSTIs class, the product offerings are split evenly between Gilead, ViiV Healthcare, and Merck. This was not a significant source of revenues for Gilead in 2014 and it was 4.0% of Merck’s revenue in 20143.

Other companies with treatments in the HIV/AIDs space include Boehringer Ingelheim GmbH, AbbVie, Pfizer, Janssen, and Roche3.

Hepatitis C Hepatitis C is a liver infection caused by the blood-borne

Hepatitis C virus (HCV). For 70-85% of infected people,

the infection becomes a serious infection that can

require liver transplants if not addressed. More than

350,000 people die annually due to HCV complications4.

Antivirals can cure the disease with minimal side effects.

As seen in the chart below, the treatment regimen has

evolved to a single tablet regimen (STR), which makes it

easier for the patient to stick to the treatment and

results in fewer complications. Gilead offers three

current STR products and has five in the pipeline3.

Source: Harvoni Product Page

More than 185 million people are infected with HCV

with most of them in emerging markets4. The global

prevalence of HCV can be seen in the figure below:

Source: Gilead’s Q3 Earnings Slides

Egypt has the highest prevalence at 14.7% of the

population. To provide access to the treatments, Gilead

offers the Egyptian Ministry of Health a greatly reduced

price of Sovaldi4. Gilead makes a commitment to

provide access to its products elsewhere in the world by

contracting with generic manufacturers in India or

creating seven drug access programs in the U.S. alone3.

Health insurers in the U.S. still will delay treatments

until the disease has progressed to a certain point6.

Insurers have called for Gilead to cut the price of its

newest HCV drugs: Sovaldi and Harvoni. Sovaldi is

4

currently priced at $1,000-per-pill while Harvoni is

currently available for $1,125-per-pill7. These two drugs

provided 51% of Gilead’s revenues in 2014, so overall

revenues would be significantly impacted in the next

two years if prices were capped in Gilead’s core markets

(U.S., Japan, and the Big-5 European countries).

In December 2014, AbbVie launched a HCV drug: Viekira

Pak for those with HCV of genotype-1, which is the most

prevalent type in the U.S.3. The drug has faced FDA

scrutiny over Viekira Pak’s potential to cause serious

liver damage8. Sovaldi sales are more likely to be

impacted in the long run as Sovaldi treats genotype-1

patients. Harvoni has been expanded to treat patients

with genotypes 1, 4, 5 and 6 as well as those co-infected

with HIV9. However, Gilead’s treatments have been

prescribed at least 10 times as much as Viekira Pak.

Merck has also been developing HCV treatments that

have shown cure rates as high as 100% after 8-weeks10.

Current Gilead HCV treatments require 8, 12 or 24

weeks to achieve cure rates of 94-99%, so Merck’s

condensed timeline could decrease Gilead’s sales.

Hepatitis B Hepatitis B is a liver infection caused by the blood-borne

Hepatitis B virus (HBV). Approximately 400 million

people live with chronic hepatitis B infection globally

with the highest rate of 8% in China. The World Health

Organization estimates that at least 780,000 people die

from HBV every year. The global prevalence of HBV can

be seen in the figure below:

Source: Gilead Hepatitis Fact Sheet

Viread and Hespera are the only HBV drugs offered by

Gilead at the present time. Gilead’s Viread and Hespera

competes with GSK’s Zefflix, Bristol Myers-Squibb’s

Baraclude, and Novartis’ Tyzeka/Sebivo11. However,

Gilead has been researching three drugs including a

tenofovir alafenamide (TAF) drug that would treat HBV.

This new compound when combined with other drugs

could provide effective new HBV treatments to increase

Gilead’s market share in the hepatitis B therapy space.

Analysis of Recent Earnings Gilead began paying a $0.43 quarterly-dividend in 2015. Dividend payments are unusual in a biotechnology company, which suggests that the management is confident in the drugs in the pipeline and the 5-year forecast of sales of newly-released pharmaceuticals. The dividend yield of 1.68% combined with a $15 billion share repurchases provides investors a return while still allowing the company to reinvest in developing new drugs. While the dividend yield is below that of Pfizer’s 3.27% and GSK’s 5.67%, Gilead is more likely going to be able to continue to be able to continue to pay these dividends if revenues fall as it has a dividend coverage ratio of 4.3.

Total revenue in the third quarter increased from $7.2 billion in 2014 to $8.2 billion. Total revenues continued to be driven by product sales rather than licensing and other contractual revenues. This increase in sales also saw an increase in R&D and SG&A expenses as a percentage of sales, which is expected as Gilead looks to diversify not only its pipeline but also its customer

base3, which can be seen in the figure below.

Gilead Pharmaceutical Segment Sales

Source:

Kalorama Information

Gilead’s three major operating costs are broken down

as a percentage of 2014 sales in the figure below:

Source: FactSet

5

Gilead spent the least on R&D—11.5% of 2014 sales—in

comparison to six of its competitors. A summary of

Gilead’s competitors is shown in the following table:

Co. Ticker Sales (M) R&D % Sales

CELG 7,643 32.1%

AMGN 20,035 22.2%

ABBV 19,960 16.5%

MRK 42,237 17.0%

GSK 35,913 15.0%

BIIB 9,703 19.5%

GILD 24,890 11.5% Source: Company 10-Ks

These numbers suggest that Gilead is able to push more

successful drugs through the pipeline with less

investment. Progression in the later stages of the FDA

approval process does require more investment, which

is reflected by Gilead’s R&D expenses as a percentage of

sales of 18.14% and 18.93% in 2012 and 2013,

respectively3.

Gilead will continue to have enough funding for its

global drug assistance, which could reduce the pressure

that it faces from U.S. politicians looking to lower drug

cost premiums. However, activists hope to challenge

Gilead’s patents for Sovaldi in Argentina, China, Brazil,

Russia, and Ukraine as they view the drug as being too

expensive30.

Production and Distribution Manufacturing Process and Costs

Gilead’s production and manufacture of drugs can be

separated into two categories: (1) the research and

development required to produce new drugs; and (2)

the manufacturing and sale of previously developed

drugs29. Prior to being submitted for approval, Gilead

drugs go through the three initial phases of drug

development: (1) discovery and development; (2) pre-

clinical research, and (3) clinical research30.

Gilead manufacturing takes place both in-house and

through contracted independent third parties3. It

produces both within the United States and abroad,

with manufacturing facilities in California, Ireland, and

Canada in addition to its independently contracted

manufacturers3. Through contracting out production

Gilead is able to increase production capabilities via

external manufacturing. If issues arise within Gilead’s

internal manufacturing processes it will allow the

company to continue to meet a majority of its

production quotas and deliver products to customers.

Distribution Products are marketed primarily by commercial teams and third party distributors. If a pharmaceutical treatment is more complex, the company provides additional guidance. In the US, 12 drugs are sold exclusively through wholesalers—Cardinal Health, Inc; McKesson Corporation; and AmerisourceBergen Corporation—who accounted for 87% of domestic and

63% of worldwide product sales3. Gilead’s reliance on these three distributors for such a large portion of its revenues is risky. The impact of any of these three wholesalers discontinuing business with Gilead or experiencing disruptions to operations would have a major impact on Gilead revenues and its ability to complete distribution of drugs.

Gilead begins by marketing drugs within the U.S. and Europe because regulatory approval is achieved there first. To continue to push global sales, the company then moves to the Asiatic market, particularly Japan. For example, Sovaldi was approved in the U.S. in late 2013 and in the E.U. in early 2014, and it is now available in

over 40 countries3.

Competition A table comparing Gilead to two large cap

pharmaceutical companies, Pfizer and GSK, as well as

the biotechnology industry is found below:

Source: Yahoo Finance

GILD Pfizer GSK Biotech Industry

Mkt Cap 156.32B 198.96B 93.51B 196.91M

Rev/Employee 4.170 m 0.616 m 0.371m 0.190 m

Qtly Rev Growth (yoy)

0.26 -0.07 0.06 0.18

Rev (ttm) 29.19B 48.20B 36.33B 8.35M

GM (ttm) 0.87 0.82 0.68 0.59

EBITDA (ttm) 20.32B 19.61B 10.27B -11.71M

OM (ttm) 0.66 0.3 0.22 -1.85

NI(ttm) 15.04B 8.91B 15.05B N/A

EPS (ttm) 9.48 1.41 6.19 -0.33

P/E (ttm) 11.24 22.9 6.25 24.71

P/S (ttm) 5.32 4.15 2.65 20.49

ROE(%) 92.9 12.4 149.5 N/A

6

GSK has been able to generate a high level of

return to its equity holders at about 1.5 times that

of Gilead’s ROE of 92.9%. Both Gilead’s and GSK’s

ROE are high in comparison to that of Pfizer’s,

which suggests that both companies had high net

incomes for the year. Gilead does have a low debt

level, which could contribute to its higher return.

Gilead has been able to generate incredibly high

revenue per each employee. With 7,000 employees

and two very successful HCV drugs, this value will

decrease over time as expansion forces the

company to hire more people. The $0.190 million-

per-employee for the biotech industry indicates

that a majority of biotechnology companies are

small-cap with very few employees.

With an operating margin of 0.66, Gilead has a

large amount of revenue left after stripping the

production costs, which could allow it to take on

more debt in the future, pay for dividends, or

service its existing debt including the $10 billion

taken out in September of 2015. The biotechnology

sector has an operating margin of -1.85%, which

indicates that many small companies do not see a

profit in early stages of development, which allows

for the larger-cap companies to acquire the

research of the companies operating at a loss.

Pfizer and GSK have similar operating margins of

0.3 and 0.22, respectively. This combined with

similar sized 2014 revenues suggests that the

companies have similar operating expenses.

Gilead is able to compete with other

biopharmaceutical companies primarily on cost,

ease of use, patent protection, and efficacy3. HIV

market share and price are being pressured

because of the existence of 39 branded drugs and a

handful of generic products.

Competing drugs and discounts have been driving

prices down and pressuring Gilead to maintain its

lead in that area.

Pfizer’s biopharmaceutical products make up 92%

of the company’s revenue, down from 93% in

201330. By December 31, 2014, Pfizer had 23

programs in Phase III and a total of 28 projects in

R&D. The difference between Gilead’s pipelines

and that of Pfizer is large, but Pfizer is heavily

investing in R&D to cover up the patent

expirations of many drugs. Pfizer also faces larger

competition from biosimilars31.

GSK is a leader in vaccines, which is a space that

Gilead does not participate in. However, GSK has

therapies for HIV, cancer, infectious diseases,

cardiovascular conditions and others.

It is important to note that GSK and Pfizer

cooperate with ViiV healthcare, a producer of

eleven HIV/AIDS treatments. Shared success with

ViiV boosts both companies, but if there is a

downturn in the market, both will move down but

less than the more exposed Gilead12

Top GILD Middle PFE Bottom GSK: Cash Use ($M) Source: FactSet

Pfizer’s stockpile of cash has either been decreasing

or only moderately increasing the past three years.

While the firm still has cash to reinvest into

developing new drugs or acquiring companies, a

continuation of this trend whether it be from

political pressure for lower drug costs or expiration

of patents, cash flow problems will make it difficult

to make innovative products.

Gilead’s patents on its three largest revenue

producing drugs (Harvoni, Sovaldi, and Truvada) do

not expire until 2030, 2029, and 2021, respectively30.

Patents for Pfizer’s top revenue-generating

7

biopharmaceutical therapy expire in 2020 and

202331. GSK’s patents are expiring in 2025, 2021,

and 2027, which will allow it to see sustained

revenues.

For a comparison of the other biopharmaceutical

companies that compete with Gilead’s anti-infective

therapies, the following table is presented:

Source: FactSet

Gilead is the second largest company in the six

company group by market cap, enterprise value

and sales. Since 50% of 2014 sales were made up of

two drugs, Gilead is likely to lose its position to

Amgen or AbbVie.

Gilead has a low level of debt to EBITDA, which

means that it will have no issues paying off debt. In

fiscal year 2015, this number is likely to rise because

of the increase in notes taken out. However, Gilead

has significant cash available to service it. Amgen

and Merck have higher ratios of 0.41 and 0.40,

respectively. While this is not an exceptionally high

number, it suggests that these two companies

might have to cease share repurchases or find other

ways to finance acquisitions in the future.

If Amgen is able to get regulatory approval of

even a portion of its 28 pipeline candidates, it will

experience market share growth in inflammation

and oncology. This could make it difficult for

Gilead to pick up market share in those two

areas. Similarly Merck is likely to experience

significant sales growth if some of its 9 therapies

make it to market. Sales growth would provide

Merck and Amgen additional funds to acquire

companies if they so choose, which might create

competition as Gilead considers acquiring

companies.

Biogen at 39.6% and Gilead at 121.8% saw

significant sales growth. The other competitors saw

slower growth or a loss. Average growth margin

ratio across the six companies was 80%, which

Gilead exceeded by 4.4%. This suggests that all

companies can cover their SG&A expenses, but

Gilead’s above average gross margin will sustain

predicted growth in SG&A expenses.

AbbVie and Gilead saw the highest return on equity,

which suggests both are particularly adept at using

investor’s money to produce revenues. Celgene,

Merck, and Amgen were still able to generate

approximately 24% ROE, but it suggests investors

are not achieving maximum returns.

From this comparison, Gilead’s performance in fiscal

year 2014 was robust in comparison to other

companies invested in antivirals. We believe that

this will allow Gilead to continue to maintain its

strong pipeline, returns to investors, and earnings

per share growth.

Foreign Sales Select Gilead produced drugs are distributed both

within the United States as well as in foreign

countries in which they have been approved. A

recent deal to resolve legal action filed against

Gilead, Mylan Inc.’s Indian subsidiary will make

them the sole distributor of Gilead’s Hepatitis C

treatments within India. This deal is a win for Mylan

in the pharmaceutical wars emerging in the race to

provide treatment for the disease. Hepatitis C

medications have had a significant impact on

Gilead’s revenue stream, with a substantial increase

in total revenues riding on "the back of almost $4

billion in hepatitis C drug sales."29

CELG AMGN ABBV MRK BIIB GILD

MV (B) 85.7 114.3 97.9 148.1 63.5 147.8

EV (B) 93.6 115 120.7 162.8 64.2 154.9

Sales (B)

7.64 20.04 19.96 42.24 9.70 24.89

#Phase III

8 28 15 22 4 8

# Pre- Reg

6 6 4 9 1 3

D net/ EBITDA

-0.22 0.41 0.98 0.40 -0.27 0.14

GM (%)

92.2 78.9 78.4 63.9 83.4 84.4

OM(%) 34.9 34.1 30.1 21.8 40.9 61.3 NM (%)

19.3 25.7 8.9 28.3 30.3 48.6

ROE(% )

29.7 24.1 56.9 24.2 34.3 90.3

Sales g (%)

17.1 7.3 6.2 -4.5 39.6 121.8

EPS (%) 4.2 0.9 -57.0 176.9 58.4 306.1

8

Source: FactSet

The chart above shows that approximately 26% of sales

come from outside the United States. To protect against

currency fluctuations especially in the European Union,

Gilead’s management uses foreign currency exchange

forward and option contracts3. The company’s revenues

would be adversely affected if the dollar appreciates

more than the hedging efforts.

Biotechnology The human health biotechnology industry focuses

on improving people’s health with research

centered on the creation of recombinant DNA.

These DNA alterations have led biotech

companies to discover treatments for diseases

including forms of cancer, AIDS, Alzheimer’s, and

diabetes. Biotechnology companies are some of

the most research-intensive companies in the

world due to the laborious process of developing

new, successful products. A majority of the

biotech industry is extremely small companies

requiring external funding, typically provided by

big pharmaceutical companies or investment

entities11.

Biotechnology firms’ product lines include various

drug delivery vehicles including monoclonal

antibodies, gene inhibitors, small molecules, and

peptides. Utilizing these delivery vehicles medium

to large cap biotechnology companies cover a

variety of therapeutic areas that include HIV/AIDS,

liver diseases, hematology/oncology,

cardiovascular, inflammation, respiratory,

neuroscience, bone health, and nephrology.

Revenue streams for biotechnology companies

result from drug sales, product licensing, and

developing bioprocessing products for the

production of biologic drugs.

Government Regulations Biotechnology firms are strictly regulated by the

US Food & Drug Administration. As firms develop

and test drugs they are subject to firm guidelines

to follow throughout the process. The five key

steps included in the drug development process

are described below12.

Step 1: Discovery and Development.

During the Discovery and Development step of

drug production a scientist for a firm will discover

a promising new drug. Discovery typically occurs

when scientists gain new insight into a disease,

realize unintended effects of other treatments,

conduct broad research of molecular compounds

to test impacts on various diseases, or take

advantage of new technological advances. Once a

promising new drug has been identified,

researchers conduct experiments to gather further

information

Step 2: Preclinical Research

Preclinical research is intended to test a drug’s

potential to cause serious harm prior to conducting

research on humans. Preclinical testing is typically

conducted both in vitro (within test tubes) and in

vivo (animal testing).

This step is closely regulated by the FDA with

minimum basic requirements guiding many aspects

of the research studies. The results from this testing

is used to determine the viability of the drug and to

decide whether to proceed to clinical research.

Step 3: Clinical Research

Once the drug has reached the clinical research

stage researchers begin testing on humans. Because

of this, the four phases that comprise clinical trials

are closely regulated by the FDA. Before beginning

clinical trials the firm must submit an Investigational

New Drug (IND) application to the FDA including

information gathered during preclinical research.

After the application has been approved by the FDA,

researchers may begin the four phases of a clinical

trial.

Phase 1: The purpose of the first phase is to

test the safety and dosage of the drug. The

trial is conducted with 20 to 100 healthy

patients over several months.

Approximately 70% of drugs successfully

move past this phase.

9

Phase 2: The purpose of the second phase

is to test the efficacy and side effects of the

drug. The trial is conducted with up to

several hundred people with the disease

over several months to two years.

Approximately 33% of drugs successfully

most past this phase.

Phase 3: The purpose of the third phase is

to test the efficacy of the drug and monitor

adverse reactions. The trial is conducted

with 300 to 3,000 volunteers who have the

disease over 1 to 4 years. Approximately 25-

30% of drugs successfully move past this

phase.

Phase 4: The purpose of the fourth phase

is to test the safety and efficacy of the

drug. The trial is conducting with several

thousand volunteers who have the disease.

Drugs that successfully move past this

phase are submitted for FDA approval. Step 4: FDA Review

Once a developer has significant evidence from

early research and preclinical and clinical trials that

the drug is safe and effective, an application to

market the drug may be submitted to the FDA. The

developers will submit a New Drug Application

telling the story of the drug describing its

effectiveness and level of safety. All information

from preclinical to phase 3 trials must be included

in the application. After submission the FDA review

team has six to ten months to review the

application and make the decision whether to

approve the drug for marketing. If approved, the

FDA works with the developer to refine prescribing

information in the ‘labeling’ process before the

drug is marketed for use. Often the developer must

address issues or answer follow-up questions

before the drug is approved.

Step 5: FDA Post-Market Safety Marketing

Once the drug has been approved by the FDA it is

closely monitored as it proceeds to market. If the

developer wishes to make any significant changes

it must first gain approval from the FDA via a

supplemental application. The marketing and use

of the drugs are closely monitored by the FDA for

the lifetime for of the drug and FDA is working to

increase efficiency in active surveillance in order

to monitor products in real time.

The strict guidelines and lengthy approval process

makes developing and testing new products highly

capital intensive. As a result, any drugs dropped at

any point during the pipeline can lead to large

losses for the developing firm. This risk shows the

importance of thoroughly conducting early testing.

The lengthy time horizon for developing new

products leads to risk of diminishing revenues as

existing patents expire if new drugs are not

completed and approved. These factors indicate

that it is critical for firms to utilize their capital to

maintain a strong pipeline of drugs to maintain

potential for future revenues.

Industry Developments and Trends FDA approval rates

In 2014 the FDA approved 44 new drugs, up from

27 in 2013 and the highest number since 1996’s

record 53 approvals. So far in 2015 the drug

approval rate has surged 89% from just 50% in

2008. The drugs approved in 2014 spanned 10

different therapeutic areas, up from 8 in 2013. The

Fed has indicated they believe the trend of

increasing drug approvals will continue as firms

continue to develop treatments for critical

diseases19. The following chart demonstrates the

increasing FDA approval ratings from 2008 to 2015.

Source: The Drug Development Process

This higher approval rating and wider variety of

diseases being treated is indicative of more drugs

making it from the discovery and testing phases to

the revenue generating phase. This surge in FDA

approvals is accompanied by technological advances

and innovation leading to faster and cheaper R&D

processes. This trend in approvals leads to a positive

10

outlook for biotechnology and pharmaceutical

firms because the increase in FDA approval rates

means increasing products for sale and therefore

higher revenue opportunities. One issue brought

on by increasing approval rates is the question of

standards. As drugs continue to be approved more

quickly are standards being lowered on safety and

effectiveness? As the trend continues in the coming

years it will be critical for Gilead to guard against

this by following internal standards to avoid recalls

or potential lawsuits for ineffective or dangerous

products.

M&A and Dividends Large cap biotech firms have recently experienced

increased cash flows needed to acquire firms and

pay dividends to investors14. Large pharmaceutical

firms look at M&A as a tool to expand their

pipeline and acquire new drugs to replace losses

stemming from expiring or non-issued patents. For

smaller biotechnology firms M&A exists as a viable

exit strategy when expanded production

capabilities are needed to earn profits15. The

following table provides information concerning

recent M&A activity both concerning the number

and size of transactions.

Source: Factset

IPOs After a substantial drop off in 2008 and 2009 the

IPO market for biotechnology companies globally

has begun to recover, reaching a record number

of 63 IPOs in 2014 with the US16. Though the

boom has slowed slightly in 2015, the trend is

expected to remain intact for the foreseeable

future. According to Portfolio Manager David

Miller, the main factor contributing to the upward

trend in IPOs is increasing investor interest in

biotech and pharmaceutical companies due to the

FDA’s increasing regulatory reasonability and

scientific advances17.

Priority Review Vouchers “Priority review vouchers” issued by the FDA as

rewards for developing drugs for pediatric

conditions or tropical diseases. The vouchers are

intended to encourage more research in

underfunded diseases and are received when the

FDA approves a drug falling in this category and

can be redeemed to speed FDA consideration from

the standard ten months to six months for any

subsequent drug for any disease18.

The vouchers can be sold for profit in a secondary

market. Gilead was the first company to purchase

a tropical disease voucher in November 2014 from

Canadian pharmaceutical company Knight

Therapeutics19. As the price continues to rise,

vouchers criticized because funding is being

directed towards the vouchers instead of

developing other important treatments further.

The vouchers create a competitive advantages for

firms developing drugs that would not otherwise

be eligible for expedited review helping companies

gain approval for drugs before rival firms

developing similar treatments.

Economic Analysis Demography

The aging of the US and world populations has had a significant impact on healthcare spending. By 2050, for the first time in human history, the world population over 65 –also known as the Silver

Generation– will outnumber those under 1420. As the average age of the world population rises, healthcare spending increases in response to increasing health complications accompanying age, specifically cardiovascular disease and

cancer21,22. As a result, demand for Gilead’s

cardiovascular and oncology related drugs will increase as global aging continues, signifying potential for continued future growth in revenues from drugs such as Zydelig and Renexa. The increase in risk of infection caused by age will also increase Gilead’s sales, but is a less significant influence.

M&A Transaction Value Analysis

Number of Deals

Transaction Value

Average

LTM '15

Multiple

s Transaction Value

1000+

LTM '15

4

LTM '14 % Change

2 100.0

LTM '15

45,623.9

LTM '14 % Change

25,922.0 76.0

EV / Sales

461.4

EV / EBITDA

-115.

6 500 to 999.9

250 to 499.9

2

4

5 -60.0

1 300.0

1,627.3

1,494.7

3,266.4 -50.2

255.0 486.2

22.0

2,076.1

-29.9

-13.5 100 to 249.9

50 to 99.9

7

3

4 75.0

1 200.0

1,218.1

171.8

588.6 106.9

83.6 105.5

14.3

4.8

-8.7

-9.2

25 to 49.9

10 to 24.9 --

5 2 150.0

2 -- --

192.3 60.3 219.0

23.0 --

--

1.6

--

0.5

Under 10

Undisclosed Value

5

27

13 -61.5

24 12.5 --

25.6

--

42.4 -39.6 --

-- --

--

--

11

Source: Bank of America Merrill Lynch

As populations in developing countries grow and

the spread of diseases such as HIV and Hepatitis

continue, companies such as Gilead are pressured

to decrease the cost of viral therapies to be sold

abroad. Currently, Gilead works with regional

business partners and generic licensing partners to

produce and distribute drugs used for HIV

treatment at a steeply discounted price in low- and

middle-income countries. These discounted prices

and the distribution of generic drugs produces little

to no profit for Gilead. As the demand for these

steeply discounted treatments in developing

countries grows, Gilead will be pushed to continue

its supply, potentially harming future potential

profits if the price is pushed below the cost of

production23.

Government Legislation The Affordable Care Act (ACA), passed in 2010,

continues to have a significant impact on the

economic landscape surrounding the Healthcare

sector. Increased costs introduced with the Act are

offset by the cash flows provided by newly insured

consumers24. As the number of insured Americans

increases, healthcare spending as a percent of GDP

is on the rise. Insured consumers are more likely to

opt into elective procedures and seek medical

attention when ill. As access to healthcare

increases, the demand for drugs will grow, leading

to increased revenues for companies such as

Gilead. The chart below shows the effect ACA has

had on healthcare spending as a percent of GDP for

both historical and forecasted years.

Source: The American Spectator

The Cadillac Tax, beginning in 2018, will counteract

a portion of the increased healthcare spending

resulting from increased insurance coverage. The

Cadillac Tax is a tax of “40% of the cost of health

coverage that exceeds the predetermined

threshold amounts.”25 The tax is intended to

decrease employee and employer excess

healthcare spending and help to finance the

expanded insurance coverage brought about by

the Affordable Care Act. The tax will have a direct

negative impact on elective healthcare spending,

while helping to fund the increase in healthcare

spending due to expanded healthcare insurance.

This tax will increase Gilead revenues by positively

affecting the ability of Americans to afford

necessary treatments.

Exchange Rates Though a majority of Gilead’s revenues result from

sales within the US, approximately 26% of 2014

revenues came from sales outside the United

States, mainly with Germany and the UK33.

According to Gilead’s management, “currency

fluctuations and hedging expenses may cause our

earnings to fluctuate” which, in turn, could

adversely affect Gilead’s stock price3. Because

Gilead is a net receiver of foreign currencies, most

significantly the Euro, when the US dollar

strengthens the relative value of sales is adversely

affected, while when the US dollar weakens, the

relative value of sales increases. Gilead hedges a

percent of forecasted international sales using

foreign currency exchange forward and option

contracts, focusing mostly on the Euro3. Though

the hedging reduces Gilead’s exposure to currency

fluctuations, it does not eliminate risk. Hedging

12

expenses associated with these activities can also

lead to fluctuations in earnings and downward

pressure on the stock price.

Since 2011, the percent of Gilead revenues

originating from sales outside the US has declined,

therefore lessening their exposure to risk

associated with currency fluctuations33. Overall,

currency risk will continue to affect Gilead, but

hedging attempts and the recent decline in

international sales serve as buffers between Gilead

and negative shifts in the strength of the US dollar.

Interest Rates Biopharmaceutical companies require substantial

capital for both operating activities and investing in

expansion, as a result, interest rates are critical to

financing decisions26. The Fed officials have

confirmed an approaching slow increase in interest

rates with target projections for 2015 year-end

stand at 0.625% while 2016 and 2017 year-end are

1.625% and 2.875% respectively27. Under the

current low rates, companies have been carrying

substantial amounts of debt on their balance sheet

comprised of both variable- and fixed- rate loans26.

The recent refinancing and substantial increase in

Gilead’s Senior Unsecured debt in September 2015

is likely a response to the looming increase in rates.

Assuming large amounts of debt under the current

low rates will enable Gilead to avoid raising capital

under the increased rates in the future. Overall, as

shown in the chart below, since 2009 the amount

of debt issued to healthcare companies has grown

steadily.

Source: Market Realist

Capital Markets Outlook The increased spending caused by growing access

and demand for healthcare is leading to increased

revenues and cash inflows for biotechnology firms.

This increased access to cash promotes firm’s ability

to invest in new technology and projects. The

healthcare sector as a whole is positioned to

outperform the market in the future. Two key

components to this success are the record high M&A

activity and the projected continued increases in

consumer healthcare spending28.

Valuation Revenue growth

We modeled product sales of $31.8 million for 2015 after examining the third quarter 10Q data. Average consensus for Gilead’s revenues is $32,147 million in 2015 and $31,263 in 2016. Our 2016 revenue increases in 2016 on the expectation that the TAF therapies are approved and drive sales upward in the HBV or the oncology markets.

Genvoya—a tenofovir alafenamide (TAF) therapy— was approved by the U.S. FDA for HIV-1 infection treatment on November 5, 2015. TAF has demonstrated high antiviral efficacy and an improved renal and bone safety profile when compared to the tenofovir disoproxil fumarate (TDF) making up Gilead’s Viread and Stribild. Production and marketing will be delayed for 2016, so new sales of Genvoya were estimated to be 180%. This drug would cannibalize sales of Viread and Stribild as the new drug has a higher efficacy at 1/10th the dosage.

Harvoni has a high cure rate (96-99%) after a brief period—8, 12, or 24 weeks. Growth could come from increasing the price of the treatment or from patients switching subscriptions. Harvoni is currently available for $1,125-per-pill. Political and health insurance backlash over current prices means that prices will likely not increase. The model reflects positive growth for Harvoni because it can be used by patient with genotype 1, 4, 5, and 6 HCV, treatment-experienced patients, and those with HCV co-infected with HIV, which makes up to 30% of

those in the U.S. infected with HIV29.

Solvadi is currently priced at $1,000-per-pill and is only for treatments for patients with genotype 1 HCV, so we expected growth to level out and modestly decline over time.

As drugs come off patent, the growth yoy will be minimal or negative as doctors will be less

13

likely to prescribe a name brand when a less expensive generic version will be more available shortly. Additionally, there are only so many patients that will be first-time treatment seekers, so newer more effective or safer drugs will be pushed over older medicines.

Profit Margins

SG&A: Management expects SG&A to increase from 2014 to support its expansion into the European and Asian markets—specifically Japan. Using management guidance, historical trends, and third quarter data, we forecasted SG&A as a percentage of sales.

COGS: We forecasted as an average of historical percent of sales. There was no additional guidance from management.

R&D: Higher expenses were forecasted because an increased number of drug candidates are expected to progress through the pipeline in the forecasted years.

Other Key Assumptions

Debt: In September 2015, Gilead issued notes in a total aggregate principal amount of $10.0 billion. We believe this action is an anomaly in part to take advantage of the low interest rate environment and will be corrected over the remaining forecast period.

Dividends: On February 15, 2015, Gilead’s board announced its intent to begin a dividend program. The dividends have been declared for the last three quarters. We forecasted the dividend to grow conservatively at 1.25%. There was no management guidance on dividend growth and other biotechnology companies paying dividends that are significantly higher and therefore susceptible to revenue fluctuations.

Share repurchases: We forecasted the number of share repurchased following management’s guidance. Management indicated that the $3 billion remainder of the $5 billion repurchase program authorized in 2014 would be completed in 2015 followed by the initiation of a $15 billion 5-year repurchase program.

Normal cash: We forecasted normal cash as a percentage of sales using the minimum value from the 5-year historical common size balance sheet.

WACC: o Cost of debt: Yield to maturity taken from

Morningstar on Gilead’s debt maturing in 2046, issued September 2015.

o Beta: We calculated beta used for the WACC calculation by averaging six betas retrieved from Bloomberg. These betas were calculated using weekly and monthly data between a one year and five year horizon.

o Equity risk premium: Calculated by adjusting Damodaran’s estimated equity risk premium. Adjustments replaced the 10-year

Treasury rate with the 30-year Treasury rate to match the time horizon used for the risk free rate.

Earnings Results

Our expected EPS for FY2015 is $8.98, which falls

below the analyst estimated range of $11.78-

$12.55. We are at the higher end of the projected

revenue range indicating that our lower estimate

likely stems from conservative forecasted share

repurchases or high forecasted expenses.

Model Results We expect Gilead’s share price to range from $140-

$145. This is based primarily on our DCF model.

Analyst’s estimates range from $111-$143, so we

are on the higher end of the range. We attribute

this mainly to our assumption that the HCV

revenues will continue to grow in the future due to

new therapies replacing those coming off patent

and the efficacy of the marketed drugs. Sensitivity

analysis suggests that the price could be as high as

$181.71 at the same equity risk premium and a 3%

CV growth rate of NOPLAT. The range for CV growth

rate of NOPLAT is typically 2%-4% instead of the

1.25% we used.

DCF

Based on our discounted cash flow and economic

profit models, we have a target price of $143.52.

The share price was driven by revenue growth

allowed by a strong pipeline of new drugs and

patent protection of current marketed drugs.

DDM

The DDM model produced a price of $105.73,

which falls outside of the analyst estimates. We

believe that this low price results from

unpredictable dividend growth. Our conservative

dividends result in a low DDM valuation that we

discounted when issuing our target price and

recommendation.

Relative Valuation

We compared Gilead to six comparable

14

biotechnology and pharmaceutical companies.

Our relative P/E model gives us a price of $187.98.

This high value stems from a high average P/E of

21.2 for the comparable companies versus

Gilead’s 11.5. Gilead’s low P/E ratio indicates the

stock is undervalued based on forecasted

earnings. Our EV/EBITDA model produced a price

of $174.09, which also falls outside of analyst

projections.

Catalysts for Growth/Change Eleclazine: A stage 3 drug that has indications to

treat Long QT syndrome—a genetic and rare heart

condition. Acceptance of this drug would provide

Gilead revenue streams from the growing

cardiovascular/blood therapeutic category.

Oncology: Cancer therapies are expected to

increase sales revenue by 47.4% by 2023. Since

Gilead has been investing in developing six drugs

related to cancer treatment, it is positioned to

capitalize on this expected industry trend.

Biosimilar drugs: Provide companies who offer a

discount for drugs with very similar chemical

structures to the premium pharmaceuticals. This

will threaten the

$500 billion in sales from companies like Pfizer,

AbbVie, and Merck who depend on patent-

protected drugs. This new class of drugs will be

favored by healthcare watch groups, health

insurers, and global governments looking to cut

healthcare costs that have strained government

healthcare systems and coverage. Gilead will see

revenues decrease in its core markets, but will not

be greatly impacted on emerging market sales.

TAF: Two NDAs and marketing authorization

applications for TAF-based regimens for HIV

treatment could lead to approval of two new single

tablet regimen drugs in next six months in addition

to the recently approved Genvoya. These drugs will

show more favorable renal and bone safety for the

increasing number of older patients.

Debt: The low interest rate environment has

enabled firms to take on large amounts of debt at

low cost.

With access to low-cost capital firms are able to

increase investments into technology and research

enabling firms to promote future growth.

Key Investment Positives or Negatives Products in late stage approval: There are seven

drugs in Phase III and three in pre-registration. The

disease targets addressed by the pharmaceuticals

include three for HIV/AIDS, two for liver diseases,

four for oncology, and one for cardiovascular

conditions. Results have been positive for other

Phase II drugs, which suggests a strong pipeline in

the future29.

Cash: Gilead has $12.261 billion and has used it to

not only reinvest in the company but also to return

cash to the shareholders with dividends and share

repurchases. Dividends paid out were $633 million

and $5.349 billion in shares were repurchased.

Hepatitis C: As discussed previously, Gilead’s

development of Sovaldi and Harvoni, treatments

for Hepatitis C, has provided a significant

advantage in generating revenues. However,

Gilead announced earlier this year the substantial

revenues stemming from sales of these drugs will

likely be diminished in 2015 due to significant

discounts necessary for Gilead to compete with

competitor AbbVie Inc.’s deep discounts provided

on a recently developed treatment.

Pricing Pressure: After Hillary Clinton tweeted out

about biotechnology price gouging, the

biotechnology stocks plunged. The public, the

government and health insurers are demanding

lower prices and access to company information

on its pricing. There will be no change until after

the conclusion of the U.S. election cycle in the late

part of 2016. If insurance companies prevent

patients from accessing treatments such as

Harvoni, Genvoya or Sovoldi, Gilead will be heavily

impacted as much of the revenue comes not from

the many patients in the emerging markets but

rather the patients in the U.S.

Reliance on Distributors: Gilead's significant reliance

on three independent distributors for 63%2 of its

total revenue presents a weakness that could cause

issues in the future. If labor standstills or other

operating disruptions arise with any of these three

major partners, Gilead could face problems with its

ability to sell and deliver products to customers as

the wholesalers represent a major pipeline for

Gilead’s revenues.

15

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2. Gilead’s 10-K

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e patitis Treatment Expansion Fact Sheet

1021143.pdf

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08/express-scripts-raises-pressure-on-gilead-for-drug-

price

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encouraging-data-hcv-222710138.html

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Gilead's Once-Daily Single Tablet Regimen for Chronic

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fda-approves-new-indications-for-harvoni-gileads-

oncedaily-single-tablet-regimen-for-chronic-hepatitis-

c

8. Merck Announces Presentation of Results from Two

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Phase-2-Studies

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fault.htm

13. Herper, M. (2015, August 20). The FDA Is Basically

Approving Everything. Here's The Data To Prove It.

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08/20/the-fda-is-basically-approving-everything-

heres-the-data-to-prove-it/

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IBISWorld.

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pulse_ma-and-alliances_infographic-with-beam.jpg

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stocks helping drive biotech IPO boom. Retrieved

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high-growth-stocks-helping-drive-biotech-ipo-boom-

2015-04-20

18. Loftus, P. (2015, November 1). Drug Makers Buy

Pricey Vouchers to Speed Products to Market.

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vouchers-to-speed-products-to-market-1445333403

19. Gaffney, A. (2014, November 19). Gilead Makes

Record-Setting Purchase of Special FDA Voucher - See

more at: Http://www.raps.org/Regulatory-

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Voucher/#sthash.0t6EXNpe.dpuf. Retrieved

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Focus/News/2014/11/19/20778/Gilead-Makes-

Record-Setting-Purchase-of-Special-FDA-Voucher/

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documents/PDFs/bofamlatwatlas.pdf

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.aspx?bedid=22

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-health-and-aging/assessing-costs-aging-and-health-

care

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http://www.gilead.com/responsibility/developing-

world-access/hiv aids

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https://www.whitehouse.gov/healthreform/healthca

re-overview

16

25. Affordable Care Act Cadillac Tax. (n.d.).

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on- reform/cadillac-tax

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interest- rates-affect-hospital-industry/

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rate-rise/

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full-speed-ahead/

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http://investors.gilead.com/phoenix.zhtml?c=6996

4& p=irol-sec

30. Pollack, A. (2015, May 19). High Cost of Sovaldi

Hepatitis C Drug Prompts a Call to Void Its Patents.

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releases/2015/11/us-fda-approves-new-

indications- for-harvoni-gileads-oncedaily-single-

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Important Disclaimer This report was created by students enrolled in the Security

Analysis (6F:112) class at the University of Iowa. The report

was originally created to offer an internal investment

recommendation for the University of Iowa Krause Fund and its

advisory board. The report also provides potential employers

and other interested parties an example of the students’ skills,

knowledge and abilities. Members of the Krause Fund are not

registered investment advisors, brokers or officially licensed

financial professionals. The investment advice contained in this

report does not represent an offer or solicitation to buy or sell

any of the securities mentioned. 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 Krause

Fund may hold a financial interest in the companies mentioned

in this report.

17

Gilead Sciences, Inc.

Revenue Decomposition

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E CV (2019)

Antiviral Products (U.S. Patent Exp): HIV/AIDS

Atripla (2021) 3,574.0 3,648.0 3,470.0 3,175.05 3,238.55 3,303.32 3,369.39 3,436.78

Growth 10.8% 2.1% -4.9% -8.5% 2.0% 2.0% 2.0% 2.0%

Truvada (2021) 3,181.0 3,136.0 3,340.0 3,456.90 3,474.18 3,439.44 3,370.65 3,368.97

Growth 10.6% -1.4% 6.5% 3.5% 0.5% -1.0% -2.0% -0.1%

Emtriva (2021) - - - - - - - -

Growth - - - - - - - -

Viread (2018) 849.0 959.0 1,058.0 1,139.47 1,162.26 1,173.88 1,115.18 1,081.73

Growth 15.1% 13.0% 10.3% 7.7% 2.0% 1.0% -5.0% -3.0%

Complere/Eviplera (2023) 342.0 810.0 1,228.0 1,473.60 1,503.07 1,533.13 1,563.80 1,595.07

Growth 782.6% 136.8% 51.6% 20.0% 2.0% 2.0% 2.0% 2.0%

Stribild (2029) 58.0 539.0 1,197.0 1,556.10 1,789.52 1,861.10 1,898.32 1,897.37

Growth 829.3% 122.1% 30.0% 15.0% 4.0% 2.0% -0.1%

Genvoya-Future - - - - 200.00 600.00 900.00 1,125.00

Growth 200.0% 50.0% 25.0%

HBV

Hepsera (2014) - - - - - - - -

Growth - - - - - - - -

HCV

Sovaldi (2029) - 139.0 10,283.0 4,113.20 4,257.16 4,342.31 4,385.73 4,517.30

Growth 7297.8% -60.0% 3.5% 2.0% 1.0% 3.0%

Harvoni (2030) - - 2,127.0 14,569.95 15,079.90 15,306.10 15,382.63 15,459.54

Growth 585.0% 3.5% 1.5% 0.5% 0.5%

Other antiviral 138.0 111.0 88.0 74.80 73.30 71.84 70.40 68.99

Growth -20% -21% -15.0% -2.0% -2.0% -2.0% -2.0%

Total Antiviral Sales $ 8,142 $ 9,342 $ 22,791 $ 29,559 $ 30,778 $ 31,631 $ 32,056 $ 32,551

Antiviral Growth 15.49% 14.74% 143.96% 29.70% 4.12% 2.77% 1.34% 1.54% Other Products:

Oncology

Letairis (2018) 410.0 520.0 595.0 743.75 766.06 781.38 785.29 769.58

Growth 39.7% 26.8% 14.4% 25.0% 3.0% 2.0% 0.5% -2.0%

Ranexa (2019) 373.0 449.0 510.0 586.50 598.23 607.20 613.28 616.34

Growth 16.6% 20.4% 13.6% 15.0% 2.0% 1.5% 1.0% 0.5%

Cardiovascular

Zydelig (2025) - - 23.0 26.91 29.06 30.52 31.74 32.37

Growth 17.0% 8.0% 5.0% 4.0% 2.0%

Other

AmBisome (2016) 346.0 352.0 388.0 376.36 378.24 370.68 359.56 355.96

Growth 4.8% 1.7% 10.2% -3.0% 0.5% -2.0% -3.0% -1.0%

Other 127.0 141.0 167.0 181.20 186.63 192.23 196.07 200.00

Growth 16.5% 11.0% 18.4% 8.5% 3.0% 3.0% 2.0% 2.0%

Total Other Sales 1,256.0 1,462.0 1,683.0 1,914.72 1,958.23 1,982.01 1,985.93 1,974.25

Total Product Sales $ 9,398 $ 10,804 $ 24,474 $ 31,474 $ 32,736 $ 33,613 $ 34,042 $ 34,525

Total Sales Growth 16% 15% 127% 28.6% 4.0% 2.7% 1.3% 1.4%

18

Gilead Sciences, Inc.

Income Statement

(in millions, except earnings per share)

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E CV (2019)

Product sales 9,398 10,804 24,474 31,474 32,736 33,613 34,042 34,525

Royalty, contract and other revenues 304 398 416 447 481 517 556 597

Total revenues 9,702 11,202 24,890 31,921 33,217 34,130 34,598 35,122

Cost of goods sold (2,388) (2,756) (3,663) (6,208) (6,457) (6,630) (6,715) (6,810)

Depreciation expense (83) (103) (125) (254) (315) (384) (463) (555)

Amortization Expense (195) (242) (925) (826) (832) (846) (853) (741)

Research and development expenses (1,760) (2,120) (2,854) (3,398) (3,535) (3,629) (3,676) (3,728)

Selling, general and administrative expenses (1,461) (1,699) (2,983) (3,312) (3,445) (3,537) (3,583) (3,633)

Operating Income/Loss 4,010 4,524 15,265 17,922 18,633 19,103 19,308 19,655

Interest expense (361) (307) (412) (569) (1,046) (986) (866) (751)

Other income / expense, net (37) (9) 3 (47) (49) (50) (51) (52)

Income before provision for income taxes 3,612 4,208 14,856 17,306 17,538 18,066 18,391 18,853

Provision for income taxes (1,038) (1,151) (2,797) (4,249) (4,306) (4,435) (4,515) (4,628)

Net income / loss 2,574 3,057 12,059 13,057 13,233 13,631 13,876 14,224

Net loss / income attributable to noncontrolling interest 18 18 42 35 37 39 41 43

Net income attributable to Gilead 2,592 3,075 12,101 13,093 13,270 13,670 13,917 14,267

Basic EPS 1.71 2.01 7.95 8.88 9.11 9.47 9.74 10.14

# Shares Outstanding (as of February) 1,515 1,529 1,522 1,474 1,457 1,443 1,428 1,407

Divs. per share - - - 1.72 1.74 1.76 1.79 1.81

Dividends Paid - - - 2,535 2,538 2,544 2,550 2,544

19

Gilead Sciences, Inc.

Balance Sheet

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E CV (2019)

Cash and cash equivalents 1,804 2,113 10,027 28,498 35,507 41,536 47,784 56,596 Short-term marketable securities 59 19 101 101 101 101 101 101

Accounts receivable, net 1,751 2,182 4,635 6,373 6,632 6,814 6,907 7,012

Inventories 1,745 1,697 1,386 2,554 2,657 2,730 2,768 2,810

Deferred tax assets 263 331 508 606 706 809 913 1,020

Prepaid taxes 348 398 391 322 322 322 322 322

Prepaid expenses 102 166 194 339 353 363 368 373 Other current assets 84 91 472 418 435 447 454 460

Total current assets 6,156 6,997 17,714 39,212 46,714 53,122 59,617 68,695

Property, plant and equipment, net 1,100 1,166 1,674 2,076 2,532 3,056 3,660 4,361

Long-term portion of prepaid royalties 176 199 466 244 244 244 244 244

Long-term deferred tax assets 131 190 236 283 331 380 430 481

Long-term marketable securities 720 439 1,598 1,630 1,663 1,697 1,731 1,766

Intangible assets, net 11,736 11,900 11,073 10,690 10,286 9,851 9,392 9,027

Goodwill 1,061 1,169 1,172 1,172 1,172 1,172 1,172 1,172

Other long-term assets 159 519 731 856 891 915 928 942

Total assets $ 21,240 $ 22,579 $ 34,664 56,163 63,832 70,436 77,174 86,688

Liabilities and Stockholders Equity

Current liabilities:

Accounts payable 1,327 1,256 955 3,397 3,535 3,632 3,682 3,738

Accrued government and other rebates 745 1,018 2,316 3,009 3,172 3,302 3,391 3,487

Accrued compensation and employee benefits 205 243 316 605 629 647 655 665

Income taxes payable 13 11 105 93 94 97 98 101

Other accrued liabilities 675 1,071 1,452 2,137 2,224 2,285 2,316 2,352

Deferred revenues 103 111 134 305 318 326 331 336

Dividends Payable - - - 634 634 636 637 636

Current portion of long-term debt and other obligations, net 1,169 2,697 483 993 1,819 1,643 1,438 1,246

Total current liabilities 4,238 6,407 5,761 11,173 12,425 12,567 12,549 12,560

Long-term debt, net 7,055 3,939 11,921 21,831 19,714 17,258 14,946.61 15,275

Long-term income taxes payable 116 162 562 608 616 634 646 662

Long-term deferred tax liabilities 10 83 51 116 183 251 321 392

Other long-term obligations excluding long-term deferred tax liabilities 271 179 535 696 724 744 754 766

Equity component of currently redeemable convertible notes 7 64 15 9 5 3 2 1

Stockholders' equity

Common stock & Additional paid-in Capital 5,644 5,388 2,393 2,685 2,978 3,270 3,504 3,504

Common Stock, Treasury - - - (6,000) (9,000) (12,000) (15,000) (18,000)

Accumulated other comprehensive income / loss (46) (124) 301 301 301 301 301 301

Retained earnings / accumulated deficit 3,705 6,106 12,732 23,888 34,584 45,672 57,000 68,679

Total Gilead stockholders' equity 9,303 11,370 15,426 20,875 28,862 37,243 45,805 54,484

Noncontrolling interest 241 375 393 412 432 452 474 497

Total stockholders’ equity 9,544 11,745 15,819 21,286 29,294 37,696 46,279 54,981 Total liabilities and stockholders’ equity $ 21,240 $ 22,579 $ 34,664 55,720 62,961 69,154 75,498 84,636

20

Gilead Sciences, Inc.

Cash Flow Statement

Fiscal Years Ending Dec. 31 2012 2013 2014

Net income / loss 2,574 3,057 12,059

Depreciation and Amortization expense 83 103 125

Stock-based compensation expense 209 252 360

Excess tax benefits from stock-based compensation (114) (279) (482)

Tax benefits from exercise and vesting of stock-based awards 113 285 484

Deferred income taxes (39) (98) (236)

Change in fair value of contingent consideration 69 59 22

Other (3) 46 79

Changes in operating assets and liabilities

Accounts receivable, net 198 (315) (2,578)

Inventories (350) (343) 143

Prepaid expenses and other assets (129) (170) (371)

Accounts payable 117 (98) (289)

Income taxes payable (68) 30 533

Accrued liabilities 396 312 2,013

Deferred revenues 23 22 31

Net cash provided by operating activities 3,195 3,105 12,818

Investing Activities

Purchases of marketable securities (1,245) (257) (2,107)

Proceeds from sales of marketable securities 528 494 807

Proceeds from maturities of marketable securities 45 78 52

Other investments (25) - (18)

Acquisitions, net of cash acquired (10,752) (379) -

Capital expenditures (397) (190) (557)

Net cash used in / provided by investing activities (11,846) (254) (1,823)

Financing Activities

Proceeds from debt financing, net of issuance costs 2,144 - 7,932

Proceeds from convertible note hedges 214 2,774 2,543

Purchases of convertible note hedges - - (26)

Repayments of debt and other obligations (1,839) (4,440) (4,779)

Payments to settle warrants - (1,040) (4,093)

Proceeds from issuances of common stock 466 313 331

Repurchases of common stock (667) (582) (5,349)

Payment of dividend - - -

Excess tax benefits from stock-based compensation 114 279 482

Payment of contingent consideration - - (101)

Net distributions to / contributions from noncontrolling interest 131 152 35

Net cash provided by / used in financing activities 563 (2,544) (3,025)

Effect of exchange rate changes on cash and cash equivalents 8 2 (56)

Net change in cash and cash equivalents (8,080) 309 7,914

Cash and cash equivalents at beginning of period 9,884 1,804 2,113

Cash and cash equivalents at end of period 1,804 2,113 10,027

Supplemental disclosure - - -

Interest paid, net of amounts capitalized (249) (238) (330)

Income taxes paid (1,101) (1,051) (2,060)

21

Gilead Sciences, Inc.

Cash Flow Statement

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E CV (2019)

Net income / loss 13,057 13,233 13,631 13,876 14,224

Adjustments

Depreciation 254 315 384 463 555

Amortization 826 832 846 853 741

Change in accounts receivable, net (1,738) (259) (182) (93) (105)

Change in inventories (1,168) (104) (73) (37) (42)

Change in prepaid taxes 69 - - - -

Change in prepaid expenses (145) (14) (10) (5) (6)

Change in other current assets 54 (17) (12) (6) (7)

Change in deferred tax assets (98) (100) (103) (104) (107)

Change in long-term deferred tax asset (47) (48) (49) (50) (51)

Change in long-term deferred tax liability 65 66 68 70 71

Change in accounts payable 2,442 138 97 50 56

Change in accrued government and other rebates 693 163 130 89 96

Change in accrued compensation and employee benefits 289 25 17 9 10

Change in current income taxes payable (12) 1 3 2 2

Change in long-term income taxes payable 46 8 19 11 16

Change in other accrued liabilities 685 87 61 31 35

Change in deferred revenues 171 12 9 4 5

Change in dividends payable 634 1 2 1 (1)

Change in other long-term obligations 161 28 20 10 11

Net cash provided by operating activities 16,237 14,368 14,857 15,174 15,505

Investing Activities

Purchase/Sale current marketable securities (0) (0) (0) (0) (0)

Purchase/Sale long-term marketable securities (32) (33) (34) (34) (35)

Capital Expenditures (gross) (655) (771) (907) (1,068) (1,256)

Change in other long-term assets (125) (35) (24) (13) (14)

Change in long-term portion of pre-paid royalties 222 - - - -

Equity component of currently redeemable convertible notes (6) (4) (2) (1) (1)

Net cash used in / provided by investing activities (596) (842) (968) (1,116) (1,306)

Financing Activities

Payment of Dividends (1,901) (2,537) (2,542) (2,548) (2,545)

Change in long-term debt, net 9,910 (2,117) (2,455) (2,312) 328

Changes in current portion of LT debt 510 826 (176) (205) (193)

Repurchases of common stock (6,000) (3,000) (3,000) (3,000) (3,000)

Common stock and APIC 292 292 292 234 -

Change in non-controlling interests 19 20 21 22 23

Net cash provided by / used in financing activities 2,830 (6,517) (7,861) (7,809) (5,387)

Net change in cash and cash equivalents

18,471

7,009

6,029

6,249

8,812

Cash and cash equivalents at beginning of period 10,027 28,498 35,507 41,536 47,784

Cash and cash equivalents at end of period 28,498 35,507 41,536 47,784 56,596

22

Gilead Sciences, Inc.

Common Size Income Statement

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E CV (2019)

Product sales 96.87% 96.45% 98.33% 98.60% 98.55% 98.49% 98.39% 98.30% Royalty, contract and other revenues 3.13% 3.55% 1.67% 1.40% 1.45% 1.51% 1.61% 1.70%

Total revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cost of goods sold -24.61% -24.60% -14.72% -19.45% -19.44% -19.43% -19.41% -19.39%

Depreciation expense -0.86% -0.92% -0.50% -0.79% -0.95% -1.12% -1.34% -1.58%

Amortization expense -2.01% -2.16% -3.72% -2.59% -2.50% -2.48% -2.47% -2.11%

Research and development expenses -18.14% -18.93% -11.47% -10.65% -10.64% -10.63% -10.62% -10.61%

Selling, general and administrative expenses -15.06% -15.17% -11.98% -10.38% -10.37% -10.36% -10.35% -10.34%

Operating Income/Loss 41.33% 40.39% 61.33% 56.15% 56.09% 55.97% 55.81% 55.96% Interest expense -3.72% -2.74% -1.66% -1.78% -3.15% -2.89% -2.50% -2.14%

Other income / expense, net -0.38% -0.08% 0.01% -0.15% -0.15% -0.15% -0.15% -0.15%

Income before provision for income taxes 37.23% 37.56% 59.69% 54.22% 52.80% 52.93% 53.16% 53.68%

Provision for income taxes -10.70% -10.27% -11.24% -13.31% -12.96% -13.00% -13.05% -13.18%

Net income / loss 26.53% 27.29% 48.45% 40.91% 39.84% 39.94% 40.11% 40.50%

Net loss / income attributable to noncontrolling interest 0.19% 0.16% 0.17% 0.11% 0.11% 0.11% 0.12% 0.12%

Net income attributable to Gilead 26.72% 27.45% 48.62% 41.02% 39.95% 40.05% 40.22% 40.62%

23

Gilead Sciences, Inc.

Common Size Balance Sheet Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E CV (2019)

Cash and cash equivalents 18.59% 18.86% 40.29% 89.28% 106.89% 121.70% 138.11% 161.14% Short-term marketable securities 0.60% 0.17% 0.41% 0.32% 0.30% 0.30% 0.29% 0.29%

Accounts receivable, net 18.05% 19.48% 18.62% 19.96% 19.96% 19.96% 19.96% 19.96%

Inventories 17.99% 15.15% 5.57% 8.00% 8.00% 8.00% 8.00% 8.00%

Deferred tax assets 2.71% 2.95% 2.04% 1.90% 2.13% 2.37% 2.64% 2.90%

Prepaid taxes 3.59% 3.55% 1.57% 1.01% 0.97% 0.94% 0.93% 0.92%

Prepaid expenses 1.06% 1.48% 0.78% 1.06% 1.06% 1.06% 1.06% 1.06%

Other current assets 0.87% 0.81% 1.90% 1.31% 1.31% 1.31% 1.31% 1.31%

Total current assets 63.45% 62.46% 71.17% 122.84% 140.63% 155.65% 172.32% 195.59%

Property, plant and equipment, net 11.34% 10.41% 6.73% 6.50% 7.62% 8.95% 10.58% 12.42%

Long-term portion of prepaid royalties 1.81% 1.78% 1.87% 0.76% 0.73% 0.71% 0.70% 0.69%

Long-term deferred tax assets 1.35% 1.70% 0.95% 0.89% 1.00% 1.11% 1.24% 1.37%

Long-term marketable securities 7.42% 3.92% 6.42% 5.11% 5.01% 4.97% 5.00% 5.03%

Intangible assets, net 120.97% 106.23% 44.49% 33.49% 30.96% 28.86% 27.15% 25.70%

Goodwill 10.94% 10.44% 4.71% 3.67% 3.53% 3.43% 3.39% 3.34%

Other long-term assets 1.64% 4.63% 2.94% 2.68% 2.68% 2.68% 2.68% 2.68%

Total assets 218.92% 201.56% 139.27% 175.94% 192.17% 206.38% 223.06% 246.82% Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable 13.68% 11.21% 3.84% 10.64% 10.64% 10.64% 10.64% 10.64%

Accrued government and other rebates 7.68% 9.09% 9.30% 9.43% 9.55% 9.67% 9.80% 9.93%

Accrued compensation and employee benefits 2.11% 2.17% 1.27% 1.89% 1.89% 1.89% 1.89% 1.89%

Income taxes payable 0.14% 0.10% 0.42% 0.29% 0.28% 0.28% 0.28% 0.29%

Other accrued liabilities 6.95% 9.56% 5.83% 6.70% 6.70% 6.70% 6.70% 6.70%

Deferred revenues 1.06% 0.99% 0.54% 0.96% 0.96% 0.96% 0.96% 0.96%

Dividends Payable 0.00% 0.00% 0.00% 1.99% 1.91% 1.86% 1.84% 1.81%

Current portion of long-term debt and other obligations, net 12.05% 24.08% 1.94% 3.11% 5.48% 4.81% 4.16% 3.55%

Total current liabilities 43.68% 57.20% 23.15% 35.00% 37.41% 36.82% 36.27% 35.76%

Long-term debt, net 72.71% 35.16% 47.89% 68.39% 59.35% 50.57% 43.20% 43.49%

Long-term income taxes payable 1.19% 1.45% 2.26% 1.90% 1.85% 1.86% 1.87% 1.88%

Long-term deferred tax liabilities 0.11% 0.74% 0.20% 0.36% 0.55% 0.74% 0.93% 1.12%

Other long-term obligations excluding long-term deferred tax liabilities 2.79% 1.60% 2.15% 2.18% 2.18% 2.18% 2.18% 2.18%

Equity component of currently redeemable convertible notes 0.07% 0.57% 0.06% 0.03% 0.02% 0.01% 0.01% 0.00% Stockholder's equity

Common stock & Additional paid-in Capital 58.17% 48.10% 9.61% 8.41% 8.96% 9.58% 10.13% 9.98%

Common Stock , Treasury Stock 0.00% 0.00% 0.00% -18.80% -27.09% -35.16% -43.36% -51.25%

Accumulated other comprehensive income / loss -0.47% -1.11% 1.21% 0.94% 0.91% 0.88% 0.87% 0.86%

Retained earnings / accumulated deficit 38.19% 54.51% 51.15% 74.84% 104.11% 133.82% 164.75% 195.54%

Total Gilead stockholders' equity 95.88% 101.50% 61.98% 65.39% 86.89% 109.12% 132.39% 155.13%

Noncontrolling interest 2.49% 3.35% 1.58% 1.29% 1.30% 1.33% 1.37% 1.41%

Total stockholders’ equity 98.37% 104.85% 63.56% 66.68% 88.19% 110.45% 133.76% 156.54%

Total liabilities and stockholders’ equity 218.92% 201.56% 139.27% 174.56% 189.55% 202.62% 218.22% 240.98%

24

Gilead Sciences, Inc.

Weighted Average Cost of Capital (WACC) Estimation

Equity

Beta 1.0215

Equity risk premium 5.72%

Cost of equity 8.71%

Share Price $102.57

Shares Outstanding 1,522

Market Capitalization $156,112

Debt

Pre-tax Cost of Debt 4.58%

Tax Rate 18.70%

After-tax Cost of Debt 3.72%

Market Value of Debt 12,419

Capitalized Operating Leases 258

Enterprise Value $168,788

Weight of Equity 92.49%

Weight of Debt 7.36%

WACC 8.33%

25

Gilead Sciences, Inc.

Value Driver Estimation

(in USD Millions)

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E CV (2019)

Net Sales $ 9,702 $ 11,202 $ 24,890 31,921 33,217 34,130 34,598 35,122

- Cost of Goods Sold (2,388) (2,756) (3,663) (6,208) (6,457) (6,630) (6,715) (6,810)

- SG&A Expense (1,461) (1,699) (2,983) (3,312) (3,445) (3,537) (3,583) (3,633)

-R&D expenses (1,760) (2,120) (2,854) (3,398) (3,535) (3,629) (3,676) (3,728)

-Depreciation (83) (103) (125) (254) (315) (384) (463) (555)

-Amortization (195) (242) (925) (826) (832) (846) (853) (741)

+ Implied Interest on Operating Leases 8 8 9 15 18 22 26 31

EBITA $ 3,823 $ 4,290 $ 14,349 17,937 18,651 19,124 19,334 19,686

Less: Adjusted Taxes

Provision for Income Taxes 1,038 1,151 2,797 4,249 4,306 4,435 4,515 4,628

+Tax Shield on Interest Expense 97 89 77 140 257 242 213 184

+Tax Shield on Implied Lease Interest 2 2 2 4 4 5 6 8

-Tax on non-operating Income (Loss) (10) (3) 1 (12) (12) (12) (13) (13)

Total Adjusted Taxes 1,128 1,240 2,876 4,380 4,555 4,670 4,721 4,807

Plus: Change in Deferred Taxes

Current Year Deferred Tax Liability 10 83 51 116 183 251 321 392

Current Year Deferred Tax Asset 394 521 744 889 1,037 1,189 1,343 1,501

Previous Year Deferred Tax Liability 10 83 51 116 183 251 321

Previous Year Deferred Tax Asset 352 394 521 744 889 1,037 1,189 1,343

Net Change in Deferred Taxes (31) (54) (255) (80) (81) (83) (85) (87)

NOPLAT 2,664 2,996 11,218 13,476 14,015 14,371 14,528 14,791

Operating Current Assets:

Normal Cash (lesser of actual or %)

206 241 1,145 3,645 3,793 3,898 3,951 4,011

Accounts Receivable, Net 1,751 2,182 4,635 6,373 6,632 6,814 6,907 7,012

Inventory 1,745 1,697 1,386 2,554 2,657 2,730 2,768 2,810

PPD Expenses 102 166 194 339 353 363 368 373

PPD Taxes 348 398 391 322 322 322 322 322

Other Current Assets 84 91 472 418 435 447 454 460

Operating Current Assets 4,237 4,775 8,223 13,652 14,193 14,574 14,770 14,989

Operating Current Liabilities:

Accounts Payable 1,327 1,256 955 3,397 3,535 3,632 3,682 3,738

Accrued government and other rebates 745 1,018 2,316 3,009 3,172 3,302 3,391 3,487

Accrued compensation and employee benefits 205 243 316 605 629 647 655 665

Income Taxes Payable 13 11 105 93 94 97 98 101

Other accrued liabilities excluding accrued royalties 675 1,071 1,452 2,137 2,224 2,285 2,316 2,352

Deferred revenues 103 111 134 305 318 326 331 336

Dividends Payable - - - 634 634 636 637 636

Operating Current Liabilities 3,068 3,710 5,278 10,180 10,606 10,925 11,111 11,314

Net Operating Working Capital 1,169 1,065 2,945 3,472 3,587 3,650 3,658 3,674

Plus: Net PPE 1,100 1,166 1,674 2,076 2,532 3,056 3,660 4,361

PV of Operating Leases 185 197 258 319 390 470 563 671

Net Intangible Assets 11,736 11,900 11,073 10,690 10,286 9,851 9,392 9,027

Long-term portion of prepaid royalties 176 199 466 244 244 244 244 244

Other long-term assets 159 519 731 856 891 915 928 942

Plus: Other Operating Assets 12,256 12,815 12,528 12,109 11,810 11,480 11,127 10,883

Other LT obligations exc. LT deferred tax liabilities 271 179 535 696 724 744 754 766

Less: Other Operating Liabilities 271 179 535 696 724 744 754 766

Invested Capital 14,254 14,867 16,612 16,961 17,204 17,441 17,691 18,153

Return on Invested Capital

NOPLAT 2,664 2,996 11,218 13,476 14,015 14,371 14,528 14,791

÷Beginning Invested Capital 4,773 14,254 14,867 16,612 16,961 17,204 17,441 17,691

ROIC 55.81% 21.02% 75.45% 81.13% 82.63% 83.53% 83.29% 83.61%

Economic Profit

Beginning Invested Capital 4,773 14,254 14,867 16,612 16,961 17,204 17,441 17,691

ROIC 55.81% 21.02% 75.45% 81.13% 82.63% 83.53% 83.29% 83.61%

WACC 8.33% 8.33% 8.33% 8.33% 8.33% 8.33% 8.33% 8.33%

EP=Beg. IC * (ROIC-WACC) 2,266 1,809 9,979 12,092 12,602 12,937 13,074 13,317

FCF

NOPLAT 2,664 2,996 11,218 13,476 14,015 14,371 14,528 14,791

Add: Beg IC 4,773 14,254 14,867 16,612 16,961 17,204 17,441 17,691

Less: Current IC 14,254 14,867 16,612 16,961 17,204 17,441 17,691 18,153

FCF (6,817) 2,384 9,473 13,127 13,772 14,134 14,278 14,329

26

Gilead Sciences, Inc.

Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:

CV Growth 1.25% CV ROIC 84% WACC 8.33% Cost of Equity 8.71%

Discount Period 1 2 3 4 5

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E CV (2019)

DCF Model NOPLAT 13,476 14,015 14,371 14,528 14,791

FCF 13,127 13,772 14,134 14,278 14,329

CV (t=4) 205,689

CF to Discount 13,127 13,772 14,134 14,278 205,689

PV(CF) 12,117 11,734 11,117 10,366 149,334

Value of Operations 194,669

+Excess Cash 22,048

+Short-Term Marketable Securities 101 +Long-Term Marketable Securities 1,598 +Minority Intersts 35 -PV Operating Leases 258 -Short-Term Debt 483 -Long-Term Debt 11,921 -PV ESOP 3,225

Value of Equity 203,012 Shares Outstanding 1,522 Intrinsic Value of Stock 133.38

Fraction of Year Elapsed 0.877 Adjusted Stock Price (as of 11/16/2015) 143.52

EP Model

Beginning Invested Capital 16,612 Economic Profit 12,092 12,602 12,937 13,074 13,317

CV (t=4) 187,999

EP to Discount 12,092 12,602 12,937 13,074 187,999

PV(EP) 11,162 10,738 10,175 9,492 136,491

Value of Operations 194,669

+Excess Cash 22,048

+ Short-Term Marketable Securities 101 +Long-Term Marketable Securities 1,598 -PV Operating Leases 258 -Short-Term Debt 483 -Long-Term Debt 11,921 -PV ESOP 3,225

Value of Equity 203,012 Shares Outstanding 1,522 Intrinsic Value of Stock 133.38

Fraction of Year Elapsed 0.877 Adjusted Stock Price (as of 11/16/2015) 143.52

27

Gilead Sciences, Inc.

Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E CV (2019)

EPS $ 8.88 $ 9.11 $ 9.47 $ 9.74 $ 10.14 Periods to Discount 1 2 3 4 4

Key Assumptions

CV growth 1.25%

CV ROE 25.95%

Cost of Equity 8.71%

Future Cash Flows

P/E Multiple (CV Year) 12.75

EPS (CV Year) 10.14

Future Stock Price 129.28

Dividends Per Share 1.72 1.74 1.76 1.79 129.28

Discounted Cash Flows 1.58 1.47 1.37 1.28 92.55

Intrinsic Value $ 98.26

Fraction of Year Elapsed 0.876712

Adjusted Stock Price (as of 11/16/15) 105.73

28

Gilead Sciences, Inc. Relative Valuation Models

Ticker

Company

Price

EPS 15E

EPS 16E

P/E 15

P/E 16 EV/EBITDA

15E EV/EBITDA

16E

ABBV AbbVie $59.86 $3.47 $4.65 17.3 12.9 12.2 10.27 MRK Merck $53.03 $1.72 $2.87 30.8 18.5 11.2 10.92

GSK GSK $39.87 $1.89 $0.55 21.1 72.5 11.4 10.49

AMGN Amgen $151.55 $8.51 $9.00 17.8 16.8 11.2 10.19

CELG Celgene $107.49 $2.15 $4.18 50.0 25.7 22.0 16.20 BIIB Biogen $284.84 $15.14 $17.59 18.8 16.2 11.6 10.61

Average 26.0 27.1 13.3 11.4

New Avg 21.2 18.0

GILD Gilead Sciences, Inc. $102.57 $8.88 $9.11 11.5 11.3

GILD EBITDA (15E)

GILD EBITDA (15E)

18,955

19,731

Implied Value:

Relative P/E (EPS15) $ 187.98

Relative P/E (EPS16) $ 164.09

EV/EBITDA (15E) $ 174.09

EV/EBITDA (16E) $ 164.28

29

Beta SG&A CAPEX Growth

Rf Normal Rd

Cash

ERP COGS

CV growth

of NOPLAT

R&D

Expenses

143.52 0.9 0.95 1 1.05 1.1 1.15 1.2

2.25%

2.50%

170.40

164.46

163.65

158.21

157.46

152.45

151.77

147.14

146.51

142.22

141.64

137.66

137.11

133.41

2.75%

3.00%

158.96

153.85

153.15

148.43

147.78

143.42

142.82

138.77

138.21

134.44

133.92

130.40

129.92

126.63

3.25% 149.08 144.02 139.33 134.96 130.89 127.09 123.52

3.50% 144.63 139.90 135.49 131.38 127.55 123.95 120.58

3.75% 140.47 136.02 131.88 128.01 124.39 120.99 117.80

4.00% 136.56 132.38 128.48 124.83 121.40 118.18 115.15

4.25% 132.89 128.95 125.27 121.81 118.57 115.52 112.64

143.52 8% 9% 10% 11% 12% 13% 14%

4.00% 152.42 149.97 147.52 145.07 142.62 140.17 137.72

6.00% 151.69 149.24 146.79 144.34 141.89 139.44 136.99

8.00% 150.96 148.51 146.06 143.61 141.15 138.70 136.25

9.00% 150.59 148.14 145.69 143.24 140.79 138.34 135.89

10.00% 150.23 147.78 145.32 142.87 140.42 137.97 135.52

11.00% 149.86 147.41 144.96 142.51 140.06 137.61 135.16

12.00% 149.49 147.04 144.59 142.14 139.69 137.24 134.79

13.00% 149.13 146.68 144.23 141.78 139.33 136.88 134.43

14.00% 148.76 146.31 143.86 141.41 138.96 136.51 134.06

143.52 15% 16% 17% 18% 19% 20% 21%

3.50%

4.00%

145.02

144.45

144.92

144.35

144.81

144.24

144.70

144.14

144.59

144.03

144.48

143.92

144.36

143.80

4.50%

5.00%

143.89

143.33

143.79

143.23

143.68

143.12

143.57

143.02

143.47

142.91

143.36

142.80

143.24

142.69

5.50% 142.77 142.67 142.57 142.46 142.36 142.25 142.14

6.00% 142.22 142.12 142.02 141.91 141.81 141.70 141.59

6.50% 141.67 141.57 141.47 141.37 141.26 141.16 141.05

7.00% 141.13 141.03 140.93 140.83 140.72 140.62 140.51

143.52 4.75% 5.00% 5.25% 5.50% 5.75% 6.00% 6.25%

1.00% 158.28 153.15 148.37 143.92 139.75 135.84 132.16

1.25% 162.76 157.27 152.18 147.43 143.01 138.86 134.98

1.50% 167.63 161.74 156.28 151.22 146.50 142.10 137.99

1.75% 172.92 166.57 160.72 155.30 150.27 145.58 141.21

2.00% 178.70 171.84 165.53 159.71 154.32 149.32 144.67

2.25% 185.04 177.60 170.77 164.50 158.71 153.36 148.39

2.50% 192.03 183.91 176.50 169.71 163.48 157.72 152.40

2.75% 199.76 190.87 182.78 175.41 168.67 162.46 156.74

3.00% 208.38 198.57 189.71 181.67 174.34 167.62 161.46

143.52 18.5% 19% 19.5% 20% 20.5% 21% 21.5%

10.00% 148.48 147.25 146.03 144.80 143.58 142.35 141.13

11.00% 146.03 144.80 143.58 142.35 141.13 139.90 138.68

12.00% 143.58 142.35 141.13 139.90 138.68 137.45 136.23

13.00% 141.13 139.90 138.68 137.45 136.23 135.00 133.78

14.00% 138.68 137.45 136.23 135.00 133.78 132.55 131.33

15.00% 136.23 135.00 133.78 132.55 131.33 130.10 128.88

16.00% 133.78 132.55 131.33 130.10 128.88 127.65 126.43

17.00% 131.33 130.10 128.88 127.65 126.43 125.20 123.98

18.00% 128.88 127.65 126.43 125.20 123.98 122.75 121.53

30

Gilead Sciences, Inc.

Key Management Ratios

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E CV (2019)

Liquidity Ratios

Current Ratio (CA/CL) 1.45 1.09 3.07 3.51 3.76 4.23 4.75 5.47

Quick Ratio (current assets - inventories)/CL 1.04 0.83 2.83 3.28 3.55 4.01 4.53 5.25

Cash Ratio (cash and cash equivalents/CL) 0.43 0.33 1.74 2.55 2.86 3.31 3.81 4.51

Activity or Asset-Management Ratios

Asset Turnover Ratio (Sales/Total Assets) 45.68% 49.61% 71.80% 56.84% 52.04% 48.46% 44.83% 40.52%

Inventory Turnover Ratio (Sales/Total Inventory) 5.56 6.60 17.96 12.50 12.50 12.50 12.50 12.50

Receivables Turnover Ratio (Sales/Avg AR) 5.24 5.70 7.30 5.80 5.11 5.08 5.04 5.05

Financial Leverage Ratios

Debt-to-Equity Ratio (Total Debt/Total Equity) 1.46 1.23 5.18 8.50 7.23 5.78 4.68 4.71

Equity Ratio (Shareholders Equity/Total Assets) 0.45 0.52 0.46 0.38 0.46 0.54 0.60 0.63

Interest Coverage (Operating Inc./Interest Expense) 11.11 14.74 37.05 31.51 17.82 19.37 22.30 26.19

Profitability Ratios

Return on Assets (NI/Total Assets) 12.12% 13.54% 34.79% 23.25% 20.73% 19.35% 17.98% 16.41%

Return on Equity (NI/SE) 26.97% 26.03% 76.23% 61.34% 45.17% 36.16% 29.98% 25.87%

Gross Margin (rev-COGS)/rev 75.39% 75.40% 85.28% 80.55% 80.56% 80.57% 80.59% 80.61%

EBIT Margin (EBIT/Sales) 41.33% 40.39% 61.33% 56.15% 56.09% 55.97% 55.81% 55.96%

Profit Margin (NI/Sales) 26.53% 27.29% 48.45% 40.91% 39.84% 39.94% 40.11% 40.50%

Payout Policy Ratios

Payout Ratio (dividends per share/earnings per share) 0 0 0 14.52% 19.12% 18.60% 18.31% 17.84%

Total Payout Ratio ((Div + Repurch)/NI) 25.73% 18.93% 44.20% 60.35% 41.73% 40.55% 39.87% 38.87%

31

Present Value of Operating Lease Obligations (2011) Present Value of Operating Lease Obligations (2012) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2014)

Fiscal Years Ending Dec. 31

Operating

Leases

Fiscal Years Ending Dec. 31

Operating

Leases

Fiscal Years Ending Dec. 31

Operating

Leases

Fiscal Years Ending Dec. 31

Operating

Leases

2012 43.635 2013 47.009 2014 49 2015 58

2013 36.302 2014 42.947 2015 46 2016 53

2014 30.027 2015 37.566 2016 41 2017 49

2015 23.961 2016 26.648 2017 32 2018 36

2016 17.814 2017 19.211 2018 25 2019 33

Thereafter 53.215 Thereafter 40.264 Thereafter 32 Thereafter 73

Total Minimum Payments 204.954 Total Minimum Payments 213.645 Total Minimum Payments 226 Total Minimum Payments 302

Less: Interest 31 Less: Interest 29 Less: Interest 29 Less: Interest 44

PV of Minimum Payments 174 PV of Minimum Payments 185 PV of Minimum Payments 197 PV of Minimum Payments 258

Capitalization of Operating Leases

Pre-Tax Cost of Debt

4.58%

Capitalization of Operating Leases

Pre-Tax Cost of Debt

4.58%

Capitalization of Operating Leases

Pre-Tax Cost of Debt

4.58%

Capitalization of Operating Leases

Pre-Tax Cost of Debt

4.58%

Number Years Implied by Year 6 Payment 3.0 Number Years Implied by Year 6 Payment 2.1 Number Years Implied by Year 6 Payment 1.3 Number Years Implied by Year 6 Payment 2.2

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease

Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment

1 43.635 41.7 1 47.009 45.0 1 48.976 46.8 1 58 55.5

2 36.302 33.2 2 42.947 39.3 2 46.345 42.4 2 53 48.5

3 30.027 26.3 3 37.566 32.8 3 41.384 36.2 3 49 42.8

4 23.961 20.0 4 26.648 22.3 4 32.482 27.2 4 36 30.1

5 17.814 14.2 5 19.211 15.4 5 25.204 20.1 5 33 26.4

6 & beyond 17.814 38.9 6 & beyond 19.211 30.0 6 & beyond 25.204 24.3 6 & beyond 33 54.3

PV of Minimum Payments 174.4 PV of Minimum Payments 184.7 PV of Minimum Payments 196.9 PV of Minimum Payments 257.6

32

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outsta

Number of Options Outstanding (shares): 39

Average Time to Maturity (years): 3.80

Expected Annual Number of Options Exercised: 10

Current Average Strike Price: $ 28.38

Cost of Equity: 8.71%

Current Stock Price: $102.57

2015E 2016E 2017E 2018E CV (2019)

Increase in Shares Outstanding: 10 10 10 8 Average Strike Price: $ 28.38 $ 28.38 $ 28.38 $ 28.38 $ 28.38

Increase in Common Stock Account: 292 292 292 234 -

Change in Treasury Stock 6,000 3,000 3,000 3,000 3,000

Expected Price of Repurchased Shares: $102.57 $ 111.51 $ 121.22 $ 131.79 $ 143.27

Number of Shares Repurchased: 58 27 25 23 21

Shares Outstanding (beginning of the year) 1,522 1,474 1,457 1,443 1,428

Plus: Shares Issued Through ESOP 10 10 10 8 0

Less: Shares Repurchased in Treasury 58 27 25 23 21

Shares Outstanding (end of the year) 1,474 1,457 1,443 1,428 1,407

(Assumes common stock and additional paid in capital are combined into one account).

33

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol

GILD

Current Stock Price $102.57

Risk Free Rate 2.87%

Current Dividend Yield 0.00%

Annualized St. Dev. of Stock Returns 36.46%

Average Average B-S Value Range of Number Exercise Remaining Option of Options

Outstanding Options of Shares Price Life (yrs) Price Granted

Range 1 39.144 22.63 3.80 $ 82.40 $ 3,225

Total 39.144 $ 22.63 3.80 $ 82.40 $ 3,225