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 SIM Equity Research
Gilead Sciences (NASDAQ: GILD)
November 14, 2014
Gilead
Sciences (GILD)
Recommendation:
BUY
Target Price:
$123.94
Current Price:
$102.06
that develops and produces medical treatments for
life-threatening
illness. Gilead primarily focuses on
HIV, chronic hepatitis virus and oncology
conditions. Through product innovations and a series
of acquisitions, Gilead keeps adding new lines of
products into its existing portfolio.
Upside:
21.4%
Investment
Thesis:
I recommend a “BUY” with a target price of
$123.94.
Since last year, Gilead has passed phase III
clinical
trials of “Sovaldi”, “Tybost” and “Stribild”.
With the new approval of “Harvoni” for treating
liver
disease in October 2014, Gilead’s revenue
consensus
is $24 billion comparing to $11 billion
from the last fiscal year. Gilead’s HIV and liver
disease
franchises lead the market share, and
continue
bringing in strong quarterly results. Under
the big picture of healthcare reform, more affordable
patients
will drive extra revenue for drug treatments.
Fund Manager:
Gilead
Sciences is a biopharmaceutical
company
Ohio State University SIM
Analyst:
[email protected]
(617) 838-5625
Drug denials from FDA
Underestimation of drug demands
Operations inefficiency
Pharmaceutical price changes
Patent war
General economic slow-down
Royce West, CFA
Company Summary
Price:
$102.06
Date of Price:
11/14/2014
Sector:
Health Care
Industry:
Biopharmaceutical
52-Week Range:
$63.50 - $116.83
Market Cap (Billion):
$151.53
Shares O/S (Billion):
1.51
Financial Summary
Risks:
•
•
•
•
•
•
Hao Lu
EBITDA (Billion):
$4.9
EBIT (Billion):
$4.5
ROA:
36.7%
ROE:
76.9%
Asset Turnover:
0.8
Debt/Assets:
Dividend Yield:
29.8%
N/A
52-­‐Week Stock Performance Opportunities:
• Licensing internationally
• Product diversification
• Affordability in emerging markets
• Increased demand as a result of the
Affordable Care Act
Gilead Sciences (GILD) Equity Research Report
Hao Lu
Table of Contents
Company Overview…………………………………………………………………………….. 3
Business Segments………………………………………………………....…………………… 3
Product Research and Development………………………........………………………… 3
Mergers & Acquisitions……………………………………………………....………….. 4
Market Outlook………………………………………………………………………………..... 5
Comparative Analysis…..…………………………………………………………………6
Recent News……………………………………………………………………………… 7
External Analysis……………………………………………………………………………….. 8
Financial Analysis……………………………………………………………………………..... 9
2014 Q3 Results………………………………………............………………………….. 9
Profitability Analysis……………………………………………………………………. 10
Liquidity Analysis………………………………………………………………………. 10
Efficiency Analysis……………………………………………………………………... 11
Valuations……………………………………………………………………………………… 12
Trend Valuation…………………………………………………………………………. 12
Relative Valuation………………………………………………………………………. 13
Multiple Valuation……………………………………………………………………… 13
DCF Valuation………………………………………………………………………….. 14
Sensitivity Analysis……………………………………………………………………...14
Investment Summary…………………………………………………………………………. 15
Appendix A: Income Statement Forecast………………………………...……………….…. 16
Appendix B: DCF Valuation………………………………………………………………….. 17
Works Cited……………………………………………………………………………………. 18
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Gilead Sciences (GILD) Equity Research Report
Hao Lu
Company Overview
Gilead Sciences, founded in 1987, is a biopharmaceutical company that develops and
commercializes drugs for HIV, liver diseases, oncology/inflammation and severe cardiovascular
and respiratory conditions. Gilead went public in 1992 with ticker “GILD” traded in NASDAQ
Stock Exchange. Gilead currently has 6,100 employees and is headquartered in Foster City,
California1. See Exhibit 1 for Gilead’s drug approval timeline.
Exhibit 1: Gilead’s product approval timeline associated with its stock price movement.
120 100 10/27/1999 Tamiflu approved 80 10/26/2001 Viread (for HIV) approved 10/10/2014 Harvoni approved 7/2/2003 Emtriva approved 7/12/2006 Atripla approvied 60 12/6/2013 Sovaldi approved 40 20 0 4/10/2008 Lexiscan 2/22/2010 approved Cayston approved 6/27/1996 Vis.de approved 8/2/2004 Truvada (for HIV) approved 9/20/2002 Hepsera approved 8/11/2008 6/15/2007 Viread (for 8/27/2012 Letairis HBV) 8/10/2011 Stribild approved approved Complera approved approved Business Segments
Product Research and Development
HIV program continues to be the substantial revenue driver for Gilead. The company’s long-term
goal is to ensure patients to have the options to choose a suitable single tablet regimen, which
helps the suppressive therapy courses4. So far, Gilead has three types of single tablet regimens
available including Stribild, Compera/Eviplera and Atripla. Tenofovir Alafenamide (TAF), a
new drug for HIV treatment, has been submitted to FDA on November 6 based on the positive
results from Phase III trial.
The successful sales of Sovaldi brought in tremendous revenues for Gilead (Exhibit 2). However,
the liver disease industry continues to be dim because of the restraints of treatment, with that
only a small number of patients are identified, and even fewer patients are treated5. Typically, a
patient with genotype infections needs Sovaldi treatments with duration of 12 weeks, and for
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Hao Lu
people waiting for liver transplantation, the treatment duration can be over 48 weeks. Gilead’s
long-term goal is to develop an oral therapy for all HCV patients. The fix-dose GS-5816 is
currently under Phase II trial.
Gilead has been improving its oncology treatments through researches and developments over
the past 5 years. In 2013, Gilead acquired GS-0387 as a result of merging YM Biosciences.
Currently, the company’s GS-1101, also known as “Idelalisib” for the treatment of iNHL and
CLL, is under Phase III trial. Gilead keeps product innovation as the company’s primary
competitive advantage.
Exhibit 2: Gilead’s marketed products
Drug Name Sovaldi Atripla Truvada Complera Stribild Viread Harvoni Letairis Ranexa AmBisome Zydelig Indication Hepatitis C HIV HIV HIV HIV HIV, Hepatitis B Hepatitis C PAH Chronic Angina Fungal Infection Blood Cancer % of U.S. Patent E.U. Patent Total Sales Expiration Expiration 49.6% 2029 2028 14.8% 2021 2018 14.2% 2021 2018 5.1% 2023 2022 4.7% 2029 2027 4.3% 2018 2018 0.1% N/A N/A 2.4% 2018 2020 2.1% 2019 2023 1.7% 2016 2008 0.0% N/A N/A Mergers & Acquisitions
Through a series of acquisitions in recent years, Gilead quickly expands its product lines and
improves its research capabilities (Exhibit 3). In 2006, Gilead’s purchase of Myogen and Corus
Pharma allowed its entry into cardiovascular and respiratory therapeutic areas6. Besides that,
Gilead has been focusing on acquiring drugs from other pharmaceutical companies that were
experiencing Phase II and III trials, and Gilead took the risk of merging that company before its
drugs got approved. As a result, the successful acquisitions boosted Gilead’s product
development. Especially, the acquisition of Pharmasset introduced sofosbuvir to support Gilead’s
new drug “Harvoni”, which was a crucial component in the combination.
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Gilead Sciences (GILD) Equity Research Report
Hao Lu
Exhibit 3: Acquisitions made by Gilead Sciences since 2010
Year Acquired Company Price Financing Method Cash 2013 YM BioSciences $510 Million 2012 Pharmasset $11 Billion 2011 Oceanside Clinical Plant N/A Cash, Bank Debt and Senior Notes N/A 2011 Calistoga Pharmaceuticals 2011 Arresto Biosciences $375 Million Cash $225 Million Cash 2010 CGI Pharmaceuticals $120 Million Cash Details Acquired YM's lead drug andicate CYT387 and the Janus Kinase (JAK) family Expand Gilead's chronic hepatitis C (HCV) product line by acquiring sofosbuvir Expand m anufacturing and process development Expand Gilead's HIV product line by acquiring Calistoga's PI3K Expand research and development expertise in cancer Expand inflammatory disease product line Market Outlook
Gilead continues to grow market shares in HIV,
liver diseases and oncology/inflammation
treatments. Gilead’s marketshare is 36.4% by
the end of third quarter in the biopharmaceutical
industry, which is increased from last fiscal
year’s 23.4% (Exhibit 4).
Gilead still dominates the majority of HIV
medicine by holding 61.7%, which is slightly
declined from last fiscal year’s 62.4% (Exhibit
5). For liver disease treatments, Gilead holds
9.1% of market share while facing heavy
competitions. It is notable that Gilead’s Sovaldi
dictates NS5B polymerase inhibitors in HCV
treatments. Gilead keeps expanding its
oncology research and development by a list of
acquisitions including buying Calistoga
Pharmaceuticals. Several developing drugs for
oncology treatments are currently under Phase II
& III trials.
Exhibit 4: Industry market share (2014 Q3)
UTHR MDCO ALXN CELG AMGN BIIB GILD Exhibit 5: HIV drug market share
JNJ BMS GILD GSK Page 5
Gilead Sciences (GILD) Equity Research Report
Hao Lu
Comparative Analysis
The environment for biopharmaceutical companies is highly competitive. Companies try pushing
their drugs to pass FDA trials in order to create market dominations. Product innovation is still
the key to become relatively competitive in the industry. Gilead keeps a high profitability while
maintaining a moderate level of sales growth (Exhibit 6). In the HIV field, Gilead leads its
market share with three types of drugs; however, GlaxoSmithKline and Bristol-Meyers Squibb
have similar drugs on testing trials, and sooner or later they will sell them. Until now, Gilead
only has one type of regimen for HIV on testing trial. The peer pressure cannot be ignored.
The competitions within liver diseases and non-antivirals are emerging. Vertex, Johnson &
Johnson and Merck split the pie with Gilead. However, Gilead has 10 HCV drugs on testing
trials at present. According to Gilead’s elevated drug approval rate, the future of Gilead’s HCV
field should be affirmative.
Exhibit 6: ROE and revenue growth rate for Gilead Sciences and its main competitors
1.0 0.8 GSK GILD ROE 0.6 0.4 CELG 0.2 AMGN 0.0 BIIB ALXN UTHR 0.0 REGN 0.3 0.6 % Revenue Growth in One Year Page 6
Gilead Sciences (GILD) Equity Research Report
Hao Lu
Recent News
Gilead’s new developed drug “Harvoni” was approved by FDA on October 10, which would be
the first once-daily single tablet regimen for curing chronic hepatitis C genotype 1 infections.
This new product will enhance Gilead’s market in the HCV treatment market. On the other hand,
Gilead is kind of stagnant with its HIV drug development (Exhibit 7). During Phase II trial of
“Simtuzumab”, the data showed that this drug didn’t significantly improve the survival rate of
previously untreated pancreatic cancer2. The previously approved HIV drugs still dominate
Gilead’s existing HIV portfolio, and the growth of HBV and HCV drugs has surpassed the
progress of HIV development. Internationally, Gilead has been successful expanding licensing and patent controls in developing
countries. On September 15, Gilead signed a licensing agreement with seven Indian
pharmaceutical companies to expand their access to Gilead’s HCV medicine; on July 24, Gilead
signed an agreement with Medicines Patent Pool (MPP) to expand their access to Gilead’s
tenofovir alafenamide (TAF) for HIV and HBV drugs. These settlements allowed Gilead to
expand its market in developing countries while under the supervision of U.S. regulatory, which
helps Gilead gain first-mover advantage.
One emerging problem with Gilead’s “Harvoni” is that it hasn’t been granted a patent. AbbVie
(NYSE: ABBV) has ambushed Gilead by receiving five U.S. patents that specifically claimed
the use of sofosbuvir and ledipasvir that are relative to “Harvoni” Combination3. AbbVie isn’t
able to commercialize “Harvoni”, but the company can harm Gilead with royalty payments.
Exhibit 7: Gilead Sciences product pipeline
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Gilead Sciences (GILD) Equity Research Report
Hao Lu
External Analysis
Under the rollout of The Affordable Care Act, it is
projected that over 30 million people will enjoy
health insurance coverage7. The increased
government spending on healthcare will lift the
sales of prescribed drugs (Exhibit 8). First of all,
insured people tend to seek medical screenings
such as HIV, and they are more likely to purchase
brand-labeled medicine since their bills are
covered. Second, the government doesn’t have the
right to negotiate drug price with pharmaceutical
companies directly, which releases the pressure of
companies like Gilead. Without the government’s
intervention, Gilead has more power in the market.
On the other hand, pharmaceutical companies
endure the national burden for its profit-booming
industry, so the general public asks for more
rebates and more benefit to the uninsured
population. Gilead’s “Atripla Patient Access
Program” is an example. Exhibit 8: Annual growth rates of national
health expenditure and prescription drug
expenditure8
The aging population also has effects on the
biotechnology industry. The baby boomers
are entering the retirement stage, and their
accumulated wealth allows them to access
expensive medical treatments. Furthermore,
people aged 65 and above will hold 20.7%
of the entire population by 2050 according
to U.S. Consensus Bureau’s projection
(Exhibit 9). It gives biopharmaceutical
companies time to develop and sell specific
medicine for the elderly group. A population
heavily driven by seniors will escalate
branded drug prescriptions.
Exhibit 9: Projections of percentage of
population aged 65 and above9
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Gilead Sciences (GILD) Equity Research Report
Hao Lu
Financial Analysis
2014 Q3 Results
Gilead Sciences announced its third quarter earnings results on September 30, 2014. Gilead
reported a 117.1% increase in revenue for the three-month period comparing to the same period
last year, which beats the analysts’ estimate of 116.5%. Income has over-tripled and EPS is
increased by 255% comparing to last year’s results (Exhibit 10). Gilead’s turnover ratio overdoubled the figure from last year. Since last year’s launch, Sovaldi’s sales have been
skyrocketing, which generates more than $5.75 billion of revenue; at the same time, Gilead’s
HIV drugs Stribild and Eviplera added sales of $550 million and $484 million. As for product
development, Gilead has reduced its R&D expenses by nearly triple times, mainly due to the
slow-down of HIV drug development.
In conclusion, Gilead has been beating its quarterly earnings with its exceptional HCV and HIV
sales growth and a list of new-drug approvals over time. For the upcoming quarter, Gilead seeks
to continue growing with its diversified revenue stream.
Exhibit 10: Key financials for Gilead’s third quarter earnings results10
(In thousands, except EPS) Product Sales Total Revenue Net Income (GAAP) Net Income (Non-­‐GAAP) Diluted EPS (GAAP) Diluted EPS (Non-­‐GAAP) R&D Expenses (GAAP) R&D Expenses (Non-­‐GAAP) Operating Margin (GAAP) Operating Margin (Non-­‐GAAP) Three Months Ended September 30 2014 2013 $5,968,208 $2,709,652 $6,041,832 $2,782,833 $2,731,274 $3,013,691 $788,606 $879,081 $1.67 $1.84 $0.47 $0.52 $630,466 $586,325 $546,244 $488,535 57.6% 62.6% 41.2% 45.2% Nine Months Ended September 30 2014 2013 $17,252,119 $7,760,505 $17,575,731 $8,081,862 $8,614,277 $2,283,397 $9,431,033 $2,520,749 $5.18 $1.35 $5.68 $1.49 $1,809,368 $1,567,778 $1,686,104 $1,436,282 62.2% 41.2% 67.2% 44.9% Page 9
Gilead Sciences (GILD) Equity Research Report
Hao Lu
Profitability Analysis
Gilead’s profit margins have been declining over the past five years (Exhibit 11). Legislative and
regulatory changes as well as the patent wars against other biopharmaceutical firms can
potentially affect Gilead’s profitability. Since December 2009, Gilead’s stock has been
increasing exponentially from around $23 to $102.06 today while ROE slides a bit year after
year, and this indicates the profit has been increasing at a relatively fast pace although it hasn’t
caught up with the growth of stock holders’ equity. Also, due to higher costs to produce and
promote new products in the competitive business environment, along with the expenditures in
R&D, these costs have driven down Gilead’s profit growth.
Exhibit 11: Profitability indexes of Gilead Sciences from 2009 to 2013
Year 2009 2010 2011 2012 2013 Return on Equity 50.11 47.44 44.49 32.30 29.74 Return on Assets 31.53 27.25 19.41 13.45 14.06 Gross Margin 77.24 76.48 74.67 74.53 74.48 Operating Mergin 50.34 49.84 45.2 41.33 40.39 EBT Margin 49.95 49.23 43.54 37.23 37.57 Liquidity Analysis
Gilead’s liquidity ratios have been falling from 2009 to 2013 (Exhibit 12). The acquisitions taken
place have reduced cash on the balance sheet; on the other hand, Gilead has been taking more
short-term debt in order to produce and market new drugs, which results in the decline of both
current and quick ratios. Although both ratios are coming down, Gilead never suffers from a
liquidity crunch. The high sales of HIV and HCV drugs give the company enough room to pay
back its debt.
Exhibit 12: Efficiency index charts of Gilead Sciences from 2009 to 2013
10.00 Quick Ra.o 5.00 Current Ra.o 0.00 2009 2010 2011 2012 2013 Page 10
Gilead Sciences (GILD) Equity Research Report
Hao Lu
Efficiency Analysis
As the nature of biopharmaceutical industry, a large part of the sales are credit sales. Gilead’s
accounts receivable ratio has rebounded to its 2009 high rate due to the growing sales from new
drugs; with a moderate asset turnover rate, Gilead always has assets under efficient control
(Exhibit 13). Sizable sales of Sovaldi require more inventory stocks, and despite Gilead has
expanded its warehousing capabilities through acquisitions, the inventory turnover ratio finally
came down in 2013.
Exhibit 13: Efficiency indexes of Gilead Sciences from 2009 to 2013
Year 2009 2010 2011 2012 2013 1.61 1.66 1.64 1.58 1.50 226.43 220.14 222.82 231.5 242.66 A/R Turnover 5.81 5.28 4.69 5.24 5.82 Asset Turnover 0.84 0.75 0.58 0.5 0.51 Inventory Turnover Days Inventory Page 11
Gilead Sciences (GILD) Equity Research Report
Hao Lu
Valuations
Trend Valuation
Exhibit 14: Gilead Sciences 10-year stock price with exponential moving average, NASDAQ, and S&P 50011
GILD
GILD Moving Average
Nasdaq
S&P 500
Based on the ten-year trend of Gilead’s share price, it has jumped over ten times with twice 2:1
stock splits (Exhibit 14). It outperforms both NASDAQ and S&P 500 indexes. Throughout the
years, Gilead has often surprised investors with its earnings followed by new drug approvals. It
can be seen that Gilead’s moving average has been flat until its takeoff in mid-year 2011. In
October 2014, Gilead suffered from the worst week of the year, and it dropped from $108.87 to
$96.16 by 11.7%, but it kicked right back in two weeks at $113.45. Although Gilead experiences
high volatility, it has enough strength to endure market down time and keeps its way to
outperform.
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Gilead Sciences (GILD) Equity Research Report
Hao Lu
Relative Valuation
Currently, Gilead is trading below the industry average multiples, which means Gilead is
undervalued. As an alternative to P/E ratio, Gilead’s low EV/EBITDA shows that it is less
levered than its peers. Gilead’s market cap surpassed the main industry competitors, and that
gives the company the ability to expand through acquisitions in order to gain market share.
Exhibit 15: Comparative multiples including Gilead and its peer companies
Multiples Market Cap (Billion) EV/EBITDA EV/MC P/FCF P/S P/E GILD $151.53 8.70 1.01 15.23 7.42 17.77 Industry Average $37.14 114.54 0.99 55.02 48.38 60.93 BIIB $71.42 12.63 0.96 27.30 7.92 29.24 CELG AMGN $83.35 $121.05 17.08 12.45 1.00 1.04 24.64 16.96 7.81 6.11 35.76 22.65 VTRX $26.85 917.47 0.96 N/A 33.05 N/A ALXN $37.04 26.04 0.95 77.95 17.78 74.74 Multiple Valuation
Considering the fact that Gilead has low multiples in the industry as well as its expected EPS
quadruples the current EPS, I estimate that Gilead’s target multiples will increase by roughly 10%
- 17% over time (Exhibit 16). The reason for a higher P/B multiple is that some of Gilead’s R&D
are not capitalized in its book value. As a result of my estimations, Gilead’s share price will be
within $117.01 - $124.79.
Exhibit 16: Multiple Valuation for Gilead’s stock price
Multiples P/E P/B P/S P/EBITDA Current 17.77 11.36 8.4 20.83 Target/ Current 1.15 1.16 1.17 1.10 Target Multiple 20.40 13.15 9.80 22.95 Expected EPS 7.99 Target Price $122.79 $123.81 $124.79 $117.85 Page 13
Gilead Sciences (GILD) Equity Research Report
Hao Lu
DCF Valuation
Appendix A presents my income statement forecast of Gilead Sciences for the next three years.
Revenues are identical to analysts’ estimates. The tremendous revenue growth in 2014 is mainly
due to the sales of new drug “Harvoni” and the continued success of “Solvadi”; alternatively,
several competitors’ new HCV drugs are set to release next year, which will downgrade Gilead’s
market share, and it will lead to a moderate revenue growth for Gilead in 2015 and 2016.
EPS estimates are slightly below analysts’ estimates. I think that boosted revenue will largely
impact Gilead’s net earnings, but at the same time, rising costs of goods sold, inventory holding
costs and transportation costs will bring down net earnings. As a result, I set EPS at a more
conservative level comparing to analysts. Besides that, I believe Gilead’s R&D expenses will
continually grow fast in order to produce more innovative drugs for HIV, HCV and
oncology/inflammation.
Appendix B illustrates the DCF valuation for Gilead Sciences. With considering inflation rate at
1.7% and 10-year treasury yield at 2.37%, I set the terminal discount rate at 9% with a terminal
FCF growth rate at 4.5%. Also, biopharmaceutical industry has a low correlation with the market
and peer competitors are highly correlated to each other, this is another reason for the moderate
indicators. The implied value for Gilead is $123.94 with an upside of 21.4%, which corresponds
to the estimation from the previous Multiple Valuation.
Sensitivity Analysis
Exhibit 17 shows the sensitivity analysis for Gilead Sciences. It is clear that a minor variation of
the growth rate has a large change on price.
Exhibit 17: Sensitivity Analysis for Gilead’s implied share price
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Gilead Sciences (GILD) Equity Research Report
Hao Lu
Investment Summary
With the projected target price of $123.94 and the potential upside of 21.9%, I recommend a
“BUY” in Gilead Sciences (GILD). The share price currently remains undervalued at $102.06.
Opportunities for Gilead include continuous growing sales, successful approvals of new drugs,
continued large government spending on healthcare industry, increased demand for HIV and
liver disease treatments and international expansion; conversely, risks associated contain FDA
denials, rising costs, legislation and business environment changes, patent wars and geopolitical
concerns. Ultimately, the growing number of insured people will purchase more branded drugs
under the big picture of healthcare reform.
Valuations:
•
•
•
•
DCF Valuation: Gilead has a target price of $123.94 with an upside of 21.9%.
Multiple Valuation: Gilead should be traded at $117.01 - $124.79.
Relative Valuation: Gilead is undervalued.
Trend Valuation: Gilead has a upward potential as a result of its uprising moving average
and comparisons to market indexes
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Hao Lu
Appendix A: Income Statement Forecast
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Hao Lu
Appendix B
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Works Cited
1
Yahoo Finance.
2
Gilead Sciences News Release
3
Seaking Alpha: http://seekingalpha.com/article/2674915-gilead-sciences-gets-ambushed-by-thepatent-troll-abbvie
4
2013 Gilead Sciences Form 10-K
5
2013 Gilead Sciences Form 10-K
6
Gilead Sciences News Release
7
The Heritage Foundation Research Reports
8
Centers for Medicare & Medicaid Services
9
United States Consensus Bureau
10
Gilead Sciences Third Quarter 2014 Financial Results
11
Yahoo Finance
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