Stock Pitch
Nikolai Doytchinov, Jonathan Im, Cheng Ma, Yang Wu, Tej Dhond, Gaurish Gwalani
Table of Contents
I. Investment Thesis
II. Industry Overview
III. Company Analysis
IV. Valuation
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I. Investment Thesis
Gilead Sciences (NASDAQ:GILD)
Gilead’s market leadership in Hepatitis C and HIV treatment, strong cash flow generation, and promising pipeline
combine to create a compelling investment that has been undervalued by the market.
Recommendation: Buy Current Price: $101.90 Price Target: $115.27 (13% upside)
CATALYSTS
Dominant market position of Hepatitis C treatments Sovaldi and Harvoni
Clinical trials on newer, better drugs including GS5816 and TAF
Recently announced $0.43/share dividend reflects strong cash position and
management confidence in continued success
RISKS
Uncertainty regarding Sovaldi pricing and Harvoni patent status in light of
competition and litigation with AbbVie
Pipeline drugs may not be approved
Expiring patents require development and approval of new drugs to sustain revenue
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II. Industry Outlook
Industry Outlook
INDUSTRY TRENDS
3 Sub-industries: Medical, Agricultural, and
Industrial
Relatively high barriers to entry
Large initial investment
Additional risk of time
Demand curve Vertical
Change in business model
Recession Lack of VC funding
Pharmaceutical partners
Internal sources
Vertical integration Higher profit margins
Higher government regulation
Higher cost for companies
Source: IBISworld Industrial Report
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Industry Outlook
FUTURE GROWTH
Baby boomers Affordable Care Act
Domestic market expansion Biologics Price
Consolidation Competition
& Innovation
Broaden product lines Act
Total tax cost
Emerging Markets = $75-$90
Mandate =
$110 billion
Rise of patent expirations billion
What is a patent?
Typical lifespan: 15 years Profit =
Potential acquisition target: biotech firms $20 - $35
Higher profit margins billion
Source: Energy & Capital
Billions
Billions
Source: IBISworld Industrial Report Source: IBISworld Industrial Report
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III. Company Overview
Company Overview
BUSINESS OVERVIEW Year Company Price Importance
Gilead Sciences (GILD) 2006 Corus Pharma $365 million Respiratory Arena;
Biopharmaceutical Cystic Fibrosis
company 2006 Myogen $2.5 billion Pulmonary diseases
Life-threatening diseases 2009 CV Therapeutics $1.4 billion Cardiovascular
Founded in June of 1987 by Franchise
Michael Riordan 2010 Arresto $225 million Fibrotic diseases;
Biosciences cancer
Company focus is on anti-
viral medicines due to 2011 Pharmasset $10.4 billion Hepatitis C
founder
2015 Phenex $470 million Liver diseases
Vast pipeline Pharmaceuticals
PERFORMANCE CEO
John C. Martin
MBA at Golden
Gate University
PhD at University
of Chicago
(Organic
Chemistry)
Source: Yahoo Finance
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Advancing HCV leadership
What is HCV?
Hepatitis C – an often debilitating viral infection
impacting the liver
Often asymptomatic and can have long latency periods.
Chronic infection can possibly lead to liver failure,
potentially liver transplantation.
Sovaldi®/Harvoni®
The standard of care for the treatment of HCV
$12bn revenue in 2014; 75% long-term market share
Sovaldi®
A life-altering treatment for HCV; The only approved
drug for HCV genotypes 2,3, and 4
Approved in 2013; $85,000 for a 12 week course
High cure rate – 90% vs. 65%
Harvoni®
Superior efficacy (94-99% cure rates) and safety
profile for HCV genotype 1 (68% of HCV population)
Approved in 2014; $94,000 for a 12 week course
The backbone of its success: HIV treatment
Gilead Tops Global Rankings Among HIV
Dominating HIV therapy
Therapies
The planet’s top-selling HIV medicines, with ~60% of U.S.
the 11.7 million patient market Rank Naive All Patients
35 million people living with HIV 1 Stribild® Atripla®
Multiple therapies targeting on different age groups and
2 Complera® Complera®
drug resistance
3 Atripla® Stribild®
$9.24 bn revenue in 2014
Truvada® + other Truvada® + other
Bright future: TAF, less toxic 4
3rd Agent 3rd Agent
Other NRTI + Truvada® + other
Antiretroviral therapy (ART) 5
other 3rd Agent 3rd Agent
Stops HIV from reproducing itself and spreading Europe
Keeps the amount of virus in bloodstream so low that Rank Naive All Patients
not enough to cause symptoms 1 Eviplera® Atripla®
2 Atripla® Eviplera®
Sustiva Viread Emtriva Edurant Reyataz
Truvada® + other Truvada® + other
Atripla® ✓ ✓ ✓ 3
3rd Agent 3rd Agent
Truvada® ✓ ✓ Truvada® + other
4 Stribild®
Complera®/ 3rd Agent
✓ ✓ ✓
Eviplera® Truvada® + other Truvada® + other
5
Stribild® ✓ ✓ ✓ ✓ 3rd Agent 3rd Agent
Source: Gilead Sciences Source: Gilead Sciences
Other Drugs
Viread Zydelig
Treats chronic Hepatitis B (HBV) Approved by FDA in July 2014
Used in combination therapy for HIV-1 Patent protected until 2033
On World Health Organization’s List of Essential Marketing exclusivity granted until 2019
Medicines
Treats blood cancers
Generated $1.06 bn in revenue in 2014
Relapsed chronic lymphocytic leukemia (CLL)
Patent expires in 2018, leaving just over $3 bn in
Relapsed follicular B-cell non-Hodgkin
expected remaining revenues
lymphoma (FL)
Relapsed small lymphocytic lymphoma (SLL)
Promising expansion into oncology market
Potential for combination therapies
J.P. Morgan Equity Research forecasts expansion
to over $1 bn in revenue by 2018
Letairis Ranexa
Treats Pulmonary Arterial Hypertension (PAH) Treats chronic angina (chest pain)
Over $500 million in annual sales More moderately priced that many other Gilead
Patent protection until 2018 products
Some residual revenues forecast after expiry Over $500 million in annual sales
Patent protected until 2019
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Sources: Gilead Sciences, drugs.com, Food and Drug Administration, JP Morgan Equity Research
Drugs in the pipeline
OVERVIEW Simtuzumab
20 new drugs in the pipeline: 1 in NDA, 5 in phase 3, General Applications
8 in phase 2, and 6 in phase 1 Oncology and non-oncology applications: NASH,
Shifting focus to oncology products, market with IPF, liver fibrosis
more than $1B in sales last year NASH (nonalcoholic steatohepatitis)
Notable products: Large and expanding market: 2-5% of U.S.
TAF (NDA stage) population (6M to 16M) are affected, 30% of
GS5816 (phase 3) population in developed countries have less
severe form which could deteriorate to NASH.
Simtuzumab (phase 2)
No optimal treatment is available currently
In Phase 2 clinical trials; data expected in 4Q15
GS5816 TAF
Hepatitis C drug in phase 3 HIV drug in NDA stage
12-wk single tablet regimen expected to be effective NDA and MAA expects approval in 4Q15.
against all genotype and cirrhotic patients Further Positive phase 3 results announced in Sept. 2014.
secure Gilead’s leading position in the franchise Improvement on side effects compared to current
Phase 3 results expected to come out mid 2015 HIV product
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Source: SEC Filings and S&P Capital IQ
Risks & Mitigation
Risks Mitigation
Commercial: competition in the HIV Drug from main competition
and HCV franchise AbbeVie is inferior in many fields
Developmental: drugs may fail to based on clinical data
prove efficacy in clinical trials Given the company’s past
Regulatory: Gilead may fail to successes, new drugs are likely to
secure regulatory approval on new be successful as well. Even if a
products some of the 20 fails, the ones that
Legal: Pending litigation with succeed can drive revenue growth
AbbVie over Harvoni patent; Will most likely obtain regulatory
uncertainty regarding intellectual approval
property rights to combination Will most likely obtain patent
therapies
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IV. Valuation
Comparable Companies Analysis
Share Price Market Value Enterprise Value Rev.
Company
(US$) (US$mm) (US$mm) Growth % Current P/E NTM P/E EV/EBITDA EV/EBIT PEG Ratio
AMGEN 153.48 116,747.60 120,436.60 7.4% 16.5 16.2 12.0 13.3 1.57
CELGENE 115.88 92,553.80 92,530.40 18.1% 24.0 23.2 18.1 18.3 0.90
ALEXION 182.29 36,849.70 35,052.70 92.2% 30.8 29.9 25.8 26.3 1.20
REGENERON 402.40 41,293.10 40,390.10 34.0% 37.7 37.0 30.1 35.1 2.07
BIOGEN 391.66 91,889.10 89,163.00 87.9% 23.0 22.6 15.8 16.4 1.29
Mean 249.14 75,866.66 75,514.56 47.92% 26.4 25.78 20.36 21.88 1.41
Median 182.29 91,889.10 89,163.00 34.00% 24.0 23.2 18.1 18.3 1.29
High 402.40 116,747.60 120,436.60 92.20% 37.7 37.0 30.1 35.1 2.07
Low 115.88 36,849.70 35,052.70 7.40% 16.5 16.2 12.0 13.3 0.90
GILEAD 101.90 153,732.90 155,748.70 122.20% 10.7 10.6 8.8 8.7 0.46
Among large-cap biotech peers, Gilead trades at the lowest multiples despite exceptional
growth in 2014 and strong projected growth in coming years
Forward P/E of 10.6 and EV/EBITDA of 8.8 suggest undervaluation relative to market even
assuming slow future growth
The uniqueness of products and diversity of financial positions of biopharmaceutical
companies limits comparability for purposes of valuation
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Source: SEC Filings and Bloomberg
Discounted Cash Flow Analysis (Base Case)
Sources: Bloomberg, JP Morgan Equity Research, Needham Equity Research, SEC filings 17
Discounted Cash Flow (Base Case), cont.
Valuation Summary In Millions, except per share
Sensitivity Analysis
Present Value of Enterprise $169,912.7
Exit Discount Rate
Less: Total Debt 9,410.1
Multiple 8.00% 9.00% 10.00% 11.00% 12.00%
Less: Minority Interest 0.0
8.0x 107.88 104.12 100.54 97.15 93.92
Less: Preferred Equity 297.4
9.0x 115.95 111.82 107.91 104.19 100.65
Plus: Cash 7,691.7
10.0x 124.02 119.53 115.27 111.22 107.38
Equity Value $187,311.9
11.0x 132.09 127.24 122.63 118.26 114.11
Shares Outstanding 1,625.0
12.0x 140.16 134.95 129.99 125.30 120.84
Equity Value Per Share $115.27
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Price Target
Base Case: $115.27 (13% upside)
Revenue estimates based on Bloomberg consensus; 5% revenue CAGR through 2019
85% gross margin; in line with historical
10x exit multiple, implying 2.0% perpetual growth
Bull Case: $130.36 (28% upside)
Revenue estimates based on Bloomberg consensus; 5% revenue CAGR through 2019
88% gross margin; slight improvement from historical, consistent with analyst
consensus
11x exit multiple, implying 2.7% perpetual growth
Bear Case: $92.20 (10% downside)
Revenue flat in 2015, followed by 3% CAGR through 2019
85% gross margin; in line with historical
9x exit multiple, implying 1.8% perpetual growth
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