Gilead: So What's It Worth Now?

| About: Gilead Sciences, (GILD)

Summary

Q2 Earnings were out last night.

Many think Gilead trades at great value.

I value Gilead with a DCF model under tough assumptions.

See the Results.

Background

Gilead's (NASDAQ:GILD) Q2 results were out last night so it was a good opportunity to analyze the stock with the latest information.

I am long Gilead myself and wanted to apply a DCF model on the future income streams of Gilead in order to determine if the future income of the business can be bought at good value now. I believe the DCF approach to be the best way to measure intrinsic value.

Back to Basics

I went through the 2015 10-K and the quarterly reports of 2016 to compile the following table of product sales.

$ Millions

2013

2014

2015

TTM

HCV

Harvoni

-

2,127

13,864

12,258

HCV

Sovaldi

139

10,283

5,276

5,648

HCV

Epclusa

64

HIV

Truvada

3,136

3,340

3,459

3,679

HIV

Atripla

3,648

3,470

3,134

2,966

HIV

Stribilid

539

1,197

1,825

1,928

HIV

Complera/Eviplera

810

1,228

1,427

1,489

HIV

Viread

959

1,058

1,108

1,162

HIV

Genvoya

-

-

45

505

HIV

Odefsey

69

HIV

Descovy

61

Other AV

Other AV

111

88

69

68

Other

Letairis

520

595

700

751

Other

Ranexa

449

510

588

627

Other

AmBisome

352

388

350

333

Other

Zydelig

-

23

132

166

Other

Other

141

167

174

178

Total Product Sales

10,804

24,474

32,151

31,952

For good reason, much of the opinion around Gilead is focused on its HCV franchise. It represents a massive share of revenue that is starting to decline. But Gilead is not just a HCV company. Here's a pie chart showing the breakdown by franchise over the twelve months to June 30th 2016.

When we chart the history of each franchise we see that the HCV franchise is declining but we also see that the HIV and Other Products Category are growing steadily.

$ Millions

2013

2014

2015

TTM

HCV

139

12,410

19,140

17,970

HIV & Other AV

9,203

10,381

11,067

11,927

Other

1,462

1,683

1,944

2,055

Total Prod Sales

10,804

24,474

32,151

31,952

We can calculate the historic growth rates from the above as follows.

2014

2015

TTM

HCV

8828%

54%

-6%

HIV & Other AV

13%

7%

8%

Other

15%

16%

6%

Total

127%

31%

-1%

Gilead guided in last night's earnings results that it expects to hit $30B in Sales for 2016.

Assuming the HIV and Other Products Category continue to grow at 8% and 6% respectively then we can solve for expected HCV franchise sales.

$ Millions

2016

YoY Growth

HCV

16,097

-16%

HIV & Other AV

11,841

7%

Other

2,060

6%

Total

30,000

-7%

Discounted Cashflow Forecast

The forecast will use the following assumptions:

  • HCV Sales to decline at 16% per year to 2020
  • HIV Sales to increase at 7% per year to 2020
  • Other Product Sales to increase at 6% per year to 2020
  • Gross Margin will be 88% to 2020
  • R&D costs to increase at 3% per year to 2020
  • SG&A costs to increase at 3% per year to 2020
  • Tax at 19%

The forecast to 2020 looks like this.

$ Millions

2016

2017

2018

2019

2020

HCV

16,098

13,539

11,387

9,577

8,055

HIV & Other AV

11,842

12,671

13,558

14,507

15,522

Other

2,061

2,184

2,315

2,454

2,602

Product Sales

30,000

28,394

27,260

26,538

26,178

Gross Margin

88%

88%

88%

88%

88%

Gross Profit

26,400

24,987

23,989

23,353

23,037

R&D

3,700

3,811

3,925

4,043

4,164

SG&A

3,200

3,296

3,395

3,497

3,602

Operating Income

19,500

17,880

16,668

15,813

15,271

Tax

3,705

3,397

3,167

3,005

2,901

Net Income

15,795

14,482

13,501

12,809

12,369

I discount the future Net Income with the following assumptions:

  • Discount Rate of 8%
  • Terminal Value assumes ongoing net income decline at -3% per year
  • The Weighted Average Cost of Capital is 11%

Here is the outcome on the above assumptions.

$ Millions

Forecast NI

PV Forecast

2016

15,795

14,625

2017

14,482

12,416

2018

13,501

10,718

2019

12,808

9,415

2020

12,369

8,418

Terminal Value

109,075

74,234.80

Fair Value Estimate

129,827

The Current Market Value of Gilead is about $120B. The Enterprise Value of Gilead more or less equates to its Market Value since the Cash on the Balance Sheets is negated by the Debt on the Balance Sheet.

The outcome of the above DCF model indicates Gilead is more or less fairly valued.

Margins of safety

If one is looking for a 20% margin of safety to the $130B Fair Value then one should only buy the stock at about $71.

If one is looking for a 10% margin of safety to the $130B Fair Value then one should only buy the stock at about $80.

Take Away

The model is very dependent on its assumptions.

Perhaps the ongoing decline of Net Income at -3% per year into perpetuity is too severe?

Perhaps the 5 year forecasted HCV decline at -16% to 2020 is too severe?

Perhaps the growth rates for the HIV and Other Products Category are too optimistic?

I have given the development pipeline no credit directly, but one can counter that a strong pipeline is required in order to replace a massive boom-bust HCV franchise.

Non-Product Sales came in at a handy $0.5B in 2015. I have give no credit for this in the model.

I have also used Net Income instead of Free Cashflows in building the DCF model. I suspect the FCFs would provide a higher Fair Value and make the stock look more attractive at current prices. Gilead however did not release a Statement of Cashflow with its quarterly earnings.

My own opinion is that value should be very obvious in relation to what Mr Market is saying he will sell at. I think Gilead trades at good value in the $70-$80 range and I will consider strongly buying at around $75. I am currently long at about $90.

Disclosure: I am/we are long GILD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.