Gilead Sciences (GILD)

Sector: Biotechnology
Price:$100.65
Market Cap:$149bn

Company Overview
-

Research-based biopharmaceutical company

Headquartered in Foster City, California
Develops and commercialises medicines in areas of unmet medical need
(innovative drugs in targeting uncaptured market share)
Product Portfolio: 21 with FDA approval
Specific focus on antiviral drugs to treat patients infected with HIV,
hepatitis B, influenza, and pulmonary diseases
A number of category firsts: first complete treatment regimens for HIV
infection in a once-daily single pill, first oral antiretroviral pill available
to reduce the risk of acquiring HIV infection

Industry Overview
- Biotechnology has high barriers to entry:
- R&D: GILD spent 2.85 billion in 2014)
- FDA approval: 5+ years and uncertain
- Patents: commercial value in the form of pricing
power ($1000 per pill for Sovaldi and $1125 for
Harvoni)
- Demand always exists for medicines for serious
illness: HIV, hepatitis B & C, etc.

Industry Overview
-

Surge in M&A activity with pharma and biotech companies with the goal
of pipeline enhancement
Increased licensing and partnering between pharma and biotech
companies
GILD has been incredibly successful at forming competitive and
collaborative relationships and has become the top M&A player in the
industry over the past 15 years
GILD has made 9 acquisitions since 2000 (Pharmasset, Myogen, Triangle)
Not a single deal has provided negative returns to GILD shareholders
6 have been undeniable successes

Current Products
-

HIV/AIDS, Oncology, Cardiovascular, Respiratory Drugs (Tamiflu)

Greatest percentage of their sales are from their Hep C Drugs, Sovaldi and Harvoni, two truly
revolutionary medications for Hep C

These two drugs made up for $25 billion in sales in 2014

Harvoni is already tracking for $3.5 billion in sales in first quarter of 2015

Sovaldi and Harvoni (a drug made from a combination of Sovaldi and another drug) are so
revolutionary because previous Hep C drugs had low cure rates and required interferon, which gave
patients painful flu-like symptoms lasting up to 84 weeks

Sovadli still needs to be taken with ribavarin (genotypes 2 and 3 only), mild side effects significantly
less painful than interferon

Harvoni, however, is taken without interferon and without ribavarin and still maintains its very high
cure rate

Pipeline
-

New AIDS/HIV drug currently undergoing the U.S. and E.U. Regulatory Submission Process

Two cardiovascular drugs in Phase 3 testing (final phase before FDA approval)

Two liver drugs in Phase 3 testing

Pipeline Portfolio: 32 products across all 3 phases

History of acquiring pharma/biotech companies with drugs in Phase 2 and Phase 3 testing (acquired
Pharmasset for $11.2 billion in 2012 to effectively get access to Sovaldi)

Potential acquisitions are on the horizon as Gilead currently sits on cash reserves of more than $10 billion

$10.3 billion in sales in year 1 vs. $11 bil acquisition cost: demand is most definitely there, despite
pricing pressure

3 million people in the U.S. with Hep C, Gilead treating 117,000 patients through the first three quarters
of 2014, leaves Gilead 2.9 million patients in the form of uncaptured market share

Mitigating Risk: Potential Pricing Pressure

-

Increased emphasis on managed healthcare has put additional pressure on product pricing

Legislation has been enacted since 10, Gilead revenues still increasing in past 5 years,
Biotech sector in general has continually outperformed S&P500 despite prominence of
managed healthcare

Pricing is justifiable and sustainable: no current alternative to Sovaldi/Harvoni, you cant

choose when you get sick, over 90% cure rate without the need for interferon, leaps and
bounds above previous forms of treatment: basically a miracle drug

Medicare/Medicaid Discounts:

In exchange for the discounts, payers are agreeing to treat more patients, even those with
little liver damage: less expensive pills, but greater volume of patients offset potential
discounts

Mitigating Risk - Litigation

-

Dec13: FDA approval of Sovaldi

Oct14: FDA approval of the fixed-dose combination of ledipasvir and sofosbuvir (Harvoni)

Sovaldi + Harvoni becomes lucrative, leads to intellectual property claims (that are without
merit)

AbbVie Harvoni Patent: Gilead filed an application in Sept11, a month (5 weeks) before
AbbVies first application: first to file law states that Gilead is in the right and owns the
intellectual property

AbbVie cannot market Harvoni since it does not own patents on either individual drug in the
combination, worst case scenario they can only potentially compel royalty payments and
damages from Gilead (estimated 10%)

AbbVie patents have not blocked or delayed the commercialization of Gileads combination
product in the US or Europe - no other foreign patents expected, AbbVie litigation expected to
take several years to resolve

concerns regarding the patent portfolio are already priced into the Gilead share price, with
Gilead undervalued on most metrics vs. its pharma peers

Previous challengers Idenix and Roche: both allege that they were the first to conceive the
compound behind Sovaldi, court ruled in favor of Gilead in both lawsuits, worst case scenario
w/ Idenix and Roche is that Gilead completely loses the patent and right to commercialize
Sovaldi - greatest hurdle has already been passed

Gilead has and will continue to aggressively defend its patents

Mitigating Risk - Competitors

-

Sovaldi vs. Viekira Pak (VP)

Sovaldi can cure almost all hepatitis C patients [genotype 1, 2, 3, 4, 5 and 6 infections]

VP drug from AbbeVie is inferior in many fields based on clinical data

Sovaldi has shorter list of adverse effects than VP, easier to take in combinations with other
drugs, 1 pill a day vs. 3 pills a day for VP

VP only approved for hepatitis C genotype 1 patients and not for patients diagnosed with the
other genotypes

Gilead may have to share some of the market with AbbVie in genotype 1 but it will maintain
its monopoly in other hepatitis C patients

Necessary drug: benefit from ridding patients of the virus, which can lead to liver cancer and
the need for liver transplants that cost a lot more than $84K (average cost of treatment)

CVS, Humana, Aetna, Anthem, EnvisionRx all chose Sovaldi vs. ExpressScript with VP

82% of all hepatitis C drug spending is on Sovaldi

what about generics?

sold in emerging markets like Africa, generic Sovaldis cost less, but given the sheer size of the
patient population in these markets, it should still translate into big money for Gilead

Financials Highlights
-Excellent returns to shareholders:
-Return on invested capital (excluding goodwill) has averaged 60.9% over past 3 years
-Return on equity stands at 82.8%
-Stockholders equity has increased 35.05% Year-over-Year
-Strong capital positioning:
-Debt to EBITDA = 1.4x
-Debt to book cap = 36.9%
-Average FCF margin of ~35% over past 3 years
-Current Ratio = 3.10
-Debt/Equity of 0.80 does not pose a major problem
-Well-positioned for another major acquisition
-Sitting on $11bn+ in cash
-EBITDA Margin > 65%
Excellent indicator of future revenue growth

Financial Highlights

Comparable Analysis
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ar
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rd
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P/F
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Comparable Analysis
Ma
rke
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Ca
p

R
OA

R
OE

Op
era
tin
g
Ma
rgi
ns

Pr
ofit
Ma
rgi
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GI
LD

$1
46
B

39
.4
%

82
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%

61
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%

48
.6
%

AM
G
N

$1
18
B

7.
5
%

21
%

34
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%

25
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%

CE
LG

$9
2B

12
.9
%

37
%

33
.5
%

26
.1
%

BII
B

$9
7B

22

29

40

30

GILD Ratios vs. Industry

-P/E: 13.36 vs. 46.50
-Future P/E: 9.72 vs. 30.70
-P/S: 6.09 vs. 208.22
-P/CF: 11.83 vs. 62.13
-Earnings Growth: 303.27% vs. 49.62%