SMC Investment Group Covering Analysts: Simon Tryzna, Brett Lyons, Amrit Saini, Alyssa Horning, Thomas Taylor February 22, 2015 Biotechnology – Health Care Leadership / Governance 73.1 Innovation 69.1 Environment 37.4 Social Impact 70 Work Place 80.2 Economic Sustainability 67.3 Overall 66 52 Week Price Range $63.50-$116.83 Market Capitalization $153.81 billion Dividend Yield N/A Avg. Daily Volume (3M) 17.68M P/E Ratio 16.66 Beta .82 Shares Outstanding 1.5 billion Investment Thesis We give a Buy recommendation for Gilead, due to our belief that it is currently undervalued in the market. With a price of $102.60 as of (2/20/15), the stock is undervalued by 63.3%. The firm has demonstrated a special ability to recognize the unique targets for acquisition, and with strong cash flow and a robust balance sheet, we view M&A as a continued source for value over the foreseeable future. Despite new HCV competitors creating an unfavorable negotiating environment for reimbursement, we view Gilead’s diversified portfolio and pipeline will protect the firm's ability to generate cash flow over the long term. The stock has been outperforming the market over the last two years, as shown below, and we believe that it will continue to do so. Percent Change in Stock Price from April 2012 -50% 50% 150% 250% 350% 450% Apr-12 Oct-12 May-13 Nov-13 Jun-14 Dec-14 S&P 500 Gilead Ticker: NASDAQ: GILD Current Price: $102.60 Recommendation: Buy Price Target: $168 Trading Statistics
Transcript
SMC Investment Group Covering Analysts: Simon Tryzna, Brett Lyons, Amrit Saini, Alyssa Horning, Thomas Taylor
February 22, 2015
Biotechnology – Health Care
Leadership / Governance 73.1 Innovation 69.1
Environment 37.4
Social Impact 70
Work Place 80.2
Economic Sustainability 67.3
Overall 66
52 Week Price Range $63.50-$116.83
Market Capitalization $153.81 billion
Dividend Yield N/A
Avg. Daily Volume (3M) 17.68M
P/E Ratio 16.66
Beta .82
Shares Outstanding 1.5 billion
Investment Thesis
We give a Buy recommendation for Gilead, due to
our belief that it is currently undervalued in the
market.
With a price of $102.60 as of (2/20/15), the stock is
undervalued by 63.3%.
The firm has demonstrated a special ability to
recognize the unique targets for acquisition, and
with strong cash flow and a robust balance sheet,
we view M&A as a continued source for value over
the foreseeable future.
Despite new HCV competitors creating an
unfavorable negotiating environment for
reimbursement, we view Gilead’s diversified
portfolio and pipeline will protect the firm's ability
to generate cash flow over the long term.
The stock has been outperforming the market over
the last two years, as shown below, and we believe
that it will continue to do so. Percent Change in Stock Price from April 2012
-50%
50%
150%
250%
350%
450%
Apr-12 Oct-12 May-13 Nov-13 Jun-14 Dec-14
S&P 500 Gilead
Ticker: NASDAQ: GILD
Current Price: $102.60
Recommendation: Buy
Price Target: $168
Trading Statistics
SMC Investment Group February 22, 2015
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Major Shareholders (funds)
VA CollegeAmerica
Growth Fund 529F 3.43%
VA CollegeAmerica
Growth Fund 529E 2%
Vanguard Total Stock
Mkt Idx 1.67%
VA CollegeAmerica Cap
World G/I 1.2%
Major Shareholders
(institutions)
Capital Research Global
Investors 8.08%
Fidelity Management &
Research Company 5.84%
Vanguard Group, Inc. 5.24%
State Street Corp. 4.11%
Basic Information
Gilead was founded in 1987 and is located in Foster City, California. It has
been trading on the NASDAQ under the ticker symbol “GILD” since its
IPO in January 1992, when it raised $86.25 million. Currently it is a
component of the S&P 500 as well as of the NASDAQ Biotechnology
index. As of closing on 2/20/15, the market price was $102.60, with a
market cap of $156.7 billion. We feel that the company is currently
undervalued and we give it a recommendation of a “Buy” with a target
price of $168. Gilead has a 30 month average trading volume of
17,196,000, showing that the company’s shares are very liquid.
Investment Summary
On December 22, 2014, shares of Gilead fell by more than 14% on the
announcement that Express Scripts would be sponsoring rival biotech
company AbbVie’s new Hepatitis C cocktail Viekira Pak rather than
Gilead’s new drug Harvoni. This decision by Express Scripts cut
significantly into the niche of Gilead, the HCV market place. By having a
portion of its market share replaced by AbbVie, investors were worried
that Gilead would be unable to replicate the success it had in 2014
moving forward. Since then, the stock price has somewhat recovered,
but the fear in investors remains: such is the nature of investing in
biotech industries. While we do not believe that Gilead will be able to
replicate a 122% sales growth from 2013 to 2014, we do think that Gilead
will continue to slowly grow: we project them to grow by 10% in 2015,
8% in 2016, and 5% in years 2017-2019. With a conservative projection,
we still believe that the stock is currently undervalued (our target price is
$168), primarily due to the risk of Gilead losing even more market share
in its niche. With more people becoming insured through Obamacare
legislation, and with possibility of Gilead releasing new and better drugs
into the marketplace, we feel that they can continue to sustain the
positive momentum of their stock as they have done so for the past few
years.
Business Description
As one of the world’s largest biotechnological companies with business
operations in North & South America, Europe, and Asia Pacific, Gilead
researches, develops, and markets treatments for various chronic
diseases internationally. Founded in Foster City, California in 1987, Gilead
has historically been a producer of treatments of life threatening
diseases, some of which dominate the market as the only or primary
viable prescriptions available for diseases such as HIV, hepatitis B and C,
among others. For this reason, the revenue growth rates for the
company have been extremely high with revenue for 2014 increased
122% from $11.20 billion for 2013 to $24.89 billion for 2014.
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Drug Category
Sovaldi HCV
Harvoni HCV
Atripla HIV
Truvada HIV
Stribild HIV
Complera HIV
Viread HIV
Drug FDA Approval*
Sovaldi 2013
Harvoni 2014
Atripla 2006
Truvada 2004
Stribild 2012
Complera 2013
Viread 2001
*year allowed to be sold
Drug 2014 Sales*
Sovaldi $ 8,507
Harvoni $ 2,100
Atripla $ 3,470
Truvada $ 3,340
Stribild $ 1,197
Complera $ 1,228
Viread $ 1,058
*in millions
Drug 2014 Sales*
Sovaldi 34.2%
Harvoni 8.4%
Atripla 13.9%
Truvada 13.4%
Stribild 4.8%
Complera 4.9%
Viread 4.3%
*as percentage of total sales revenue
The company currently has nineteen drugs on the market. Gilead’s most
profitable products are their antiviral medications, which accounted for
93% of the company’s 2014 revenues. Their antiviral offerings include the
drugs Harvoni, Sovaldi, Atripla, Truvada, Stribild, Complera, and Viread.
Sovaldi, a Hepatitis C (HCV) drug that was approved for use in the
United States in December of 2013 (approved one month later in
Europe), was the company’s greatest revenue driver in 2014.
Harvoni, also a hepatitis C drug, is a combination of NS5A inhibitor
Ledipasvir and Sovaldi. It is effective against CHC genotype 1 and can
reduce treatment time down from Sovaldi’s treatment cycle of 12 weeks
to 8 weeks if the patient does not display cirrhosis. Throughout the 3
clinical trials the number of patients achieving sustained viral response
ranged from 94% to 99%. Harvoni was approved by the FDA on October
10, 2014 and generated over $2.1 billion in revenue in the fourth quarter,
exceeding the $1.732B generated by Sovaldi in the same quarter.
Gilead also has an impressive portfolio of HIV drugs. Atripla combines
the medicines Viread, Emtriva, and Sustiva into a single pill. Truvada is a
combination of the drugs Emtriva and Viread and is meant to be taken in
combination with other drugs. Despite being approved in 2004, in 2012
the FDA indicated Truvada, in combination with safer sex practices for
pre-exposure prophylaxis (PrEP), can also reduce the risk of sexually
acquiring HIV in high-risk adults.
Stribild is an HIV treatment combining the four drugs Viketa, Tybost,
Viread, and Emtriva into one pill and is intended for use by treatment-
naïve adults. It received FDA approval in August 2012 and EMA approval
in May of 2013. The next HIV drug is marketed as Complera in the United
States and Eviplera in Europe. It combines Viread, Emtriva, and Edurant
(manufactured by Janssen R&D Ireland). Complera is intended for use as
a complete regimen for patients with no antiretroviral treatment history
and with HIV-1 RNA less than or equal to 50 copies/mL. Janssen
commercializes the product in certain markets. The drug received
approval in both the United States and Europe in 2011. Gilead’s final
major HIV product is Viread. It was approved in the United States in 2001
and 2002 in Europe. It is used to treat patients as young as 2 years old
and received approval in 2008 to treat patients with the Hepatitis B virus.
One of the primary reasons each one of the drugs generates the
revenue that it does is due to the difficulty of getting the drug to the
public. To get a drug into the marketplace, a drug company will analyze
thousands of compounds in search of a viable treatment option for what
they want to treat. Of five thousand compounds analyzed, 5 will typically
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Phase 3 Pipeline Candidates
Decease Drug
HIV
STR of
EVG/cobicistat/FTC/
TAF*
HIV
F/TAF
(emtricitabine/tenof
ovir alafenamide) -
Switch Studies
HCV
FDC of SOF/GS-5816
(pan-genotypic
NS5B/NS5A
inhibitors)
HBV
TAF (nucleotide
reverse transcriptase
inhibitor)
Oncology/
inflammation
Idelalisib (PI3K delta
inhibitor) - Frontline
and Relapsed
Refractory CLL
Oncology/
inflammation
Idelalisib (PI3K delta
inhibitor) - iNHL
Oncology/
inflammation
Momelotinib (JAK
inhibitor) -
Myelofibrosis
Cardiovascular
Ranolazine (late
sodium current
inhibitor) -
Incomplete
Revascularization
Post PCI
Cardiovascular
GS-6615 (late
sodium current
inhibitor) - LQT-3
Syndrome
make it to a stage where the company will request approval from the
FDA to begin development. This process of preclinical testing (synthesis,
purification, animal testing) usually takes between 6-7 years. There are
three phases of development:
Phase 1: clinical trials on heathy people (1-2 years)
Phase 2: efficacy trials on target population (1-2 years)
FDA airs concerns and approves protocols for phase 3
Phase 3: safety, efficacy and side effect testing (2-3 years)
During the approval process, manufacturers can get accelerated
development/review if a disease is life threatening and no alternative
treatment is available and if the FDA has deemed it safe for a narrow
population. This means some patients can receive the drug faster and
the approval process is shortened and the manufacturer can begin sales
sooner, cutting R and D costs. After clinical testing the manufacturer files
a New Drug Application (0.6-2 years) and experts are consulted on the
efficacy and safety of the drug, labeling is determined and post-market
surveillance begins (11-14 years).
Gilead’s pipeline of developing drugs is extensive. As it takes between 8-
11 years to have a drug approved by the FDA, and the likelihood of
approval is extremely low it is important to have numerous possible
drugs in different stages of development. As of now, Gilead has 30
products in the pipeline.
To sell their newly created drugs, biotech companies can group up with
a Pharmacy Benefit Manager (PMB) to help distribute and supply a firm’s
drug to the people who need it. The majority of Americans receive their
prescription drugs with the help of a PMB. PMBs also work out discounts
for various drugs with their associated manufacturers. Express Scripts, a
PMB, only carries hepatitis C drugs made by AbbVie whereas PMBs CVS
and Blue Cross carry the hepatitis C drug made by Gilead Sciences.
Management & Governance
The highest leadership of Gilead consists of scientists who know how
their products work and what it takes to research and develop them. The
Chairman and Chief Executive, John C. Martin PhD, has been with Gilead
for over two decades, holding advanced degrees in organic chemistry
and marketing. In addition to many other notable accomplishments, he
served as President of the International Society for Antiviral Research.
John Milligan is the president and COO. He held the CFO position
directly before stepping into his current role. Like Martin, he also joined
the company in 1990. He has a PhD in biochemistry. Milligan was named
Bay Area CFO of the Year for companies with revenues greater than
SMC Investment Group February 22, 2015
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Board of Directors
Director Year
Joined
John C. Martin, PhD 1990
John F. Cogan, PhD 2005
Etienne F. Davignon 1990
Carla A. Hills 2007
Kevin E. Lofton 2009
John W. Madigan 2005
Nicholas G. Moore 2004
Richard J. Whitley,
MD 2008
Gayle Edlund Wilson 2001
Per Wold-Olsen 2010
$500 million in 2006 and was named the top biotechnology CEO in the
country in 2006, 2007, and 2008.
The leadership of the company has been the primary reason it has
grown to what it is today. While most of Gilead’s growth has been
organic, a big reason for their success occurred when they acquired
Pharmasset in January of 2012 for $10.8 billion. At the time many industry
experts claimed this purchase price was much too high, however Gilead
developed Pharmasset’s medication PSI-7977 into the marketed drug
Sovaldi, which generated over $10 billion in revenue last year alone. This
is just one of the many successful company buyouts that Gilead has had.
In their acquisitions alone, the management has demonstrated that they
know how to continue to grow Gilead in years to come.
Industry Overview & Competitive Positioning
Within the biotech industry there are hundreds of companies
specializing in developing treatments for a wide range of diseases. The
biggest advantage that a biotechnology company can have is simply
being first to effectively treat a disease, and take hold of the majority of
that market. Getting FDA approval and launching a product into the
market at the right time can be the difference between a firm
skyrocketing to the top of the industry or suffering massive losses due to
not being able to recoup their costs of R&D. This results in the
biotechnology industry becoming an increasingly competitive space.
As you can see from the graph on the left, in 2014, Gilead spent the
lowest on R&D when compared to some of its industry peers. Gilead’s
$11 billion acquisition of Pharmasset helped to drive down their R&D
costs since Pharmasset worked on developing antiviral drugs for
hepatitis C and HIV (the two largest markets targeted by Gilead).
The threat of a new firm entering the biotech industry and immediately
jumping to the top is highly unlikely, due to the biotech industry having
high barriers of entry. To begin a clinical study on a drug, a firm has to
get their product FDA approved. This FDA approval process goes
through 3 separate phases and can take anywhere from 8 to 11 years to
complete. Statistically only 1 to 2 drugs out of every 20 that enter the
FDA to get tested make it into the market. Biotech companies also have
expensive research and development costs, some in the range of over
$10 billion annually. If another large firm already owns the majority of the
market share of a particular illness, attempting to take over a part of that
market share would be incredibly difficult since the other firm has been
established in that area. Gilead is successful and will remain successful
due to owning the majority of market share for HVC & HIV drugs.
SMC Investment Group February 22, 2015
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Competitor 2014 EPS
Gilead 5.80
AbbVie 1.60
Bristol-Myers Squib 1.20
Merck and Co. 1.57
Pfizer 1.23
Amgen 6.70
Celgene 1.66
Number of Insured
Americans
2010 258.88
2011 262.76
2012 265.73
2013 270.61
2014 276.17 *in millions
Sales Growth Rate
2012 16.5%
2013 15.45%
2014 122.19%
2015* 10%
2016* 8%
2017* 5%
2018* 5%
2019* 5% *projected
Within the biotech industry there are hundreds of companies
specializing in developing treatments for a wide range of diseases. The
biggest advantage that a biotechnology company can have is simply
being first to effectively treat a disease, and take hold of the majority of
that market. Getting FDA approval and launching a product into the
market at the right time can be the difference between a firm
skyrocketing to the top of the industry or suffering massive losses due to
not being able to recoup their costs of R&D. This results in the
biotechnology industry becoming an increasingly competitive space.
Since 2010, the Biotechnology Industry and Gilead have given a return of
153% and 206%, respectively, compared to the S&P 500 which only gave
a return of 79% in that same time frame. We believe that this flow of
capital into the biotechnology industry can be traced back to the
inception of the Affordable Care Act in 2010. The introduction of the
Affordable Care Act in 2010 has led to an increase in patients having
access to various medical professionals and their associated facilities.
Around 6.5 million people enrolled in 2014 and 9 million more people
are expected to enroll in 2015. This influx of new patients has resulted in
an increase in demand for pharmaceutical drugs and medical devices,
which in turn caused an inflow of capital into the biotechnology and
health-care sector resulting in increased share prices of many companies
in the health-care sector.
Valuation
Based on a discounted cash flow valuation, we believe that Gilead should
be worth $167.53 per share. Our target price is based off a sales growth
rate projection of 10% in 2015, 8% in 2016, and 5% each year from 2017-
2019, and a weighted average cost of capital of 9.04%. Over the last few
years, Gilead sales growth has been remarkable, with an increase of
15.45% from 2012 to 2013, and then a 122.19% increase from 2013 to
2014. The reason for the increase in sales is due to Sovaldi, a treatment
for chronic hepatitis C, becoming available on the market. In 2014,
Sovaldi generated $10.3 billion in sales for Gilead, which was 41.4% of
total sales for the year.
While Gilead has over 30 drugs in the pipeline, we did not take into
account any potential new drugs being available in the market due to
the difficulty of getting a drug approved by the Federal Drug
Administration. In addition, any profit that could be made with a new
drug hitting the marketplace could be offset with a loss in market cap by
a current drug, as seen in late December when it was announced that
insurance company Express Scripts has chosen to sponsor rival AbbVie
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Sales Revenue (in millions)
2012 $9,703
2013 $11,202
2014 $24,890
2015* $27,379
2016* $29,569
2017* $31,047
2018* $32,600
2019* $34,230 *projected
Weighted Average Cost of
Capital Risk Free Rate 1%
Beta 1.1
Market Risk Premium 10
%
Cost of Equity 12
%
After Tax Cost of Debt 4%
Target Debts to Assets
Ratio
37
%
WACC 9.04
%
HCV drugs, which cut significantly into Sovaldi’s market cap and
dropped the stock price by 14%. The Express Scripts decision is worth
$3-4 billion in lost sales to Gilead. The combination of unknown
potential of a new drug combined with the potential risk in the loss of
market cap of a current drug led us to have a relatively conservative
projected sales growth rate.
For our valuation, we used a Weighted Average Cost of Capital of 9.04%.
We believe that the listed beta, .82, is not the true beta of the company,
as the investment in a biotech firm will lead to higher return on
investment then investing in the market index; therefore, we used a beta
of 1.1 in our calculations. We believe the annual market risk premium
over the next five years will be 10%, and with a long term growth rate of
cash (inflation) at 3%, we believe the equity value of Gilead is $252,752,
which results in a per-share equity value of $167.53.
As of 2013 Gilead has 200 active clinical studies with 60 of those studies
in phase three of the FDA approval process. Around 90% of the drugs in
Phase 3 make it to the market; we believe this gives Gilead a very strong
pipeline given the number of drugs the company has in phase three. On
top of having twenty drugs in phase three, Gilead owns about 70% of
the global hepatitis C market and treats 85% of HIV patients in the US.
We feel that due to the of Gilead’s presence in the HIV and hepatitis C
drug markets will make it difficult for rivals to encroach on their market
share.
Gilead is planning to cut prices on their hepatitis C drugs Harvoni and
Sovaldi in 2015 in response to competition from AbbVie. We think that
this discounting of Harvoni and Sovaldi will allow Gilead to maintain and
grow their 70% market share in the hepatitis C drug market, even
though AbbVie and Bristol-Myers Sqibb are releasing their own hepatitis
C drugs. Harvoni and Sovaldi’s high rate of success of has lead
physicians to use Gilead’s drugs over its competitor’s drugs. Gilead also
has patents filed on its hepatitis C drugs, keeping the medication
protected until 2029.
Gilead drugs currently treat around 85% of the HIV patients in the US
and 7 million people worldwide in over 125 countries worldwide. Despite
the fact that patents central to Gilead’s HIV drugs will begin to expire in
2018, the firm’s newer HIV drugs are patent protected. We think that
based on its history and large number of drugs in its pipeline, the firm
will be able to have a competitive advantage in new drug therapy
markets in the future.
SMC Investment Group February 22, 2015
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We also believe that the growing number of individuals that are
becoming insured through the Affordable Care Act will cause an increase
in demand for goods and services provided by the healthcare and
biotechnology industry. To Gilead, this would be an opportunity to treat
new patients who previously went un-diagnosed resulting in the growth
of the company and its wide economic moat.
Financial Analysis
Over the last several years Gilead has leveraged its wide margins to
consistently drive incremental profit through to its bottom line. Its ability
to retain about 45% of revenue over the last twelve months has allowed
the firm opportunities to reinvest in R&D, M&A, and, more recently, its
shareholders. In its 2014 year end conference call, management
announced it will pay a 43 cent per share dividend, which implies a yield
of about 1.5% and places Gilead among only a handful of large
pharmaceutical companies to pay a dividend.
In the call, management also said it will buyback an additional $15 billion
of its shares to supplement the current $3 billion repurchase program.
CFO Robin Washington said that despite the decision to return such an
aggressive amount of value to shareholders, the firm’s balance sheet
remains robust and that money will still be available to maintain R&D
and even invest in M&A, which has been an important theme for the
players in the space.
We believe that this trend will continue. Many criticized Gilead’s $11
billion acquisition of Pharmasset in 2012, but the firm has already
recovered its investment thanks to Solvadi’s record setting sales in 2014.
And Gilead currently maintains over $11 billion in cash and cash
equivalents, which should provide ample cushion to remain acquisitive.
Management also guided for 2015 sales between $26 billion-$27 billion,
which is in line with our estimates. HCV and HIV treatments together
generated roughly $13 billion in operating income in 2014, and
management expects numbers to be even better in 2015.
For fiscal year 2014, sales increased 122% from $11 billion to $24.9 billion
on the back of Solvadi and Harvoni, which together brought in $12.4
billion. Gross margins increased at an even faster rate, signaling Gilead’s
ability to control prices in the marketplace. 2014 operating margins came
in at 58% with R&D and SG&A together accounting for just over 10% of
sales. Net income increased year over year from $3 billion to $12 billion,
which drove 2014 EPS to $7.35 from $1.81 in 2013.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Operating Cash Flow (millions)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000 Sales (millions)
SMC Investment Group February 22, 2015
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2014 Industry Sales Growth
Gilead 122.2%
AbbVie 7.01%
Bristol-Myers Squib -3.09%
Merck and Co. -4.08%
Pfizer -3.84%
Amgen 7.43%
Celgene 17.9%
Fourth quarter EPS came in at 2.43 on revenue of $7.3 billion, versus
analyst estimates of $2.16 EPS on revenue of $6.67 billion. Sales in the
period were up from $3.1 billion in the same period last year. While our
HIV sales estimates were in line with results, management said that
Hepatitis C discounts rose higher than we expected in 2015. Over the last
few years, Gilead has grown revenue at a much higher rate than any of
its competitors (see side, full chart in Appendix 4).
With Abbvie’s introduction of Viekira Pak to the market during the
second half of 2014, Gilead Sciences has been under increasing pressure
to discount its blockbuster HCV treatments, Solvaldi and Harvoni. Before
Abbvie’s treatment, Gilead had the only treatment on the market, and
was able to charge a whopping $95,000 per patient in the US. The
insurance and pharmaceutical benefits space is dominated by only a few
large players, which were able to negotiate with Gilead to receive an
average discount on the price tag of about 22% in 2014.
However, with Abbvie’s entry into the market, Gilead has been under
immense pressure to further discount its treatments. On the fourth-
quarter conference call, management shed light on how deep discounts
can go. It said that the 22% 2014 gross to net ratio was steeper-than-
expected, and that it expects a 46% gross to net ratio for 2015. Shares
slid that day more than 5 percent.
Both AbbVie and Gilead have fought for market share by cutting deals
with group payers. First, AbbVie struck a deal with Express Scripts, the
largest player in the space. Express Scripts' roughly 30% market share for
US prescription drugs combined with the 30% of its customers that are
loyal to the formulary (list of accepted drugs), translates into at least 10%
of the total HCV-infected US patients who will take AbbVie’s regimen
next year.
But Gilead answered back by negotiating with CVS, the number two
player. As Gilead further discounts its treatments, it also seeks to treat
more hepatitis C patients insured through Medicare and the Veterans
Administration, where gross-to-net adjustments are more than 50%.
Essentially, Gilead is signaling that while it offers bigger discounts, it will
increase the number of hepatitis C patients treated to make up for the
lost sales.
Investment Risks
Negotiating environments with insurance companies and pharmacy
benefit managers can continue to worsen as AbbVie continues to battle
for market share. Competitors continue to push hard to develop HCV
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
2011 2012 2013 2014
Yearly Revenue Growth
Gilead
AbbVie
Bristol-Myers Squib
Merck and Co.
Pfizer
Amgen
Celgene
SMC Investment Group February 22, 2015
10
Patent Expiration Product U.S. E.U
Hepsera 2014 2016
AmBisome 2016 2008
Macugen 2017 2017
Tamiflu 2017 2016
Letairis 2018 2020
Viread 2018 2018
Ranexa 2019 2023
Atripla 2021 2018
Cayston 2021 2021
Emtriva 2021 2016
Truvada 2021 2018
Lexiscan 2022 2025
Complera 2023 2022
Vitekta 2023
Sovaldi 2029 2028
Striblid 2029 2028
Tybost 2027
Harvoni 2029 *projected
treatments, notably Merck and Bristol, which look capably of bringing
regimens to market by 2016.
In the biotech market, the power of the buyer is very influential, as seen
by the Express Scripts decision dropping the price of Gilead’s stock.
Pharmacy Benefit Managers (PBM) governments, hospitals, and other
entities that buy drugs and medical devices from biotech firms can have
an effect on what price the firm sells its products for. If a biotech firm
tries selling a drug at too high of a price, the particular entity that is
buying or was planning on buying might end up not buying at all or
would attempt to get the drug at a discount. This can be seen in today’s
biotech market where “price wars” between firms have begun in an
attempt to gain market share and increase sales. The power of the buyer
can result in lost revenue for a biotech firm if they discount their product
too deeply.
A major hit to sales in pharmaceuticals is typically felt when the patent of
a profitable drug expires. Generic companies can produce the drug at
low costs because they do not need to spend money on research and
development, only production. Gilead’s main drugs are protected for
over a decade as the most profitable drug up for patent expiration is
Ambisome in 2016 which is the company’s tenth most profitable drug.
Biotech firms use patents to make sure that no other company can steal
their market share or drug formula. Foreign countries might not uphold
the patent laws of another country which can result in the illegal
production of a drug for significantly lower prices. If a biotech firm relies
heavily on international sales, this could damage their revenue.
Substitute drugs can cause a shift in market share if a biotech firm
develops a drug that is similar to another firm’s drug, but sells it for a
cheaper price. This is the threat that generic drugs pose to biotech firms
that try to maintain the exclusivity of their drug in their respective
markets.
The competitive nature of the biotech industry makes this stock a very
risky investment due to the numerous factors that drive the stock price
up or down. A drug not passing the FDA regulations or a new drug
being awarded a contract that Gilead previously had can hamper future
earnings and drive the stock price down, as seen by the 14% drop in late
December 2014.
SMC Investment Group February 22, 2015
11
Appendix 1:
Gilead
Financial Statements
Year 2014 2013 2012 2014 2013 2012 Average 2014 2013
Income statement (amounts in millions) Common-Size (% Sales) Trend (% Change)
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