EFTA00598622.pdf

Morgan Stanley MORGAN STANLEY RESEARCH NORTH AMERICA 7.1;r4.-.713er Jey e C.; _LC. Matthew Harrison • David Friedman. M. J , 21 2: I - Stock Rating Gilead Sciences Inc. Equal-weight Industry View HCV Still Near and LT Focus In-Une Key Ratios and Statistics Upside Sovaldi (4611M vs cons) drove a $0.57 Reuters: GILD.O Bloomberg: GILD US EPS beat: Sovaldi (4611M), Truvada (+$18M), Viread Biotechnology / United Stales of America (+$24M) and Complera (+$22M) drove the $685M rev Shr price. close (Jul 23. 2014) $90.34 beat vs cons. Better gross margins (89% vs MSe 86%) Mkt cap. curt (mm) $152.143 and a lower tax rate (14.6% with a 1 qtr 3.6% catch-up) 62-Week Range $90.74-55.96 represented the majority of the delta between our $2.14 and Gilead's reported EPS of $2.36. Mgt. also gavels' Fiscal Year ending 12/3 12/14e 12/15e 12/16e time guidance incorporating Sovaldi with revs of $21- ModelWare EPS (5) 2.05 8.16 9.19 10.17 23B (prior $11.3-11.56). This suggests 2H Sovaldi revs Prior ModelWare EPS ($) 7.58 8.42 9.64 of -'$3.945-5.745B, below the 1H total of $5.7558. Mgt. PIE 36.7 11.1 9.8 8.9 cited warehousing and inventory destocking ahead of Consensus EPS ($)§ 1.98 6.73 8.22 9.35 the all-oral launch as potential contributing factors. Div yld (%) 0.0 - 0.5 1.2 Unless othenvaa noted. all metrics ate based on Morgan Stanley ModetWare Sovaldi still the centerpiece: Near and long-term framework (please see explanabon later in Ills note) Sovaldi sales continue to dominate the debate. On the § a Consensus data is provided by Thomson Reuters Estrne: a a Morgan Stanley Research estimates near-term, guidance seems to imply a seq. deceleration for 3O followed by an uptick in 4O after the all-oral launch, inline with our model. Hwr, with the implied 2H run-rate below 1H reported sales, it appears a modest disappointment vs high expectations. Nonetheless, sig. investor expectations for an early all-oral approval ahead of the 10/10 PDUFA (and the assoc sales bolus) is likely to offset any guidance concerns. While we agree early approval could represent 2014 upside, it could conversely make the 2015 comp that much harder. On the LT, our view remains that there are risks to sustainability of the HCV franchise. Separately, the early approval of idelalisib (CLL & iNHL) was a nice positive offset by the boxed warning and REMS. We still see it as a 10-15% mkt share drug with $1B+ pot. Capital allocation continues to represent the other LT driver, but mgt. Isn't pointing to a deal: While mgt. repurchased 15.2M shares in the qtr ($1.28) and said it will finish another $1.78 in buybacks by Sept., a near-term deal to ease LT Sovaldi tail concerns didn't appear immine a see continued investor focus on dividends and as the cash from Sovaldi builds. We expect a muted stock reaction even as Sovaldi delivered given high expectations: We believe cons Morgan Stanley does and seeks to do business with expectations of a Sovaldi beat have been a major companies covered in Morgan Stanley Research. As driver of GILD over the last few weeks, thus the beat a result. investors should be aware that the firm may have a conflict of interest that could affect the was widely expected. With guidance not suggesting sig. objectivity of Morgan Stanley Research. Investors upside to cons, we expect GILD to not move much should consider Morgan Stanley Research as only a tomorrow. Our 2014E/2015E EPS ests move modestly single factor in making their investment decision. higher to $8.17/$9.19 ($7.58/$8.43 prior) on tax-rate, For analyst certification and other important gross margin and share count changes to our model. disclosures. refer to the Disclosure Section, lo cated at the end of this report. EFTA00598622 Morgan Stanley MORGAN STANLEY RESEARCH July 23. 2014 Gilead Sciences Inc. Risk-Reward Snapshot: Gilead (GILD, EW, PT $81) Sovaldi peak and duration, HIV patent expirations drive Risk-Reward Investment Thesis Exhrlal 1 S 160 We are EW Gilead as we believe some of the risks around HCV have been 140 overlooked suggesting risk to out-year estimates. This is balanced by the 120 potential for a solid hemionc franchise in 100 idelalisib and time to switch HIV patients away from therapies that go generic. 60 • HCV (Sovaldi): HCV demand is off to a 60 strong start with sales likely of at least $10B in the first year. That said, we 40 don't have confidence that peak 20 revenues will continue after all the patients in care are treated (-2017E). 0 We highlight risks on multiple fronts JS-12 Jan-13 Jul-13 Jan-14 Jul 14 Jan-15 Jul-1S including pricing. competition and high • FiriooTanpi(Jul-15) 1.1abmiceiSiod.Poitomionoo • CocroniSiockPeco consensus expectations. Source: Morgan Slarty Research estimates. Thomson Reuleis Price We derive our PT from a discounted cash flow analysis that uses a WACC of 10•% and • HIV: Gilead has done a good job of Target a 2% terminal growth rate. The main drivers are the HIV franchise and Sovaldi. switching naïve patients to the new $81 STRs (Stribild and Complera), but The number of treated HCV patients do not decline post 2017E TruvadaiAtripla still hold -60% of the Bull DCF Case and competition is less robust; Gilead transitions more than market right now. which means a half of HIV sales to new regimens We assume: significant number still need to be $145 1) -35B in 2020E antiviral sales. of which 6168 is from HCV. switched. This is a potential source of 2) The number of naive US HCV patients treated is stable at -2001vyr. LT risk. However. there is still time and 3) HCV pricing is not impacted by competition, and we've yet to get all the TAF data. 4) CompleraiEvipleraiStribild/TAF take -60% patient share of HIV Base DCF US treated HCV patients decline modestly post 2017E, around • Oncology (Idelalisib): We believe Case half of HIV sales are transltioned to new regimens. We assume: idelalisib can be a $1-2B US asset. 1) -208 in 2020E antiviral sales. of which -$62 is from HCV. $81 2) The number of naive US HCV patients treated declines to That said. duration of therapy is -115Wyr. currently unclear (the major driver of 3) HCV pricing is modestly impacted by competition (-15%). and sales) given the liver function issues. If 4) ComplerarEvipleraiStribild/TAF take -35% patient share of HIV LFTs cause short duration. there could Bear DCF Rapid peak and then erosion of the HCV market, HIV cliffs: be downside to sales. However. we Case 1) -9B in 2020E antiviral sales. of which -$500M is from HCV. note expectations are modest. 2) The number of naive US HCV patients treated declines to $34 baseline. 3) HCV pricing/share is aggressively impacted by competitors (- Risks to our price target 70%). 1) A longer peak to HCV sales. 2) A 4) ComplerarEviplera/Stribild/TAF take -20% patient share of HIV higher peak of HCV sales followed by a rapid decline. 3) Unexpected toxicity or competition in HCV, 4) Unexpected toxicity in idelalisib, 5) Early pipeline success for simtuzumab 2 EFTA00598623 Morgan Stanley MORGAN STANLEY RESEARCH July 23. 2014 Gilead Sciences inc. Exhibit 2 Gilead 2014 Variance MSe 2O14E 2O14A Consensus MSe %YiY Actual % Y/Y Difference 2O14E* Difference Product Sales (WW): Atripla $923 -2% $871 -7% -6% $875 ($4) 0% Tmvada $807 0% $807 0% 0% $789 $18 2% Viread $269 8% $261 4% -3% $237 $24 10% CompleraiEviplera $265 40% $299 59% 13% $277 $22 8% Stribild $248 150% $270 171% 9% $262 $7 3% Sovaldi 53.625 NM $3,481 NM -4% $2.870 $611 21% Other $30 NM $24 •13% •19% Total Antiviral Products $6.197 168% $6,012 160% .3% Letairis $156 22% $145 13% -7% $134 $11 8% Ranexa $129 21% $122 14% •5% $119 $3 2% AmBisome $89 18% $95 26% 7% $87 $7 8% Cayman $40 18% $39 16% -2% Other $1 •13% $0 NM MN Total Product Sales $6.612 149% $6.413 141% •3% $340 56.073 1784% Royalty. Contract. Other Revs $93 •16% $122 11% 31% Total Revenues $6.705 142% $6,535 136% -3% $5.850 $685 12% COGS $927 40% $723 9% -22% Gross Profil $5.778 174% $5,812 176% 1% M $575 18% $542 11% -6% SG&A $535 42% $569 51% 6% Operating Income $4,668 276% $4,701 278% 1% Interest Expense. Nel ($76) NM ($102) NM 34% Other Income (Expense). Nel ($20) NM ($4) NM -82% Pretax Income $4,572 293% $4,595 295% 1% Taxes $963 192% $671 104% -30% Tax tale 2f% •26% 15% -48% -31% Net loss from noncontroiling interest ($5) NM ($5) NM 6% Net Income (Non-GAAP) $3,613 330% $3,930 368% 9% Non-GAAP EPS (excl. options) $2.14 331% $2.36 376% 11% $1.79 $0.57 32% GAAP EPS $1.96 331% 52.20 382% 12% Diluted Shares Outstanding 1678 1663 NM Gross Margin 86% 13% 89% 17% 3% 85% M (% of Sales) 9% •51% 8% -53% -3% SG&A (% of Sales) 8% -41% 9% -36% 9% Operating Margin 70% 55% 72% 60% 3% Seine: Company Dela. Morgan Santry Research 3 EFTA00598624 Morgan Stanley MORGAN STANLEY RESEARCH July 23. 2014 Gilead Sciences Inc. Exhitin 3 Gilead Income Statement 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E GIN% Scene $1410inen1 10144 20144 3014E 4014E Produci5.0% 6.469 7.350 8002 9.3% 10.804 4171 6.413 5.796 7.672 24.813 27.797 29.280 26.763 25.286 22933 22660 Rey=0•1441(1011* MM.* 542 559 283 301 316 128 122 71 43 365 377 390 403 418 433 448 Toll R.ynae 7.011 7949 8.385 9.7% 11902 4.999 6.636 6867 7.716 25.171 26.174 29.670 27.166 25.703 23.364 23.100 5.530 6257 22.628 0008 1.533 1.793 2.046 2.401 2.708 611 723 964 1.233 3.532 4.679 4.909 4.647 4.544 4.434 4.491 Or048 P7041 6481 1157 1339 7.302 8.493 4.388 5.812 4.903 6.482 21.646 23.495 24,761 22519 21.159 18932 18.618 631 839 1.119 1.4% 1.948 558 542 600 660 350 2.515 2.691 2325 2.896 2.968 3.042 Go, 061044101 32 3-2.4B $06A 820 913 1.091 1.226 1.557 500 569 2.703 2.973 3.121 3.090 3.059 3.029 Operailna Income 3.430 4.405 4.126 41490 4.988 3930 4.701 663 5.161 15.946 18.278 19.098 16972 16.173 12.961 12447 Mem, 4/wee -70 -109 -182 .307 -76 '102 -102 .82 363 -400 383 364 .341 -343 -332 Cesar income (emonso. nal 42 60 67 .37 -20 -4 67 30 123 239 325 371 376 356 Pian none 1803 4357 4011 4.189 4.673 3934 4.595 3.587 5.136 16.614 16.000 19.954 16934 15.202 12.939 12971 Tates 950 1.154 987 1.123 1.240 751 671 636 663 3.020 2.732 2.308 1.848 1.851 1.705 1.782 Tar Rate 25% 26% 15% 17% 17% 22% 15% It% 77% 032% 15% /2% //IS /2% 13% 14% Net Moose 0.644,10) 2443 3.203 3.024 3036 3.433 2.483 15268 18.645 14486 13.350 11233 10.789 Na loss Inn noncortrohna emoted. '10 '12 'IS 44 '18 5 5 5 II 'II 'II 0 0 0 0 NM Income 10 Gilead 61440-08.481 2853 9,214 AO* 3,004 3.451 Mae 3230 2.957 4.213$ 13.611 11286 16863 14.686 13.350 11233 10.789 7k4semp tPs5na 0646580 $584 $183 096 82.0$ $1.48 1136 11.78 1296 $8.17 $9.19 $10.18 1932 96.96 18.05 1840 ipallesus 1.62 7.94 6.73 8.23 935 M75 Nen gaap EPS(al. omons) $1.46 $1.76 EIS $1.73 61.91 $1.44 $232 $1.74 $253 5901 5333 59,94 6905 $166 $788 $787 GOAP EP5 Owl comes/ $1.41 $1.66 $1.77 $1.64 41.32 $1.32 $220 $1.60 $249 $7.97 $5.98 $9.94 $805 $4.64 $788 $7.86 Eitiee %OM • GAAP 1409 1.712 1.615 1.515 1.529 1.537 1.533 1.532 1.531 1.526 1523 1.499 1.443 1.366 1278 1.190 MAW Shares. CIAAP 1ass 1.747 1.550 1.583 1.686 1.680 1.664 1.663 1.662 1667 1.664 1.638 1576 1.491 1.397 1,300 DAM Shares- eon4144P 1.818 1.743 1.576 1.590 1.685 1.679 1.663 1.662 1.661 1.626 1.663 1.637 1.576 1.490 1.396 1.300 COGS (poaduci revensa) 24% 24% 25% 28% 25% 13% 11% 24% 26% 25% 25% 25% 25% 25% 24% 26% Goss Mamie (Mel awenue) 78% 77% 78% 75% 76% 88% 89% 84% 84% 86% 83% 83% 83% 82% 81% 81% Co. Oulciance 85-88% A (es 3%43 44881 12% 11% 19% 13% 14% 10% 9% 14% 14% 14% 14% 14% 14% 14% 14% S (es a %Oita%) Operang lMrgm 12% 55% 11% 55% 13% 49% 15% 47% 17% 45% 11% 67% 8% 72% 18% 63% 15 16% 67% 17% 67% 17% 65% 17% 64% 17% 61% 17% 59% 17% 55% 17% 54% 58170.0 slaty 58% 59% 53% 50% 48% 69% 73% 65% 68% 69% a% 66% 63% 61% 91% 57% Nel /Malin 41% 40% 36% 32% 31% 50% 60% 50% 55% 54% 54% 66% 54% 52% 48% 47% "'" ."7-6(11/1• Nei 120(11.1617611619 27% 14% 10% 16% 15% 104% 141% 114% 152% 133% 12% 5% -9% 4% 4% Total revenue 31% 13% 5% 16% 15% 97% 136% 111% 147% 125% 12% 5% 41% 4% .1% COGS 37% IT% 14% 17% 13% 0% 9% 46% 59% 30% 32% 5% 4% 1% - 3064 27% 14% 1% 11% 33% 34% 12% 30% 21% 50% 11% 23% 27% 42% 21% 7% 7% 5% 2% -1% 2% 2% -1% 20% V% 51% 62% 51% 15% 10% 5% -1% 00On% AS& OMIT/ 3% 1% -11% -4% 4% 50% 60% 39% 53% 51% -4% -1% 4% -3% 4% -2% ESIMAmarqn 3% 2% .10% 4% -5% 43% 53% 34% 47% 45% -4% •1% .5% -3% .5% 3% Seine: Germany Dela Morgan Stanley Research EFTA00598625 Morgan Stanley M0RGAN STANLEY RESEARCH July 23. 2014 Gilead Sciences Inc. EPhitA 4 Gilead Product Revenues (1 of 2) Product Revenue 20094 2010A 2011A 2012A 20134 2014E 2015E 2016E 2017E 2018E 2018E 2020E 1014 2014 3014E 4014E woe 2,382 2927 3,225 3.574 3,648 780 871 917 1.009 3,577 3,572 3,559 3405 3,331 2.741 2,534 US (2021 Expiator') 1.646 1.909 2.022 2253 2.356 490 sea 610 678 2.356 2.447 2.507 2505 2.503 2.500 2.497 EU (2018 Expkarn:nl 678 910 1.043 1.103 1,062 237 234 237 270 978 869 782 717 573 177 20 ROW 59 106 160 219 231 53 56 71 61 243 256 269 283 255 64 16 Runde 2,490 21650 2,875 3.181 3,136 760 807 803 799 3,169 3,140 3,125 3.124 2,779 2.139 1,892 US (2021 Expired:ell 1.178 1.309 1.385 1813 1.570 368 400 430 448 1.645 1.679 1.711 1.742 1.771 1.797 1.822 EU (2018 ExpOixonl 1.170 1.171 1.257 1316 1296 323 338 300 278 1.240 1.163 1,101 1.054 844 259 ea ROW 142 170 232 253 270 69 69 73 73 284 296 313 326 164 82 41 EtNi Plowed WM 732 849 969 211 261 249 294 1.014 1.064 1,113 1.166 822 241 29 US (2018 Explremn. Teva cetWemen0 290 320 388 428 81 117 115 121 433 432 430 425 304 81 8 EU (2018 Expiration) 273 293 336 354 84 88 93 117 382 408 430 454 318 100 15 ROW 105 119 125 177 46 57 41 56 199 224 253 286 200 60 6 oodll CompleradEvIpbra 342 809 261 299 310 362 1.212 1.689 2.292 2.604 2.101 20418 2.943 US (2023 Explre0:01 280 503 130 154 195 237 717 1.043 1.453 1.566 1.673 1.788 1.910 EU (2022 Experaecni 53 268 109 132 MO 97 438 569 749 834 914 910 912 ROW 9 39 it 13 15 19 58 75 91 104 115 120 120 Stribid 68 639 216 270 289 316 1.080 1.911 2.787 3.346 3863 4.132 4,418 US (2029 Expealen) 58 510 187 229 223 206 646 1.330 1.820 2.111 2346 2596 2.862 EU (2027 Expiraton) 24 24 31 51 102 208 534 698 1.154 1.416 1,430 1.448 ROW 0 5 5 9 15 7 36 53 69 80 92 105 111 TAF 474 998 1,372 1,800 1,995 US (20222029 Expiration) 446 834 1.072 1.326 1.407 EU (202112027 Expiration) 23 129 248 404 510 ROW 5 35 53 68 78 SovNdl 139 2.274 3,481 2,765 4,374 12,894 14.073 13,649 10.045 8,471 7219 7,016 US (2029 Expiation. 2030 for FCC) 136 2 098 3.032 2.100 3.590 10.619 9,212 7.394 5,247 4.645 4.041 3.933 EU (2028 Expiration. 2029 for FCC) 3 164 401 600 680 1.845 3.559 4.240 2.750 2.078 1519 1.302 ROW 0 3 49 65 104 231 1.302 2.015 2.047 1.750 1.659 1.782 Other AMIvIrgl 300 228 173 138 109 18 24 25 55 123 152 164 193 237 266 301 CoblcIsnoTybora (2027 Expiration) 10 15 25 100 125 150 165 180 195 TOW ArelVela Product* 5,839 6537 7,050 6.142 9,340 4,506 6012 5.369 7214 23,104 25,706 26,813 24.032 22,359 19,736 19,328 Soiree. Company Da Morgan Stanley Research EFTA00598626 Morgan Stanley MORGAN STANLEY RESEARCH July 23. 2014 Gilead Sciences Inc. Exhibit 5 Gilead Product Revenues (2 of 2) Product Revenue 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 1014 2014 3014E 4014E Letalas (US Only . Patent ExpluMon 2018) 184 240 293 410 520 123 145 156 156 624 718 789 852 639 320 64 Raneaa (US Only. Patent Expiratean 2019) 131 240 320 373 449 ❑2 122 129 129 516 593 682 771 856 933 700 AmEusome (US Paten] 2016: EU 2008) 299 306 330 347 352 92 95 89 89 314 359 305 153 IS 2 0 Other Products 17 67 109 127 143 36 39 53 84 210 422 690 955 1.416 1.943 2.569 Cayston (US 4, EU Patents 2021) 48 91 107 139 36 39 42 44 161 185 207 228 246 261 271 Other 17 19 18 20 4 0 0 I i 4 4 4 4 4 4 4 Idelalisib (2025 Esplreti0n) 10 39 49 233 479 723 1.166 1,678 2,294 Total Product Sales 6,469 7.390 8,102 9.398 10,804 4,871 6,413 5,796 7,672 24,813 27,797 29.280 26,763 25,286 22,933 22,660 Royatly.contract and other revenue 542 559 283 304 398 128 122 71 43 366 377 390 403 418 433 448 Royalty Revenue 492 546 269 291 384 120 118 68 40 351 363 376 389 404 419 434 Tamill3 RayateS 393 387 76 44 13$ 52 58 5 -25 90 90 90 90 90 90 90 Other PoyaTher, 99 159 193 247 249 72 60 63 65 261 273 286 300 314 329 345 Contract and other revenue 50 14 14 14 14 4 4 3 3 14 14 14 14 14 14 14 Total Rev nu 7,011 7,949 8,385 9,703 11,203 4,999 6,535 5,867 7.716 25,178 28,174 29.670 27,166 25.703 23.366 23,109 Smote: Company Data. 1.5angan Stanley Research EFTA00598627 Morgan Stanley MORGAN STANLEY RESEARCH July 23. 2014 Gilead Sciences Inc. Exhite 6 Gilead Balance Sheet 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E Current assets Cash and Equivalents 1.273 908 9.884 1.804 2.113 10.875 21.989 30255 34.444 34.626 32.346 27.517 Marketable Securities 384 1.191 16 59 19 530 989 1.403 1,776 2.111 2.413 2.684 Trade Receivables. nel 1.390 1.622 1,951 1.751 2.100 4,721 5.282 5.563 5,094 4.819 4.381 4.333 Inventories 1.052 1.204 1,390 1.745 2.056 2,681 3.552 3.726 3,528 3.449 3.366 3.409 Deferred Taxes. Net 295 279 208 263 331 331 331 331 331 331 331 331 Prepaid Expenses & Taxes 352 388 342 535 564 1,385 1.409 1.483 1,358 1.285 1,168 1.155 Other Current Assets 67 116 127 0 92 378 394 415 380 386 350 347 Total current assets 4,813 5.708 13,919 6,156 7274 20.899 33247 43.177 46.910 47.006 44.354 39.775 Property. Plant & Equipment. Net 700 701 774 1,100 1.166 1.521 1.960 2.455 2.904 3224 3,680 4.029 Non-Current Portion of Prepaid Royalties 226 204 175 176 199 225 254 287 325 367 415 470 Non-Current Deferred Tax Asset 101 153 144 131 155 155 155 155 155 155 155 155 Intangible Assets. net 1,062 893 2,067 11,736 11.900 11.658 11.416 11.174 10.932 10,690 10,448 10206 Long Term Marketable Securities 2,248 3.219 64 720 439 439 439 439 439 439 439 439 Goodwill 463 533 0 1.061 1.169 1.169 1,169 1.169 1.169 1.169 1.169 1.169 Other Assets 86 181 161 159 195 413 435 428 392 371 374 370 Total assets 9.699 11,593 17.303 21,240 22.497 36.479 49.774 59.284 63.225 63,521 61.034 56.612 Current liabilities Accounts Payable 811 803 1.206 1,327 1.256 1,638 2,170 2,276 2,155 2,107 2,056 2,082 Accrued Expensestomp & Employee Ben. 132 148 173 237 244 547 613 645 591 559 508 502 Accrued Liabilities 800 765 1,059 1,433 2.018 1,860 1,826 1.982 2,081 2.095 2,110 2,125 Deferred Revenue 123 103 75 103 111 111 111 111 111 111 111 111 Curren1 Portion of Long Term Debt 6 646 2 1.169 2.697 0 1,167 0 0 0 0 0 Total current liabilities 1,872 2.465 2,515 4,270 6.325 4.176 5.885 5.014 4.938 4.872 4.784 4.920 Deferred Tax Liabilities 87 107 136 116 162 162 162 162 162 162 162 162 Long-Term Debt 1,155 2239 7.606 7.055 3.939 9,821 7.932 7.932 7.232 7.232 7.232 6,733 Long-Term Deferred Revenue 43 33 32 21 22 22 22 22 22 22 22 22 Other long.term obligations 36 27 148 228 304 904 904 904 904 904 904 904 Total liabilities 3,193 5.471 10.436 11,689 10.752 15.085 14,905 14.034 13.258 13.192 13,105 12.642 &enmity Interest 138 258 128 241 375 358 340 323 323 323 323 323 Preferred Stock 0 0 0 0 0 0 0 0 0 0 0 0 Common Stock 1 1 1 1 2 2 2 2 2 2 2 2 Additional paid-in capital