Financial Analysis Gilead (fy 2014)

Gilead Science Inc.

Financial performance

Analysis of profitability

Gilead Sciences Inc. reported impressive financial results in 2014 (See Exhibit 1 for Gilead’s financial statements at the end of the fiscal year 2014): the Foster City, California-based biotech company recorded a ROE of 78,45%, a ROTA of 44,04%, a profit margin of 62,37% and an asset turnover of 0.72.

These values are leveraged by the hike in revenues, from $11.201.690.000 in 2013 to $24.890.000.000 (112,2% annual growth), mostly thanks to the sales of Sovaldi, which was launched in December 2013, and Harvoni, which was launched in October 2014.

By the way, the data from the last years (See Exhibit 2 for Gilead’s financial ratios of last 5 years) confirm a positive trend, sign that the strategy is ingeniously designed and efficiently implemented, and prove that Gilead is a successful, appealing and thriving company.

This is highlighted by the comparison of these values with those achieved by its major competitors and the industry average (See Exhibit 3 for the comparison of financial performance between Gilead and its major competitors)

Analysis of liquidity

The current ratio, 3,07, looks very high, but it is consistent with the industry average of 2,92: Biotech companies need liquidity because they are usually involved in inorganic growth, that allow them to consolidate their position in the market and may also use the cash to further research projects.

The quick ratio, which is important for evaluating biotech companies because of the long lag time between new product development and going to market, during which companies must be able to sustain themselves with current revenues and assets, is fairly satisfying, 2,83 (e.d. the industry average is 2,42).

Finally, the values of the working capital to sales ratio point out that the short-term surplus liquidity amounts to a great part of the sales, 48,84%, which is far above the industry average of 23,48%.

In conclusion, Gilead Sciences has substantial liquidity to function smoothly on a day-to-day basis.

Analysis of solvency

The interest cover ratio of 37,06 is impressive, but again the value is leveraged by the record revenues registered in 2014. By the way, in the last 5 years has been above 10%.

Then debt to equity ratio of 1,19 shows that the firm is decently levered, which is expected as they are using the leverage to sustain growth and invest additional capital into forward-looking operations.

The cost of debt, which is very low, 2,19%, is consistent with the high value of interest coverage.

Conclusions

The overall Gilead’s financial performance is more than positive, but the long-term sustainability of the firm’s profits is threatened by a unique combination of business-specific risks as well as risks related to the biotechnology industry in general: the potential loss of its leadership in the global HIV market due to the expiration of TDF’s patent protection in 2018; the increased pricing pressures on Sovaldi and Harvoni due to high number of innovative drugs launched in the HCV space; and the potential expansion failure in the oncology, pulmonology and cardiology fields due to a muted patient response to other innovative drugs in new therapeutic areas, which could lead to loss of investment for Gilead Sciences.