GILD Gilead Sciences Inc. Sector: Healthcare HOLD

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1 Analysts: Zachary Haller, Andrew Paley Brown and Sean Miller Washburn University Applied Portfolio Management GILD Sector: Healthcare HOLD Report Date: 4/18/2016 Market Cap (mm) $137,792 Annual Dividend $ Yr Beta (S&P 500 Index) 0.96 Return on Capital 113.9% Dividend Yield 1.4% Annualized Alpha 6.4% Compared With: EPS (ttm) $12.37 Price/Earnings (ttm) 7.6 Institutional Ownership 6.7% Celgene Corporation Current Price $94.44 Economic Value Added (ttm) $17,179 Short Interest (% of Shares) 2.3% Biogen Inc. 12 mo. Target Price $ Free Cash Flow Margin 46.1% Days to Cover Short 2.4 and the S&P 500 Index Business Description Gilead Sciences, Inc., a research based biopharmaceutical company, discovers, develops, and commercializes medicines in areas of unmet medical needs in North America, South America, Europe, and the Asia Pacific. The company s products include Genvoya, Stribild, Complera/Eviplera, Atripla, Truvada, Viread, Emtriva, Tybost, and Vitekta for the treatment of human immunodeficiency virus (HIV) infection in adults; and Harvoni, Sovaldi, Viread, and Hepsera products for the treatment of liver diseases. It also offers Zydelig, a PI3K delta inhibitor, in combination with rituximab, for the treatment of certain blood cancers; Letairis, an endothelin receptor antagonist for the treatment of pulmonary arterial hypertension; Ranexa, a tablet used for the treatment of Investment Thesis Gilead is a leader in the biopharmaceutical industry. The Company has approximately 8 of the Hepatitis C and HIV market Share, dominating the industry. The company has introduced new Pipeline products that have broken pharmaceutical sales records. In 2014 they more than doubled their 2013 revenue and were growing at a record breaking pace. The companies historical 3 year CAGR has EBIT and NOPAT both growing above 7 and at a faster Rate than revenue as the company continues to increase its Operational efficiency. With industry leading margins and low fixed Capital investment, Gilead has moved to the top of the list of Free Cash Flow generators in the healthcare industry. However with clout surrounding Merrick vs. Gilead Patent Infringement Case as well as new pressure from the government we expect significant decreases ANNUALIZED 3 YEAR CAGR Total Revenue 49.8% Free Cash Flow 10.6% EBIT 72.8% Total Invested Capital 66. NOPAT 82.3% Total Assets 34.6% Earnings Per Share 93.4% Economic Value Added 83.9% Dividends Per Share N/A Market Value Added 40.9% % 2 15% 1 5% 5% 1 15% GILD CELG BIIB GILD ^SPX ROA ROE ROIC Margins and Yields Operating Margin Free Cash Flow Margin Earnings Yield Dividend Yield 45.5% 44.3% 40.4% 62.7% 68. N/A 114.7% 28.3% 14.3% 46.1% 8.8% 4.7% 2.7% 8.4% 12.2% % $25,000 $20,000 $15,000 EBIT Net Operating Profit After Tax Per Share Metrics Earnings Dividends NOPAT Free Cash Flow N/A $5,000 $20,000 $18,000 $16,000 $14,000 $12,000 $8,000 $6,000 $4,000 $2,000 Economic Value Added Market Valued Added $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20, Price/Earnings Price/Free Cash Flow Datasource: Capital IQ

2 GILD Sector Healthcare Celgene Corporation CELG Sector Healthcare Income Statement Highlights Income Statement Highlights Total Revenue 8,385 9,702 11,202 24,890 32,639 Total Revenue 4,842 5,507 6,494 7,670 9,256 Cost of Goods Sold 2,124 2,471 2,859 3,788 4,006 Cost of Goods Sold ,949 Gross Profit 6,261 7,231 8,343 21,102 28,633 Gross Profit 4,344 5,024 5,507 6,779 7,307 SG&A Expense 1,214 1,280 1,699 2,983 3,426 SG&A Expense 1,226 1,374 1,685 2,028 2,300 R&D Expense 1,229 1,652 2,120 2,504 3,014 R&D Expense 1,319 1,418 1,580 1,796 2,090 Dep. & Amort Dep. & Amort Other Oper. Exp Other Oper. Exp Operating Income 3,818 4,299 4,524 15,615 22,193 Operating Income 1,509 2,038 1,980 2,697 2,638 Interest Expense (205) (361) (307) (412) (688) Interest Expense (43) (63) (92) (180) (310) Other Non Oper. Exp (9) Other Non Oper. Exp. (6) 9 (74) (30) (48) EBT ex Unusuals 3,679 3,941 4,208 15,205 21,659 EBT ex Unusuals 1,486 1,999 1,837 2,515 2,311 Total Unusual Exp. (28) (329) 0 (349) 0 Total Unusual Exp. (66) (317) (171) (188) (287) Earnings Before Tax 3,651 3,612 4,208 14,856 21,659 Earnings Before Tax 1,420 1,682 1,665 2,327 2,024 Income Tax Expense 862 1,038 1,151 2,797 3,553 Income Tax Expense Net Income 2,804 2,592 3,075 12,101 18,108 Net Income 1,318 1,456 1,450 2,000 1,602 Earnings per Share $1.81 $1.71 $2.01 $7.95 $12.37 Earnings per Share $1.45 $1.69 $1.75 $2.49 $2.02 Dividends per Share $1.73 Dividends per Share Effective Tax Rate 23.61% 28.74% 27.35% 18.83% 16.4 Effective Tax Rate 7.19% % 14.07% 20.83% Total Common Shares 1,550 1,515 1,529 1,522 1,464 Total Common Shares Year end Stock Price $ $ $ $ $ Year end Stock Price $ $ $ $ $ Balance Sheet Highlights Balance Sheet Highlights Assets Assets Cash and Equivalents 9,884 1,804 2,113 10,027 12,851 Cash and Equivalents 1,859 2,090 3,234 4,122 4,880 Short Term Investments ,756 Short Term Investments 789 1,810 2,453 3,425 1,672 Total Cash & ST Invest. 9,900 1,862 2,132 10,128 14,607 Total Cash & ST Invest. 2,648 3,901 5,704 7,565 6,583 Total Receivables 1,951 1,751 2,182 4,635 5,854 Total Receivables ,061 1,167 1,421 Inventory 1,390 1,745 1,697 1,386 1,955 Inventory Prepaid Expenses ,013 Prepaid Expenses Total Current Assets 13,919 6,156 6,997 17,714 24,763 Total Current Assets 4,353 5,534 7,551 9,713 9,401 Net PPE 774 1,100 1,166 1,674 2,276 Net PPE Total Assets 17,303 21,240 22,579 34,664 51,839 Total Assets 10,006 11,734 13,378 17,340 27,053 Liabilities and Equity Liabilities and Equity Accounts Payable 1,206 1,327 1, ,178 Accounts Payable Accrued Expenses 1,187 1,570 2,246 4,084 7,225 Accrued Expenses ,013 1,070 1,475 Short Term Debt Short Term Debt Total Current Liab. 2,515 4,238 6,407 5,761 9,891 Total Current Liab. 1,540 1,690 1,946 2,112 1,969 Long Term Debt 7,606 7,055 3,939 11,921 21,195 Long Term Debt 1,293 2,786 4,265 6,266 14,250 Total Liabilities 10,436 11,689 10,770 18,830 32,724 Total Liabilities 4,493 6,040 7,788 10,815 21,134 Preferred Equity Preferred Equity Common Stock & APIC 4,904 5,643 5,388 2, Common Stock & APIC 6,769 7,545 8,686 9,836 11,129 Retained Earnings 1,777 3,705 6,106 12,732 18,001 Retained Earnings 1,566 3,023 4,473 6,472 8,074 Treasury Stock Treasury Stock (2,761) (4,823) (7,662) (10,699) (14,052) Total Common Equity 6,739 9,310 11,434 15,441 18,536 Total Common Equity 5,513 5,695 5,590 6,525 5,919 Total Equity 6,867 9,551 11,809 15,834 19,115 Total Equity 5,513 5,695 5,590 6,525 5,919 Total Liab. and Equity 17,303 21,240 22,579 34,664 51,839 Total Liab. and Equity 10,006 11,734 13,378 17,340 27, Margins and Profitability GILD, Page 2 of 20 Copyright Robert A. Weigand, Ph.D., 2016

3 GILD CELG Celgene Corporation Profit Margins Profit Margins Gross Profit Margin 74.7% 74.5% 74.5% 84.8% 87.7% Gross Profit Margin 89.7% 91.2% 84.8% 88.4% 78.9% Operating Profit Margin 45.5% 44.3% 40.4% 62.7% 68. Operating Profit Margin 31.2% % 35.2% 28.5% Net Profit Margin 33.4% 26.7% 27.5% 48.6% 55.5% Net Profit Margin 27.2% 26.4% 22.3% 26.1% 17.3% Free Cash Flow Margin N/A 114.7% 28.3% 14.3% 46.1% Free Cash Flow Margin N/A 7.9% 0.5% 4.6% 32.9% 10 Gross Profit Margin Operating Profit Margin 10 Gross Profit Margin GILD CELG 10 Gross Profit Margin Operating Profit Margin Operating Profit Margin GILD CELG Net Profit Margin GILD CELG Free Cash Flow Margin GILD CELG Analyst Comments: Gross Profit Margin: The gross profit margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company. GILDs Gross profit margin increases steadily from 74.7% in 2011 to 87.7% in 2015, CELG has seen a decline in their gross profit margin from 89.7% in 2011 to 78.9% in The important thing to note is that with GILD, we have seen a huge increase in total revenue which makes up for the increasing COGs. Even when GILD saw a increase in COGs, they were still able to increase the gross profit margin. EBIT Margin (Operating profit margin): EBIT/Operating margin is a measurement of a company's operating profitability. This margin can provide an investor with a cleaner view of a company's core profitability. GILD sees an increase in operating profit margin from 45.5% to 68., which is amazing growth. CELGs operating margin also sees a decrease from 31.2% to 28.5% during the same period. We can conclude that during this 5 year period GILD has seen great growth while CELG have seen a decline in EBIT/Operating Profit Margin. Net Profit Margin: Net profit margin, is the ratio of net profits revenues, which shows how much of each revenue dollar earned is translated into bottom line profits. GILD s net profit margin increased from 33.4% in 2011 to 55.5% in CELG has seen a decrease in net profit margin, from 27.2% in 2011 to 17.3% in We concluded from this that GILD has increased net profit while CELG have seen a decrease in their net profit margins. Free Cash Flow Margin: Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. We want to make sure that accounting profits are backed up by tangible free cash flows. GILD has seen a slight volatile free cash flow margin, from 114.7% in 2012 to 46.1% in CELG has seen more of an increase in FCF, 7.9% in 2012 to 32.9% in Profit margin synthesis: With the new drugs GILD has produced especially in the HCV and HIV market they have seen tremendous growth, and overall have increased there profitability greatly in the past 5 years. 1. Margins and Profitability GILD, Page 3 of 20 Copyright Robert A. Weigand, Ph.D., 2016

4 GILD CELG Celgene Corporation Profitability Ratios Profitability Ratios Net Profit Margin 33.4% 26.7% 27.5% 48.6% 55.5% Net Profit Margin 27.2% 26.4% 22.3% 26.1% 17.3% Total Asset Turnover Total Asset Turnover = Return on Assets 16.2% 12.2% 13.6% 34.9% 34.9% = Return on Assets 13.2% 12.4% 10.8% 11.5% 5.9% Equity Multiplier Equity Multiplier = Return on Equity 40.8% 27.1% % 94.7% = Return on Equity 23.9% 25.6% 25.9% 30.7% 27.1% Return on Assets Return on Equity Total Asset Turnover GILD CELG 35% 3 25% 2 15% 1 5% Return on Assets Return on Equity Equity Multiplier GILD CELG Return on Assets GILD CELG Return on Equity GILD CELG Analyst Comments: Total asset turnover: The Asset Turnover ratio can often be used as an indicator of the efficiency with which a company is deploying its assets in generating revenue. GILD s total asset turnover has remained relatively constant from 2011 to 2015, ranging from.5.7. CELG has seem around a..5 to.3 decrease for the past 5 years. Total revenue and total assets are increasing at a similar rate, which is why asset turnover has remained constant. With a constant total asset turnover rate, any increase in net profit margin directly increases return on assets. Return on assets: ROA shows how efficient management is at using its assets to generate earnings. GILD s ROA has increased from 16.2% to 34.9% in the 5 year hysterics. CELG s ROA has decreased over the past 5 years from 13.2% in 2011 to 5.9% in 2015, due to a decreasing total asset turnover, and with adecrease in net profit margin. GILD has an advantage on return on assets due to a higher net profit margin than CELG. Return on equity / equity multiplier: Return on equity (ROE) is the amount of net income returned as a percentage of shareholder s equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. CELG s return on equity has increased in 2011, from 23.9% to 27.1% in GILD on the other hand has been able to increase their return on equity from 40.8% in 2011 to 94.7% in 2015; this is a direct result of an increase in equity multiplier. We can conclude that GILD is pushing out more profit with shareholder s money. 1. Margins and Profitability GILD, Page 4 of 20 Copyright Robert A. Weigand, Ph.D., 2016

5 GILD CELG Celgene Corporation Multiples and Yields Multiples and Yields Price/Earnings Price/Earnings Price/Book Price/Book Price/Free Cash Flow N/A Price/Free Cash Flow N/A 77.9 N/A Earnings Yield 8.8% 4.7% 2.7% 8.4% 12.2% Earnings Yield 4.3% 4.3% 2.1% 2.2% 1.7% Dividend Yield % Dividend Yield Price/Earnings Price/Free Cash Flow Price to Earnings GILD CELG Price/Earnings Price/Free Cash Flow Earnings Yield Dividend Yield Earnings Yield GILD CELG Earnings Yield Dividend Yield Price to Book GILD CELG 1.8% 1.6% 1.4% 1.2% % 0.6% 0.4% 0.2% 0. Dividend Yield GILD CELG Price to Free Cash Flow GILD CELG Analyst Comments: Price/Earnings: The P/ E ratio, or P/ E multiple, expresses a stock's price as a multiple of its earnings over the past 12 trailing months. As we can see in this chart, GILD s P/E ratio decreased from 2011 through 2015, from 11.3 to 8.2. It is important to note that GILD s P/E ratio is no longer within the reasonable range of CELG s P/E ratio has increased over this 5 year period, from 23.4 in 2011, to 59.2 in GILD s P/E ratio decreased because the market is willing to pay less today than they were in 2011 based on their projected future earnings. Earnings Yield: Earnings yield expresses net income (ttm) as a percentage of the price investors are currently paying to buy a fractional claim on that net income. GILD s earnings yield increased from 2011 through 2015, from 8.8% to 12.2%, seeing the majority of the increase in CELG s earnings yield has remained relatively stagnant over the last 5 years. GILD s earning yield increased therefore indicating the market is pricing their stock more cheaply relative to their earnings. Dividend Yield: Dividend yield indicates how much a company pays out in dividends each year relative to its share price. GILD s has offered their first dividend of $1.73 in CELG s has not yet offered a dividend. 2. Relative Valuation and Debt GILD, Page 5 of 20 Copyright Robert A. Weigand, Ph.D., 2016

6 GILD CELG Celgene Corporation Liquidity and Debt Liquidity and Debt Current Ratio Current Ratio Quick Ratio Quick Ratio Days Sales Outstanding Days Sales Outstanding Inventory Turnover Inventory Turnover Total Debt to Assets % 17.4% 34.4% 40.9% Total Debt to Assets 18.2% 26.4% % 52.7% Long Term Debt to Equity 112.9% 75.8% 34.4% 77.2% 114.3% Long Term Debt to Equity 23.5% 48.9% 76.3% % Times Interest Earned Times Interest Earned Current Ratio Quick Ratio 6.0 Current Ratio GILD CELG 6.0 Current Ratio Quick Ratio Days Sales Outstanding Inventory Turnover Total Debt to Assets GILD CELG Days Sales Outstanding Inventory Turnover Total Debt to Assets Long-Term Debt to Equity Long-Term Debt to Equity GILD CELG Total Debt to Assets Long-Term Debt to Equity Analyst Comments: Current Ratio: The current ratio is simply current assets over current liabilities, a quick check to make sure the company's short term liabilities can be covered by liquid short term assets. GILD s dropped significantly from 2011 to 2012 from 5.53 to 1.45, and has increased from 1.45 in 2012 to 2.50 by CELG s current ratio has increased during this period, from 2.83 in 2011 to 4.77 in We found that HON has a better likelihood of maintaining its short term liabilities since GILD s current ratio is decreasing. Total Debt to Assets: Total debt to assets defines the total amount of debt relative to assets. GILD s debt to assets decreased from 2011 to 2015, from 44% to 40.9%. CELG s total debt to assets has also increased over this 5 year period, from 18.2% to 52.7%. Based on this 5 year period, GILD has been decreasing their debt relative to their assets. Long Term Debt to Equity: Long term debt to equity is used to measure a company s financial leverage; the ratio indicates how much debt a company is using to finance its assets relative to the amount of value represented in the shareholders equity. GILD s long term debt to equity ratio has seen significant fluctuations from 2011 to 2015, starting at 112.9% and ending at 114.3%. CELG has seen a considerable increase in debt to equity over the 5 year period, from 23.5% to 240.8%. GILD uses relatively high debt to finance capital expenditures. 2. Relative Valuation and Debt GILD, Page 6 of 20 Copyright Robert A. Weigand, Ph.D., 2016

7 GILD CELG Celgene Corporation Total Invested Capital Total Invested Capital Total Cash and ST Investments 9,900 1,862 2,132 10,128 14,607 Total Cash and ST Investments 2,648 3,901 5,704 7,565 6,583 + Receivables 1,951 1,751 2,182 4,635 5,854 + Receivables ,061 1,167 1,421 + Inventory 1,390 1,745 1,697 1,386 1,955 + Inventory Accounts Payable 1,206 1,327 1, ,178 Accounts Payable Accrued Expenses 1,187 1,570 2,246 4,084 7,225 Accrued Expenses ,013 1,070 1,475 = Net Oper. Working Capital 10,849 2,461 2,509 11,110 14,013 = Net Oper. Working Capital 2,939 4,197 5,937 7,856 6,732 + Net Property, Plant & Equip ,100 1,166 1,674 2,276 + Net Property, Plant & Equip = Total Invested Capital 11,623 3,562 3,675 12,784 16,289 = Total Invested Capital 3,445 4,776 6,530 8,499 7,546 Total Weighted Shares 1,550 1,515 1,529 1,522 1,464 Total Weighted Shares = Total Invested Capital/Share $7.50 $2.35 $2.40 $8.40 $11.13 = Total Invested Capital/Share $3.78 $5.54 $7.89 $10.59 $9.52 Net Property, Plant & Equip. Total Invested Capital Net Property, Plant & Equip. Total Invested Capital $18,000 $16,000 $14,000 $12,000 $8,000 $6,000 $4,000 $2,000 Total Invested Capital per Share GILD CELG $12.00 $10 $8.00 $6.00 $4.00 $ $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 GILD CELG Celgene Corporation NOPAT and Free Cash Flow NOPAT and Free Cash Flow Operating Income (EBIT) 3,818 4,299 4,524 15,615 22,193 Operating Income (EBIT) 1,509 2,038 1,980 2,697 2,638 (1 Effective Tax Rate) 23.6% 28.7% 27.4% 18.8% 16.4% (1 Effective Tax Rate) 7.2% 13.4% 12.9% 14.1% 20.8% = Net Oper. Profit After Tax 2,917 3,064 3,287 12,675 18,552 = Net Oper. Profit After Tax 1,400 1,765 1,724 2,317 2,088 Total Invested Capital N/A (8,061) 113 9,109 3,505 Total Invested Capital N/A 1,331 1,755 1,968 (953) = Free Cash Flow N/A 11,125 3,173 3,566 15,047 = Free Cash Flow N/A 434 (31) 349 3,041 NOPAT per Share $1.88 $2.02 $2.15 $8.33 $12.67 NOPAT per Share $1.54 $2.05 $2.08 $2.89 $2.64 Free Cash Flow per Share N/A $7.34 $2.08 $2.34 $10.28 Free Cash Flow per Share N/A.50 (.04).43 $3.84 Net Operating Profit After Tax Free Cash Flow Net Operating Profit After Tax Free Cash Flow $20,000 $15,000 $5,000 NOPAT per Share GILD CELG $14.00 $12.00 $10 $8.00 $6.00 $4.00 $ $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 ($500) Analyst Comments: Net Property, Plant & Equipment: Net Property Plant and Equipment is the value of all buildings, land, furniture, and other physical capital that a business has purchased to run its business. GILD has increased their PPE each year, increasing from $.774 billion in 2011 to $2.276 billion in Net PPE makes up a small portion of PEP's total invested capital (They are a working capital intensive firm), and as we can see GILD utilizes net operating working capital. Net Operating Profit After Tax and Free Cash Flow: NOPAT is simply after tax EBIT. NOPAT is used by analysts and investors as a precise and accurate measurement of profitability to compare a company's financial results across its history and against competitors. GILD s NOPAT has increased from 2011 to Along with the large increase in NOPAT, GILD has seen an increase in free cash flow from $ billion in 2012 to $147 billion in Just to reiterate Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. 3. Value Creation and DCF Model GILD, Page 7 of 20 Copyright Robert A. Weigand, Ph.D., 2016

8 GILD CELG Celgene Corporation Cost of Capital 2015 Weight % Cost Weighted % Cost of Capital 2015 Weight % Cost Weighted % Equity Capitalization $148, % 9.043% 7.911% Equity Capitalization $94, % % Total Debt $21, % % + Total Debt $14, % % + Preferred Stock Preferred Stock = Value of All Securities $169, = Value of All Securities $109, Effective Tax Rate 16.4 Alternative RF Rate: Effective Tax Rate 20.83% Alternative RF Rate: Risk Free Rate 1.791% 1.791% Risk Free Rate 1.791% 1.791% Beta (5 Yr) Alternative Beta: Beta (5 Yr) Alternative Beta: Market Risk Premium 7. Market Risk Premium 7. CAPM Cost of Equity 9.043% CAPM Cost of Equity % Weighted Average Cost of Capital: 8.434% Weighted Average Cost of Capital: 9.337% 8.434% 8.434% 8.434% 8.434% 8.434% GILD CELG Celgene Corporation ROIC, EVA and MVA ROIC, EVA and MVA Return on Invested Capital 25.1% % 99.1% 113.9% Return on Invested Capital 40.6% % 27.3% 27.7% Economic Value Added 1,937 2,763 2,977 11,597 17,179 Economic Value Added 1,079 1,319 1,114 1,524 1,384 Market Valued Added 24,978 46, , , ,606 Market Valued Added 25,266 28,122 64,338 83,265 88,955 EVA per Share $1.25 $1.82 $1.95 $7.62 $11.73 EVA per Share $1.18 $1.53 $1.35 $1.90 $1.75 MVA per Share $16.12 $30.58 $67.62 $84.11 $88.53 MVA per Share $27.75 $32.63 $77.73 $ $ ,000 15,000 10,000 5,000 0 Economic Value-Added Market Valued-Added 140, , ,000 80,000 60,000 40,000 20,000 0 $14.00 $12.00 $10 $8.00 $6.00 $4.00 $ EVA per Share GILD CELG 1,800 1,600 1,400 1,200 1, Economic Value-Added Market Valued-Added 100,000 80,000 60,000 40,000 20, Return on Invested Capital Return on Equity Return on Invested Capital GILD CELG % 4 35% 3 25% 2 15% 1 5% Return on Invested Capital Return on Equity Analyst Comments: WACC (Weighted Average Cost of Capital)*: The WACC measures each investor's expected return in proportion to their contribution to financing the firm's assets. We did not alter GILD's or CELG s beta as it should represent the risk the company endured during previous years. The same could be said for the the risk free rate as well. All else equal, an investor now receives far more value per capital investment made by GILD when compared to CELG. Return on Invested Capital: ROIC is a calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ROIC increased in the 5 year period from 25.1% in 2011 to 113.9% in 2015 for GILD. Note that GILD s WACC is at 8.683%, which is a positive indication for the investment since it is astronomically below the ROIC. When we compare it to CELG you will notice that they did not have an increasing ROIC. Both companies are equally creating value for their company, however in regards to this model GILD has Blown away its competition. 3. Value Creation and DCF Model GILD, Page 8 of 20 Copyright Robert A. Weigand, Ph.D., 2016

9 Long Term Growth Rate: Long Term Growth Rate: GILD CELG Celgene Corporation Intrinsic Value Model Intrinsic Value Model PV of Future FCFs 155, , , , ,415 PV of Future FCFs 25,560 27,512 30,112 32,574 32,574 + Value of Non Oper. Assets 9,900 1,862 2,132 10,128 14,607 + Value of Non Oper. Assets 2,648 3,900 5,687 7,547 6,552 = Total Intrinsic Firm Value 165, , , , ,022 = Total Intrinsic Firm Value 28,208 31,412 35,799 40,121 39,126 Total Debt 7,606 7,055 3,939 11,921 21,195 Total Debt 1,819 3,095 4,810 6,872 14,250 = Intrinsic Value of Equity 157, , , , ,827 = Intrinsic Value of Equity 26,389 28,318 30,989 33,249 24,876 Total Weighted Shares 1,550 1,515 1,529 1,522 1,464 Total Weighted Shares = Per Share Intrinsic Value $ $ $ $ $ = Per Share Intrinsic Value $28.98 $32.85 $37.44 $41.42 $31.40 vs. Year End Stock Price $20.47 $36.73 $75.10 $94.26 $ vs. Year End Stock Price $33.80 $39.24 $84.48 $ $ Over (Under) Valuation/Share ($81.48) ($63.94) ($33.48) ($21.79) ($16.18) Over (Under) Valuation/Share $4.82 $6.38 $47.04 $70.44 $88.36 % Over (Under) Valued 79.9% 63.5% 30.8% 18.8% 13.8% % Over (Under) Valued 16.6% 19.4% 125.7% 170.1% 281.4% $140 $120 $100 $80 $60 $40 $20 Year-End Stock Price Per Share Intrinsic Value $120 $100 $80 $60 $40 $20 MVA per Share GILD CELG $140 $120 $100 $80 $60 $40 $20 Year-End Stock Price Per Share Intrinsic Value ($10) ($20) ($30) ($40) ($50) ($60) ($70) ($80) ($90) $ Over (Under) Valued % Over (Under) Valued Return on Invested Capital WACC $100 $80 $60 $40 $20 $ Over (Under) Valued % Over (Under) Valued Analyst Comments: Economic Value Added Market Value added: EVA is a year by year measure of how much economic profit the firm has created. While CELG has been able to increase their economic profit consistently over this 5 year period, we do see a GILD increasing their EVA at a greater rate. From our model we can conclude that CELG grows in value more slowly than GILD, but GILD is truly outperforming the other, it is important to note that both are positively growing economic value. MVA is measured as the market value of all the firm's securities minus the book value of all the firm's securities and therefore is a basic measure of value creation. As was the case with many of the value creation metrics, GILD posted significantly higher MVA/shares than CELG. In conclusion the market has undervalued GILD stock from while overvaluing CELG. Intrinsic Value: When both firms are given a long term growth rate of 1% you can see they both created intrinsic value for the past 5 years. It is important to note that GILD has been under valued every year, whereas CELD continues to remain overvalued. Bankruptcy Score: Both companies are in a solid financial position, and according to the Altman probability of bankruptcy show no recent indications of financial trouble. 3. Value Creation and DCF Model GILD, Page 9 of 20 Copyright Robert A. Weigand, Ph.D., 2016

10 GILD CELG Celgene Corporation Piotroski Financial Fitness Scorecard Piotroski Financial Fitness Scorecard Positive Net Income Positive Net Income Positive Free Cash Flow Positive Free Cash Flow Growing ROA (% change NI > % change TA) Growing ROA (% change NI > % change TA) Earnings Quality (Operating Income > Net Income) Earnings Quality (Operating Income > Net Income) Total Assets Growing Faster Than Total Liabilities Total Assets Growing Faster Than Total Liabilities Increasing Liquidity (Current Ratio) Increasing Liquidity (Current Ratio) % Change Shares Outstanding < % Change Shares Outstanding (Diluted) < Expanding Operating Margin Expanding Operating Margin Asset Turnover (% change sales > % change assets) Asset Turnover (% change sales > % change assets) Total Liabilities to Operating Cash Flow (EBIT) < Total Liabilities to Operating Cash Flow (EBIT) < Piotroski Score (max = 10) Piotroski Score (max = 10) GILD CELG Celgene Corporation Altman Probability of Bankruptcy Z Score Altman Probability of Bankruptcy Z Score (Current Assets Current Liabilities)/Total Assets ## (Current Assets Current Liabilities)/Total Assets Retained Earnings/Total Assets ## Retained Earnings/Total Assets Earnings Before Interest & Tax/Total Assets ## Earnings Before Interest & Tax/Total Assets Market Value Equity/Total Liabilities ## Market Value Equity/Total Liabilities Sales/Total Assets ## Sales/Total Assets Altman Score Altman Score Altman Z Score Scale: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23 Altman Z Score Scale: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < Value Creation and DCF Model GILD, Page 10 of 20 Copyright Robert A. Weigand, Ph.D., 2016

11 31 Dec Dec Dec Dec Dec 15 GILD Healthcare Report Date: April 18, 2016 Historical Income Statement Drivers Average Forecasted Income Statement Drivers E 2017E 2018E 2019E 2020E Total Revenue 8,385 9,702 11,202 24,890 32,639 Total Revenue 31,333 30,707 29,479 29,479 29,773 % growth N/A 15.7% 15.5% 122.2% 31.1% 40.5% % growth Gross Profit 6,261 7,231 8,343 21,102 28,633 Gross Profit 27,573 26,868 25,646 25,499 25,605 Gross Margin (% of sales) 74.7% 74.5% 74.5% 84.8% 87.7% 79.2% Gross Margin (% of sales) % % 86. Operating Income (EBIT) 3,818 4,299 4,524 15,615 22,193 Operating Income (EBIT) 20,993 20,266 19,456 19,456 19,650 Operating Margin (% of sales) 45.5% 44.3% 40.4% 62.7% % Operating Margin (% of sales) Earnings Before Tax 3,651 3,612 4,208 14,856 21,659 Income Tax Expense 862 1,038 1,151 2,797 3,553 Forecasted Effective Tax Rate Effective Tax Rate 23.6% 28.7% 27.4% 18.8% 16.4% 23. Effective Tax Rate Adjustment Net Income 2,804 2,592 3,075 12,101 18,108 Net Income 16,920 16,428 15,624 15,476 15,482 Net Margin (% of sales) 33.4% 26.7% 27.5% 48.6% 55.5% 38.3% Net Margin (% of sales) % % 52. Total Common Shares 1,550 1,515 1,529 1,522 1,464 Total Common Shares 1,398 1,363 1,350 1,336 1,323 % growth N/A 2.2% 0.9% 0.5% 3.8% 1.4% % growth 4.5% 2.5% Earnings per Share $1.81 $1.71 $2.01 $7.95 $12.37 Earnings per Share $12.10 $12.05 $11.58 $11.58 $11.71 Dividends per Share $1.73 Dividends per Share $1.80 $1.96 $2.08 $2.14 $2.16 % growth N/A N/A N/A N/A N/A 0. % growth Year end Stock Price $ $ $ $ $ Historical Balance Sheet Drivers Forecasted Balance Sheet Drivers 2016E 2017E 2018E 2019E 2020E Cash + ST Investments 9,900 1,862 2,132 10,128 14,607 Cash + ST Investments 14,100 13,818 13,265 13,265 13,398 % of sales 118.1% 19.2% % 44.8% 48.3% % of sales Total Receivables 1,951 1,751 2,182 4,635 5,854 Total Receivables 6,101 5,979 5,740 5,740 5,797 % of sales 23.3% 18.1% 19.5% 18.6% 17.9% 19.5% % of sales Inventory 1,390 1,745 1,697 1,386 1,955 Inventory 2,037 1,996 1,916 1,916 1,935 % of sales 16.6% % 5.6% % % of sales 6.5% 6.5% 6.5% 6.5% 6.5% Net PPE 774 1,100 1,166 1,674 2,276 Net PPE 2,789 3,071 3,243 3,537 3,871 % of sales 9.2% 11.3% 10.4% 6.7% % % of sales 8.9% Total Assets 17,303 21,240 22,579 34,664 51,839 Total Assets 51,857 51,894 51,941 52,472 52,996 % of sales 206.3% 218.9% 201.6% 139.3% 158.8% 185. % of sales 165.5% % Payables and Accruals 2,393 2,897 3,502 5,039 8,403 Payables and Accruals 8,501 8,331 7,998 7,998 8,078 % of sales 28.5% 29.9% 31.3% 20.2% 25.7% 27.1% % of sales ST Debt plus LT Debt 7,606 7,055 3,939 11,921 21,195 ST Debt plus LT Debt 21,307 21,495 21,519 21,814 22,032 % of sales 90.7% 72.7% 35.2% 47.9% 64.9% 62.3% % of sales Total Equity 6,867 9,551 11,809 15,834 19,115 Total Equity 20,367 20,574 20,340 20,930 21,734 % of sales 81.9% 98.4% 105.4% 63.6% 58.6% 81.6% % of sales Analyst Comments: Total Revenue: We expect total revenue to decrease in the future. Capital IQ and management attribute these revenue decreases due to the ongoing litigation battles with Merck, and issues with pressure from the government to lower pricing. Our declining rate surpassed what capital IQ predicted to show a 1 royalty being taken off the top in addition to stressing the model. The government has increased its pressure to decrease the prices of some their drugs according to the reports and the 10 K. We wanted to stress the model b remaining pessimistic due to Gilead s ongoing litigation battles, increased government pressure to lower prices, and competition entering drugs into the markets. *It is important to note that they currently have 25 products in the pipeline, which could possibly increase revenue in the future*gross Profit and Operating Income: We forecasted a decrease in gross profit margin due to uncertainty on the pricing of their drugs. The decrease in total revenue would directly affect gross profit, because historically COGS grew at an insignificant pace while total revenues skyrocketed. Additionally, we expect decreases in operating income due to an increase in research and development which historically has seen steady increases per year. We based this off of our historical data up to 2015 and according to the 10 K and reports. *It is important to note that they currently have 25 products in the pipeline, which could possibly increase revenue in the future* Tax Rate: We saw no information about future Tax Rates in the 10K or the reports. We decided to implement the historical tax rate. Net Income: Because competitors are expected to come out with HEP C drugs in 2016 we forecasted a decrease in net income. This is due to a loss of pricing power as competitors enter the market and with the government intervention we forecasted a slow decrease in net income. With the addition of government pressures to decrease costs and ongoing litigation with Merck we would conclude that their net income will overall decrease in the future. *It is important to note that they currently have 25 products in the pipeline, which could possibly increase revenue in the future* Total Common Shares: GILD implemented a $5 billion accelerated repurchase program that began in Feb However, they will initiate another repurchase program in 2016 for $12 billion, which will commence upon the completion of our 2015 repurchase program. Based on this information in the 10 k, and the continued litigation battles we implemented a long term 1% buy back through 2020.As stated in the 10k the buy back program could be cut if an financial troubles arise, such as paying a royalty to Merck. *They state in the 10K that they have no obligation to continue buying back shares or increasing dividends.* Dividend Per Share: Based off the Argus report GILD is estimated to have dividends of $1.80 in 2016 and $1.96 in The remaining years we tapered it down and finished 2020 with a perpetual growth rate of 1%. *They state in the 10K that they have no obligation to continue buying back shares or increasing dividends.*balance SHEET: Cash + ST Investments: We maintained a historic levels of cash from 2015 through This is due to management s interests having product acquisitions, licenses, and collaborations, in order to father their diversification. Cash + ST Investments: We maintained a historic levels of cash from 2015 through This is due to management s interests having product acquisitions, licenses, and collaborations, in order to father their diversification. Also indicated in the 10k is the use of cash for their investments. Total Receivables. We left the historical average growth rate for our forecast. Inventory: We maintained the historic levels of inventory for our forecast. Management did not indicate a change in inventory.net PPE: Management did not indicate any significant desire to invest into any specific capital investment. However, they do increase capital a little bit each year. Therefore we continue to slowly grow Net PPE from 2016 through Total Assets: To follow the steady inventory rate and increases in net PPE we have total assets growing slowly from 2016 through ST Debt plus LT Debt: Gilead historically has used cash and some debt for financing, and indicated in the 10k they would continue finance through these means. Total Equity: Historically even with the buy back program their retained earnings continued to increase their total equity. Because dividends are not a firm facet of management's operations, we can expect this trend to continue as they may not pay out these 4. Forecasting and Valuation GILD, Page 11 of 20 Copyright Robert A. Weigand, Ph.D., 2016

12 Total Revenue Operating Income (EBIT) Earnings per Share Dividends per Share Gross Profit Margin Operating Profit Margin $35,000 $30,000 $25,000 $20,000 $14.00 $12.00 $10 $ $15,000 $5, E 2017E 2018E 2019E 2020E $6.00 $4.00 $ E 2017E 2018E 2019E 2020E E 2017E 2018E 2019E 2020E Historical Performance Forecasted Performance Total Invested Capital Total Invested Capital 2016E 2017E 2018E 2019E 2020E Cash and ST Investments 9,900 1,862 2,132 10,128 14,607 Cash and ST Investments 14,100 13,818 13,265 13,265 13,398 + Receivables 1,951 1,751 2,182 4,635 5,854 + Receivable 6,101 5,979 5,740 5,740 5,797 + Inventory 1,390 1,745 1,697 1,386 1,955 + Inventory 2,037 1,996 1,916 1,916 1,935 Payables and Accruals 2,393 2,897 3,502 5,039 8,403 Payables and Accruals 8,501 8,331 7,998 7,998 8,078 = Net Oper. Working Capital 10,849 2,461 2,509 11,110 14,013 = Net Oper. Working Capital 13,737 13,462 12,924 12,924 13,053 + Net Property, Plant & Equip ,100 1,166 1,674 2,276 + Net Property, Plant & Equip. 2,789 3,071 3,243 3,537 3,871 = Total Invested Capital 11,623 3,562 3,675 12,784 16,289 = Total Invested Capital 16,526 16,533 16,166 16,461 16,923 Total Common Shares 1,550 1,515 1,529 1,522 1,464 Total Common Shares 1,398 1,363 1,350 1,336 1,323 = Total Invested Capital/Share $7.50 $2.35 $2.40 $8.40 $11.13 = Total Invested Capital/Share $11.82 $12.13 $11.98 $12.32 $ Net Profit Margin Effective Tax Rate (right axis) E 2017E 2018E 2019E 2020E $18,000 $16,000 $14,000 $12,000 $8,000 $6,000 $4,000 $2,000 Total Invested Capital Net Fixed Assets 2016E 2017E 2018E 2019E 2020E $18,000 $16,000 $14,000 $12,000 $8,000 $6,000 $4,000 $2,000 Total Invested Capital Net Operating Working Capital 2016E 2017E 2018E 2019E 2020E Historical Performance Forecasted Performance NOPAT and Free Cash Flow NOPAT and Free Cash Flow 2016E 2017E 2018E 2019E 2020E Operating Income (EBIT) 3,818 4,299 4,524 15,615 22,193 Operating Income (EBIT) 20,993 20,266 19,456 19,456 19,650 (1 Effective Tax Rate) 23.6% 28.7% 27.4% 18.8% 16.4% (1 Effective Tax Rate) = Net Oper. Profit After Tax 2,917 3,064 3,287 12,675 18,552 = Net Oper. Profit After Tax 16,165 15,605 14,981 14,981 15,131 Total Invested Capital N/A (8,061) 113 9,109 3,505 Total Invested Capital (367) = Free Cash Flow N/A 11,125 3,173 3,566 15,047 = Free Cash Flow 15,928 15,598 15,348 14,686 14,668 NOPAT per Share $1.88 $2.02 $2.15 $8.33 $12.67 NOPAT per Share $11.56 $11.45 $11.10 $11.21 $11.44 Free Cash Flow per Share N/A $7.34 $2.08 $2.34 $10.28 Free Cash Flow per Share $11.39 $11.44 $11.37 $10.99 $11.09 Analyst Comments: Total Invested Capital, Net Fixed Assets and Net Operating Working Capital: We forecasted GILD to continue growing their total invested capital, from 2016 through GILD utilizes net fixed assets less than net operating working capital. When projecting the future, GILD is expected to grow invested capital at a slower rate than net working capital. The slower rate of growth in invested capital, compared to working capital, is due to utilizing current assets for earning profits. This steady growth supports management s investment strategy. GILD uses current assets and intangibles to develop and grow its business instead of long lived assets. 4. Forecasting and Valuation GILD, Page 12 of 20 Copyright Robert A. Weigand, Ph.D., 2016

13 Cost of Capital 2015 Weight % Cost Weighted % Dividend Discount Valuation Model Equity Capitalization $148, % % + Total Debt $21, % % Year 2016E 2017E 2018E 2019E 2020E = Value of All Securities $169, Dividend Growth Rates Expected Future Dividends $1.80 $1.96 $2.08 $2.14 $2.16 Effective Tax Rate 23.0 Alternative RF Rate: Risk Free Rate year Yield: 1.791% PV Dividends 1 4 $6.25 Dividend Yield 1.9% Beta (default = 5 Yr) Alternative Beta: 5 year Beta: PV Perpetual Div. $15.94 Market Risk Premium year Beta: Intrinsic Value $22.19 If Purchased For: $94.44 CAPM Cost of Equity Current Price $94.44 Expected Return = 25.5% Weighted Average Cost of Capital: 9.405% 9.405% 9.405% 9.405% 9.405% 9.405% ($94.44) $ % $ % $ % $ % $ % Historical Performance Forecasted Performance ROIC, EVA and MVA ROIC, EVA and MVA 2016E 2017E 2018E 2019E 2020E Return on Invested Capital 25.1% % 99.1% 113.9% Return on Invested Capital 97.8% 94.4% 92.7% % Economic Value Added 1,824 2,729 2,941 11,473 17,020 Economic Value Added 14,611 14,050 13,460 13,433 13,539 Market Valued Added 24,849 46, , , ,027 Market Valued Added 111, , , , ,893 EVA per Share $1.18 $1.80 $1.92 $7.54 $11.63 EVA per Share $10.45 $10.31 $9.97 $15 $10.24 MVA per Share $16.03 $30.42 $67.38 $83.86 $88.13 MVA per Share $79.87 $ $ $ $ $20,000 $15,000 $5,000 NOPAT Free Cash Flow 2016E 2017E 2018E 2019E 2020E $14 $12 $10 $8 $6 $4 $2 NOPAT per Share Free Cash Flow per Share 2016E 2017E 2018E 2019E 2020E 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 EVA MVA (right axis) 2016E 2017E 2018E 2019E 2020E 160, , , ,000 80,000 60,000 40,000 20,000 0 Perpetual Growth Rate: 1. Historical Performance Forecasted Performance DCF Intrinsic Value Model DCF Intrinsic Value Model 2016E 2017E 2018E 2019E 2020E PV of Future FCFs 145, , , , ,371 PV of Future FCFs 171, , , , ,261 + Cash and ST Investments 9,900 1,862 2,132 10,128 14,607 + Cash and ST Investments 14,100 13,818 13,265 13,265 13,398 = Total Intrinsic Firm Value 155, , , , ,978 = Total Intrinsic Firm Value 185, , , , ,659 Total Debt 7,606 7,055 3,939 11,921 21,195 Total Debt 21,307 21,495 21,519 21,814 22,032 = Intrinsic Value of Equity 147, , , , ,783 = Intrinsic Value of Equity 164, , , , ,627 Total Common Shares 1,550 1,515 1,529 1,522 1,464 Total Common Shares 1,398 1,363 1,350 1,336 1,323 = Per Share Intrinsic Value $95.47 $94.42 $ $ $ = Per Share Intrinsic Value $ $ $ $ $ vs. Year End Stock Price $20.47 $36.73 $75.10 $94.26 $ vs. Most Recent Stock Price $94.44 Over (Under) Valuation/Share ($70) ($57.69) ($27.71) ($16.52) ($11.37) Over (Under) Valuation/Share ($23.11) % Over (Under) Valued 78.6% 61.1% % 10.1% % Over (Under) Valued 19.7% Analyst Comments: NOPAT: As project revenues continuously decrease through 2020, and GILD projected operating margin staying constant; we see NOPAT slowly decreasing. GILD is forecasted to see a decrease in bottom line profits. This is do to losing pricing power, increased competition, and the ongoing litigation battles with Merck. Free Cash Flow: Management is purposely holding higher free cash flows in order to have the ability to acquire products, licenses, and collaborations to continue to diversify. EVA and MVA: We forecasted that GILD will see a decrease in economic and a slight increase in market value added. GILD will still be creating economic value, while MVA sluggishly grows through ROIC and WACC: WACC saw an decrease in their risk free rate to the current 10 year treasury note, as well as an increase in the beta of Generating a WACC of 9.405%. Even with a fairly high WACC of 9.405%, GILD is earning an ROIC that far exceeds it. The spread between ROIC and the WACC creates value for the firm. 4. Forecasting and Valuation GILD, Page 13 of 20 Copyright Robert A. Weigand, Ph.D., 2016

14 ROIC WACC Year-End/Most Recent Stock Price Per Share Intrinsic Value $ Over (Under) Valued % Over (Under) Valued E 2017E 2018E 2019E 2020E $140 $120 $100 $80 $60 $40 $ E 2017E 2018E 2019E 2020E $10 $20 $30 $40 $50 $60 $70 $ E Historical Performance Forecasted Performance Relative Valuation Relative Valuation 2016E 2017E 2018E 2019E 2020E Price to Earnings Price to Earnings Price to Free Cash Flow N/A Price to Free Cash Flow Price to Sales Price to Sales Price to Book Price to Book Earnings Yield 8.8% 4.7% 2.7% 8.4% 12.2% Earnings Yield 12.8% % 9.3% 9.2% Dividend Yield % Dividend Yield 1.9% 1.6% 1.7% 1.7% 1.7% Price to Earnings Price to Free Cash Flow Price to Sales Price to Book (right axis) Earnings Yield Dividend Yield E 2017E 2018E 2019E 2020E E 2017E 2018E 2019E 2020E E 2017E 2018E 2019E 2020E Analyst Comments: Price to Earnings: GILD s projected P/E increases in our forecast from 8.1 in 2016 to 11.6 in 2020, this small P/E ratio can be attributed to our decrease in growth. Dividend Yield: We project that dividend yield will remain relatively stagnant. We don't see GILD as a dividend play. Earnings Yield: We have projected that earnings yield will decline over the next 5 years, from 12.4% to 8.6%. This is caused by negative revenue growth. The trajectory of GILD s pro forma relative valuation shows that our model is slightly conservative. 4. Forecasting and Valuation GILD, Page 14 of 20 Copyright Robert A. Weigand, Ph.D., 2016