1

Krause Fund Research

Spring 2015

Healthcare Recommendation: BUY

Analysts

Imran Hasan

Imran-hasan@uiowa.edu

Alex Knight

Alex-knight@uiowa.edu

Company Overview

Gilead Sciences, Inc., is a biopharmaceutical company that

discovers, develops, and commercializes medicines for the

treatment of life threatening diseases in North America, South

America, Europe, and the Asia-Pacific. They have drugs that can

treat a wide variety of diseases. Their largest product lines help

in the treatment of Hepatitis C, HIV/AIDS, rare cardiovascular

diseases, and Hepatitis B. Further, it has product candidates in

various stages for the treatment of HIV, liver,

oncology/inflammation, cardiovascular, and respiratory diseases.

The company markets its products through its commercial teams

and/or in conjunction with third-party distributors and corporate

partners. Gilead has collaborations with BMS, Janssen, and

Japan Tobacco to develop and commercialize various products.

The company was founded in 1987 and is headquartered in

Foster City, California

Stock Performance Highlights 52 week High $116.83

52 week Low $71.63

Beta Value 0.9

Average Daily Volume 11,743,000

Share Highlights Market Capitalization $156.68b

Shares Outstanding 1.49 b

Book Value per share $10.30

EPS (ttm) $7.35

P/E Ratio 14.31

Dividend Yield NA

Dividend Payout Ratio NA

Company Performance Highlights ROA 34.15%

ROE 87.25%

Sales $24.89 b

Financial Ratios Current Ratio 3.08

Debt to Equity 78.34%

Gilead Sciences, Inc. (NASDAQ: GILD)

April 17, 2015

Current Price $101.09

Target Price $151.09

GILD Positioned to Breakout in 2015

2015 sets the stage for Gilead to take complete market share

of the Hepatitis C industry with new blockbuster drug

Gilead’s revenue double at the end of FY2014 with profit

margins hovering above 85%. Current product offerings show no

sign of decline

Low interest rate environment along with $10B+ cash on

hand sets the stage for Gilead to significantly expand the

business.

Gilead sees opportunity in emerging markets through

licensing out generics.

Gilead plans to continue to increase R&D as % of sales,

passing pharmaceutical counterparts.

Promising pipeline of 29 drugs across several industries

including one that received orphan designation

One Year Stock Performance

2

Investment Thesis

Healthcare spending is rising and more people

are covered with insurance than ever. The

healthcare market is being flooded with

investment as investors see the potential.

Gilead Sciences, Inc. is ahead of the curve and

on top of the biotechnology industry. They

have established drug franchises in HIV/AIDS,

cardiovascular diseases, and Hepatitis B. As of

last year Gilead added their biggest franchise

to their company becoming the number

provide of treatment for Hepatitis C. Gilead’s

strong patents and protected revenue streams in

niche markets make it an excellent investment

choice. Their low levels of debt coupled with a

stockpile of cash make them a very exciting

company to watch in 2015. Their robust

pipeline of 29 drugs spread across several

subsectors provides investors with the

diversification they need. Our team

recommends a BUY on Gilead at $145. Their

growth prospects and tight cost structure make

them a very lucrative investment.

Economic Analysis

Our team believes that there are four economic

indicators that influence the future

performance of GILD. These economic

indicators are Gross Domestic Product, Interest

Rates, Demographics, Government

Legislation, and innovation.

Gross Domestic Product

Gross Domestic Product (GDP) represents the

monetary value of all finished goods and

services within a country. It’s a strong

indicator of a county’s economic health and

can help to provide insight into where the

economy is headed. During the most recent

quarter of Q4 2014 GDP grew at 2.2%, but

lagged behind Q1 2013.1 The slowed growth in

GDP is due to a strong U.S. dollar and

decreased government spending. The strength

of the dollar is causing the U.S. to import

heavily.

We expect GDP in Q1 2015 to be 2% as it

continues to lag from last year. This is due to

the dollar continuing to strengthen, decreased

consumer spending, and slowed

manufacturing. While GDP is slowing down

this will have little effect on the healthcare

industry because of how desensitized it is to

what is driving the deceleration. Healthcare

makes up 17.4% of GDP, which makes it the

single largest share.3 The healthcare industry is

relatively unaffected by the current drivers of

GDP and is actually expected to grow1.1%

faster than GDP through 2023. This is largely

due to the American Care Act (ACA) which

has allowed increased access to healthcare. The

ACA will help to drive healthcare GDP

because the states will have to take the burden

of paying for healthcare for many of its

citizens. Since, the government has entered the

market this has motivated companies to expand

their healthcare businesses. This is supported

by the National Health Expenditures Account

estimating that healthcare will increase to

19.3% of GDP by 2023.3 This is very

important to the business of Gilead because of

how expensive their drugs are such as Harvoni

which retails at $93K a treatment. The

increased access and emphasis on healthcare in

the economy going forward will allow Gilead

to continue to benefit from more patients being

able to use their insurance to buy their

treatments.

Interest Rates

Currently, the U.S. offers a very strong interest

rate environment with the 10-year treasury

yielding 1.87%.4 That is nearly a percentage

point lower than this same time last year. This

is surprising since there has been talks of a

Federal Reserve increasing the rate for some

time now. The recent decline is due to the Fed

laying out certain expectations before anything

will happen. They would like to see

unemployment consistently at 5% and inflation

reach a steady 2%.5 Our team expects that in

the short term interest rates will rise slightly to

2% because the strong employment market.

We don’t believe the Fed will take any action

though until Q1 of next year because of the

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extremely low inflation environment we are in.

We believe that within the next three years

interest rates will reach 3.85% because the Fed

will increase rates due to inflation reaching

their targets. The low interest rate environment

is a positive for the healthcare industry because

it comes at a time when companies are

expanding rapidly. The expansion within

Gilead’s sector; biotechnology has come in

two different ways. One of which is Mergers &

Acquisitions (M&A) and the other is increased

research spending. The low cost of borrowing

has sparked M&A in the biotech industry as

companies look to diversify their product lines.

In 2014 deal volume rose 37.5% from 2013

levels and is expected to further grow in 2015. 6 A large portion of operating expenses for a

biotech company is their research arm which

helps them to stay competitive. The low cost of

borrowing provides the opportunity for biotech

companies to invest heavily in their product

pipeline now so that they stay competitive once

rates to rise. This provides Gilead a very strong

opportunity to expand since they are sitting on

over $10 billion in cash and have very little

debt. We expect Gilead to invest heavily in

their pipeline as they look to diversity outside

of their main product segments: Hepatitis C

and HIV/AIDS.

Demographics

The aging population of the United States

plays an important role in healthcare industry.

Baby boomers will begin to hit the retirement

age and will qualify for Medicare.

Source: CMS

Above is the most recent enrollment

demographic data from the Center for

Medicare and Medicaid Services. The 52

million number is expected to increase rapidly

as the population continues to age. This

provides the healthcare industry a large amount

of new patients that will need and have access

to healthcare. The aging population has

become a recent target of Gilead as they look

to diversity their products. Currently, Gilead

has drugs in phase 2 testing or later to treat

liver disease, lymphoma, hypertension, and

illnesses associated with cystic fibrosis.7 Of the

four diseases listed above each of them affect a

different demographic and provides

diversification for Gilead.

Government Legislation

The government plays an important role within

the healthcare industry because of their power

to regulate and the large amount of healthcare

spending they engage in. As noted above

Medicare enrollment is expected to increase

yoy in 2015. Along with this the Center for

Medicare and Medicaid Services has reported

that the sustainable growth rate (SGR) for their

services is expected to be -13.7%. This is the

lowest since the SGR was first used in 1997.

The sharp decline in the growth rate is due to a

cut in expenditures because of the ACA.

The passage of the ACA has opened up many

opportunities for new streams of income. The

new streams of income come from patients that

were previously not insured.

Innovation

Another large driver of the Healthcare industry is

innovation and the appetite that companies and

investors have for it. As the market continues to

release new products and services this creates

opportunities for new streams of revenue. This is

very important for the biotechnology industry as

companies benefit from patent protection for x

years. A patent is granted for 20 years. An

exclusivity patent can be granted varying from 180

days to 7 years.

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Source: FDA Website

The graph illustrates the steady increase in

innovation, measured by the number of Novel

New Drugs approved by the FDA. One can

observe the importance of developing new and

innovative drugs by looking at the years 2005-

2007 where new drug approvals were lower than

average, in part due to more stringent FDA

requirements following the Vioxx debacle.

Looking at the relative performance of MSCI HC

in those years one can see poor performance vs the

market as a whole.

Capital Markets Outlook

Our team believes that the healthcare sector

provides a strong opportunity to invest. The

low interest rate environment allows healthcare

companies to reinvest as they anticipate greater

demand in the future. The changing

demographics of the United States provides

incentive for companies to invest in new

treatments. This is further driven by the ACA

and enrollment in Medicare increasing because

people will be able to utilize services. GDP

will bounce back into the year just as it did

during 2013. Along with the GDP growth in

the future healthcare is expected to surpass it

by at least a percentage point a year. The

heightened innovation that we are experiencing

currently is a result of the market seeing

growth prospects in the sector as well.

Industry Analysis and

Overview

Gilead Sciences, Inc. is a part of the

biotechnology industry, which is under the

umbrella of the healthcare sector. The

biotechnology industry has been the best

forming industry within the healthcare industry

over the past year. The biotechnology industry

is made up of companies that use living

organisms or molecular and cellular techniques

to create treatments and solutions to current

problems.8 The industry has grown extremely

fast and has seen an annual growth of 5.5%

since 2009. It’s expected to continue to grow at

an annual rate of 9.1% through 2019.8

Source: MSCI10

Industry Trends

The biotechnology industry relies heavily on

finding new or enhanced treatments for various

diseases. Companies tend to focus their

research on treatments that don’t have a cure or

an effective treatment. These medical

conditions tend to be autoimmune diseases,

infectious diseases and various cancers. They

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chose to focus on these because they provide

the largest profit if the treatments end up being

successful. The industry relies heavily on a

“first mover advantage” where companies

attempt to get a patent on their successful

treatment. Research and development can be

extremely costly and risky. Companies will

have a large number of treatments that they are

testing at any given time called their product

pipeline. From the pre-clinical stage only 5 of

the original 5000 compounds will make it to

FDA approval. The high risks allows biotech

companies to charge large premiums on their

successful products to cover losses on the

treatments that didn’t succeed.9 The entire

process can take anywhere from 5-7 years for a

drug to be approved.

During the past year R&D within the biotech

industry has been much greater than their

pharma counterparts. Within the NASDAQ

Biotechnology Index R&D spending was up

14% coupled with 11% increase in revenue

largely driven by the major biotech

companies.11 The increase in R&D has been a

result of increased FDA drug approvals and the

large amount of cash reserves that many

biotech companies were sitting on.

Government Regulation

The biotechnology sector faces a large variety

of regulation due to the nature of their

business. They are heavily regulated by the

Federal Drug Administration (FDA) and go

through a very stringent process to bring any

treatment to market. There are several phases

that a company must go through before they

are able to sell their drug to the public. The

process is as follows:

Pre-Clinical Phase- Researchers will look for

new compounds that could potentially

contribute to the treatment of an illness. They

will test the compound to find the correct

formula, dosage, and will conduct tests on

animals or human tissue. Once this is finished

the compound is submitted as a new drug

application (IND) to the FDA. This will all

typically take 3 years. During this stage a

company can apply for “fast track designation”

if their proposed treatment meets an unmet

medical need.

Phase 1- If the new drug application is

approved researched have permission to

conduct human trials on less than 100 healthy

people. They will look to see if the dosing is

correct, how the human processes it, and if

there are any notable side effects. This will

take a year to complete.9

Phase 2 – If the drug is found to be tolerable

by a human then it will enter testing to see if it

can heal the targeted disease. Researchers now

have permission to test on up to 300 healthy

people. This process will take two years.9

Phase 3 – During this stage researchers may

now test the drug on up to 3000 healthy

patients to see how effective the drug is.

Researchers must also see what the side effects

are and how they plan to distribute the drug at

a large scale. This process will take three

years.9

New Drug Application (NDA) – If the drug

turns out to be effective and safe then it is

submitted to the FDA for approval. The

company will have to provide all of their data

from all of the previous phases. This usually

takes 1-2 years to complete as there is much

due diligence that needs to be done.9

Phase 4 – The company can now distribute the

drug to the public. The FDA continues to look

into any possible short or long term side

effects. 9

There are two ways to expedite the process:

Priority Review and Orphan Drug Status.

Priority Review is given when the treatment

meets an unmet medical need. Orphan Status is

given when the drug treats a disease that has no

other treatments.

Orphan drug designation is very lucrative

because of the tax credits it offers. The U.S.

government offers 50% tax credit on the R&D

cost of an Orphan drug and will provide grants

of up to $30M for the costs associated for

earlier trials. On average an Orphan drug will

return 1.89 times that compared to a non-

Orphan. EvaluatePharma predicts that Orphan

drugs will make up 19.1% of total

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pharmaceutical sales by 2020. This is due to

the average treatment per patient prescribed to

an Orphan drug is $137,782 relative to $20,875

for one that is not.12

In January Gilead’s simtuzumab was given

Orphan designation which comes with seven-

year period of market exclusivity if approved.13

The FDA’s programs and the innovation of

companies has led to record new drug

approvals. The chart below helps to show the

strong year drug approvals had in 2014. There

were 41 new drug applications filed and all of

them were approved. This indicates that the

FDA is becoming more flexible especially with

drugs that are unique to the market.

Source:FDA14

Currently, Gilead has 7 drugs that are in phase

3 of the FDA process. If the approval trend

continues from 2014, then Gilead will be able

to add new stream of revenue to their existing

business.

Recent Trends and

Developments

The Biotech industry has seen increased

demand from emerging markets, heavy

consolidation, and a strong IPO market.

Emerging Markets

The biotech industry has seen heavy demand

from emerging markets. Many of their drugs

help to solve diseases that are common in

poorer countries. The industry has seen the

demand and has recently made strides to

provide their treatments at a reduced costs.

This is strategic because most drugs are only

held to patent exclusivity within large

established countries. Third party companies

can attempt to copy a drug and sell it where the

patent isn’t recognized at a significant

discount. To combat this problem there has

been a trend within the industry to partner with

a large generic pharmaceutical company, so

that they can manufacture and distribute the

drugs in non-patent areas. This is a win-win

relationship because biotech companies are

able to reap some profits instead of losing it all

to an unknown third party. In February Gilead

signed an exclusive agreement with Mylan to

allow them to sell the generic version of their

two largest drugs in 91 undeveloped countries.

This will create an entirely new product

segment for Gilead as they enter licensing

agreements with other drugs in the future. 15

Source: Statista16

The chart above further shows that demand for

pharmaceuticals is increasing in emerging

markets. Sales growth in emerging markets

outpaced all others and has increased 23%

since 2012.

Heavy Consolidation

In 2014 there were 27 biotech M&A deals

worth $12.7 billion compared to 27 deals in

2013 worth only $7.1 billion.17 The rise in deal

value is an indication that companies are

having to pay a premium for biotech

companies. This premium comes at a time

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where larger biotech companies have shifted

some of their R&D to buying small but

promising companies. M&A deal volume is

expected to increase further is year as biotech

firms attempt to diversify by merging with

pharmaceutical companies. M&A is further

being driven by interest from private equity

firms.

Source: Basberry Sims

In chart above shows a survey recently

conducted by Bassberry Sims as to what

private equity firms will be most interested in

buying. The number one response were

biotech/pharma companies which further

shows that the economy feels these companies

hold strong value. The surge in M&A activity

comes at an ideal time for Gilead because they

are currently sitting on over $10 billion in cash

and little to no debt. Over 50% of publically

traded healthcare companies are either biotech

or pharmaceutical. Gilead has the resources

and momentum to acquire a competitor or a

smaller company to spur growth. Our team

believes that Gilead will continue to purchase

smaller biotechs because of their success with

Savoldi. Our team believes the heavy

consolidation will continue into the future due

to the low cost of borrowing and the growth

from Obamacare in the U.S.

Strong IPO Market18

In 2014 the biotech industry set a record for the

number of IPOs and the value of proceeds

received from them. The market has a strong

appetite for small biotech stocks that offer

promising treatments especially within cancer

and immunotherapy. Investors see strong

growth potential in the companies in hopes that

they become an acquisition target for a larger

player in the industry. Over the past 12 months

240 stocks have gone public with 1 out of

every 4 attributed to the biotech industry. The

market hasn’t slowed down either; the Nasdaq

Biotechnology Index has already returned 18%

this year. The IPO market’s strength further

justifies the trend in heavy M&A. Gilead can

take advantage of the biotech appetite by

purchasing a company through an issuance of

shares as well. Our team continues to see the

IPO market to stay strong in the biotech

industry. This is due to the low yielding bond

environment causing investors to look for

larger returns elsewhere.

Source: EY Biotech Report19

From the chart above you can see that an

overwhelming amount of IPOs were in the

therapeutic subindustry. The more interesting

story to draw is that only 31% of these

companies were at least into phase 3 of the

FDA process. This statistic shows that

investors are willing to take on the risk and be

patient in hopes that their company catches the

eye of a larger biotech. The industry has begun

to shift to allow larger companies to use small

biotech firms as their vehicle of innovation.

Markets and Competition

The current climate of the biotechnology

industry is very unique. As seen earlier in the

report it’s a very strong market for biotech

companies to grow and expand since investor

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demand for the industry is at all-time highs.

The market is currently very open to smaller

firms that are looking to expand and are more

than willing to provide the growth financing

through purchasing equity. Government

regulation contributed to the strong climate

with the implementation of accelerate drug

review programs by the FDA and the record

drug approval percentage during 2014.

Threat of New Entrants – The industry is

heavily driven by research and development.

Smaller firms with a promising cure will easily

be able to access the industry. The depth of the

industry allows for new entrants to find niche

markets that they can compete in. The record

number of biotech IPOs indicates that investors

are willing to invest capital into projects that

show promise. Smaller firms can enter the

industry, but it is extremely difficult to become

a large player. On average it takes about $5

billion for a drug to go from pre-clinical stages

to the market. That would be very difficult for

a small firm to achieve on their own and would

most likely look to be acquired. However, if a

small firm was able to take their drug from

start to finish the profit margins would be large

enough to make them an established firm. The

threat of new entrants entering the market is

medium due to strong investor appetite for

biotechs, and the large range of subindustries a

firm could chose to compete in. The threat of a

new entrant having an effect on Gilead’s

business is low due to its large size and ability

to buyout a smaller competitor.

Threat of Substitute Products or Services –

Gilead holds an exclusive patent on all of their

largest drugs with none of them expiring in the

near future. The threat of generic copies

flooding the market is of concern especially

since the government has established a process

for the approval of biosimilars. Gilead has

taken a proactive approach by signing an

exclusivity agreement with Mylan to distribute

generic versions of Harvoni and Sovaldi to

undeveloped countries. The proactive approach

is to push companies outside of the U.S. to

make illegal copies of their drugs.

Additionally, Gilead’s threat to substitutes is

low because of the niche markets they are in.

Bargaining Power of Suppliers – The

biotechnology industry does not rely heavily

on materials or suppliers to add value to the

business. Firms within the industry are

concerned with building partnerships for

commercialization and clinical purposes.

Gilead has created partnerships with numerous

firms to license out their products. They

licensed out the right to manufacture and

distribute Tamiflu to Roche. Gilead has also

entered a partnership to assist and provide

funding to Yale School of Medicine to conduct

research on their behalf.29

Bargaining Power of Customers – Within the

biotech industry customers have very little

power over setting prices. Customers are “price

takers” and don’t have enough power to cause

a shift in price. A large entity like the U.S.

government which pays for customer’s drugs

does have some influence. They can push for

their insurance to only cover up to a certain

amount of a drug. This in turn could force a

company to decrease their price, so that

customers can afford it. Currently, the U.S.

government hasn’t done this to Gilead and

actually supported the branded HIV/AIDS

franchise through drug rebates when a generic

drug maker released an alternative. Gilead is

safe from the influence of customers

attempting to change prices because they

operate in a very niche industry that have few

alternatives available.

Intensity of Competitive Rivalry – There are 10

major players in the biotechnology industry.

They are Gilead, Amgen, Celgene, Biogen,

Regeneron, Alexion, Vertex, Illumina,

BioMarin, and Agilent Technologies.

Company Analysis

Gilead Sciences, Inc. is a biopharmaceutical

company that discovers, develops, and

commercializes medicines for the treatment of

diseases around the world. The company was

founded in 1987 and is headquartered in Foster

City, California.

9

Source: Factset

Corporate Strategy

Gilead aims to find medicines for the treatment

of life threatening diseases. They are focused

on North America, South America, Europe,

and Asia-Pacific. The company has been

successful in providing drugs that treat are

large variety of diseases and are expected to

add more to the list in the future. In addition to

diversifying their product portfolio Gilead

would like to continue their business strategy

of partnerships. They are in commercial

collaboration partnerships which allows other

pharmaceutical institutions to commercialize

some of their products. One of these

agreements is with Japan Tobacco to

commercialize their HIV products in Japan.20 Along with this Gilead has clinical research

partnerships which allows them access to various

institutions to conduct research for drugs in their

pipeline.

Life Cycle: Gilead is currently in the growth portion of the

business life cycle. They have 29 drugs that are

currently in their pipeline and have increased

R&D spending by 34.5% yoy. In 2013 they

acquired YM BioSciences and are rumored to

offer to buy Arrowhead Research Corp. Their

rumored interest in Arrowhead Research Corp.

indicates that Gilead is interested in furthering

growth through acquisitions.

Financial Summary: During 2014 Gilead’s largest share of revenue

came from their Hepatitis C franchise; Sovaldi

and Harvoni. These two drugs made up 49.66%

of their total sales even though Harvoni was only

available for sale during Q4 2014. Followed by

that Gilead’s HIV franchise which comprises

eight drugs made up 41.3% of their sales.

Gilead’s cardiovascular franchise contributed to

4.42% of their total sales. The remaining came

from their other lesser known franchises such as

hepatitis B, oncology, and royalty revenues.

Gilead witnessed their strongest financial year to

date during 2014 with revenues increasing 122%

from 2013. This was attributed to their newly

approved Hepatitis C franchise which was able to

capture 83% of the entire market in just one year.

The success of their two blockbuster drugs

guarantees Gilead strong revenue streams for at

least the next 15 years during the course of the

patents.21 Gross profit increased 10% yoy to 85%

of total sales and we expect it to remain stagnant

at that rate going forward as Gilead’s sales

increase, but they invest more towards R&D.

Another strong figure in Gilead’s financials is the

decrease in the effective tax rate that they are

paying. They only paid 18.83% tax on their

record profits which is 8.52% less than 2013.

This is due to Gilead moving recording profits

overseas and moving their intangibles outside of

the U.S. According to Bloomberg, Gilead will be

able to continue to save on taxes going forward

cutting nearly a percentage point off for every $1

billion in sales of Sovaldi.22 Lastly, Gilead ended

2014 in a very strong financial position. They

have around $10 billion in cash and cash

equivalents, $4.5 billion in accounts receivable

and $11 billion in intangibles. Their largest

liability is long term debt of $$11 billion with

$9.25 billion of it due after 2020.

Product Segments

Gilead has medicines for HIV/AIDS, Hepatitis

B, Hepatitis C, Chronic Lymphocytic

Leukemia, pulmonary arterial hypertension

(PAH), chronic angina, Pseudomonas

10

aeruginosa, influenza, presumed fungal

infection, and neovascular age-related macular

degeneration. Their portfolio has a total of 18

marketed drugs.

Source: Financial Numbers from Gilead 10K

Hepatitis C

Gilead’s largest revenue stream stems from

their Hepatitis C franchise which made up 41%

percent of their revenues in 2014. Their

franchise is made up of Sovaldi and Harvoni

which boast 90 and 95% cure rates in 12

weeks. Prior to the approval of these drugs the

best cure rate that a drug could produce was

70% and produced harsh side effects. Gilead

has taken over the Hepatitis C market with

over 85% market share. CVS estimates that

global spending on specialty pharmaceuticals

will quadruple by 2019. On top of this PWC

recently reported that specialty pharma

spending will make up 50% of all prescription

sales by 2020 and will continue to grow at 9%

annually.

Product Pipeline There are 29 drugs across 5 segments: HIV/Aids,

liver diseases, oncology/inflammation,

cardiovascular disease, and respiratory disease that

are in the pipeline. Of these drugs, six are in phase 3

of the FDA process and one has been submitted for

U.S. and E.U. approval. Gilead has put a large

emphasis on creating a single regimen drug for the

treatment of HIV/AIDS. Their one tablet regimen is

currently the drug that is in the approval process.

Competition

Gilead’s Top Competitors

Source: Yahoo Finance

Gilead has becoming one of the leading

biotechnology companies over the past few

years. They have continually innovated and

introduced new treatments to solidify itself as

an established company within the industry.

Gilead is trading at very attractive multiples

relative to its peers. Its EPS is second only to

Roche and will increase over the next five

years as Gilead continues to implement its

share buyback program. The share buyback

program will also help to bring Gilead’s

price/sales ratio more in line with its

competitors. The high P/S ratio is an indicator

that the market places a higher premium on

each dollar that Gilead generate. This makes

sense since Gilead leads all its competitors in

profit margins achieving 85% in 2014. Along

with this the market is placing Gilead at the

bottom of its competitors valuing its future

growth the least. The low forward P/E ratio is

due to investors being becoming bearish on the

announcement that Gilead would be offering

discounts of over 50% on their top selling drug

Sovaldi. Our team believes that Gilead’s drug

Harvoni will be able to cover the losses due to

the discounts and keep earnings growing.

Lastly, Gilead’s strong EPS makes it an

attractive investment especially since the

number of shares will be decreasing over the

next five years due to the share repurchase

plan. Our team believes that Gilead is heavily

undervalued relative to its peers especially

because the market expects their revenues to

increase next year.

Research & Development

11

Gilead has increased their R&D significantly

nearly tripling the amount since 2008. This is

significantly outpacing the industry average since

2009. As seen from the chart below the U.S. has

seen pharmaceutical research and development

staying relatively low and slightly above GDP.

Gilead’s constant increase in R&D is an indicator

that the company is committed to growth in an

environment where large pharmaceutical

companies are focusing on M&A as a vehicle for

innovation.

Source: Statista23

Our forecast below predicts that Gilead will

continue to increase R&D yoy. Our estimates are

based on Gilead’s guidance prior to the surprise

of revenues doubling. Their original guidance

given in Q1 2014 indicated that they wanted to

increase R&D around 20% per year. The

continued reinvestment into the firm reiterates

their growth stage standing.

2016E 2015E 2014 2013 2012

Sales 29,900 27,934 24,890 11,221 9,614

R&D 4,194 3,462 2,854 2,120 1,760

R&D % of Sales

15.0% 13.0% 11.5% 18.9% 18.3%

YOY Growth of R&D

21.2% 21.3% 34.6% 20.5% -

Payout Policy: Gilead recently announced a $0.43 per share

dividend that will start in the second quarter of

2015. In addition to the dividend, Gilead has

approved a share buyback program of up to $15

billion of company stock. The repurchase

program will begin once Gilead finishes

purchasing $3 billion of company stock from a

previous program. The program will expire 5

years after the $3 billion of company stock from

previous commitments is completed.24

Catalysts for Growth/Change:

Generic Compeition: Within the biotechnology industry a growing

concern since the inception of biosimilars are the

possibility of losing revenues to a generic. Gilead

has patent protection for the next fifteen years on

two of its largest drugs: Harvoni and Sovaldi.

They have patent protection on their 3rd and 4th

best sellers Antripla and Truvada until 2021 in

the U.S. and 2018 in the EU. Antripla and

Truvada make up about 27% of Gilead’s sales,

leading to doubts if they can sustain their

revenues for much longer especially with only 3

years of protection left in the E.U. This shouldn’t

be a concern because Gilead has faced generic

competition from drug makers introducing

alternatives to its HIV franchise. Antripla and

Truvada are very unique because they offer a one

tablet regimen. A generic drug maker offered a

three tablet alternative that the market wasn’t

interested in. Only about 20% of people living

with HIV/AIDS have private insurance while the

rest are treated through government options. The

government actually supports the branded

version of the HIV drugs that Gilead offers. The

government feels that it rather have patients take

a pill a day than them miss a dose and further

hurting their health with a more demanding

regimen. In addition to this, the government

provides drug rebate programs and has special

designated programs for HIV/AIDS treatments

which causes the branded versions to be cheaper.

The fear of the HIV franchise being affected by

any generic competition should be minimal as

Gilead has overcome the problem in the past.25

HIV Spending in Africa: Gilead plays a large role in the treatment of HIV

and the African market will be key to their

growth as they try to distribute their treatments

where HIV is most prevalent. The amount of

spending that African nations place on HIV will

be the largest driver as countries will have to

subsidize these treatments for patients. Recently,

South Africa announced they would spend $2.2

12

billion over the next two years to buy HIV drugs

for public hospitals throughout the country.

Gilead has created programs that help to treat

HIV/AIDS in Africa with their drugs. They’ve

created a tiered system which allows them to

generic versions of their drugs to low income

areas and discounted versions of the branded

drugs to the middle class. The generics are

manufactured through a voluntary partnership in

which they allow high quality and low cost

generics to be made. Gilead’s charitable work

offers little to no profit on their drugs when the

generics are sold. The opportunity they have for

increasing the bottom line is through spreading

the word of their treatment in hopes of more

people wanting it and selling branded versions to

the middle class.26

Source: Gilead Website 26

Since the inception of the program access to

Gilead’s medicines have dramatically

increased. There are currently 24.7 million

people living with HIV/AIDS in low and

middle income countries. Gilead currently is

serving 28.3% of those people with goals of

increasing the number in the future.27

Better Alternatives to Current Franchises: Gilead’s Hepatitis C drug Sovaldi generated

$10.5 billion in sales during 2014contributing

largely to their strong growth yoy. Sovaldi can

produce 90% cure rates in as little as 12 months.

Harvoni is expected to achieve over $10 billion

in sales as well and can produce identical results

but in a shorter period of time. Although these

two drugs dominate the hepatitis C market is a

better alternative can enter the market. In the

beginning of 2015 Achillion Pharmaceuticals

announced that their compound ACH-3102 was

able to achieve 100% cure rates when taken with

a small dose of Sovaldi.28 The trial was only

conducted on a dozen people and the compound

is still in phase two of testing. Even though it has

at least 3-5 years before it would be available on

the market it does pose a threat to Gilead. If

another drug were introduced to the market even

if it incorporated some of Gilead’s product it

would cut into market share and revenues.

Abbvie has an alternative treatment as well

called the Viekira Pak which sells for slightly

less than Gilead’s treatment. The downside to

their treatment is that it is a six pill daily regimen

which increases risk of patients not taking the

full course. Our team feels that this isn’t a valid

concern as phase two in the FDA process doesn’t

provide enough insight as to whether the drug

will be successful. We also feel that the Viekira

Pak won’t be able to take too much market share

from Gilead because payors risk increasing that

patients are not finishing their treatments.

Key Investment Positives: Gilead provides a lot of key investment

opportunities especially because they are in the

growth stage. As stated above they have 29 drugs

across various segments in their pipeline. Their

diversified pipeline provides investors the ability

to reduce risk because of the many new streams

of revenue that Gilead could enter. Gilead’s HIV

franchise is protected because of their past track

record of beating out generic alternatives and the

federal government supports the branded version.

Gilead’s explosive growth in the Hepatitis C

franchise due to Sovaldi and Harvoni should

provide increasing revenues over the next 2-3

years. Even if Achillion produces a drug that

produces higher cure rates, they have noted that

it must be taken together with Sovaldi. Gilead

has a very small amount of LT debt and has

shown a large increase in ST cash and cash

equivalents. This provides further safety to

investors and also shows that Gilead has the

resources available if an acquisition opportunity

presented itself.

Key Investment Negatives: Gilead attributed almost 50% of their 2014 sales

to Sovaldi which does raise a red flag for many

13

investors. Their drug has faced criticism on its

high price and Gilead has responded by noting

that they will offer significant discounts.

Investors could worry that the large discounting

is throwing away profits that could be made in a

time when the drug has the largest ability to do

so. Increased generic competition is also a fear

because this can cause branded drugs to lose

about to 90% of their revenues. Gilead’s HIV

franchise is very dependent on governments

which can also be seen as a negative because the

U.S. could look for other treatments to battle

HIV in a more affordable manner.

Valuation Summary

Our team believes that Gilead is a very unique

company that has various integral parts to its

business that can help its future growth. The

due diligence into the current economic factors

helped to shape some of our assumptions. The

biotechnology industry is growing extremely

fast and offers an opportunity to become a

market leader. Gilead has positioned itself to

through its core business operations to make a

move in the industry and become an

established firm. Our valuation consisted of a

discounted cash flow (DCF), economic profit

model (EP), dividend discount model (DDM),

and the relative valuation model. Through

analyzing and projecting the future streams of

revenue and expenses for Gilead we were able

to decide that Gilead should be a BUY at $132

based on out DCF and EP models.

Assumptions

Gilead plays in a very niche market which

allows it to dominate their competition fairly

easily. They focus on diseases that previously

didn’t have a treatment or there was one that

wasn’t very effective. This strategy allows

them to charge a very handsome premium for

their drugs since there aren’t many alternatives.

From the report you can see that 2014 was a

breakout year for Gilead because of their new

Hepatitis C division. The record sales of

Sovaldi coupled with the approval of Harvoni

allowed it to take charge of the market. Both of

these drugs offer large profit margins for

Gilead and they have the patent for the next 15

years. The Hepatitis C market is expected to

triple in spending by 2023 because of better

treatments coming out on the market. This

creates an opportunity for Gilead and we feel it

will be the largest contributor to its growth. In

addition to this Gilead has a strong HIV/AIDS

franchise that has already took on generic

competition. Gilead’s ability to offer a single

pill regimen will continue to dominate the

industry. We decided to apply a 9% growth

rate based on the growth of specialty pharma

and finally reaching a steady growth stage of

4% annually. We chose to increase all other

streams of drugs by 4% because of the industry

charging more for prescriptions yoy and the

increase in spending from emerging markets. .

Discounted Cash Flow and Economic Profit

Our discounted cash flow and economic profit

models provided us with a target price of

$151.09. The share price was driven by profit

margin estimates which we believe will stay

constant at 85% and growth in their drug

revenues. The growth in revenues and

consistent cost structure will allow Gilead to

have free cash flows of $17 billion in 2020.

Gilead’s tax structure allowing them to move

almost all of their profits from Sovaldi

benefited their share price as well.

Dividend Discount Model

Gilead will begin to pay dividends of $0.43 per

share on a quarterly basis starting in Q2 2015.

This is the first time the Gilead will be paying

dividends. The biotechnology industry

historically has not paid many dividends since

management teams like to reinvest in their

product pipeline. Gilead on the other hand, is

sitting on a large stockpile of cash and we

predict that with their strong growth prospects

that the dividend will stay steady through

2020. The DDM calculated a recommended

price of $185.19 a share. The price is supported

with strong EPS estimates during the terminal

year of $11.91.

Relative P/E Valuation

Our team compared Gilead relative to some of

its peers. We used applied fundamental ratio

14

analysis to come up with a target price of

$157.41. The price target is based on Gilead’s

current price against its estimated forward EPS

ratio. We applied the average forward looking

2015 P/E ratio of four of Gilead’s competitors

to derive the price. We were surprised to see

the Gilead was trading at lower P/E multiples

compared to their peers because of our strong

sentiment that they are in an extreme growth

phase. Out of all the peers Gilead has the

lowest CAGR for EPS growth as well. Our

team feels this is due to Gilead reinvesting in

the company and paying out a hefty dividend.

Weighted Average Cost of Capital

Our WACC calculated to be 7.23% based on a

few different factors. The cost of debt was

derived from the latest maturity bond that

Gilead had on the market. We took the yield

from the bond which was set to mature in

2045. Our choice to pick a bond that was

expiring late into the future was because we

didn’t want short-term factors to throw off the

rate. We derived our equity risk premium by

using the Bloomberg terminal and found the

rate updated as of 4/17/15. Lastly, we found

out cost of equity by using the capital asset

pricing model. We applied a levered beta of

1.18 showing that Gilead’s cost of equity is

7.96%.

CV Growth

We chose to apply a CV growth rate of 4% to

Gilead in 2020. Our team felt that with patents

expiring in the time span and the possibility of

new entrants into Gilead’s markets that the

company would enter a steady growth phase.

We also feel that inflation will rise to 2% by

2020 allowing Gilead to still provide a return

on investment.

Sensitivity Analysis

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.

15

Bureau of Economic Analysis: Report on GDP

https://www.bea.gov/newsreleases/national/gdp/gd

pnewsrelease.htm1

CNN Article on Atlanta Fed Cuttting GDP

Estimates

http://money.cnn.com/2015/04/02/news/economy/

us-economy-growth-zero-growth-first-quarter/ 2

National Healthcare Expenditures Account

http://www.cms.gov/Research-Statistics-Data-and-

Systems/Statistics-Trends-and-

Reports/NationalHealthExpendData/Downloads/Pr

oj2013.pdf 3

U.S. Department of Treasury Interest Rate

Information

http://www.treasury.gov/resource-center/data-

chart-center/interest-

rates/Pages/TextView.aspx?data=yield 4

Reuters: Conditions for Rate Hike Not Yet Met

http://www.reuters.com/article/2015/04/16/us-usa-

fed-rosengren-idUSKBN0N726Q20150416 5

PWC M&A Outlook

http://pwchealth.com/cgi-

local/hregister.cgi/reg/pwc-pharma-deals-insight-

q4-2014.pdf 6

Gilead’s Pipeline

http://www.gilead.com/research/pipeline 7

IBIS Database Biotechnology Industry

http://clients1.ibisworld.com/reports/us/industry/de

fault.aspx?entid=2001 8

Fierce Biotech: FDA Approval Process

http://www.fiercebiotech.com/topics/fda_approval

_process.asp 9

MSCI

http://www.msci.com/resources/factsheets/index_f

act_sheet/msci-acwi-health-care-index.pdf 10

BDO: R&D Spending Analysis

https://www.bdo.com/insights/industries/press-

releases/r-d-spending-surges-in-biotech-industry11

EvaluatePharma Orphan Drug Report

http://info.evaluategroup.com/rs/evaluatepharmaltd

/images/2014OD.pdf 12

Gilead’s simtuzumab given Orphan Status

http://seekingalpha.com/news/2210425-gileads-

simtuzumab-an-orphan-drug-for-rare-liver-

disease13

FDA New Drug Approvals

http://www.fda.gov/Drugs/DevelopmentApproval

Process/DrugInnovation/ucm429873.htm14

WSJ Article on Gilead agreeing to distribute

Hepatitis C drug with Mylan

http://www.wsj.com/articles/mylan-to-distribute-

gileads-hepatitis-c-drugs-in-india-1424698301 15

Statista Word Pharmaceutical Sales

http://www.statista.com/study/10708/us-

pharmaceutical-industry-statista-dossier/ 16

PharmaExec.com: Biotech M&A Trends 2014

http://www.pharmexec.com/wild-ride-biotech-

financial-and-ma-trends-2014 17

MarketWatch Article: Appetite for High-

Growth Stocks

http://www.marketwatch.com/story/appetite-for-

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

boom-2015-04-20 18

16

Ernst & Young: A new benchmark year for

biotech IPOs

http://lifesciencesblog.ey.com/2015/01/09/2014-a-

new-benchmark-year-for-biotech-ipos-infographic/ 19

Gilead Signs Agreement with Japan Tobacco

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

4&p=irol-newsArticle&ID=687733&highlight= 20

Gilead’s Patent Information

http://stks.freshpatents.com/GILD-sym.php 21

Bloomberg article on Gilead Avoiding Taxes

http://www.bloomberg.com/news/articles/2015-

02-26/gilead-avoids-billions-in-u-s-taxes-on-its-1-

000-a-pill-drug 22

Statista: Yearly Growth Rate of R&D Spending

in U.S. and Europe

http://www.statista.com/statistics/315959/annual-

growth-rate-of-pharmaceutical-research-and-

development-expenditure/ 23

Gilead announces dividend and repurchase

Program

http://www.gilead.com/news/press-

releases/2015/2/gilead-sciences-announces-43-

cents-quarterly-dividend-program-and-15-billion-

share-buyback-program 24

HIV drugs are uniquely shielded from generics

http://www.ft.com/cms/s/2/286774b4-81be-11e2-

b050-00144feabdc0.html#axzz3XwPiny2n 25

HIV Treatment Expansion Snapshot

http://www.gilead.com/~/media/Files/pdfs/other/H

IV%20Treatment%20Expansion%20Fact%20Shee

t%20%20121914.pdf 26

World Health Organization: HIV/AIDS

Statistics

http://www.who.int/mediacentre/factsheets/fs360/e

n/goo 27

Should Gilead Sciences be afraid of Achillion

Pharmaceuticals?

http://www.fool.com/investing/general/2015/04/01

/should-gilead-sciences-inc-be-worried-by-

achillion.aspx28

Yale and Gilead Sciences announce cancer

research collaboration

http://news.yale.edu/2011/03/30/yale-and-gilead-

sciences-announce-cancer-research-collaboration 29

CMS Report on Medicaid and Medicare

http://www.cms.gov/Research-Statistics-Data-and-

Systems/Statistics-Trends-and-

Reports/MCRAdvPartDEnrolData/ 30

Gilead Sciences, Inc.Key Assumptions of Valuation Model

Ticker Symbol GILDCurrent Share Price $101.09Current Model Date 4/17/2015 151.09$           4.06% 4.16% 4.26% 4.36% 4.46%Fiscal Year End Dec. 31 1.1 151.09 151.09 151.09 151.09 151.09

1.14 151.09 151.09 151.09 151.09 151.09Pre‐Tax Cost of Debt 3.93% Beta 1.18 151.09 151.09 151.09 151.09 151.09Beta 1.18 1.22 151.09 151.09 151.09 151.09 151.09Risk‐Free Rate 2.51% 1.26 151.09 151.09 151.09 151.09 151.09Equity Risk Premium 4.26%CV Growth of EPS 4.00% 151.09$ 13.0% 14.0% 15.0% 16.0% 17.0%Marginal Tax Rate 20% 13.0% 159.78 157.61 155.43 153.26 151.09WACC 7.23% 14.0% 157.61 155.43 153.26 151.09 148.92

CV COGS 15.0% 155.43 153.26 151.09 148.92 146.7516.0% 153.26 151.09 148.92 146.75 144.5717.0% 151.09 148.92 146.75 144.57 142.40

Year 2015E 2016E 2017E 2018E 2019E 2020ERevenue Growth 1.15 1.07 1.07 1.07 1.07 1.04 WACCCost of Goods Sold 0.15 0.15 0.15 0.15 0.15 0.15 151.09$           5.23% 6.23% 7.23% 8.23% 9.23%Gross Profit 0.85 0.85 0.85 0.85 0.85 0.85 83.0% 164.08 159.74 155.39 151.05 146.70R & D 0.15 0.15 0.15 0.15 0.15 0.15 84.0% 161.91 157.57 153.22 148.88 144.53SG&A 0.14 0.14 0.14 0.14 0.14 0.14 Gross Profit 85.0% 159.74 155.39 151.05 146.70 142.36Operating Expenses 86.0% 157.57 153.22 148.88 144.53 140.19Interest Expense = Avg 4% * 1.04 1.04 1.04 1.04 1.04 87.0% 153.22 148.88 144.53 140.19 135.84Other Income (Expense), netIncome Tax Provision (Benefit) SG&AMinority Interest based on 3 year moving average 0.0053986 0.004871 0.004584 0.004951126 0.004802 0.004779 151.09$           10.0% 12.0% 14.0% 16.0% 18.0%Net earnings attributable to the noncontrolling interest 13.0% 164.12 159.78 155.43 151.09 146.75Weighted Average Common Shares Outstanding 14.0% 161.95 157.61 153.26 148.92 144.57

CV COGS 15.0% 159.78 155.43 151.09 146.75 142.40Balance Sheet Inputs 16.0% 157.61 153.26 148.92 144.57 140.23Assets 2015 2016 2017 2018 2019 2020 18.0% 153.26 148.92 144.57 140.23 135.88Cash and Cash Equiv. = 15% of sales 0.15 0.15 0.15 0.15 0.15 0.15

Equity Risk Premium

R&D

Gilead Sciences, Inc.Revenue Decomposition

Fiscal Years Ending Dec. 31 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020ERevenuesProduct Sales $7,389,921 $8,102,359 $9,398,371 $10,803,695 24,474,000              27,539,240          29,525,074          31,546,978           33,673,020          36,063,306     37,583,088 Royalty and Contract Revenues 559,499              283,026           304,146            397,993          416,000                         395,200               375,440                356,668                 338,835               321,893           305,798 

Total revenues 7,949,420          8,385,385        9,702,517         11,201,688     24,890,000              27,934,440          29,900,514          31,903,646           34,011,854          36,385,199     37,888,887 

Revenue BreakdownHepatitis C FranchiseSovaldi ‐ ‐ ‐ 139,435          10,283,000     6,169,800 6,725,082 7,330,339 7,990,070 8,709,176 9,057,543Growth 7274.76% ‐40.00% 9.00% 9.00% 9.00% 9.00% 4.00%Harvoni ‐ ‐ ‐ ‐ 2,127,000       9,273,720 10,108,355 11,018,107 12,009,736 13,090,613 13,614,237Growth 336.00% 9.00% 9.00% 9.00% 9.00% 4.00%

Total Hepatitis C Sales ‐                      ‐                    ‐                     139,435          12,410,000     15,443,520         16,833,437        18,348,446        19,999,806         21,799,789        22,671,780    HIV/AIDS FranchiseAtripla 2,926,579          3,224,518        3,574,483         3,648,496       3,470,000       3,608,800 3,753,152 3,903,278 4,059,409 4,221,786 4,390,657Growth ‐ 10.18% 10.85% 2.07% ‐4.89% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%Truvada 2,649,908          2,875,141        3,181,110         3,135,771       3,340,000       3,473,600 3,612,544 3,757,046 3,907,328 4,063,621 4,226,166Growth 8.50% 10.64% ‐1.43% 6.51% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%Complera/Eviplera ‐ 38,747              342,200            809,452          1,228,000       1,277,120 1,328,205 1,381,333 1,436,586 1,494,050 1,553,812Growth 783.17% 136.54% 51.71% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%Stribild ‐ ‐ 57,536               539,256          1,197,000       1,244,880 1,294,675 1,346,462 1,400,321 1,456,334 1,514,587Growth 837.25% 121.97% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%Viread 732,240              737,867           848,697            958,969          1,058,000       1,100,320 1,144,333 1,190,106 1,237,710 1,287,219 1,338,708Growth 0.77% 15.02% 12.99% 10.33% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%

Total HIV/AIDS Sales ‐                      ‐                    8,004,026         9,091,944       10,293,000     10,704,720         11,132,909        11,578,225        12,041,354         12,523,008        13,023,929    Cardiovascular FranchiseLetairis 239,832              293,426           410,054            519,966          595,000          618,800 643,552 669,294 696,066 723,908 752,865Growth #DIV/0! 22.35% 39.75% 26.80% 14.43% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%Ranexa 305,856              320,004           372,949            448,624          510,000          530,400 551,616 573,681 596,628 620,493 645,313Growth #DIV/0! 4.63% 16.55% 20.29% 13.68% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%

Total CardioVascular Sales 545,688              613,430           783,003            968,590          1,105,000       1,149,200            1,195,168          1,242,975          1,292,694            1,344,401          1,398,178      OncologyZydelig ‐ ‐ ‐ ‐ ‐ 191,000 248,300 322,790 419,627 545,515 709,170Growth ‐ ‐ ‐ ‐ ‐ ‐ 30.00% 30.00% 30.00% 30.00% 30.00%

Total Oncology Sales ‐                      ‐                    ‐                     ‐                   ‐                   191,000               248,300              322,790              419,627               545,515              709,170         Other 6,631,633 551,599 575,410 567,327 634,000 637,000 739,000 734,000 678,000 718,000 795,000Growth ‐ ‐91.68% 4.32% ‐1.40% 11.75% 0.47% 16.01% 70.42% 31.40% 61.01% 17.97%

Total Other Sales 6,631,633          551,599           575,410            567,327          634,000          637,000               739,000              734,000              678,000               718,000              795,000         

Gilead Sciences, Inc.Income Statement(In thousands except per share amount)Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

RevenuesTotal Revenue 9,702,520      11,201,690   24,890,000      28,623,500       30,627,145      32,771,045        35,065,018        37,519,570        39,020,352       Cost of Revenue 2,471,360      2,858,500      3,788,000        4,293,525         4,594,072        4,915,657           5,259,753           5,627,935           5,853,053          Gross Profit 7,231,150      8,343,190      21,102,000      24,329,975       26,033,073      27,855,388        29,805,266        31,891,634        33,167,300       

Operating Expenses

Selling / General / Administrative Expenses, Total 1,461,030      1,699,430      2,964,000        4,007,290         4,287,800        4,587,946           4,909,103           5,252,740           5,462,849          Research & Development 1,759,950      2,119,760      2,737,000        4,293,525         4,594,072        4,915,657           5,259,753           5,627,935           5,853,053          Other Expenses ‐                  ‐                  136,000            ‐                      ‐                    ‐                       ‐                       ‐                       ‐                      

Total Operating Expense 5,692,340      6,677,690      9,625,000        8,300,815         8,881,872        9,503,603           10,168,855        10,880,675        11,315,902       Earnings from operations 4,010,180      4,524,000      15,265,000      16,029,160       17,151,201      18,351,785        19,636,410        21,010,959        21,851,397       Non‐Operating ExpensesInterest Expense 370,460 321,800 412,000 476,840 495,914 515,750 536,380 557,835 580,149Other Non‐Operating Income (Expense) ‐27,740 6,020 3,000 50,000 50,000 50,000 50,000 50,000 50,000

Net Income Before Taxes 3,611,980 4,208,220 14,856,000 15,602,320 16,705,288 17,886,035 19,150,030 20,503,124 21,321,249Provision for Income Taxes 1,038,380 1,150,930 2,797,000 3,120,464 3,341,058 3,577,207 3,830,006 4,100,625 4,264,250

Net Income After Taxes 2,573,600 3,057,290 12,059,000 12,481,856 13,364,230 14,308,828 15,320,024 16,402,499 17,056,999Minority Interest 17,970 17,520 42,000 67,385 65,093 65,593 75,851 78,764 81,516

Net Income 2,591,570 3,074,810 12,101,000 12,549,241 13,429,323 14,374,421 15,395,875 16,481,263 17,138,515Basic Weighted Average Shares 1,515 1,529 1,522 1,503 1,486 1,471 1,458 1,448 1,439Basic Normalized EPS 1.71 2.01 8.01 8.35 9.04 9.77 10.56 11.38 11.91Effective Tax Rate 28.75% 27.35% 18.83% 20% 20% 20% 20% 20% 20%Dividends Per Share 1.29 1.72 1.72 1.72 1.72 1.72

Gilead Sciences, Inc.Balance Sheet In thousands of USD  Fiscal Years Ending Dec. 31  2012  2013  2014  2015E  2016E  2017E  2018E  2019E  2020E  Period Ended  12/31/2012 12/31/2013 12/31/2014 12/31/2015 13/31/16  12/31/2017 13/31/18 12/31/2019 12/31/2020 Assets  Current Assets  Cash & Equivalents  1,803,694         2,113,000       10,027,000           20,635,690        32,786,339        46,073,523        61,309,917          77,936,411          98,693,593  Short Term Investments  58,556               19,000             101,000           57,247             61,254             65,542             70,130              75,039               78,041               Account Receivables ‐ Net  1,751,383         2,182,000       4,635,000       5,152,230        5,512,886        6,226,499        6,662,353         6,753,523          7,023,663          Total Inventory  1,744,982         1,697,000       1,386,000       1,431,175        1,531,357        1,638,552        1,753,251         1,875,978          1,951,018          Deferred Income Tax   262,641             331,000           508,000           685,000           726,100           740,622           755,434            762,989             785,878             Prepaid Expenses  450,784             564,000           585,000           963,873           963,873           1,033,378        1,104,144         1,178,556          1,262,216          Other Current Assets  84,302               91,000             472,000           572,470           612,543           655,421           701,300            750,391             780,407            

 Total Current Assets  6,156,342        6,997,000      17,714,000    29,497,685    42,194,353    56,433,536    72,356,530      89,332,887      110,574,816    Property / Plant / Equipment, Total at cost  1,523,560         1,269,200       1,799,000       2,862,350        3,062,715        3,277,105        3,506,502         3,751,957          3,902,035          Less: Accumulated Depreciation  (423,300)           (103,000)         (125,000)         (572,470)          (612,543)          (655,421)          (701,300)           (750,391)            (780,407)            Property / Plant / Equipment, Total ‐ Net  1,100,260         1,166,000       1,674,000       2,289,880        2,450,172        2,621,684        2,805,201         3,001,566          3,121,628          Goodwill, Net  1,060,920         1,169,000       1,172,000       1,172,000        1,172,000        1,172,000        1,172,000         1,172,000          1,172,000          Intangibles, Net  11,736,390       11,900,000     11,073,000     10,297,890     9,577,038        8,906,645        8,283,180         7,703,357          7,164,122          Long Term Investments  719,840             439,000           1,598,000       1,144,940 1,225,086 1,310,842 1,402,601 1,500,783 1,560,814 Defered Income Tax   131,110             190,000           236,000                       286,235              306,271              327,710              350,650                375,196               390,204 Other Long Term Assets  334,977             357,953           625,187           703,034           741,103           781,837           825,422            872,059             900,574            

 Total Assets  21,239,840       22,417,719     34,558,187     45,935,510     58,247,938     72,176,904     87,861,820       104,670,719     125,625,545     Liabilities 

Current Liabilities  Accounts Payable  1,327,340         1,256,000       955,000           1,431,175        1,837,629        1,966,263        2,454,551         2,626,370          2,731,425          Accrued Expenses  1,569,890         2,332,000       2,632,000       4,865,995        5,206,615        5,898,788        6,311,703         6,378,327          6,633,460          Current Portion of Long Term Debt / Capital Leases  1,169,490         2,697,000       483,000           917,000 1,010,162 1,342,730 1,702,632 2,109,786 2,568,269 Deferred Revenues  103,160             111,000           134,000           247,357           244,350           240,361           279,988            291,372             300,265             Income Taxes Payable  13,400               11,000             105,000           62,412             74,727             95,282             88,094              98,419               104,670             Other Current Liabilities  54,620               1,071,000       1,452,000       1,431,175        1,531,357        1,638,552        1,753,251         1,875,978          1,951,018         

 Total Current Liabilities  4,237,900         6,407,000       5,761,000       8,955,113        9,904,840        11,181,976     12,590,219       13,380,252       14,289,105       Long Term Debt  7,054,560         3,939,000       11,921,000     13,132,111     17,455,494     22,134,216     27,427,224       33,387,492       39,774,873       Long Term Income Taxes Payable  115,822             162,000           562,000           572,470           612,543           655,421           701,300            750,391             780,407             Long Term Deferred Tax Liabilities  10,190               83,000             51,000             57,247             61,254             65,542             70,130              75,039               78,041               Minority Interest  241,130             ‐                   ‐                   ‐                   ‐                   ‐                    ‐                    ‐                     ‐                     Other Long Term Liabilities  257,120             243,000           550,000           572,470           612,543           655,421           701,300            750,391             780,407            

 Total Liabilities  11,916,722       10,834,000     18,845,000     23,289,411     28,646,673     34,692,576     41,490,174       48,343,566       55,702,833       Equity

 Common Equity  5,643,460         5,388,000       2,393,000       2,393,233        2,393,466        2,393,699        2,393,932         2,394,166          2,394,399          Retained Earnings (Accumulated Deficit)  3,704,740         6,106,000       12,732,000     23,342,855     33,297,778     44,180,599     56,067,674       69,022,938       82,618,253       Unrealized Gain (Loss)  (44,200)              (124,000)         301,000           301,000           301,000           301,000           301,000            301,000             301,000             Translation Adjustment  (1,420)                ‐                   ‐                   ‐                   ‐                   ‐                    ‐                    ‐                     ‐                     Other Equity, Total  (1,420)                (375,000)         (393,000)         (393,000)          (393,000)          (393,000)          (393,000)           (393,000)            (393,000)            Total Before Treasury Stock  9,302,680         10,997,000     15,035,000     25,646,098     35,601,265     46,484,328     58,371,647       71,327,153       84,922,711       Less: Treasury Stock  (3,000,000)      (6,000,000)      (9,000,000)      (12,000,000)     (15,000,000)      (15,000,000)     

 Total Equity  9,302,680         10,997,000     15,035,000     22,646,098     29,601,265     37,484,328     46,371,647       56,327,153       69,922,711       Total Liabilities & Shareholders' Equity  21,239,840       22,579,000     34,664,000     45,935,510     58,247,938     72,176,904     87,861,821       104,670,719     125,625,544    

Gilead Sciences, Inc.Cash Flow Statement

Fiscal Years Ending Dec. 31 2010 2011 2012 2013 2014

Operating Activities:Net income $2,789,059 $2,573,599 $3,057,286 $12,059,000

Adjustments to reconcile net income to net cash:Depreciation expense 67,240 72,187 82,847 102,644 125,000Amortization expense 198,237 230,045 195,359 242,060 925,000Stock‐based compensation expense 200,041 192,378 208,725 251,984 360,000In‐process research and development impairment charges 136,000 26,630 ‐                       ‐                    ‐                  Excess tax benefits from stock‐based compensation (81,620) (40,848) (114,236) (278,773) (482,000)Tax benefits from employee stock plans 82,086 37,231 112,629 284,655 484,000         Deferred income taxes 12,152 64,061 (39,393) (98,181) (236,000)Change in fair value of contingent consideration 8,483 69,469 58,700 22,000Other 10,408 47,931 (1,878) 47,289 79,000

Changes in operating assets and liabilities:Accounts receivable, net (348,875) (375,736) 197,986 (315,299) (2,578,000)Inventories (161,190) (200,793) (349,924) (343,143) 143,000Prepaid expenses and other assets (70,466) (13,959) (129,318) (170,355) (371,000)Accounts payable (4,453) 428,944 117,485 (97,673) (289,000)Income taxes payable (185,733) 110,771 (68,473) 30,021 533,000Accrued liabilities 120,065 292,110 316,594 311,628 2,013,000Deferred revenues (29,728) (29,484) 23,245 22,145 31,000

Net cash provided by operating activities 2,833,913 3,639,010 3,194,716 3,104,988 12,818,000

Investing Activities:Purchases of marketable securities (5,502,687) (5,127,790) (1,244,898) (256,700) (2,107,000)Proceeds from sales of marketable securities 3,033,893 8,649,752 527,712 494,117 807,000Proceeds from maturities of marketable securities 683,927 788,395 44,813 77,655 52,000Purchases of other investments (25,000) (18,000)Acquisitions, net of cash acquired (91,000) (588,608) (10,751,635) (378,645)Capital expenditures (61,884) (131,904) (397,046) (190,782) (557,000)

Net cash provided by (used in) investing acitivites (1,937,751) 3,589,845 (11,846,054) (254,355) (1,823,000)

Financing Activities:Proceeds from debt financing, net of issuance costs 2,962,500 4,660,702 2,144,733 7,932,000Proceeds from convertible note hedges 155,425 36,148 213,856 2,774,402 2,543,000Proceeds from issuances of common stock 221,223 211,737 466,283 313,079 331,000Repurchases of common stock (4,022,593) (2,383,132) (667,041) (582,358) (5,349,000)Repurchases of convertible note hedges (362,622) (26,000)Repayments of debt financing (500,000) (686,135) (1,837,139) (4,439,891)Payments to settle warrants (1,039,695) (4,093,000)Repayments of other long‐term obligations (5,786) (1,562) (2,186) (77)Excess tax benefits from stock‐based compensation 81,620 40,848 114,236 278,773 (4,779,000)Contributions from (distributions to) 131,523 (115,037) 130,604 151,826 35,000            noncontrolling interestDividends paid ‐                    ‐                   ‐                       ‐                    ‐                  

Net cash provided by (used in) financing activities (1,338,710) 1,763,569 563,346 (2,543,941) (3,025,000)

Effect of exchange rate changes on cash 77,469 (16,526) 7,909 2,420 (56,000)Net change in cash and cash equivalents (365,079) 8,975,898 (8,080,083) 309,112 7,914,000Cash and cash equivalents at beginning of period 1,272,958 907,879 9,883,777 1,803,694 2,113,000Cash and cash equivalents at end of period $907,879 $9,883,777 $1,803,694 $2,112,806 $10,027,000

Supplemental disclosure of cash flow information:Interest paid, net of amounts capitalized $15,748 $62,180 $249,358 $238,325 $330,000Income taxes paid $1,129,577 $621,025 $1,101,241 $1,050,588 $2,060,000

$2,889,749

Gilead Sciences, IncCash Flow Statement

2015E 2016E 2017E 2018E 2019E 2020EOperating Activities:Net income 12,549,241 13,429,323 14,374,421 15,395,875 16,481,263 17,138,515

Adjustments to reconcile net income to net cash:Depreciation expense 447,470 40,073 42,878 45,879 49,091 30,016Amortization expense 775,110 720,852 670,393 623,465 579,823 539,235Change in Deferred Income Tax 177,000 41,100 14,522 14,812 7,554 22,890

Changes in working capital accountsChange in Receivables (517,230) (360,656) (713,612) (435,855) (91,169) (270,141)Change in Inventories (45,175) (100,182) (107,195) (114,699) (122,728) (75,039)Change in Prepaid Expenses 378,873 0 69,504 70,767 74,411 83,660Change in Income Taxes Payable (42,588) 12,315 20,555 (7,188) 10,325 6,251Change in Accounts Payable 476,175 406,454 128,634 488,289 171,819 105,055Change in Accrued Expenses 2,233,995 340,620 692,173 412,915 66,624 255,133Change in Other Current Assets (100,470) (40,073) (42,878) (45,879) (49,091) (30,016)Change in Deferred Revenues 113,357 (3,007) (3,989) 39,628 11,384 8,893Change in Other Noncurrent Liabilities (22,470) (40,073) (42,878) (45,879) (49,091) (30,016)Change in Other Current Liabilities 20,825 (100,182) (107,195) (114,699) (122,728) (75,039)

Net cash provided by operating activities 3,894,872 917,240 620,911 931,556 536,224 570,881

Investing Activities:Change in Short Term Investments 43,753 (4,007) (4,288) (4,588) (4,909) (3,002)Change in Long‐Term Assets 453,060 (80,146) (85,756) (91,759) (98,182) (60,031)Change in Other Assets 77,846 38,069 40,734 43,585 46,636 28,515Capital Expenditures (615,880) (160,292) (171,512) (183,518) (196,364) (120,063)

Net cash provided by (used in) investing acitivites (41,220) (206,375) (220,822) (236,279) (252,819) (154,581)

Financing Activities:Proceeds from debt financing, net of issuance costs 1,211,111 4,323,383 4,678,723 5,293,007 5,960,268 6,387,382Changes in Current Portion of Long Term Debt (434,000) (93,162) (332,568) (359,902) (407,154) (458,482)Proceeds from issuances of common stockRepurchases of common stock (3,000,000) (3,000,000) (3,000,000) (3,000,000) (3,000,000) 0Repayments of debt financing (1,632,928) (1,303,207) (935,862) (906,518) (823,774) (870,612)Dividends paid (1,938,386) (1,916,552) (1,897,619) (1,881,346) (1,867,514) (1,855,921)

Net cash provided by (used in) financing activities (5,794,203) (1,989,539) (1,487,326) (854,758) (138,174) 3,202,366

Net change in cash and cash equivalents 10,608,690 12,150,649 13,287,184 15,236,394 16,626,494 20,757,182Cash and cash equivalents at beginning of period 10,027,000 20,635,690 32,786,339 46,073,523 61,309,917 77,936,411Cash and cash equivalents at end of period 20,635,690 32,786,339 46,073,523 61,309,917 77,936,411 98,693,593

Supplemental disclosure of cash flow information:Interest paid, net of amounts capitalized 476,840 495,914 515,750 536,380 557,835 580,149Income taxes paid 3,120,464 3,341,058 3,577,207 3,830,006 4,100,625 4,264,250

Gilead Sciences, Inc.Common Size Income Statement

Fiscal Years Ending Dec. 31 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020EPeriod EndedRevenuesTotal Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of Revenue 23.52% 25.33% 25.47% 25.52% 15.22% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00%Gross Profit 76.48% 74.67% 74.53% 74.48% 84.78% 85.00% 85.00% 85.00% 85.00% 85.00% 85.00%

Operating ExpensesSelling / General / Administrative Expenses, Total 12.81% 14.37% 15.06% 15.17% 11.91% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00%Research & Development 11.61% 14.22% 18.14% 18.92% 11.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00%Unusual Expense (Income) 2.21% 0.88% ‐ ‐ 0.55% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total Operating Expense 50.16% 54.80% 58.67% 59.61% 38.67% 29.00% 29.00% 29.00% 29.00% 29.00% 29.00%Earnings from operations 49.84% 45.20% 41.33% 40.39% 61.33% 56.00% 56.00% 56.00% 56.00% 56.00% 56.00%Non‐Operating Expenses

Interest Income (Expense), Net‐Non‐Operating, Total 1.37% 2.45% 3.82% 2.87% 1.66% 1.67% 1.62% 1.57% 1.53% 1.49% 1.49%Other Non‐Operating Income (Expense) 0.76% 0.79% ‐0.29% 0.05% 0.01% 0.17% 0.16% 0.15% 0.14% 0.13% 0.13%

Net Income Before Taxes 49.23% 43.54% 37.23% 37.57% 59.69% 54.51% 54.54% 54.58% 54.61% 54.65% 54.64%Provision for Income Taxes 12.88% 10.28% 10.70% 10.27% 11.24% 10.90% 10.91% 10.92% 10.92% 10.93% 10.93%

Net Income After Taxes 36.35% 33.26% 26.53% 27.29% 48.45% 43.61% 43.64% 43.66% 43.69% 43.72% 43.71%Minority Interest 0.14% 0.17% 0.19% 0.16% 0.17% 0.24% 0.21% 0.20% 0.22% 0.21% 0.21%

Net Income 36.50% 33.43% 26.71% 27.45% 48.62% 43.84% 43.85% 43.86% 43.91% 43.93% 43.92%

Gilead Sciences, Inc.Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

AssetsCurrent AssetsCash & Equivalents 11.42% 117.87% 18.59% 18.86% 40.29% 72.01% 106.97% 140.51% 174.76% 207.62% 252.83%Short Term Investments 14.97% 0.20% 0.60% 0.17% 0.41% 0.20% 0.20% 0.20% 0.20% 0.20% 0.20%Account Receivables ‐ Net 20.40% 23.27% 18.05% 19.48% 18.62% 18.00% 18.00% 19.00% 19.00% 18.00% 18.00%Total Inventory 15.14% 16.58% 17.98% 15.15% 5.57% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%Deferred Income Tax  3.51% 2.48% 2.71% 2.95% 2.04% 2.39% 2.37% 2.26% 2.15% 2.03% 2.01%

Total Current AssetsProperty / Plant / Equipment, Total at cost 12.80% 13.51% 15.70% 11.33% 7.23% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%Less: Accumulated Depreciation 3.98% 4.27% 4.36% 0.92% 0.50% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%Property / Plant / Equipment, Total ‐ Net 8.82% 9.24% 11.34% 10.41% 6.73% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%Goodwill, Net 6.70% 11.97% 10.93% 10.44% 4.71% 4.09% 3.83% 3.58% 3.34% 3.12% 3.00%Intangibles, Net 11.23% 12.68% 120.96% 106.23% 44.49% 35.98% 31.27% 27.18% 23.62% 20.53% 18.36%Long Term Investments 40.50% 0.76% 7.42% 3.92% 6.42% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%Defered Income Tax ‐ Long Term Asset 1.93% 1.72% 1.35% 1.70% 0.95% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%Other Long Term Assets 4.84% 4.00% 3.45% 3.20% 2.51% 2.46% 2.42% 2.39% 2.35% 2.32% 2.31%

Total Assets 145.83% 206.35% 218.91% 200.13% 138.84% 160.48% 190.18% 220.25% 250.57% 278.98% 321.95%Liabilities

Current LiabilitiesAccounts Payable 10.10% 14.38% 13.68% 11.21% 3.84% 0.05 0.06 0.06 0.07 0.07 0.07Accrued Expenses 11.45% 14.15% 16.18% 20.82% 10.57% 0.17 0.17 0.18 0.18 0.17 0.17Current Portion of LTD / Capital Leases 8.13% 0.02% 12.05% 24.08% 1.94% 3.20% 3.30% 4.10% 4.86% 5.62% 6.58%Customer Advances 1.30% 0.89% 1.06% 0.99% 0.54% 0.86% 0.80% 0.73% 0.80% 0.78% 0.77%Income Taxes Payable 0.02% 0.48% 0.14% 0.10% 0.42% 0.22% 0.24% 0.29% 0.25% 0.26% 0.27%Other Current Liabilities ‐‐ 0.06% 0.56% 9.56% 5.83% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%

Total Current Liabilities 31.01% 29.99% 43.68% 57.20% 23.15% 31.29% 32.34% 34.12% 35.91% 35.66% 36.62%Long Term Debt 35.71% 90.70% 72.71% 35.16% 47.89% 45.88% 56.99% 67.54% 78.22% 88.99% 101.93%Minority Interest 3.25% 1.53% 2.49% ‐‐ 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other Long Term Liabilities 2.10% 3.76% 2.65% 2.17% 2.21% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%

Total Liabilities 72.07% 125.98% 122.82% 96.72% 75.71% 81.36% 93.53% 105.86% 118.32% 128.85% 142.75%Equity 0.00% 0.00% 0.00% 0.00% 0.00%

Common Stock 0.01% 0.01% 0.02% 0.02% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01%Additional Paid‐In Capital 58.47% 58.47% 58.16% 48.10% 9.61% 8.36% 7.81% 7.30% 6.83% 6.38% 6.14%Retained Earnings (Accumulated Deficit) 14.89% 21.19% 38.18% 54.51% 51.15% 81.55% 108.72% 134.82% 159.90% 183.97% 211.73%Unrealized Gain (Loss) 0.48% 0.84% ‐0.46% ‐1.11% 1.21% 1.05% 0.98% 0.92% 0.86% 0.80% 0.77%Translation Adjustment ‐0.09% ‐0.15% ‐0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other Equity, Total ‐0.09% ‐0.15% ‐0.01% ‐3.35% ‐1.58% ‐1.37% ‐1.28% ‐1.20% ‐1.12% ‐1.05% ‐1.01%

Total Equity 73.67% 80.22% 95.88% 98.17% 60.41% 79.12% 96.65% 114.38% 132.24% 150.13% 179.20%Total Liabilities & Shareholders' Equity 145.83% 206.35% 218.91% 201.57% 139.27% 1.6048181 1.9018403 2.2024596 2.505683 2.7897633 3.2194877

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol GILDCurrent Stock Price $101.09Risk Free Rate 2.51%Current Dividend Yield 0.00%Annualized St. Dev. of Stock Returns 38.80%

Average Average B‐S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 39,144 22.63 3.80 80.73$        2,804,000$      Range 2Range 3Range 4Range 5Range 6 ‐$                  Range 7 ‐$                  Range 8 ‐$                  Range 9 ‐$                  Range 10 ‐$                  Range 11 ‐$                  Range 12 ‐$                  Range 13 ‐$                  Range 14 ‐$                  Total 39,144 22.63$        3.80 80.73$        2,804,000$      

Gilead Sciences, Inc.Value Driver Estimation

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

NOPLAT Computation:

EBITA:Net Sales 9,702,520         11,201,690       24,890,000    28,623,500    30,627,145    32,771,045    35,065,018    37,519,570    39,020,352   ‐Cost of Products Sold 2,471,360         2,858,500         3,788,000       4,293,525       4,594,072       4,915,657       5,259,753       5,627,935       5,853,053      ‐Operating Expenses 5,692,340         6,677,690         9,625,000       8,300,815       8,881,872       9,503,603       10,168,855    10,880,675    11,315,902   +Implied Interest on Operating Leases 25,217              25,590              105,907          113,320          121,253          129,741          138,822          144,375          ‐                 EBITA 1,564,037         1,691,090         11,582,907    16,142,480    17,272,454    18,481,526    19,775,233    21,155,334    21,851,397   

Less: Adjusted Taxes:Provision for Income Taxes 1,038,380         1,150,930         2,797,000       3,120,464       3,341,058       3,577,207       3,830,006       4,100,625       4,264,250      +Tax Shield on Interest Expense 74,092              64,360              82,400            95,368            99,183            103,150          107,276          111,567          116,030         +Tax Shield on Implied Lease Interest 5,043                5,118                21,181            22,664            24,251            25,948            27,764            28,875            ‐                 ‐Tax on Other Interest Income (Expense) (5,548)               1,204                600                 10,000            10,000            10,000            10,000            10,000            10,000           Adjusted Taxes 1,123,063         1,219,204         2,899,981       3,228,496       3,454,491       3,696,305       3,955,047       4,231,067       4,370,279      

Plus: Change in Deferred Tax (DT) LiabilitiesDT Liabilities 10,190              72,810              (32,000)           6,247              4,007              4,288              4,588              4,909              3,002             DT Current Assets (54,481)             (68,359)             (177,000)         (177,000)         (41,100)           (14,522)           (14,812)           (7,554)             (22,890)          DT Long‐Term Assets 12,910              (58,890)             (46,000)           (50,235)           (20,036)           (21,439)           (22,940)           (24,546)           (15,008)          Net DT Liabilities (31,381)             (54,439)             (255,000)         (220,988)         (57,129)           (31,673)           (33,164)           (27,191)           (34,896)          

Net Change in DT Liabilities (1,455,961)        (23,058)             (200,561)         34,012            163,859          25,456            (1,491)             5,973              (7,705)            

NOPLAT: EBITA‐Adjusted Taxes+Change in DT 409,593            417,447            8,427,926       12,692,996    13,760,834    14,753,547    15,787,022    16,897,077    17,446,222   

Invested Capital Computation:

Operating Current Assets:Normal Cash (lesser of actual or 2%) 485,126            560,085            1,244,500       1,431,175       1,531,357       1,638,552       1,753,251       1,875,978       1,951,018      Accounts Receivable, Net 1,751,383         2,182,000         4,635,000       5,152,230       5,512,886       6,226,499       6,662,353       6,753,523       7,023,663      Inventory 1,744,982         1,697,000         1,386,000       1,431,175       1,531,357       1,638,552       1,753,251       1,875,978       1,951,018      Prepaid Expenses 450,784            564,000            585,000          987,991          987,991          1,058,810       1,134,503       1,215,416       1,301,919      Other Current Operating Assets 84,302              91,000              472,000          572,470          612,543          655,421          701,300          750,391          780,407         Operating Current Assets 4,516,577         5,094,085         8,322,500       9,575,041       10,176,134    11,217,834    12,004,659    12,471,287    13,008,024   

Operating Current Liabilities:Accounts Payable 1,327,340         1,256,000         955,000          1,431,175       1,837,629       1,966,263       2,454,551       2,626,370       2,731,425      Accrued Expenses 1,569,890         2,332,000         2,632,000       4,865,995       5,206,615       5,898,788       6,311,703       6,378,327       6,633,460      Deferred Revenue 103,160            111,000            134,000          247,357          244,350          240,361          279,988          291,372          300,265         Income Taxes Payable 13,400              11,000              105,000          62,412            74,727            95,282            88,094            98,419            104,670         Operating Current Liabilities 3,013,790         3,710,000         3,826,000       6,606,938       7,363,320       8,200,693       9,134,336       9,394,487       9,769,819      

Net Operating Working Capital 1,502,787         1,384,085         4,496,500       2,968,102       2,812,814       3,017,141       2,870,322       3,076,800       3,238,205      

Plus: Net PPE 1,100,260         1,166,000         1,674,000       2,289,880       2,450,172       2,621,684       2,805,201       3,001,566       3,121,628      

Plus: PV of Operating Leases 188,428            200,723            572,470          612,543          655,421          701,300          750,391          780,407          ‐                 

Plus: Other Oper. Assets 12,071,367       12,257,953       11,698,187    11,000,924    10,318,140    9,688,482       9,108,602       8,575,416       8,064,696      

Invested Capital: 14,862,842       15,008,760       18,441,157    16,871,448    16,236,547    16,028,607    15,534,518    15,434,189    14,424,530   

Value Drivers:

ROICNOPLAT 409,593            417,447            8,427,926       12,692,996    13,760,834    14,753,547    15,787,022    16,897,077    17,446,222   Beginning Invested Capital 3,603,049         14,862,842       15,008,760    18,441,157    16,871,448    16,236,547    16,028,607    15,534,518    15,434,189   ROIC 11.37% 2.81% 56.15% 68.83% 81.56% 90.87% 98.49% 108.77% 113.04%

EPNOPLAT 409,593            417,447            8,427,926       12,692,996    13,760,834    14,753,547    15,787,022    16,897,077    17,446,222   Beginning Invested Capital 3,603,049         14,862,842       15,008,760    18,441,157    16,871,448    16,236,547    16,028,607    15,534,518    15,434,189   WACC 7% 7% 7% 7% 7% 7% 7% 7% 7%EP 149,225 ‐656,591 7,343,343 11,360,377 12,541,647 13,580,241 14,628,742 15,774,501 16,330,896

FCFNOPLAT 409,593            417,447            8,427,926       12,692,996    13,760,834    14,753,547    15,787,022    16,897,077    17,446,222   Change in Invested Capital 11,259,793       145,919            3,432,397       (1,569,709)      (634,901)         (207,941)         (494,089)         (100,329)         (1,009,659)     FCF (10,850,200)      271,528            4,995,529       14,262,705    14,395,736    14,961,488    16,281,111    16,997,406    18,455,881   

Gilead Sciences, Inc.Relative Valuation Models

EPS EPS Est. 5yrTicker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr. PEG 15 PEG 16AMGN Amgen Inc. $155.49 $9.31  $10.48  16.7          14.8          11% 151.83      134.88     BIIB Biogen Inc.  $413.85 $16.92  $19.87  24.5          20.8          18% 135.88      115.71     GSK GlaxoSmithKline $46.94 $2.73  $3.10  17.2          15.1          14% 122.82      108.16     ACT Actavis PLC $299.48 $17.58  $21.28  17.0        14.1        18% 94.64      78.19     

Average 18.8        16.2        126.3      109.2     

GILD Gilead Sciences, Inc. $101.09 $8.35  $9.04  12.1          11.2          7.4% 164.4        151.9       

Implied Value:   Relative P/E (EPS15) $  157.41    Relative P/E (EPS16) 146.61$     PEG Ratio (EPS15) 77.64$       PEG Ratio (EPS16) 72.68$    

Gilead Sciences, Inc.Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E

EPS 8.35$       9.04$       9.77$       10.56$    11.38$    11.91$   

Key Assumptions   CV growth 4.00%   CV ROE 27.15%   Cost of Equity 7.96%

Future Cash Flows     P/E Multiple (CV Year) 21.52     EPS (CV Year) 11.91$        Future Stock Price 256.40$      Dividends Per Share 1.29 1.72 1.72 1.72 1.72 256.40$ Number of Periods 1 2 3 4 5 5

     Discounted Cash Flows 1.19$       1.48$       1.37$       1.27$       1.17$       174.81$ 

Intrinsic Value 181.29$ Fraction of year elapsed  0.304

Adjusted Stock Price (as of 04/21/2015) 185.19$ 

Gilead Sciences, Inc.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:     CV Growth 4.00%     CV ROIC 113.31%     WACC 7.23%     Cost of Equity 7.96%

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E

DCF ModelEBIT                      16,142,480            17,272,454            18,481,526            19,775,233            21,155,334              21,851,397 Less: Taxes                         3,228,496              3,454,491              3,696,305              3,955,047              4,231,067                4,370,279 

Tax Adjusted EBIT                      12,913,984            13,817,963            14,785,221            15,820,186            16,924,267              17,481,118 Plus: D&A                            447,470                   40,073                   42,878                   45,879                   49,091                      30,016 Less: Capex 615,880                            160,292                171,512                183,518                196,364                120,063                  Less: Change in Working Capital (1,552,515)                       (155,288)               203,012                (151,745)               199,976                158,563                  

Unlevered Free Cash Flow 14,298,089                      13,853,033           14,453,575           15,834,293           16,577,019           248,007,009          

Periods to Discount 1                                         2                             3                             4                             5                             5                              PV of Cash Flows 13,334,494.63                 12,048,749.10     11,723,868.66     11,978,236.47     11,694,972.16     174,967,231.71     Total PV of Cash Flows 235,747,553                   Less: LT Debt 13,132,111                      Less: PV operating leases 263,197                           Enterprise Value 222,352,245                   Shares Outstanding 1,502,625                        Intrinsic Stock Value 148Fraction of year elapsed  0.304

Adjusted Stock Price (as of 04/21/2015) 151.09$                          

EP ModelBeginning Invested Capital 18,441,157 Economic Profit 11,360,377 12,543,390 13,581,984 14,630,580 15,776,695 16,333,560 Continuing Value (CV) 235,069,524

WACC 7.23%EP to Discount 11,360,377 12,543,390 13,581,984 14,630,580 15,776,695 235,069,524 Number of Periods 1 2 3 4 5 5 Present Value of Economic Profit 10,594,764.49 10,909,680.61 11,016,886.14 11,067,658.28 11,130,349.22 165,839,925.53

PV of EP 220,559,264

Value of operating assets 239,000,421 Less: long term debt 13,132,111 Less: PV operating leases 263,197 Value of Equity 225,605,113 19,783,023 Shares Outstanding 1,502,625 Intrinsic Value of Stock 148 Fraction of year elapsed  0.304

Adjusted Stock Price (as of 04/21/2015) 151.09$                          

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

Number of Options Outstanding (shares):  39,144Average Time to Maturity (years): 3.80Expected Annual Number of Options Exercised: 10,301

Current Average Strike Price: 22.63$        Cost of Equity: 9.00%Current Stock Price: $101.09

2015E 2016E 2017E 2018E 2019E 2020EIncrease in Shares Outstanding: 10 10 10 10 10 10Average Strike Price: 22.63$         22.63$         22.63$         22.63$         22.63$         22.63$        Increase in Common Stock Account: 233             233             233             233              233             233            

Change in Treasury Stock 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000Expected Price of Repurchased Shares: 101.09$       110.19$       120.11$       130.91$        142.70$       155.54$      Number of Shares Repurchased: 30                27                25                23                 21                19               

Shares Outstanding (beginning of the year) 1,522 1,503 1,486 1,471 1,458 1,448Plus: Shares Issued Through ESOP 10 10 10 10 10 10Less: Shares Repurchased in Treasury 30                27                25                23                 21                19               Shares Outstanding (end of the year) 1,503 1,486 1,471 1,458 1,448 1,439

Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012) Present Value of Operating Lease Obligations (2011) Present Value of Operating Lease Obligations (2010)

Operating Operating Operating Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending 159.737266578493 Leases Fiscal Years Ending  Leases Fiscal Years Ending 151.048211434253 Leases2015 58,000            2014 48,976              2013 47,009              2012 43,635              2011 45,887             2016 53,000            2015 46,345              2014 42,947              2013 36,302              2012 37,733             2017 49,000            2016 41,384              2015 37,566              2014 30,027              2013 29,648             2018 36,000            2017 32,482              2016 26,648              2015 23,961              2014 21,477             2019 33,000            2018 25,204              2017 19,211              2016 17,814              2015 19,078             Thereafter 73,000            Thereafter 31,922              Thereafter 40,264              Thereafter 53,215              Thereafter 57,344             Total Minimum Payments 302,000         Total Minimum Payments 226,313           Total Minimum Payments 213,645           Total Minimum Payments 204,954           Total Minimum Payments 211,167           Less: Interest 38,803            Less: Interest 25,590              Less: Interest 25,217              Less: Interest 26,724              Less: Interest 27,730             PV of Minimum Payments 263,197         PV of Minimum Payments 200,723           PV of Minimum Payments 188,428           PV of Minimum Payments 178,230           PV of Minimum Payments 183,437           

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre‐Tax Cost of Debt 3.93% Pre‐Tax Cost of Debt 3.93% Pre‐Tax Cost of Debt 3.93% Pre‐Tax Cost of Debt 3.93% Pre‐Tax Cost of Debt 3.93%Number Years Implied by Year 6 Payment 2.21 Number Years Implied by Year 6 Payment 1.27 Number Years Implied by Year 6 Payment 2.10 Number Years Implied by Year 6 Payment 2.99 Number Years Implied by Year 6 Payment 3.01

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 58,000                 55,807            1 48,976              47,124              1 47,009              45,231              1 43,635              41,985              1 45,887            44,152             2 53,000                 49,068            2 46,345              42,906              2 42,947              39,760              2 36,302              33,608              2 37,733            34,933             3 49,000                 43,649            3 41,384              36,865              3 37,566              33,464              3 30,027              26,748              3 29,648            26,410             4 36,000                 30,856            4 32,482              27,841              4 26,648              22,840              4 23,961              20,537              4 21,477            18,408             5 33,000                 27,215            5 25,204              20,786              5 19,211              15,843              5 17,814              14,691              5 19,078            15,734             6 & beyond 33,000                 56,603            6 & beyond 25,204              25,202              6 & beyond 19,211              31,289              6 & beyond 17,814              40,660              6 & beyond 19,078            43,800             PV of Minimum Payments 263,197         PV of Minimum Payments 200,723           PV of Minimum Payments 188,428           PV of Minimum Payments 178,230           PV of Minimum Payments 183,437           

Gilead Sciences, Inc.Weighted Average Cost of Capital (WACC) Estimation

WACC= 7.23%

Equity:Beta 1.18 Beta:Risk-Free 2.51% Unlevered 1.06Equity risk premium 4.62% Levered 1.18Cost of Equity 7.96%

Share Price $101.09Shares Outstanding 1,502,625Market Cap 151,900,313$

Debt:Pre-Tax Cost of Debt 3.93%Tax Rate 20%After-tax Cost of Debt 3.14%

Book Value of Debt 13,132,111$ Capitalized Operating Leases 263,197 Enterprise Value 165,295,621$

% Debt 8.10%Weight of Equity 91.90%

Gilead Sciences, Inc.Key Management Ratios

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Liquidity RatiosCurrent Ratio = CA/CL 1.45 1.09 3.07 3.29 4.26 5.05 5.75 6.68 7.74Quick Ratio = (CA‐INV)/CL 1.04 0.83 2.83 3.13 4.11 4.90 5.61 6.54 7.60Working Capital = CA ‐ CL 1,918,442         590,000   11,953,000   20,542,572   32,289,513   45,251,561   59,766,312   75,952,635   96,285,711  Activity or Asset‐Management RatiosAsset Turnover Ratio = Total Revenue/Total Assets 0.46 0.50 0.72 0.62 0.53 0.45 0.40 0.36 0.31Cash/Asset Ratio = Cash & Cash equiv + ST investements / CL 0.44 0.33 1.76 2.31 3.31 4.12 4.87 5.83 6.91Financial Leverage RatiosDebt to Equity = Total Liabilities/Total Equity 1.28 0.99 1.25 1.03 0.97 0.93 0.89 0.86 0.80Debt ratio = Total Debt/Total Assets 0.33 0.18 0.34 0.29 0.30 0.31 0.31 0.32 0.32Interest Coverage Ratio = EBITA/Int. Expense 4.22 5.26 28.11 33.85 34.83 35.83 36.87 37.92 37.67Profitability RatiosGross Margin = (Rev‐COGS)/Revenues) 74.53% 74.48% 84.78% 85.00% 85.00% 85.00% 85.00% 85.00% 85.00%Operating Margin = Operating Income/Net Sales 41.33% 40.39% 61.33% 56.00% 56.00% 56.00% 56.00% 56.00% 56.00%Net Margin = Net Profit/Revenues 26.71% 27.45% 48.62% 43.84% 43.85% 43.86% 43.91% 43.93% 43.92%Return on Assets = Net Income/Avg Total Assets 13.45% 14.09% 42.48% 31.18% 25.78% 22.04% 19.24% 17.12% 14.88%Return on Equity = Net Income/Avg Total SE 32.34% 30.29% 92.97% 66.61% 51.41% 42.85% 36.72% 32.10% 27.15%Payout Policy RatiosDividend Payout = Dividends per share/EPS 0.00% 0.00% 0.00% 15.45% 14.27% 13.20% 12.22% 11.33% 10.83%