First Read: US Pharmaceuticals & Biotechnology "MRK/GILD: Positive HIV U..."

Research evidence excerpt

First Read: US Pharmaceuticals & Biotechnology "MRK/GILD: Positive HIV U..."

Valuation Method and Risk Statement

SMID Cap Biotech: Investing in small and mid cap biotech is inherently risky and thus we view

investments in this field is more appropriate for investors comfortable with high risk/reward

profiles. The sector is characterized by high volatility (often related to expectations leading

into and out of binary events); heavy use of options strategies where sophisticated investors

often use leverage in an attempt to maximize returns; and sharp stock movements that can

often be driven by pure market speculation. Given the challenges of drug development, the

intricacies of clinical trial design and interpretation of results, and the complexities of the

science, we advocate use of caution when evaluating opportunities in the small and mid-cap

biotechnology sector.

GILD: Our valuation is based on an EV/peak sales multiple informed by our DCF sensitivity.

Gilead’s risks include (1) slower than anticipated growth of Trodelvy, (2) slower growth of the

HIV portfolio, (3) slower than anticipated growth of PrEP utilization, (4) pricing pressure and/

or access challenges on the HIV franchise stemming due to evolving payor attitudes towards

HIV, (5) challenges in finding appropriate M&A targets to reignite growth.

MRK: Our price target is based on a one-year forward P/E valuation, supported by DCF. Risks

to our MRK valuation include: (1) slowdown in Keytruda due to competition and/or pipeline

failure, (2) failure of other pipeline assets (sotatercept, oral PCSK9, etc), (3) slowdown in

Gardasil sales leading to worse-than-expected sales, (4) pricing pressure on the overall

portfolio. Industry-specific risks include: (1) uncertainty around potential reforms around