CFA Society of San Francisco

San Jose State University – Team Gold

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S&P 500 GILD

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San Jose State University – Student Research

Gilead Sciences Biotechnology Sector

Date: 2/22/2015 Current Price: $102.61 Recommendation: BUY Ticker: GILD (NASDAQ) Target Price: $125.03 Potential Upside: 21.85%

We issue a BUY recommendation on the GILD stock with a one-year target price of

$125.03. The target price is derived from the Discounted Free Cash Flow to Firm method.

The buy recommendation is based on the strong growth potential forecast of the new

drugs for the Hepatitis C treatment along with continued growth in their existing HIV

treatments.

Emerging Leader in the Hepatitis C market

Gilead’s billion dollar drugs Sovaldi & Harvoni have boosted the sales for 2014. As the

sales soared by 122%, the net income grew by 300% and the cash in hand rose from $2.5

billion to $11.7 billion. With less competition and a sizeable potential market worldwide,

the trend is expected to continue in the near future and GILD can be seen as the new

emerging leader in the Hepatitis-C market.

Market Leader in the HIV market

Gilead’s strong performance in the HIV treatment is expected to continue in the future.

With their top 5 drugs reaching $1 billion in annual sales individually, Gilead is expected

to retain its market leadership in this segment. With recent approvals from the EU for

Stribild, GILD can expand further into the European market. Their strategic partnerships

with generic manufacturers in developing countries like India and South Africa will

further strengthen their dominance in these emerging markets.

Robust drugs pipeline

Gilead’s R&D pipeline boasts of 30 drugs focusing on Hepatitis, HIV, Liver Diseases,

Oncology, Inflammation and Respiratory diseases among others. Even though some of

their key HIV drugs expire in 2017-2018, Gilead has replacement drugs in the pipeline. With strong operating cash flows and high

cash balances, Gilead is expected to expand its product portfolio and its horizons to other potential markets.

Gilead is strategically well positioned to be the leader in the Biotech industry and emerge as the key player in the future due to

such strong revenue potential and the ability to tap into new markets.

Market Profile

Closing Price($) 102.61

52 week Range($) 63.5-116.83

Daily Volume 17437500

Shares Outstanding 1.50 B

Market Cap ($) 153.81 B

Forward P/E 14.00

P/B 9.73

EV/EBITDA 9.40

Figure 1 Market Profile - GILD

1,229

1,760 2,120

2,355

2011 2012 2013 2014

R&D Budget

Figure 2 R&D Budget

BUSINESS DESCRIPTION

Gilead Sciences, Inc. (GILD) is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need. Gilead’s portfolio of products and pipeline of investigational drugs includes treatments for HIV/AIDS, liver diseases, cancer and inflammation, and serious respiratory and cardiovascular conditions

1. Gilead’s primary areas of focus include human immunodeficiency virus (HIV), liver diseases such as chronic hepatitis

B virus (HBV) infection and chronic hepatitis C virus (HCV) infection, oncology/inflammation and serious cardiovascular and respiratory conditions. Headquartered in Foster City, California, Gilead has operations in North and South America, Europe and Asia-Pacific

2.

Gilead’s portfolio of marketed products includes Sovaldi, Stribild, Complera/Eviplera, Atripla, Truvada, Viread, Vitekta, Tybost, Zydelig, Hepsera, Emtriva, Letairis, Ranexa, AmBisome, Cayston, Tamiflu, and Harvoni. In addition, they also sell and distribute certain products through their corporate partners under royalty-paying collaborative agreements

3. Sales for December

31, 2014 ended $24,890 million. Most notably, Gilead’s HCV drugs, Sovaldi and Harvoni, account for 51% of product sales while the HIV products Atripla, Truvda, Viread, Complera, and Stribild account for 42% of product sales. The remaining sales are attributed to other focuses such as cardiovascular, respiratory, and oncology.

Company Strategies

Collaborative Relationships: As part of Gilead’s business strategy, they establish collaborations with other companies, universities and medical research institutions to assist in the clinical development and/or commercialization of certain products and product candidates and to provide support for their research programs. Gilead also evaluates opportunities for acquiring products or rights to products and technologies that are complementary to their business. Research and Development: Gilead’s R&D philosophy and strategy is to develop best-in-class drugs. They intend to continue committing significant resources to R&D opportunities and business development activity. They have research scientists in Foster City, Fremont, San Dimas and Oceanside, California; Branford, Connecticut; Seattle, Washington; and Alberta, Canada engaged in the discovery and development of new molecules and technologies that they hope will lead to the approval of new medicines. The development of Gilead’s product candidates is subject to various risks and

uncertainties. These risks and uncertainties include their ability to enroll patients in clinical trials, the possibility of unfavorable results of their clinical trials, the need to modify or delay their clinical trials or to perform additional trials and the risk of failing to obtain regulatory approvals

5.

Patent Protection: Patents and other proprietary rights are very important to Gilead’s business. Gilead’s success will depend to a significant degree on their ability to: obtain patents and licenses to patent rights, preserve trade secrets, defend against infringement and efforts to invalidate patents and operate without infringing on the intellectual property of others. As part of Gilead’s business strategy, they actively seek patent protection both in the United States and internationally and file addit ional patent applications, when appropriate, to cover improvements in their compounds, products and technology. They have a number of U.S. and foreign patents, patent applications and rights to patents related to their compounds, products and technology, but cannot be certain that issued patents will be enforceable or provide adequate protection or that pending patent applications will result in issued patents. Because patents have a limited life, which may begin to run prior to the commercial sale of the related product, the commercial value of the patent may be limited

6.

Shareholder Structure

Gilead Sciences, Inc. is listed on the NASDAQ with roughly 1.50 billion shares outstanding. Management and the Board of Directors own 0.572% of Gilead

7. Institutional investors own 88.28% of Gilead. The top 25 of the 1,739 Institutional investors

own 48.2% of Gilead. The top 25 of the 2,283 Mutual Funds own 22.6%. Capital Research & Management Co. (Global Investors) has the largest stake in Gilead with 8.105% invested. Capital Research & Management Co. (Global Investors), Fidelity Management & Research Co., The Vanguard Group, Inc., SSgA Funds Management, Inc., BlackRock Fund Advisors, and T. Rowe

74%

21% 5%

Geographic Revenue Breakdown

U.S.

Europe

OtherInternational

Figure 2 Revenue Breakdown (Company Data)

51% 42%

7%

Product Revenue Breakdown

HCV

HIV/Aids

OtherProducts

Figure 3 Product Revenue Breakdown (Company Data)

Price Associates, Inc. own a combined total of 31.305% of Gilead8. The Vanguard Total Stock Market Index Fund owns 1.67% of

Gilead accounting for 0.67% of the entire fund9.

Corporate Management

Dr. John C. Martin currently serves as Chairman & Chief Executive Officer of Gilead Sciences, Inc. John F. Milligan, PhD serves as the President & Chief Operating Officer of Gilead succeeding Dr. Martin as President in 2008. Norbert W. Bischofberger, PhD serves as Chief Scientific Officer & Executive VP-Research. All three have been with Gilead Sciences since 1990 with a 25-year Tenure. Management consists of 12 total members and the Board of Directors consists of 11 total members. The Average age of Management and the Board is 55 yrs. and 72 respectively. Average tenure of both Management and the Board is 12 yrs. Dr. Martin sits as Chairman of the Board and CEO of management

10.

CORPORATE GOVERNANCE AND SOCIAL RESPONSIBILITY

Corporate Governance Gilead Science has developed their own Code of Ethics and ensures that the company abides by this

code at all times. Gilead’s corporate core values consist of Integrity, Teamwork, Accountability and Excellence. In addition to the

code of ethics, they have assessed the following governance parameters.

Board Guidelines: Guideline providing promote the functioning of the board and its committees, to promote the interests of stockholders.

Audit Committee Charter: the committee assists the board in overseeing the quality and integrity of the corporate accounting and financial reporting practices of Gilead and the related systems of internal controls

Compensation Committee Charter: The committee reviews the performance of Gilead's executive officers and approves the type and level of their compensation, and assists the board in overseeing overall compensation plans and programs of Gilead.

Nominating and Corporate Governance charter: This charter outlines the roles and responsibilities of the Nominating and Corporate Governance of Gilead's board of directors.

Lead Independent Director Charter: This charter outlines the roles and responsibilities of the Scientific Committee of Gilead's board of directors.

Social Responsibility: The Gilead Foundation, a non-profit organization established in 2005, seeks to improve the health and

wellbeing of underserved communities around the world. Their corporate giving programs provide support to U.S.-based

healthcare and charitable activities related to their core therapeutic areas. Gilead also supports non-healthcare related social

service, science and education, and community programs in the locations where they operate.

INDUSTRY OVERVIEW AND COMPETITIVE POSITIONING

Industry Overview

Macro Outlook: We will analyze the macro outlooks of both the United States and parts of the European Union (EU), for together they make up 88% of Gilead’s product revenue. For the EU, we analyze Italy, Turkey, and Spain for they are the three countries that make up over half of the Hepatitis C population in Europe. Gilead's revenue stream from Europe is predominantly in the HIV/Aids category, however our analysts argue once Sovaldi and Harvoni make its way through marketing approval, the two hepatitis C drugs will account for the majority of the European region revenue growth.

Figure 4 Macroeconomic Data (OECD)

Macro Analysis: The U.S. accounts for nearly 68% of Gilead’s product revenue. This correlates with the U.S. spending more on healthy per capita than Italy, Turkey and Spain combined. The same is true when comparing US dollars spent on pharmaceuticals in the U.S. vs the European region. Assuming health spending is fixed as a percentage of GDP, we can expect health spending to increase at the same rate as GDP growth. European Region: The EU offers high levels of protection and enforcement of intellectual property rights (IPR). Both the United States and the EU have committed: to encouraging protection and enforcement of IPR in third countries, to take cooperative efforts to strengthen IPR enforcement at U.S. and EU borders, and to work together to protect and strengthen IPR for small to medium sized enterprises abroad. Both the United States and the EU adhere to all major IPR agreements, including the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) provisions. Population size of Diseases Hepatitis C Virus: Worldwide, it is estimated that 130 million people are chronically infected with Hepatitis C (HCV). The Center for Disease prevention estimates 3.2 million people in the United States are living with chronic hepatitis C infection. New cases in the U.S. are estimated year over year at 16,500 cases of HCV while the European center for Disease Prevention and Control estimates 8.6 million people in Europe are infected with HCV. There are an estimated 30,607 new cases of HCV are reported in 27 EU countries annually.

HIV/AIDS: Worldwide, it is estimated that 35 million people are living with HIV at the end of 2013, of which Africa accounts for approximately 71%. The CDC estimates 1.2 million people in the United States are living with HIV infection. The infection rate has remained stable at about 50,000 new cases per year. The European center for Disease Prevention and Control estimates 1.72 million people in the European Region are living with the disease. 136,235 new cases were reported in 2013 in the European Region. Industry Characteristics The cost of bringing a new drug to market can cost $1.3 billion according to

Deloitte and Thomson Reuters. The amount of time it takes a drug to go through

clinical trials and commercialization can be as much as 15 years. The steps of discovery and development consist of: preclinical

development, clinical trials, and regulatory filing and review. Preclinical development is estimated to consume half of Research

and Development costs. During clinical trials, Biotechnology medications go through the same testing process as pharmaceutical

products consisting of three phases. After regulatory filing and review, drugs may still be monitored for long-term side effects

which may cause for an additional phase of trials.

Competitive Positioning

Favorable Position in the Competitive Environment: Gilead is in a favorable

position within the Biotechnology industry due to its strong position with their

HCV treatments. Sovaldi and Harvoni can potentially achieve 90% of the HCV

market with a breakdown of 32% and 68%, respectively. Sovaldi’s and Harvoni’s

strong position is due to its high efficacy rates compared to similar products in

the market like Abbvie’s Viekira Pak. Gilead’s leadership in the HCV market will

also continue due to potential drugs in the pipeline that are showing faster cure

rates with both Harvoni and Sovaldi.

Insurance Providers can Create Difficulties: A big concern for Gilead, as well as

other Biotechnology companies, is coverage by insurance companies. A tactic

typically employed by many Biotechnology companies and insurance providers

is exclusivity contracts. These contracts, like the one Gilead signed with CVS, allow companies to have exclusive rights to sell

certain products through insurance companies. Looking forward, Gilead must continue to cultivate relationships with insurance

providers to avoid the risk of being excluded from selling their product.

61%

29%

10%

HCV Market Share - US

Gilead-Genotype 1

Gilead- OtherGenotypes

Other

Figure 5 HCV Market Share (Genome type)

73.00%

14.00%

8.00% 5.00%

United States HCV Genotype Breakdown

1

2

3

Other

Figure 6 HCV Genotype breakdown

Figure 8 Health Expenditure as % of GDP (Source: World Bank)

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Revenue (Team Estimates)

HIV Hepatitis C

Figure 7 Revenue Estimates comparison

Expansion into Europe: Gilead’s HCV drugs have not been properly introduced into Europe yet due to the pricing of Sovaldi and

Harvoni. In 2015, Europe has approved pricing of Sovaldi and Harvoni and will grant its citizens more access to the treatments.

Europe’s HCV population is estimated to be around 8.6 million people consisting mainly of genotype 1B (with a 3:2 ratio) while

in the United States, the HCV population is approximately 75% genotype 1 with about 70% of those cases being genotype 1A.

Generics

Generic versions of drugs are common place in developing countries. In recent news, Gilead lost its patent coverage in India.

This outcome opened the flood gates for cheaper access to Sovaldi and Harvoni. Estimates of potential royalty revenue from

India and other developing countries are estimated at $600 million dollars with the drug being priced as low as $300 to a

maximum of $1000.

One strategy Gilead can adopt to take advantage of the generics market is to make a strategic alliance with the generic companies, which would allow Gilead to have some control over their product with a minimum amount of risk. The benefit to Gilead is the potential to make a branded generic product for Sovaldi, Harvoni, Atripla, etc. which allows for market dominance in developing countries.

INVESTMENT SUMMARY

We issue a BUY recommendation for Gilead Science due to its strong earning potential

and optimistic forecast. Gilead is a market leader in the Biotech industry with an

aggregate market share of 11% only behind Amgen. Their prime focus is on the

discovery, development and commercialization of therapeutics for incurable diseases

like HIV, Hepatitis B & C, fungal infections, influenza. With a strong focus on HIV and

Hepatitis market, Gilead’s revenues have grown at a compounded rate of 27% over the

last 8 years. With strong business performance backed by robust product pipeline,

Gilead can tap further into these markets, which in turn, can maximize its firm value.

With Sovaldi and Harvoni, Gilead has the first mover’s advantage into the Hepatitis C market. The drugs have a high effective cure rate and is well accepted by the industry. The strategic tie-ups with CVS for marketing and sales and absence of the strong competition in the segment, Gilead’s growth potential is very high. In 2014, these drug combined contribute almost 50% of the total revenues and the ratio is expected to rise going forward. An estimated 3 million plus people are affected by Hep C. With a

cure rate of 91% (Sovaldi) and 94-99% (Harvoni), these drugs are best treatment options currently available in the market. The second biggest growth segment for Gilead is the HIV drugs. Gilead’s products are

well known in this segment and as of 2014, Gilead’s market share is approximately 46%.

Gilead’s key drug Viread’s patent expires in 2017 but their replacement TAF

(combination of Viread and other drugs) is waiting for FDA approval and is expected to

replace Viread in the future.. Truvuda is one other key driver for Gilead in this segment.

Its annual sales touched $ 3.5B in 2014 and are expected to stabilize at $ 4B in the

future. However, unlike Hepatitis C, HIV can only be treated and hence this segment is

one of the key stable revenue source for Gilead. On the other hand, the launch of

Complera and Stribild will solidify their leadership in this segment.

Gilead also has intends to have strong presence in Europe . However, USA has been

the biggest market in terms of revenues. On a macroeconomic level, the health

expenditure as a percentage of GDP have remained almost flat at 17% over past 5 years. But with the rise in GDP by 20% over

last two years, the expenditure per capita has risen as well. And with the PACCA (Obamacare) coming into effect from 2014-15,

as estimated 25-30 million people will be enrolled for insurance over the next 5 years. This will have a positive impact on the

potential market size for HIV and Hepatitis C.

Valuation Model: The valuation method used is Discounted Free Cash Flow Model.

Earnings Volatility: Estimates of Hepatitis C drugs are the main drivers of volatility earnings. Since Hepatitis C is a curable

disease and a potential new market for Gilead, there is uncertainty regarding its long-term growth and potential market size.

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VALUATION

DCF valuation: we used the Discounted Free Cash Flow to Firm method to value

the common stock of Gilead and arrive at a price of $125.03. The firm value arrived

in this calculation is divided by the weighted average common shares as of 2014.

We have used a two stage FCFF model for arriving at the target value. The first

stage of the model lasts for 10 years and at the end of year 2023, based on

company estimates, we have forecasted the terminal value of the company.

Revenues Forecasting

Hepatitis C Segment: The first stage of the model is primarily focused on the

spike in revenues due to the sales of Sovaldi and Harvoni. This is an unexplored

market and Gilead’s products are the only ones in this segment. As of 2014,

revenues from these segment accounted for 50% of the total and we expect the

trend to continue in the short term till Gilead is able to capture the market. As per

the team estimates, the revenues in this segment are expected to grow annually

from 2014-2023. Since this treatment is curable in nature, once a sizeable portion

of the market is captured by 2023, we expect the revenues to decline by 85% of

their peak value and grow steadily at a slow pace at 2.25% annually thereafter. This

growth is also due to the estimated revenues from developing countries like India,

China & Egypt which have a sizeable portion of Hepatitis C patients.

HIV segment: Gilead’s main source of stable revenues would be from the HIV

segment. Market for this segment is stable and expected to grow at 3% annually.

The primary drugs in this segment – Atripla Viread and Truvda will expire within

next 5 years but their replacements Complera and Stribild are already in the

market. These new drugs are also generating stable revenue sources and are

eventually expected to replace the expiring drugs. Hence, the overall segment, in

which Gilead is a market leader, is a stable one and Gilead is expected to

maintain its leadership in this segment in the long run as well.

The revenues from the remaining products is combined in a single line item.

These revenues are also growing at a stable pace at 3% and are expected to do

so in the short term.

For products whose patents are expired, their revenues are decreased by 85 %

next year and assumed constant thereafter.

Depreciation and Amortization: Depreciation & Amortization for the calculation is estimated as % of the Gross PP&E

estimates from the Balance sheet. For the long term estimates, D&A are taken as the historical average of PP&E as percentage

of PPE.

Working Capital Expenditure: Working Capital Expenditure for the first stage is estimated based on the Balance sheet

estimates of Current Assets and Current Liabilities. The rise in working capitals is attributed to the increase in receivables and

payables and inventory to due to high demand of the new drugs in the market.

Long term estimates are based on the historical average of Working Capital

Capital Expenditure is estimated based on the cash flow estimates for the short term. The increase in Capital expenditure

during the first stage will be driven by the growth of sales and Gilead’s increasing focus on Europe and greater access of patients

in the Hepatitis C market. For the long term growth, CapEx is estimated as historical average of the percentage of revenues.

FCFF Valuation Inputs

WACC 5.63%

Long term growth rate 2.25%

Firm Value ( $ million) 187418

Shares( million) 1499

Target Price per share 125.03

Figure 9 Target Price Computation

Terminal Value Estimates ($ million)

EBIT 10342

Tax Rate 18.8%

D&A 0.35

NWC 2500

Cap Ex 852

FCFF 5015

PV of FCCF 98604

Figure 11 Terminal Value Estimates

Figure 10 Revenue Estimates

Terminal Growth Rate

The terminal growth rate is based on simple average of the real GDP growth rates of Unites States and EU. The forecasted rates

are 2.5% and 2 % respectively.

WACC

The cost of equity was calculated using CAPM. The Beta was estimated using a

regression model of historical 30 year monthly returns of Gilead against S&P 500. The

beta computed by this method was 1.05. For the risk free rate, 10 year US Bond was

used as benchmark (risk free rate = 2.15%). The equity risk premium was estimated at

5.5 % based on research study by NYU Professor Aswath Damodaran. The cost of debt

is based on the most recently issued 10 year debt at 3.7%. The capital structure was

calculated based on the book value of debt and equity from company data. The WACC

calculated with this estimates is 5.63%

Tax Rate

The tax rate assumed for the calculations is 18.8% based on the most recent data. The tax rate is assumed to be constant for

valuation purposes.

Product Pricing

For the HIV segment, under the assumption of stable market and flat growth structure, the forecast based on the overall

revenues and not on cost basis for each individual drug. The entire segment is treated as a single unit for forecasting.

For the Hepatitis C segment, we have a differentiated cost structure based on certain key assumptions as highlighted in the

table. The revenues are forecasted based on the cost of treatment per patient and the expected number of patients to be

treated per year. This is based on team estimates and under the assumption that Gilead will have aggressive strategy for

campaigning their drugs in this segment.

FINANCIAL ANALYSIS

Balance Sheet

Year ended 12/31/14 has the company’s Long-term debt to Total Capital ratio at 0.4, which shows an increase from December 2013 where it was 0.25. This is due to an increase of Long-term debt of $4 billion that was issued in the fourth quarter of 2014. The company continues to improve its current ratio and is continuously improving their balance sheet to make it stronger. Shifting from a weak 1.15 to a much stronger 3.16, from 2013 to 2014, respectively. Meanwhile, Gilead’s competitors, Amgen and Merck sit at 4.95 and 1.34 showing that the company continues to improve its status in the industry.

Income Statement

Gilead has been steadily increasing their sales year over year but had a huge jump in 2014 due to the launch of Sovaldi and Harvoni and the continued success of Atripla, Truvada, and other products. December 2014 preliminary sales are $24,890 million, which is a 55% increase from the previous year. Selling, general and administrative expenses increased primarily due to Gilead’s business growth, including commercial expansion related to the launches of Sovaldi and Harvoni. Additionally, there was a one-time, non-tax deductible branded-description drug fee that Gilead paid $460 million for in 2014. We saw an increased in the research and development expenses due to the progression of Gilead’s product pipeline, particularly in the oncology and liver disease areas. Gilead’s R&D and SG&A are forecasted to grow at the same rate as Sales Growth. Despite the increased in expenses, the net income jumped up to $14,856 million from $4,208 million in 2013. This is a significant 71% increase. Gilead’s executive team has a bottoms-up approach when setting budgets and is more concerned with the success of each project. Budgets are not based on incentives to move drugs through the development process. We do not believe this growing trend is sustainable due to the nature of the industry.

Variable Value

Risk Free rate 2.17%

Market Risk Premium 5.52%

Beta 105.00%

Cost of Equity 7.97%

Pre Tax cost of Debt 3.70%

Cost of Debt, post-tax 3.00%

Debt component 47.00%

Equity Component 53.00%

WACC 5.63%

Figure 12 WACC Estimates

P/E Ratio

Gilead’s P/E ratio of 14.00 is considerably lower than its competitors such as Amgen Inc., AbbVie Inc., and Biogen Idec Inc., who each have ratios of 23.29, 53.64, and 32.88, respectively. This is rather expected since Gilead’s price has been on the rise due to the release of their new products. The market is not expecting it to continue to rise much more significantly with the big jump it has already done in the near future. However, the product pipeline is promising and breakthroughs into new markets such as Japan in the first half of 2015 can be a game changer.

Cash Flow

The company has seen a huge influx in free cash flow since the release of their new products in 2014 but had steady levels of

usage. With the success of Sovaldi and Harvoni, the company has opted to use the extra cash to pay down a significant amount

of debt, $3.2 billion, as well as introduce a $15 billion share repurchase program, $3.7 billion repurchased as of 9/30/2014. They

will continue this trend into 2015 where they will also begin to pay dividends in the latter half of the year. They declared a $0.43

dividend. With all of these expenditures, their free cash flow is still up significantly from $2.9 billion to $10.1 billion.

Gilead Sciences 2013 2014 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F

Profitability

Gross Margin 0.74 0.77 0.77 0.77 0.77 0.77 0.76 0.76 0.76 0.76 0.76

Operating Margin 0.40 0.58 0.58 0.58 0.58 0.58 0.56 0.56 0.56 0.56 0.56

Net Profit Margin 0.27 0.49 0.46 0.46 0.46 0.46 0.45 0.45 0.45 0.45 0.45

ROE DuPont 0.18 0.58 0.32 0.25 0.23 0.20 0.16 0.14 0.13 0.11 0.10

ROA 0.14 0.35 0.22 0.20 0.19 0.17 0.14 0.13 0.12 0.10 0.09

Liquidity

Current Ratio 1.15 3.16 4.11 4.2 4.59 4.66 4.73 4.94 5.01 5.18 5.26

Quick Ratio 0.82 2.91 3.82 3.91 4.27 4.35 4.41 4.62 4.68 4.85 4.93

Financial Leverage

Long-term debt to Total Capital 0.25 0.4 0.3 0.22 0.18 0.15 0.12 0.11 0.09 0.08 0.07

Equity Multiplier 1.34 1.66 1.43 1.28 1.21 1.17 1.14 1.12 1.1 1.09 1.07

Shareholder Ratios

EPS 1.85 7.95 8.7 9.22 10.53 11.19 10.69 11.29 11.91 10.84 11.18

Efficiency Ratios

Asset Turnover Ratio 0.5 0.71 0.49 0.43 0.4 0.36 0.31 0.29 0.27 0.22 0.2

Figure 13 Financial Ratio Estimates

INVESTMENT RISKS

OPERATIONAL RISKS

Concentrated Revenues A substantial portion of revenues, approximately 51%, is derived from sales of products to treat hepatitis C virus infection (HCV) and HIV. If they are unable to maintain or continue increasing sales of these products, results of operations may be adversely affected. Breakthrough into new markets has proven to be difficult. However, Gilead has a strong pipeline with great potential to mitigate this risk with 5 products in phase one, 16 products in phase two, 6 products in phase three of testing, and a single tablet regimen for HIV/AIDS submitted for approval. Partnership Reliability Gilead depends on relationships with other companies for sales and marketing performance, development and commercialization of product candidates and revenues. Failure to maintain these relationships, poor performance by these companies or disputes with these companies could negatively impact business. Due to reliance on third-party contract research organizations to conduct clinical trials, Gilead is unable to directly control the timing, conduct, expense and quality of clinical trials.

Results of operations may be adversely affected by current and potential future healthcare reforms.

If significant safety issues arise for marketed products or product candidates, future sales may be reduced, which would adversely affect results of operations.

Gilead faces credit risks from Southern European customers that may adversely affect results of operations.

Operations depend on compliance with complex FDA and comparable international regulations. Failure to obtain broad approvals on a timely basis or to maintain compliance could delay or halt commercialization of products.

Manufacturing problems, including at third-party manufacturers and corporate partners, could cause inventory shortages and delay product shipments and regulatory approvals, which may adversely affect results of operations.

If Gilead fails to attract and retain highly qualified personnel, they may be unable to successfully develop new product candidates, conduct clinical trials and commercialize product candidates.

Gilead depends on relationships with other companies for sales and marketing performance, development and commercialization of product candidates and revenues. Failure to maintain these relationships, poor performance by these companies or disputes with these companies could negatively impact business.

MARKET RISKS

Significant Competition Success will depend to a significant degree on the ability to defend patents and other intellectual property rights both domestically and internationally from competitors. Gilead may not be able to obtain effective patents to protect their technologies from use by competitors and patents of other companies could require them to stop using or pay for the use of required technology. For example, if any party is successful in establishing exclusive rights to Sofosbuvir, expected revenues and earnings could be adversely affected. There are new competitive threats in HIV, a new single tablet regimen from Glaxo could be introduced once Truvada’s patents expire in 2018 and generic versions of Atripla could become available in 2021. However, Gilead’s Complera and Stribild will have a strong foothold in the market by this time. Additionally, AbbVie received FDA approval for its all-oral hepatitis C treatment Viekira for genotype 1 patients, which was favored by Express Scripts over Gilead’s Harvoni medication that will result in a loss of market share. Litigation Litigation with generic manufacturers has increased expenses that may continue to reduce earnings. If Gilead is unsuccessful in all or some of these lawsuits, some or all of their claims in the patents may be narrowed or invalidated and generic versions of products could be launched prior to their patent expiry. Most notably, Gilead is facing a litigation cases with their fierce competitors, AbbVie and Merck, regarding patents to their hepatitis-C drugs. These are very common in the industry and Gilead is well versed in the courtroom. Many of these litigations are without merit and we expect Gilead to win the cases.

FINANCIAL RISKS

International Sales Approximately 27% of product sales occur outside the United States, and currency fluctuations and hedging expenses may cause earnings to fluctuate, which could adversely affect the stock price. Revenues and gross margin could be reduced by imports from countries where products are available at lower prices. Clinical Trial Costs The results and anticipated timelines of clinical trials are uncertain and may not support continued development of a product candidate, which would adversely affect prospects for future revenue growth. Expenses associated with clinical trials may cause earnings to fluctuate, which could adversely affect the stock price.

The inability to accurately estimate demand for products, the uptake of new products or the timing of fluctuations in the inventories maintained by customers makes it difficult to accurately forecast sales and may cause revenues and earnings to fluctuate, which could adversely affect financial results and our stock price.

Existing products are subject to reimbursement from government agencies and other third parties. Pharmaceutical

pricing and reimbursement pressures may reduce profitability.

Gilead may not be able to obtain materials or supplies necessary to conduct clinical trials or to manufacture and sell products, which would limit ability to generate revenues.

Gilead may face significant liability resulting from products that may not be covered by insurance and successful claims could materially reduce earnings.

APPENDICES

Appendix 1 – Income Statement

Income Statement 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Revenues 11202 24474 28039 29577 32805 34370 33422 34629 35833 32662 33665 19124

- COGS (inlcuding D&A) 2859 5666 6454 6875 7518 7922 8077 8369 8660 7894 8136 4622

Gross Profit 8343 18808 21585 22702 25287 26448 25345 26260 27173 24768 25529 14502

- Selling, General & Admin Expense 1699 1818 2071 2207 2413 2543 2592 2686 2779 2533 2611 1483

Research & Development 2120 2794 3183 3391 3708 3907 3984 4127 4271 3893 4012 2279

Operating Income 4524 14196 16331 17105 19166 19998 18769 19447 20123 18342 18905 10740

- Interest Expense 307 412 470 440 443 443 429 423 416 410 404 398

- Foreign Exchange Losses (Gains) 4 0 0 0 0 0 0 0 0 0 0 0

- Net Non-Operating Losses (Gains) 5 -3 0 0 0 0 0 0 0 0 0 0

EBIT 4208 14856 15860 16664 18724 19555 18340 19024 19706 17932 18501 10342

- Income Tax Expense 1151 2797 2986 3137 3525 3682 3453 3582 3710 3376 3483 1947

Income Before XO Items 3057 12059 12874 13527 15199 15873 14887 15442 15996 14556 15018 8395

- Extraordinary Loss Net of Tax 0 0 0 0 0 0 0 0 0 0 0 0

- Minority Interests -18 -42 -42 -42 -42 -42 -42 -42 -42 -42 -42 -42

Net Income 3075 12101 12916 13569 15241 15915 14929 15484 16038 14598 15060 8437

Net Income to Retained Earnings 3075 12101 9797 10292 11560 12072 11324 11745 12165 11072 11423 6399

EPS 1.85 7.95 8.7 9.22 10.53 11.19 10.69 11.29 11.91 10.84 11.18 6.26

Appendix 2 – Income Statement: Common Size

Income Statement 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Revenues 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - COGS (inlcuding D&A) 26% 23% 23% 23% 23% 23% 24% 24% 24% 24% 24%

Gross Profit 74% 77% 77% 77% 77% 77% 76% 76% 76% 76% 76%

- Selling, General & Admin Expense 15% 7% 7% 7% 7% 7% 8% 8% 8% 8% 8%

Research & Development 19% 11% 11% 11% 11% 11% 12% 12% 12% 12% 12%

Operating Income 40% 58% 58% 58% 58% 58% 56% 56% 56% 56% 56%

- Interest Expense 3% 2% 2% 1% 1% 1% 1% 1% 1% 1% 1%

- Foreign Exchange Losses (Gains) 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

- Net Non-Operating Losses (Gains) 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

EBIT 38% 61% 57% 56% 57% 57% 55% 55% 55% 55% 55%

- Income Tax Expense 10% 11% 11% 11% 11% 11% 10% 10% 10% 10% 10%

Income Before XO Items 27% 49% 46% 46% 46% 46% 45% 45% 45% 45% 45%

- Extraordinary Loss Net of Tax 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

- Minority Interests 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Net Income 27% 49% 46% 46% 46% 46% 45% 45% 45% 45% 45%

Net Income to Retained Earnings 27% 49% 35% 35% 35% 35% 34% 34% 34% 34% 34%

Appendix 3 – Balance Sheet

Balance Sheet 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Assets + Cash & Near Cash Items 2113 11726 13358 14229 15560 16397 16717 17321 17923 16337 16839 9566

+ Short-Term Investments 19 - 0 0 0 0 0 0 0 0 0 0

+ Accounts & Notes Receivable 2100 4635 5280 5625 6150 6481 6608 6847 7085 6458 6656 3781

+ Inventories 2056 1386 1579 1682 1839 1938 1976 2047 2119 1931 1990 1131

+ Other Current Assets 986 - 2313 2757 3268 3813 4287 4801 5354 5948 6603 6900

Total Current Assets 7274 17747 22530 24293 26817 28629 29588 31017 32480 30674 32089 21378

+ Long-Term Investments 439 - 439 439 439 439 439 439 439 439 439 440

+ Gross Fixed Assets 1668 - 4056 4835 5729 6685 7516 8418 9387 10428 11578 12099

- Accumulated Depreciation 502 - 1221 1455 1724 2012 2262 2533 2825 3138 3484 3641

+ Net Fixed Assets 1166 1674 2836 3380 4005 4673 5255 5885 6562 7290 8094 8458

+ Other Long-Term Assets 13618 15243 31771 40517 50065 61150 71414 82157 93761 109624 123724 141463

Total Long-Term Assets 15223 16917 35046 44335 54509 66262 77107 88481 100762 117353 132257 150361

Total Assets 22497 34664 57576 68629 81326 94891 106696 119498 133242 148027 164345 171739

Liabilities & Shareholders' Equity + Accounts Payable 1256 1183 1348 1435 1570 1654 1686 1747 1808 1648 1699 965

Current Portion of LT Debt 2697 1477 764 764 352 352 352 157 157 157 157 157

+ Other Short-Term Liabilities 2372 2958 3370 3590 3925 4136 4217 4369 4521 4121 4248 2413

Total Current Liabilities 6325 5618 5482 5789 5847 6142 6255 6273 6486 5926 6103 3535

Long Term Debt Net 4003 10443 11920 11156 11220 11220 10869 10712 10556 10399 10243 10086

+ Other Long-Term Liabilities 424 2769 424 424 424 424 424 424 424 424 424 425

Total Long-Term Liabilities 4427 13212 12344 11580 11645 11645 11293 11136 10980 10823 10667 10511

Total Liabilities 10752 18830 30170 28949 29136 29432 28841 28546 28446 27573 27437 24557

+ Total Preferred Equity 0 0 0 0 0 0 0 0 0 0 0 1

+ Minority Interest 375 494 650 854 1124 1478 1944 2557 3363 4423 5818 7653

+ Share Capital & APIC 5388 0 0 0 0 0 0 0 0 0 0 1

+ Retained Earnings & Other Equity 5981 15340 26756 38825 51066 63981 75910 88395 101433 116031 131091 139527

Total Shareholders' Equity 11745 15834 27406 39680 52190 65459 77854 90952 104796 120454 136909 147182

Total Liabilities & Equity 22497 34664 57576 68629 81326 94891 106696 119498 133242 148027 164345 171739

Appendix 4 – Balance Sheet: Common Size

Balance Sheet 2013 2014 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F

Assets

+ Cash & Near Cash Items 9.39% 33.83% 23.20% 20.73% 19.13% 17.28% 15.67% 14.49% 13.45% 11.04% 10.25%

+ Short-Term Investments 0.08% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

+ Accounts & Notes Receivable 9.34% 13.37% 9.17% 8.20% 7.56% 6.83% 6.19% 5.73% 5.32% 4.36% 4.05%

+ Inventories 9.14% 4.00% 2.74% 2.45% 2.26% 2.04% 1.85% 1.71% 1.59% 1.30% 1.21%

+ Other Current Assets 4.38% 4.02% 4.02% 4.02% 4.02% 4.02% 4.02% 4.02% 4.02% 4.02%

Total Current Assets 32.33% 51.20% 39.13% 35.40% 32.97% 30.17% 27.73% 25.96% 24.38% 20.72% 19.53%

+ Long-Term Investments 1.95% 0.76% 0.64% 0.54% 0.46% 0.41% 0.37% 0.33% 0.30% 0.27%

+ Gross Fixed Assets 7.42% 7.04% 7.04% 7.04% 7.04% 7.04% 7.04% 7.04% 7.04% 7.04%

- Accumulated Depreciation 2.23% 2.12% 2.12% 2.12% 2.12% 2.12% 2.12% 2.12% 2.12% 2.12%

+ Net Fixed Assets 5.18% 4.83% 4.92% 4.92% 4.92% 4.92% 4.92% 4.92% 4.92% 4.92% 4.92%

+ Other Long-Term Assets 60.53% 43.97% 55.18% 59.04% 61.56% 64.44% 66.93% 68.75% 70.37% 74.06% 75.28%

Total Long-Term Assets 67.67% 48.80% 60.87% 64.60% 67.03% 69.83% 72.27% 74.04% 75.62% 79.28% 80.47%

Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Liabilities & Shareholders' Equity

+ Accounts Payable 5.58% 3.41% 2.34% 2.09% 1.93% 1.74% 1.58% 1.46% 1.36% 1.11% 1.03%

Current Portion of LT Debt 11.99% 4.26% 1.33% 1.11% 0.43% 0.37% 0.33% 0.13% 0.12% 0.11% 0.10%

+ Other Short-Term Liabilities 10.55% 8.53% 5.85% 5.23% 4.83% 4.36% 3.95% 3.66% 3.39% 2.78% 2.58%

Total Current Liabilities 28.12% 16.21% 9.52% 8.44% 7.19% 6.47% 5.86% 5.25% 4.87% 4.00% 3.71%

Long Term Debt Net 17.79% 30.13% 20.70% 16.25% 13.80% 11.82% 10.19% 8.96% 7.92% 7.03% 6.23%

+ Other Long-Term Liabilities 1.89% 7.99% 0.74% 0.62% 0.52% 0.45% 0.40% 0.36% 0.32% 0.29% 0.26%

Total Long-Term Liabilities 19.68% 38.11% 21.44% 16.87% 14.32% 12.27% 10.58% 9.32% 8.24% 7.31% 6.49%

Total Liabilities 47.79% 54.32% 52.40% 42.18% 35.83% 31.02% 27.03% 23.89% 21.35% 18.63% 16.69%

+ Total Preferred Equity 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

+ Minority Interest 1.67% 1.42% 1.13% 1.24% 1.38% 1.56% 1.82% 2.14% 2.52% 2.99% 3.54%

+ Share Capital & APIC 23.95% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

+ Retained Earnings & Other Equity

26.59% 44.25% 46.47% 56.57% 62.79% 67.43% 71.15% 73.97% 76.13% 78.38% 79.77%

Total Shareholders' Equity 52.21% 45.68% 47.60% 57.82% 64.17% 68.98% 72.97% 76.11% 78.65% 81.37% 83.31%

Total Liabilities & Equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Appendix 5 – Capital Structure computations

Capital Structure

(in thousands, except per share amounts) As Adjusted

Cash, cash equivalents and marketable securities 7691726 11649496

Other long-term obligations, current portion 1,477,082 1,477,082

Long-term debt and other long-term obligations, less current portion:

4.50% Senior Unsecured Notes due April 2021 994425 994425

3.05% Senior Unsecured Notes due December 2016 699499 699499

4.40% Senior Unsecured Notes due December 2021 1247933 1247933

5.65% Senior Unsecured Notes due December 2041 997942 997942

2.05% Senior Unsecured Notes due April 2019 499232 499232

3.70% Senior Unsecured Notes due April 2024 1747340 1747340

4.80% Senior Unsecured Notes due April 2044 1746669 1746669

2.350% Senior Notes due February 2020 offered hereby

— 498860

3.500% Senior Notes due February 2025 offered hereby

— 1748355

4.500% Senior Notes due February 2045 offered hereby

— 1739728

Other long-term obligations 482542 482542

Total long-term debt and other long-term obligations, less current portion

8415582 12402525

Equity component of currently redeemable convertible notes

27382 27382

Stockholders’ equity

Preferred stock, $0.001 par value; 5,000 shares authorized; none outstanding

— —

Common stock, $0.001 par value; shares authorized of 5,600,000 at September 30, 2014; shares issued and outstanding of 1,513,593 at September 30, 2014(1)

1514 1514

Additional paid-in capital(1) 2143092 2143092

Accumulated other comprehensive income 173962 173962

Retained earnings 11247655 11247655

Total Gilead stockholders’ equity 13566223 13566223

Noncontrolling interest 297387 297387

Total stockholders’ equity 13863610 13863610

Total capitalization 23783656 27770599

% %

Total long-term debt and other long-term obligations, less current portion

8415582 38% 12,402,525 47%

Total stockholders’ equity 13863610 62% 13,863,610 53%

Capital Structure 22279192 26,266,135

Appendix 6 – Income statement Estimate Assumptions

Appendix 7 - Balance Sheet Assumptions

Balance Sheet Assumptions

Assets

+ Cash & Near Cash Items Increase at same rate as revenue

+ Short-Term Investments No change Year over Year

+ Accounts & Notes Receivable Increase at same rate as revenue

+ Inventories Increase at same rate as revenue

+ Other Current Assets Average Common Size Analysis of 4.02% of Total Assets from years 2011-

2013

+ Long-Term Investments No change Year over Year

+ Gross Fixed Assets Average Common Size Analysis of 7.04% of Total Assets from years 2011-

2013

- Accumulated Depreciation 31.12% Average Depreciation as percentage of Gross Fixed Assets from

years 2003-2013

+ Other Long-Term Assets Difference between Total Liabilities & Equity and Total Assets

Liabilities & Shareholders' Equity

+ Accounts Payable Increase at same rate as revenue

Current Portion of LT Debt In accordance to Debt Schedule

+ Other Short-Term Liabilities Increase at same rate as revenue

Long Term Debt Net Total Debt Net Current Portion

+ Other Long-Term Liabilities No change Year over Year

+ Total Preferred Equity No change Year over Year

+ Minority Interest Minority Interest Growth Rate of 31.53% based on average growth over 6

year period

+ Share Capital & APIC No issuance of new shares outstanding

+ Retained Earnings & Other Equity Retained Earnings plus Net Income after dividend payouts and Net

change in Shares outstanding times market price

Income Statement Assumptions

Revenues

- COGS (inlcuding D&A) Increase at same rate as revenue

- Selling, General & Admin Expense Increase at same rate as revenue

Research & Development Increase at same rate as revenue

- Interest Expense Effective Interest rate 3.95%

- Foreign Exchange Losses (Gains) No change Year over Year

- Net Non-Operating Losses (Gains) No change Year over Year

- Income Tax Expense Effective Income Tax Rate 18.827%

- Minority Interests No change Year over Year

Net Income to Retained Earnings Dividend Payout ratio of 24.15%

EPS Net Income / Shares Outstanding after share repurchased program effect

Appendix 9 - DCF Assumptions

Variable Value Basis

Risk Free rate 2.17% 1 Jan 2015 10 year US Govt Bond ( USGG10YR:IND)

Market Risk Premium 5.52% Country Default Spreads and Risk Premiums (Aswath Damodaran - NYU)

Beta 1.05 Regression of stock returns with market returns

Cost of Equity 7.97% CAPM Model ( Team computations)

Pre Tax cost of Debt 3.70% Weighted average of most recently issued debt

Cost of Debt, post-tax 3.00% 19.1% tax rate as per the company data

Debt component 47.00% Team Computations - book value of debt and equity

Equity Component 53.00% Team Computations - book value of debt and equity

WACC 5.63% Team Computations

1. Risk Free Rate: The risk free was based on the most recently issued 10 year US Govt. Bond’s yield as of 1st

Jan,2015

2. Beta: The beta was computed using a regression of the weekly returns of the Gilead against S&P returns from 1995 – 2014.

3. Market Risk Premium: The market risk premium is based on the study of Professor Aswath Damodaran of NYU. The study

is based on the sovereign ratings of Moody’s adjusted over the default free government bond.

(http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html)

4. Pre-tax Cost of Debt: The pre-tax cost of debt is based on the most recently issued debt by Gilead on November 2014.

5. Capital Structure: The capital structure is based on the book value of debt and equity based on the Q4, 2014 earnings

results. The ratio takes into account the recently issued debt of $ 4.5B but does not consider the recently announced $15B share buy-back program.

Appendix 10 FCFF Assumptions (Other Estimates and Computations)

Revenue Estimates – Sovaldi & Harvoni

The revenues for Harvoni and Sovaldi were forecasted based on the potential

market size and the number of competitors in the market. Since Hepatitis is a

curable treatment, we identified the potential market size – specifically for USA

and Europe since they are the biggest market and account for more than 99% of

the revenues.

The revenues were estimated based on the number of patients to be treated per

year and the expected cost of the treatment per year. The expected costs, take

into account, the effect of bulk discounts and expected competition from the

rivals.

Year Cost per year ($) Number of patients ('000) Total HEP C revenue ( $million)

2014 84000 145 10

2015 71400 175 12495

2016 63000 200 12600

2017 58800 225 13230

2018 57036 225 12833

2019 55325 225 12448

2020 53665 225 12075

2021 52055 225 11712

2022 50494 225 11361

2023 48979 225 11020

Table 2 Hepatitis C Revenue Estimates

Discount Factor Price Scenario

1 84000 For Base Case

0.85 71400 Adjustment for pricing pressure

0.75 63000 Bulk Discounts to distributors

0.7 58800 Adjustment for competitive pricing

0.03 YOY Price decrease due to various external market factors

Table 3 Pricing Scenario YOY

As of 2014, based on the total revenues of $1.6 billion and average cost of $55,000 for the treatment, we calculated the number

of patients treated to be roughly 29982. Since the market in Europe is roughly double than US, Gilead should have strong

aggressive campaign in the years to come to capture as much market as possible. We estimate the number of patients treated

per year will almost triple in next 5 year in Europe. The cost per year is estimated to decline by 3% as shown in the table

tomorrow.

Market Size (Millions)

US market size 4

Europe market size 7

Japan 1.5

Canada/Australia/NZ 1.5

India 12

Worldwide ( WHO estimates)

200

Table 1 Potential Market Size - Hep C

Year Cost Number of patients Revenue ($ millions)

2014 55000 29982 1649

2015 53350 40475 2159

2016 51750 54642 2828

2017 50197 73767 3703

2018 48691 92208 4490

2019 47230 110650 5226

2020 45813 127247 5830

2021 44439 139972 6220

2022 43106 146971 6335

2023 41813 154319 6452

Table 4 Revenue Estimates (Europe)

Revenue Estimates – HIV

Drug 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014

Atripla 574 574 574 574 521 3470 3470 3470 3470 3470

Truvad 501 501 3340 3340 3340 3340 3340 3340 3340 3340

Viread 17 33 66 132 265 529 1058 1058 1058 1058

Emtriva 0 0 0 0 0 0 0 0 0 0

Complera 6676 6069 5517 5015 4559 3507 2698 2075 1596 1228

Stribild 6507 5915 5378 4889 4444 3419 2630 2023 1556 1197

Letairis 113 113 113 113 113 113 113 113 756 595

Table 5 HIV Revenue Estimates

For the HIV segment, the market seems to be in a mature stage with revenues stabilizing for the past 3 years. Some of the key assumptions in revenue estimations are as follows.

The revenue growth as highlighted in the table is the CAGR for past 3 years.

Once the patent of a drug expires, its revenues are slashed by 50% YOY.

The revenues highlighted in the table above are combined for all the regions.

Revenue Estimates – Other Drugs

The revenues of the remaining drugs in the Gilead’s portfolio were estimated to

grow at a rate of 3% YOY based on the historical growth. The growth rate of this

segment is assumed to be flat at 3 % in the short term in absence of any specific

niche market and the limited market accessibility.

Table 6 Estimation of remaining drugs ($million)

In the long term, all the revenues are expected to grow at 2.25% annually at a stable rate. This is based on the average of the

long term USA and Europe’s GDP growth rate.

Working Capital – Computations

The working capital expenditure is based on the balance sheet estimates. The computations for the net working capital are as

shown in the table below.

Drug CAGR Expiration year

Atripla 2% 2018

Truvad 5% 2021

Viread 13% 2107

Emtriva 0 2021

Complera 30% 2023

Stribild 30% 2022

Letairis 27% 2015

Figure 14 Additional Data

Drug 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014

Remaining Products

1588 1536 1486 1437 1390 1344 1300 1257 1216 1176

Capital Expenditure

The Capital Expenditure is computed as % of the revenues. And for the terminal value calculations, we estimated by taking the

historical average as percentage of sales for past 10 years.

Depreciation & Amortization

Depreciation & Amortization for the calculation is estimated as % of the Gross PP&E estimates from the Balance sheet. For the

long term estimates, D&A are taken as the historical average of PP&E as percentage of PPE.

FCFF Computation

The formula used to compute the FCF is as follows. YOY calculation for the FCFF are as shown in Table 8 below.

FCFF = EBIT (I – tax rate) + Depreciation & Amortization – Net Working Capital – Capital Expenditure

FCCF Inputs 2015 2016 2017 2018 2019 2020 2021 2022 2023

EBIT 15860 16662 18724 19555 18346 19112 19788 18008 18571

Tax Rate 18.80% 18.80% 18.80% 18.80% 18.80% 18.80% 18.80% 18.80% 18.80%

D&A 0.243 0.290 0.343 0.400 0.450 0.504 0.562 0.640 0.693

Working Capital 4920 1455 2466 1516 846 1410 1251 -1246 1238

Cap Ex 780 823 913 956 930 963 997 909 936

FCFF 7179 11252 11825 13407 13121 13146 13820 14960 12906

PV of FCFF 7179 10652 10598 11376 10540 9997 9949 10196 8327

Table 7 FCFF Computations (Team Estimates)

Appendix 11 – Product Pipeline

Drug Name Potential Indication Testing Phase Single Tablet Regimen HIV/AIDS Submitted for Approval

Fixed-dose Co-formulation HIV/AIDS Phase 3

Single Tablet Regimen HIV/AIDS Phase 2

Fixed-Dose Combination of sofosbuvir and GS-5816

Chronic HCV infection Phase 3

Vedroprevir Chronic HCV infection Phase 2

GS-9669 Chronic HCV infection Phase 2

GS-9857 Chronic HCV infection Phase 1

Tenofovir Alafenamide Chronic HBV infection Phase 3

GS-4774 Chronic HBV infection Phase 2

GS-9620 Chronic HBV infection Phase 2

Simtuzumab Liver Fibrosis; Primary Sclerosing Cholangitis; Nonalcoholic Steatohepatitis

Phase 2

Idelalisib Frontline Chronic Lymphocytic Leukemia; Indolent non-Hodgkin’s Lymphoma

Phase 3

Momelotinib Myelofibrosis Phase 3

Idelalisib Frontline Indolent non-Hodgkin’s Lymphoma Phase 2

Momelotinib Pancreatic Cancer Phase 2

Simtuzumab Myelofibrosis; Colorectal Cancer Phase 2

GS-9973 Hematological Malignancies Phase 2

GS-9901 Hematological Malignancies Phase 1

GS-5745

Solid Tumors; Ulcerative Colitis Phase 1

Ranolazine Incomplete Revascularization Post-PCI Phase 3

Fixed-dose Combination of ranolazine and dronedarone

Paroxysmal Atrial Fibrillation Phase 2

GS-4997 Pulmonary Arterial Hypertension Phase 2

GS-6615 Ventricular Tachycardia/ Ventricular Fibrillation Phase 2

GS-6615 Long QT-3 Syndrome; Hypertrophic Cardiomyopathy

Phase 1

Simtuzumab Idiopathic Pulmonary Fibrosis Phase 2

GS-5806 Respiratory Syncytial Virus Phase 2

GS-4997 Diabetic Nephropathy Phase 2

GS-6637 Drug Addiction Phase 1

Appendix 12 - Product Portfolio

Brand Name

Drug Name(s) Indication USA Date Approved

Marketing Partner(s)

U.S. Patent Expiration

European Patent Expiration

AmBisome liposomal amphotericin B

fungal infection, cryptococcal meningitis, Aspergillus, Candida, Cryptococcus infections

8/11/97 Astellas Pharma(USA) Rapiscan(EU)

2016 2008

Atripla tenofovir, emtricitabine, and efavirenz

HIV, AIDS 7/12/06 Bristol-Myers Squibb

2021 2018

Cayston Aztreonam Cystic Fibrosis 2/22/10 2021 2021

Complera/ Eviplera

tenofovir, emtricitabine, and rilpivirine

HIV, AIDS 8/10/11 Johnson and Johnson

Emtriva emtricitabine HIV, AIDS 7/2/03 2021 2016

Flolan epoprostenol sodium pulmonary hypertension 9/20/95 GlaxoSmithKline expired expired

Harvoni sofosbuvir, ledipasvir Hepatitis C 10/10/14

Hepsera adefovir dipivoxil hepatitis B (HBV) 9/20/02 2014 2011

Letairis ambrisentan Pulmonary arterial hypertension 6/15/07 GlaxoSmithKline 2015 2015

Lexiscan regadenoson myocardial perfusion imaging 4/10/08 Astellas 2019 2020

Macugen pegaptanib sodium solution

age-related macular degeneration

12/17/04 OSI and Pfizer 2017 2017

Ranexa ranolazine angina 1/27/06 Hoffmann–La Roche

2019 2019

Sovaldi sofosbuvir Hepatitis C 12/6/13

Stribild elvitegravir, cobicistat, emtricitabine, tenofovir

HIV, AIDS 8/27/12

Tamiflu oseltamivir phosphate

influenza 10/27/99 Hoffmann–La Roche

2016 2016

Truvada emtricitabine and tenofovir

HIV, AIDS 8/2/04 2021 2018

Tybost cobicistat HIV, AIDS 2013-09-25* 2014-09-24

Viread tenofovir HIV, AIDS, hepatitis B 10/26/01 2017 2018

Vistide cidofovir CMV retinitis 6/26/96 Pfizer expired expired

Vitekta elvitegravir HIV, AIDS 2013-09-25* 2014-09-24

Zydelig idelalisib oncology, lymphoma 7/23/14

Appendix 13 - Mergers and Acquisitions (History)

Year Company Price

1999 NeXstar Pharmaceuticals $550 million

2003 Triangle Pharmaceuticals $464 million

2006 Corus Pharma, Inc. $365 million

2006 Myogen, Inc. $2.5 billion

2006 Raylo Chemicals, Inc. $148 million

2007 Nycomed fr. Altana - Cork $47 million

2009 CV Therapeutics, Inc. $1.4 billion

2010 CGI Pharmaceuticals $120 million

2010 Arresto Biosciences, Inc. $225 million

2011 Calistoga Pharmaceuticals $375 million ($225 million additional w/ milestones)

2011 Pharmasset, Inc $10.4 billion

2013 YM Biosciences, Inc $510 million

2015 Phenex Pharmaceuticals up-to $470 million

Appendix 14 – Porter Five Forces Analysis

Threat of new entrants: Low

New entrants into the biotechnology industry require a lot of capital to get started. For example, an average cost to

develop a drug in the United States is around 2.55 billion dollars. Even if a company gets the required capital to

begin researching a possible treatment, the average time required by the FDA approval process, fifteen years, makes

its very difficult for the company to produce revenue for a long period of time. There is also the possibility that a

potential drug may not even be approved by the FDA. If a new entrant into the biotechnology industry were to show

a promising treatment, it will most likely be a target for acquisition. For example, Pharmasset had potentially

promising Hepatitis C Virus treatments in its product pipeline and Gilead, eventually, acquired it.

Bargaining Power of Suppliers: Low

The items supplied to pharmaceutical companies are raw materials, labor, manufacturing, etc. The physical capital

provided by the suppliers isn’t unique which indicate low switching costs for the buyer. The concentration of

suppliers is also high relative to the biotechnology industry. Combining these two will make the supplier’s power

very low since a potential buyer can just go to a different supplier.

Bargaining Power of Buyers: Moderate

Buyers of the biotechnology industry include hospitals, pharmacies, managed care organizations, and the

government. In some areas of the world, the government is the largest buyer of treatments. This type of relationship

between biotechnology companies and the government makes the government a powerful buyer.

On the other end of the spectrum, patients only have a few options for alternative products. This type of relation

tends to reduce buying power of individuals for the term of the products patent life. Once the patent life ends, a

buyer has the ability to switch to a generic version of the treatment.

Threat of Substitute Products: Moderate

Many companies will try to release a product that is slightly better than another company’s current treatment. One

saving grace for biotechnology companies is that it takes about fifteen years for a treatment to be approved by the

FDA. When a new treatment is approved by the FDA, the potential substitute product’s switching costs will be

evaluated by customers based on price and efficacy rate. As soon as a treatment’s patent life expires, many generic

versions of the treatment will flood the market and reduce its total revenue.

Competitive Rivalry: Significant

The biotechnology industry has shifted from the typical conglomerate structure of offering a myriad of treatments to

more focused treatments. Each company tries to employ a focus strategy where they will emphasize certain

treatments, like HCV for Gilead. The outcome is a race for each company to be the de facto industry leader of certain

treatments. Even when a blockbuster drug is released, there is still a chance another treatment may out-compete it.

For example, Gilead stated it has the capacity to treat 250,000 patients in 2015 with HCV. In the United States alone,

there are over 3.2 million potential patients that are eligible for the treatment. This could make people wait for a

few years to get treatment or they could use a competitor’s product instead.

Another major source of rivalry is seen in the recent contracts with biotechnology and health insurance providers.

Health insurance providers set the pace for how many potential treatments are purchased in a given year. Many

biotechnology companies have been vying for these lucrative contracts in which only their product is offered to

hundreds of thousands of people and their competitor is completely left out.

Appendix 15 – Litigations (excerpt from 10-k)

Litigation Related to Sofosbuvir

In January 2012, we acquired Pharmasset, Inc. (Pharmasset). Through the acquisition, we acquired sofosbuvir, a nucleotide

analog that acts to inhibit the replication of the hepatitis C virus (HCV). In December 2013, we received U.S. Food and Drug

Administration (FDA) approval of sofosbuvir, now known commercially as Sovaldi. In October 2014, we also received approval of

the fixed dose combination of ledipasvir and sofosbuvir (LDV/SOF), now known commercially as Harvoni. We have received a

number of contractual and intellectual property claims regarding sofosbuvir. We have carefully considered these claims both

prior to and following the acquisition and believe they are without merit.

We own patents that claim sofosbuvir as a chemical entity and its metabolites. However, the existence of patents does

not necessarily guarantee our right to practice the patented technology or commercialize the patented product. Third parties

may have, or may obtain rights to, patents that allegedly could be used to prevent or attempt to prevent us from

commercializing sofosbuvir. For example, we are aware of patents and patent applications owned by other parties that may be

alleged by such parties to cover the use of sofosbuvir. We cannot predict the ultimate outcome of contractual and intellectual

property claims related to sofosbuvir, and we have and may continue spend significant resources enforcing and defending these

patents.

If these parties successfully obtain valid and enforceable patents, and successfully prove infringement of those patents

by sofosbuvir, we could be prevented from selling sofosbuvir unless we were able to obtain a license under such patents. Such a

license may not be available on commercially- reasonable terms or at all.

Arbitration with F. Hoffman-La Roche Ltd and Hoffman-La Roche Inc. (collectively, Roche)

Gilead (as successor to Pharmasset) is a party to a collaboration agreement with Roche. The agreement granted Roche

rights to develop PSI-6130, a cytidine analog, and its prodrugs, for the treatment of HCV infection. The collaborative research

efforts under the agreement ended in 2006. In March 2013, Roche served an arbitration against us and Pharmasset, predecessor

to Gilead Pharmasset LLC. In the arbitration demand, Roche asserted that it had an exclusive license to sofosbuvir pursuant to

the collaboration agreement because sofosbuvir, a prodrug of a uridine analog, is allegedly a prodrug of PSI-6130, a cytidine

analog. Roche further claimed that, because it had exclusive rights to sofosbuvir, it also had an exclusive license to a patent

covering sofosbuvir, and that we infringed that patent by selling and offering for sale products containing sofosbuvir. Gilead and

Gilead Pharmasset LLC filed their response to Roche's arbitration demand in April 2013. The arbitration hearing was held in New

York in June 2014. In August 2014, the arbitration panel determined that Roche failed to establish any of their claims and ruled

in favor of us. As a result, Roche is not entitled to any damages or other relief.

Interference Proceedings and Litigation with Idenix Pharmaceuticals, Inc. (Idenix)

In February 2012, we received notice that the U.S. Patent and Trademark Office (USPTO) had declared Interference No. 105,871

(First Idenix Interference) between our U.S. Patent No. 7,429,572 and Idenix's pending U.S. Patent Application No. 12/131,868.

An interference is an administrative proceeding before the USPTO designed to determine who was the first to invent the subject

matter claimed by both parties. Our patent covers metabolites of sofosbuvir and RG7128, a prodrug of a cytidine nucleoside

analog that Pharmasset licensed to Roche. Idenix is attempting to patent a class of compounds, including these metabolites. The

purpose of the First Idenix Interference was to determine who was first to invent these compounds and therefore who is

entitled to the patent claiming these compounds. In March 2013, the USPTO Patent Trial and Appeal Board (the Board)

determined that Idenix is not entitled to the benefit of any of its early application filing dates because none of those patent

applications, including the application that led to Idenix’s U.S. Patent No. 7,608,600 (the ‘600 patent), taught how to make the

compounds in dispute. The Board also determined that because we are entitled to the filing date of our earliest application, we

were first to file the patent application on the compounds in dispute, and we were therefore the “senior party” in the First

Idenix Interference. On January 29, 2014, the Board determined that Pharmasset and not Idenix was the first to invent the

compounds in dispute and accordingly Gilead prevailed. In its decision, the Board held that Idenix failed to prove that it was first

to conceive of any of the compounds in dispute. Specifically, Idenix failed to prove that the Idenix inventors had identified the

structure, a method of making and a use for any of the disputed compounds. The Board went on to conclude that Idenix failed

to work diligently toward making and testing the compounds in dispute during the relevant time period. Idenix has appealed the

Board’s decisions to the U.S. District Court for the District of Delaware. If either or both of the Board’s decisions are reversed on

appeal and the court determines that Idenix is entitled to their patent claims, and it is determined that we have infringed those

claims, we may be required to obtain a license from and pay royalties to Idenix to commercialize sofosbuvir and RG7128 in the

United States. A decision by the District Court can be appealed by either party to the U.S. Court of Appeals for the Federal Circuit

(CAFC).

We believe the claims in the Idenix application involved in the First Idenix Interference, and similar U.S. and foreign

patents claiming the same compounds and metabolites, are invalid. As a result, we filed an Impeachment Action in the Federal

Court of Canada to invalidate Idenix Canadian Patent No. 2,490,191 (the ‘191 patent), which is the Canadian patent that

corresponds to the ‘600 patent and the Idenix patent application that was the subject of the First Idenix Interference. Idenix has

now asserted that the commercialization of Sovaldi in Canada will infringe its ‘191 patent and that our Canadian Patent No.

2,527,657, corresponding to our U.S. Patent No. 7,429,572 in the First Idenix Interference, is invalid. A trial on these issues is

scheduled to commence in January 2015 in Toronto.

We filed a similar legal action in Norway in the Oslo District Court seeking to invalidate Idenix's corresponding

Norwegian patent. In September 2013, Idenix filed an invalidation action in the Norwegian proceedings against our Norwegian

Patent No. 333700 patent, which corresponds to our U.S. Patent No. 7,429,572 patent. The trial was held in November 2013. On

March 21, 2014, the Norwegian court found all claims in the Idenix Norwegian patent to be invalid and upheld the validity of all

claims in the challenged Gilead patent. Additionally, the Norwegian court ordered Idenix to pay us over $2.0 million in attorney

fees as the losing party to the litigation. On April 30, 2014, Idenix appealed the March 21, 2014 decision to the Norwegian Court

of Appeal. Idenix’s obligation to pay our attorneys’ fees will be stayed during the pendency of the appeal. The appeal from the

March 2014 decision is scheduled to commence in December 2015.

In August 2013 and April 2014, Idenix filed two separate requests for invalidation with the Chinese Patent Office of our

Chinese Patent CN ZL200480019148.4, which corresponds to our U.S. Patent No. 7,429,572 patent. In August 2014 Idenix

withdrew its invalidation requests and the Chinese proceedings were terminated with our challenged patent remaining valid and

enforceable.

We filed a legal action in the Federal Court of Australia seeking to invalidate Idenix’s Australian patent corresponding to the ‘600

patent. In April 2013, Idenix asserted that the commercialization of sofosbuvir will infringe the Australian patent corresponding

to the ‘600 patent. A trial on these issues is scheduled to commence in September 2015 in Sydney.

On March 12, 2014 the European Patent Office (EPO) granted Idenix European Patent No. 1 523 489 (the ‘489 patent),

which corresponds to the ‘600 patent. The same day that the ‘489 patent granted, we filed an opposition with the EPO seeking

to revoke the ‘489 patent. Also on that day, Idenix initiated infringement proceedings against Gilead in the United Kingdom,

Germany and France alleging that the commercialization of Sovaldi in those countries would infringe the respective national

counterparts of the ‘489 patent. In the United Kingdom, a trial was held in October 2014 to determine the issues of infringement

and validity of the Idenix United Kingdom patent. A decision is expected in the fourth quarter of 2014. In Germany, the court in

Düsseldorf has ordered a hearing date of December 2, 2014 to determine the issue of infringement of the Idenix German patent.

We do not have a trial date for the French lawsuit.

Idenix has not been awarded patents corresponding to the ‘600 patent in Japan or China. In the event such patents issue, we

expect to challenge them in proceedings similar to those we invoked in Europe, Canada, Norway and Australia. If the courts

hearing these proceedings determine that Idenix is entitled to their patent claims and it is determined that we have infringed

those claims, we may be required to obtain a license from and pay royalties to Idenix to commercialize sofosbuvir and RG7128 in

that country.

In December 2013, after receiving our request to do so, the USPTO declared Interference No. 105,981 (Second Idenix

Interference) between our pending U.S. Patent Application No. 11/854,218 and the ‘600 patent. The ‘600 patent includes claims

directed to methods of treating HCV with nucleoside compounds similar to those which were involved in the First Idenix

Interference. The Second Idenix Interference will determine who was first to invent the claimed methods of treating HCV. In the

declaration of the Second Idenix Interference, the USPTO has initially designated Gilead as the junior party based upon the

patent application filing dates appearing on the face of the ‘600 patent. We believe the Board’s determinat ion in the First Idenix

Interference that Idenix is not entitled to the benefit of any of its earlier application filing dates, including the filing date of the

‘600 patent, will be equally applicable to the Second Idenix Interference. If we are correct, the Board may conclude that Gilead is

the senior party in the Second Idenix Interference, consistent with the determination in the First Idenix Interference. In light of

the Board’s conclusion in the First Idenix Interference that the application that led to the ‘600 patent does not teach how to

make the claimed compounds, it is possible that the Board will make the same determination in the Second Idenix Interference

and eliminate the need for the Board to address who was the first to invent the claimed methods of treating HCV. However, if

the Board does consider who was the first to invent the claimed methods of treating HCV and ultimately concludes that Gilead

was first, the claims in the ‘600 patent may be revoked. If the Board determines that Idenix was first to invent and is entitled to

these patent claims, and it is determined in other proceedings that we have infringed those claims, we may be required to

obtain a license from and pay royalties to Idenix to commercialize sofosbuvir and RG7128. Any determination by the Board can

be appealed by either party to U.S. federal court.

In December 2013, Idenix, Universita Degli Studi di Cagliari (UDSG), Centre National de la Recherche Scientifique and

L’Université Montpellier II sued us in U.S. District Court for the District of Delaware alleging that the commercialization of

sofosbuvir will infringe the ‘600 patent and that an interference exists between the ‘600 patent and our U.S. Patent No.

8,415,322. We believe that the claims in the ‘600 patent are invalid and that we have the sole right to commercialize sofosbuvir.

However, if the court disagrees with our view and further determines that the ‘600 patent is infringed, we may be required to

obtain a license from and pay royalties to Idenix to commercialize sofosbuvir. A decision by the District Court can be appealed by

either party to the CAFC.

Also in December 2013, Idenix and UDSG sued us in the U.S. District Court for the District of Massachusetts alleging that

the commercialization of sofosbuvir will infringe U.S. Patent Nos. 6,914,054 and 7,608,597. On June 30, 2014, the court in

Massachusetts granted our request and transferred the Massachusetts litigation to the U.S. District Court for the District of

Delaware. We believe that Idenix’s patents are invalid and would not be infringed by our commercialization of sofosbuvir and

that we have the sole right to commercialize sofosbuvir. However, if the court disagrees with our view and determines that

these patents are infringed, we may be required to obtain a license from and pay royalties to Idenix to commercialize sofosbuvir.

A decision by the District Court can be appealed by either party to the CAFC.

Idenix was acquired by Merck & Co., Inc. (Merck) in August 2014. While the acquisition does not change our view of the

lack of merit in the claims made by Idenix, Merck has greater resources than Idenix and may therefore choose to fund the

litigation at higher levels than Idenix.

Litigation with Merck

In August 2013, Merck contacted us requesting that we pay royalties on the sales of sofosbuvir and obtain a license to U.S.

Patent Nos. 7,105,499 and 8,481,712, which it co-owns with Isis Pharmaceuticals, Inc. We believe that Merck’s patents are

invalid and would not be infringed by our commercialization of sofosbuvir and that we have the sole right to commercialize

sofosbuvir. Accordingly, in August 2013, we filed a lawsuit in the U.S. District Court for the Northern District of California seeking

a declaratory judgment that the Merck patents are invalid and not infringed. Merck’s U.S. Patent Nos. 7,105,499 and 8,481,712

cover compounds which do not include, but may relate to, sofosbuvir. During patent prosecution, Merck amended its patent

application in an attempt to cover compounds related to sofosbuvir and ultimately extract royalty payments for sofosbuvir’s

commercialization, or to exclude it from the market. If the court determines that Merck’s patents are valid and that we have

infringed those claims, we may be required to obtain a license from and pay royalties to Merck to commercialize sofosbuvir.

Either party can appeal a decision by the District Court to the CAFC. The court has set a trial date of March 7, 2016 for this

litigation.

Litigation with AbbVie, Inc. (AbbVie)

AbbVie has obtained U.S. Patent Nos. 8,466,159, 8,492,386, 8,680,106, 8,685,984, and 8,809,265 which purport to cover the use

of a combination of LDV/SOF for the treatment of HCV. Gilead is aware that AbbVie has pending patent applications in other

countries. We own published and pending patent applications directed to the use of combinations for the treatment of HCV,

and, specifically, to the combination of ledipasvir and sofosbuvir. Certain of those applications were filed before AbbVie’s

patents. For this reason and others, we believe AbbVie’s patents are invalid.

Accordingly, in December 2013, we filed a lawsuit in the U.S. District Court for the District of Delaware seeking declaratory

judgment that the AbbVie patents are invalid and unenforceable, as well as other relief. We believe that Abbott Laboratories,

Inc. and AbbVie conspired to eliminate competition in the HCV market by falsely representing to the USPTO that they, and not

Gilead, invented methods of treating HCV using a combination of LDV/SOF. In February and March 2014, AbbVie responded to

our lawsuit by filing two lawsuits also in the U.S. District Court for the District of Delaware alleging that our fixed-dose

combination of LDV/SOF will infringe its patents. All of those lawsuits have been consolidated into a single action. AbbVie’s

patents have not blocked or delayed the commercialization of our combination product in the United States, and we do not

expect any foreign counterparts to block or delay the commercialization around the world. If a court determines that AbbVie’s

patents are valid and that we have infringed those claims, we may be required to obtain a license from and pay royalties to

AbbVie to commercialize sofosbuvir combination products. Either party can appeal a decision by the District Court to the CAFC.

Litigation with Generic Manufacturers

As part of the approval process for some of our products, the FDA granted us a New Chemical Entity (NCE) exclusivity period

during which other manufacturers' applications for approval of generic versions of our product will not be approved. Generic

manufacturers may challenge the patents protecting products that have been granted NCE exclusivity one year prior to the end

of the NCE exclusivity period. Generic manufacturers have sought and may continue to seek FDA approval for a similar or

identical drug through an abbreviated new drug application (ANDA), the application form typically used by manufacturers

seeking approval of a generic drug.

Tenofovir Disoproxil Fumarate, Emtricitabine and Fixed-Dose Combination of Emtricitabine, Tenofovir Disoproxil Fumarate

and Efavirenz

In 2008 and 2009, we received notices that Teva Pharmaceuticals (Teva) submitted an ANDA to the FDA requesting permission

to manufacture and market a generic version of Truvada. In the notices, Teva alleged that patents associated with emtricitabine

and tenofovir disoproxil fumarate are invalid, unenforceable and/or will not be infringed by Teva's manufacture, use or sale of a

generic fixed-dose combination of emtricitabine and tenofovir disoproxil fumarate. In April 2013, we and Teva reached an

agreement to settle the ongoing patent litigation concerning the patents that protect tenofovir disoproxil fumarate in Atripla,

Truvada and Viread. Under the agreement, Teva will be allowed to launch a generic version of Viread on December 15, 2017. In

April 2014, we and Teva entered into an agreement to settle the ongoing patent litigation concerning the emtricitabine patents

that protect Atripla and Truvada.

In November 2011, we received notice that Teva submitted an abbreviated new drug submission (ANDS) to the

Canadian Minister of Health requesting permission to manufacture and market a generic fixed-dose combination of

emtricitabine and tenofovir disoproxil fumarate. In the notice, Teva alleges that three of the patents associated with Truvada are

invalid, unenforceable and/or will not be infringed by Teva's manufacture, use or sale of a generic version of Truvada. In January

2012, we filed a lawsuit against Teva in the Federal Court of Canada seeking an order of prohibition against approval of this

ANDS.

In December 2011, we received notice that Teva submitted an ANDS to the Canadian Minister of Health requesting

permission to manufacture and market a generic fixed-dose combination of emtricitabine, tenofovir disoproxil fumarate and

efavirenz. In the notice, Teva alleges that three of our patents associated with Atripla and two of Merck's patents associated

with Atripla are invalid, unenforceable and/or will not be infringed by Teva's manufacture, use or sale of a generic fixed-dose

combination of emtricitabine, tenofovir disoproxil fumarate and efavirenz. In February 2012, we filed a lawsuit against Teva in

the Federal Court of Canada seeking an order of prohibition against approval of this ANDS. In August 2012, we received notice

that Teva submitted an ANDS to the Canadian Minister of Health requesting permission to manufacture and market a generic

version of Viread. In the notice, Teva alleges that two patents associated with tenofovir disoproxil fumarate are invalid,

unenforceable and/or will not be infringed by Teva's manufacture, use or sale of a generic version of Viread, Truvada, and

Atripla. In September 2012, we filed a lawsuit against Teva in the Federal Court of Canada seeking an order of prohibition against

approval of this ANDS. Also in August 2012, Teva filed an Impeachment Action in the Federal Court of Canada seeking

invalidation of our two Canadian patents associated with Viread. We are currently defending that Impeachment Action. The

requests for orders of prohibition in connection with all three of Teva’s ANDS filings (for Teva’s generic versions of Viread,

Truvada and Atripla) were consolidated and a hearing on the consolidated requests for the orders of prohibition took place in

September 2013. In December 2013, the court issued our requested order prohibiting the Canadian Minister of Health from

issuing a Notice of Compliance for Teva’s generic versions of our Viread, Truvada and Atripla products until expiry of our patent

in July 2017. Teva appealed the decision of the court prohibiting the Minister of Heath from issuing the Notices of Compliance

until expiry of our patent in July 2017. This decision did not rule on the validity of the patents and accordingly the only issue on

appeal is whether the Minister of Health should be prohibited from issuing the Notices of Compliance for Teva’s products.

Separately, the court will determine the validity of the patents in the pending Impeachment Action. A trial in the Impeachment

Action is scheduled for March 2015. If Teva is successful in invalidating our patents, Teva may be able to launch generic versions

of our Viread, Truvada and Atripla products in Canada prior to the expiry of our patents.

In July 2012, we received notice that Lupin Limited (Lupin) submitted an ANDA to the FDA requesting permission to

manufacture and market a generic version of Truvada. In the notice, Lupin alleges that four patents associated with

emtricitabine and four patents associated with tenofovir disoproxil fumarate are invalid, unenforceable and/or will not be

infringed by Lupin's manufacture, use or sale of a generic version of a fixed-dose combination of emtricitabine and tenofovir

disoproxil fumarate. In August 2012, we filed two lawsuits against Lupin in U.S. District Court for the Southern District of New

York for infringement of our patents. In October 2012, we received notice that Lupin submitted an ANDA to the FDA requesting

permission to manufacture and market a generic version of Viread. In the notice, Lupin alleges that four patents associated with

tenofovir disoproxil fumarate are invalid, unenforceable and/or will not be infringed by Lupin's manufacture, use or sale of a

generic version of tenofovir disoproxil fumarate. In October 2012, we filed a lawsuit against Lupin in U.S. District Court for the

Southern District of New York for infringement of our patents. In May 2014, Lupin amended its ANDAs to certify that it is no

longer seeking approval to market generic versions of Truvada and Viread prior to the expiration of the four patents associated

with tenofovir disoproxil fumarate in January 2018 (including pediatric exclusivity). As a result, in May 2014, the District Court

granted Gilead and Lupin's Joint Motion for Order of Dismissal in our patent infringement lawsuit against Lupin for the tenofovir

disoproxil fumarate patents. In September 2014, we reached agreement with Lupin to settle the lawsuit related to the

emtricitabine patents that protect Truvada and Atripla. Terms of the settlement are confidential.

In July 2012, we received notice that Cipla Ltd. (Cipla) submitted an ANDA to the FDA requesting permission to manufacture and

market a generic version of Emtriva and a generic version of Viread. In the notice, Cipla alleges that two patents associated with

emtricitabine are invalid, unenforceable and/or will not be infringed by Cipla's manufacture, use or sale of a generic version of

emtricitabine and four patents associated with tenofovir disoproxil fumarate are invalid, unenforceable and/or will not be

infringed by Cipla's manufacture, use or sale of a generic version of tenofovir disoproxil fumarate. In August 2012, we filed

lawsuits against Cipla in U.S. District Court for the Southern District of New York for infringement of our patents. In July 2014, we

and Cipla reached agreement to settle those lawsuits. Terms of the settlement are confidential.

In April 2014, we received notice that Mylan Inc. (Mylan) submitted an ANDA to the FDA requesting permission to

manufacture and market a generic version of Truvada. In the notice, Mylan alleges that two of the patents associated with

emtricitabine and one of our patents associated with the fixed-dose combination of emtricitabine with tenofovir disoproxil

fumarate are invalid, unenforceable and/or will not be infringed by Mylan's manufacture, use or sale of a generic version of

Truvada. In June 2014, we filed a lawsuit against Mylan in U.S. District Court for the Northern District of West Virginia for

infringement of our patents.

In June 2014, we received notice that Mylan Inc. submitted petitions for Inter Partes Review (IPR) to the Board alleging that four

patents associated with tenofovir disoproxil fumarate are invalid. We are opposing Mylan’s petitions. We anticipate that the

Board will issue a decision on whether to institute an IPR by December 2014. If the Board institutes an IPR, we anticipate a final

decision by December 2015. Either party can appeal a decision of the Board to the CAFC. If Mylan is successful in invalidating our

patents, generic companies will be able to launch a generic version of our Viread product prior to the expiry of our patents.

In June 2014, we received notice that Apotex Inc. (Apotex) submitted an ANDS to the Canadian Minister of Health

requesting permission to manufacture and market a generic fixed-dose combination of emtricitabine and tenofovir disoproxil

fumarate and a separate ANDS requesting permission to manufacture and market a generic version of Viread. In the notice,

Apotex alleges that three of the patents associated with Truvada and two of the patents associated with Viread are invalid,

unenforceable and/or will not be infringed by Apotex's manufacture, use or sale of a generic version of Truvada or Viread. In

August 2014, we filed a lawsuit against Apotex in the Federal Court of Canada seeking an order of prohibition against approval of

this ANDS.

Ranolazine

In June 2010, we received notice that Lupin submitted an ANDA to the FDA requesting permission to manufacture and market a

generic version of sustained-release ranolazine. In the notice, Lupin alleged that ten of the patents associated with Ranexa are

invalid, unenforceable and/or will not be infringed by Lupin's manufacture, use or sale of a generic version of Ranexa. In July

2010, we filed a lawsuit against Lupin in U.S. District Court for the District of New Jersey for infringement of certain Ranexa

patents challenged by Lupin. The trial took place in April and May 2013. In August 2013, the parties reached agreement to settle

the patent litigation prior to issuance of the court’s decision. Under the agreement, Lupin would be allowed to launch a generic

version of Ranexa on February 27, 2019.

Tamiflu

In February 2011, we received notice that Natco Pharma Ltd. (Natco) submitted an ANDA to the FDA requesting permission to

manufacture and market a generic version of Tamiflu. In the notice, Natco alleges that one of the patents associated with

oseltamivir phosphate is invalid, unenforceable and/or will not be infringed by Natco's manufacture, use or sale of a generic

version of Tamiflu. In March 2011, we and Roche filed a lawsuit against Natco in U.S. District Court for the District of New Jersey

for infringement of one of the patents associated with Tamiflu. In December 2012, the court issued a ruling in favor of Gilead

and Roche that our patent is not invalid for the reason stated in Natco's notice letter. Natco has appealed this decision to the

CAFC. A hearing on Natco’s appeal took place in January 2014. The court issued a decision on April 22, 2014 which will allow

Natco’s patent invalidity challenge to proceed if the case is remanded to the District Court of New Jersey for a full trial on the

merits. On June 30, 2014, we filed a petition for rehearing en banc with the CAFC, which was subsequently denied. We have

submitted a request for an extension of time to submit our petition for certiorari to the Supreme Court and are concurrently

proceeding before the District Court.

Department of Justice Investigation

In June 2011, we received a subpoena from the U.S. Attorney's Office for the Northern District of California requesting

documents related to the manufacture, and related quality and distribution practices, of Complera, Atripla, Truvada, Viread,

Emtriva, Hepsera and Letairis. We cooperated with the government’s inquiry. On April 16, 2014, the United States Department

of Justice informed us that, following an investigation; it declined to intervene in a False Claims Act lawsuit filed by two former

employees. We have moved to dismiss the complaint

Citations

1. Gilead, Q3 2014 Financial Tear Sheet (2014)

2. Gilead, Form 10-k 2013 (2013)

3. Gilead, Form 10-k 2013 (2013)

4. Gilead, Form 10-k 2013 (2013)

5. Gilead, Form 10-k 2013 (2013)

6. Gilead, Form 10-k 2013 (2013)

7. FactSet, Management & Board Members (2014)

8. FactSet, Ownership Updates: Gilead Sciences Inc Com (GILD) for 31-Dec-2014 (2014)

9. MorningStar Vanguard Total Stock Mkt Idx Inv VTSMX: Equity View (2015)

10. FactSet, Management & Board Members (2014)

11. U.S. Department of State. 2014 Investment Climate Statement – European Union (2014)

http://www.state.gov/e/eb/rls/othr/ics/2014/231435.htm

12. ECDC. Hepatitis C (2014) http://ecdc.europa.eu/en/healthtopics/hepatitis_C/Pages/index.aspx

13. CDC. Hepatitis Populations (2014) http://www.cdc.gov/hepatitis/Populations/AAC-HepC.htm

14. CDC, ECDC Infection Rates (2014) http://www.cdc.gov/hepatitis/Statistics/index.htm

15. CDC. HIV Populations (2014) http://www.cdc.gov/hiv/statistics/basics/ataglance.html

16. ECDC. HIV Populations (2014) http://ecdc.europa.eu/en/publications/Publications/hiv-aids-surveillance-report-Europe-

2013.pdf

17. S&P Capital IQ Industry Surveys: Biotechnology (2014)

18. http://blogs.wsj.com/pharmalot/2015/02/10/gilead-faces-sovaldi-patent-challenge-in-europe-by-a-non-profit-group/

19. http://blogs.wsj.com/pharmalot/2014/09/15/gilead-deal-to-sell-sovaldi-in-poor-countries-meets-criticism/

20. http://blogs.wsj.com/pharmalot/2015/02/04/what-the-shocking-gilead-discounts-on-its-hepatitis-c-drugs-will-mean/

21. http://knoema.com/qhswwkc/us-gdp-growth-forecast-2014-2015-and-up-to-2060-data-and-charts

22. Bloomberg terminal

23. Yahoo Finance

24. Google Finance

25. Businessweek

Disclosures:

Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a

financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know

of the existence of any conflicts of interest that might bias the content or publication of this report.

Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue.

Position as an officer or director: The author(s), or a member of their household, does not serve as an officer, director or

advisory board member of the subject company.

Market making: The author(s) does not act as a market maker in the subject company’s securities.

Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and

believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as

to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any

person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or

sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA San

Francisco, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.