Gilead Sciences (GILD)

Total return at 5 years: 0.2%/year = -2.4% appreciation + 2.7% dividend. The target price ($133) is ex-dividend; the $19 in dividends collected over 5 years are added separately.

The methods disagree: one places the value today above the price ($150) and the other below.

Today — expensive, no margin of safety: at $150 trades ~21.9% above its value discounted to today (~$123); the expected return does not even reach the risk-free rate (4.5%).

At 5 years — Preserva valor: the target price ($133) plus dividends yield just enough to preserve nominal capital, below the required 4% floor.

The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$79.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($150) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-0.8%/year) than we project (5.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$8.4 bn of owner earnings in year 5 (vs ~$11.2 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on NOPAT (EV/NOPAT). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

The quarter ended 30 June 2026 included charges for acquired in-process research and development and impairments of approximately US$14,100 million over the last twelve months, tied to the acquisitions of Arcellx, Tubulis and Ouro Medicines and to an impairment of previously acquired Immunomedics assets. This is a one-off charge associated with the period's merger and acquisition activity, not a deterioration of the ongoing business: product gross margin held steady at around 79%, and operating cash flow was unaffected, since acquisition payments are recorded as investing activity. The base-year operating margin is therefore normalized to 34.9%, the level in force before these charges, and the path for the following years is unchanged. Net income for the period reflects the same effect, compounded because these charges are mostly non-deductible for tax purposes; because the valuation rests on operating income and cash flow, this figure is left declared in the corresponding row without changing the calculated value. On growth, the quarter's revenue increase (+10.2% year over year) reflects broad strength in the base business -HIV +12%, Trodelvy +26%, Descovy +48%- and not a one-off comparison; the weight of Veklury in the year-over-year comparison, by contrast, fell to a marginal level (-81% year over year) and its drag is close to exhausted. Even so, the company's current guidance for fiscal year 2026, published on 4 August 2026, implies a deceleration in growth to around 2.8% year over year for the second half of the year -in line with the growth assumption already used for the model's year 1 (3.2%)-, so the revenue path is left unchanged.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $133 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $150, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $133 in 5 years plus $19 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $123. Against the current market price ($150), the margin of safety is -21.9% (trades above the maximum → a premium is paid) and the total return at that price would be 0.2% annually.

• Multiple vs quality. EV/NOPAT on normalized after-tax operating income (~20× in 3 years; today's multiple isn't comparable due to the base year's non-normalized IPR&D charges).
• Reverse DCF. Today's price discounts moderate growth, consistent with the HIV franchise sustaining the business without relying on a speculative pipeline.
• Margin of safety. No margin of safety: at this price capital is preserved, but it is not bought below its value. Total return combines modest appreciation (multiple compression absorbs much of the earnings growth) with the dividend.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ High incremental ROIC (compounding)
• ✓ CFROIC backs up the ROIC (118%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• ROIC vs the 10% bar. ROIC ~23% — well above the 10% bar. Genuine quality in the underlying business.
• Cash quality. TTM FCF ~$12.9bn, robust and growing; covers the dividend + buybacks + reinvestment without strain.
• Earnings stability. GAAP is uneven due to IPR&D charges (FY2024 collapsed to $480M) — a recurring accounting artifact for biopharma active in M&A, not a sign of deterioration in the underlying business.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Gilead's engine is the HIV franchise (~70% of revenue, +6% in 2025 — Biktarvy consolidated, Descovy accelerating +31%, Yeztugo launched in 2025 as the first twice-yearly PrEP option), which offsets the Veklury decline (−49%, already ~3% of revenue) and Cell Therapy weakness (−7%, competitive pressure) against a recovering Trodelvy (+6%). The dividend grew from $2.92 (2022) to $3.16 declared in 2025 (current run-rate $3.28 following the increase to $0.82 quarterly declared in Feb-2026).

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Real, not nominal. HIV growth (+6%) is real and organic; the consolidated figure (+2.4% to +3.5%) is diluted by Veklury and Oncology.
• Growth engine. The HIV franchise (Biktarvy, Descovy, Yeztugo) is the engine; Veklury and Oncology are headwinds that fade over time.
• Regulatory risk (IRA). Medicare price negotiation on Biktarvy (effective 2028) is a new structural headwind on the largest product.

• Relevant in 10 years (recurrence). HIV treatment and prevention are lifelong chronic therapies — recurrence is very high. It will still be in use in 10 years.
• Pricing power. Strong while the patent lasts, but constrained by Medicare price negotiation on Biktarvy starting in 2028 and by Medicaid/340B rebates.
• Moat and its direction. Wide and stable: the Biktarvy extension through 2036 via settlement agreements is the clearest signal of a moat that holds.
• HIV concentration. ~70% of revenue in a single therapeutic category (though diversified across several products within it) — the main structural vulnerability.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $0 bn
• ✓Interest coverage (EBIT / interest)11.4x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 118% of ROIC
• ✓Value creation (ROIC − 10% bar)+13pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.2x — no over-investment
• !Float / working capitalConsumes cash $0.4 bn (positive WC)
• ✓Dilution (SBC % of revenue + shares)SBC 3.0% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Net debt ~$18.7bn (gross debt $26.2bn − cash $7.6bn), moderate relative to the business's cash flow.
• Coverage and cash. Interest coverage ~11.7x on trailing operating income excluding the IPR&D charges (US$11.65bn / interest US$1.0bn; GAAP is negative because of those charges); TTM FCF ~$12.9bn is solid.
• Manufacturing concentration. Reliance on third-party manufacturing outside the U.S., compounded by the BIOSECURE Act and potential tariffs on imported pharmaceuticals.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Skin in the game. O'Day holds ~2M shares; no controlling shareholder, dispersed passive institutional ownership. Reasonable alignment, not exceptional.
• Capital allocation. Reinvestment-first (R&D + capex ~49%) with measured business development (~8%, incremental) — avoiding the wave of transformational M&A that distorted GAAP at other sector peers.
• Integrity / normalization. The GAAP lumpiness from IPR&D charges is a known accounting artifact in the industry, well documented in the 10-K notes.

• There is no evident source of discount: Gilead trades at a double-digit multiple on after-tax operating income (~20× in 3 years), which reflects the successful execution of Yeztugo/lenacapavir and the Biktarvy patent extension through 2036.
• The risk of Medicare price negotiation on Biktarvy (effective 2028) and the concentration in HIV (~70% of revenue) are known risks, already reflected in the price — not a hidden edge.
• The FY2024 accounting collapse (net income $480M on IPR&D charges) is accounting noise that Q2'26 repeated (US$11,183M of acquired IPR&D) and that the model's normalized base (~$8.8bn) excludes — it does not explain today's price.

With no clear source of missing buyers/motivated sellers → the price already reflects a quality franchise with a genuinely extended moat, but at a multiple that leaves little additional margin: the return depends on the modest growth path and the dividend holding up, not on a structural discount to correct.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -11%/year (-44% total): the margin of safety protects the downside. The bull (+6%/year, +35% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Medicare price negotiation (IRA). The central regulatory disconfirmer: Biktarvy selected in January 2026, negotiated price effective 2028, with rising Medicaid rebates.
• HIV concentration (~70% of revenue). Any hit to the franchise (generics, competition, pricing) lands hard on the consolidated figure.
• Patent litigation / generic entry. Despite the agreements through 2036, future litigation or acceleration clauses could bring generic entry forward.
• Third-party manufacturing reliance + tariffs. The BIOSECURE Act and potential 100% tariffs on imported branded pharmaceuticals are a supply-chain risk.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 23% above the 10% bar, but the price sits above value (no margin) → great business, expensive.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 5% at a multiple/growth of 4.5 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 6% (EBIT/EV) + ROIC 23% → brushes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -1% vs our 5%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -14%/yr over 5y (material loss) → risk of permanent capital loss.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: intangibles, efficient scale, switching costs → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -1%, within what we project (5%) — the story squares with the numbers.