Gilead Sciences, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Gilead is a research-based biopharmaceutical company focused primarily on HIV/AIDS, liver diseases, hematology/oncology, and inflammation/respiratory diseases. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $5,604 | $5,596 | $16,570 | $16,332 |
| Operating income (loss) | ($1,473) | $2,623 | $3,194 | $7,056 |
| Net income (loss) attributable to Gilead | ($1,165) | $2,097 | $2,690 | $5,452 |
| Diluted EPS | ($0.92) | $1.60 | $2.10 | $4.15 |
| Operating cash flow | Not separately stated | Not separately stated | $6,564 | $6,055 |
Q3 product sales rose 1% to $5,516 million; nine-month product sales rose 2% to $16,323 million. Product gross margin was 81% for Q3 and 82% year to date, versus 80% and 79%, respectively, in 2018. Q3 operating loss reflected a $3.92 billion Galapagos collaboration and licensing expense; the filing does not provide a company-wide operating margin adjusted for this item.
Liquidity, debt and capital allocation
- At September 30, 2019, cash, cash equivalents and marketable debt securities totaled $25.051 billion, down from $31.512 billion at December 31, 2018. Working capital was $18.794 billion, versus $25.231 billion.
- Total debt carrying value was $24.588 billion, including $2.498 billion current and $22.090 billion long-term. No borrowings were outstanding under the $2.5 billion revolving credit facility; Gilead reported compliance with debt covenants.
- Nine-month operating cash flow was $6.564 billion; investing cash outflow was $8.248 billion and financing cash outflow was $6.738 billion. Cash declined by $8.466 billion during the period.
- Gilead paid $5.05 billion in connection with the Galapagos collaboration and subscription agreements, repaid $2.8 billion of debt, paid $2.4 billion in dividends and repurchased $1.6 billion of stock during the first nine months. The remaining authorization under the share repurchase program was $3.5 billion.
Material changes and business developments
- HIV product sales increased 13% in Q3 to $4.2 billion and 12% year to date to $11.9 billion, driven mainly by Biktarvy uptake. Biktarvy sales were $1.259 billion in Q3 and $3.168 billion year to date.
- HCV product sales fell 25% in Q3 to $674 million and 22% year to date to $2.306 billion, primarily from lower net prices, competition, fewer patient starts and reduced market share.
- Yescarta sales rose 57% in Q3 to $118 million and 83% year to date to $334 million. Sales of Ranexa and Letairis declined following generic entry in the United States.
- Q3 R&D expense increased to $4.990 billion from $939 million, largely due to the $3.92 billion Galapagos charge and increased research investment. SG&A rose 11% to $1.052 billion, reflecting promotional costs and expansion in Japan and China.
- In August, Gilead closed a global collaboration with Galapagos covering its portfolio other than filgotinib. The $5.05 billion payment included $1.13 billion for equity; Gilead recorded the remaining $3.92 billion as R&D expense. In October, Gilead gave notice to exercise warrants for an additional 2.6 million Galapagos shares at an aggregate price of €368 million.
Outlook, risks and contingencies
Gilead gave no quantified financial guidance in the supplied filing text. Management stated that existing capital resources and operating cash flows should meet capital needs for the foreseeable future. The company highlighted continuing dependence on HIV sales, declining HCV revenues, pricing and reimbursement pressure, generic competition, clinical and regulatory uncertainty, and the need to develop and commercialize new products. Filgotinib was under regulatory review in Europe, and the FDA had requested a safety study in men with inflammatory bowel disease as a post-marketing requirement. The filing also noted recent leadership changes and the possibility of organizational disruption.
Gilead reported several significant patent, product-liability, antitrust and government-inquiry matters. It recorded no accrual for the matters described because it did not consider losses probable; outcomes and potential exposure generally could not be estimated. In October 2019, the Federal Circuit affirmed invalidation of the Idenix patent involved in sofosbuvir litigation. Other disclosed matters include Juno/Sloan Kettering litigation concerning Yescarta, ViiV litigation concerning Biktarvy, lawsuits alleging kidney or bone injuries from certain HIV products, and government inquiries relating to patient support, pricing and promotional practices. The company said it intends to defend the claims and cannot predict their outcomes.
Other unusual items include $309 million of favorable nine-month revenue adjustments for prior-period government rebates and discounts, $312 million of nine-month unrealized equity-security gains included in other income, and a $119 million tax benefit from settlements with taxing authorities. Gilead adopted the new lease standard in 2019, recognizing $441 million of right-of-use assets and $490 million of lease liabilities at adoption. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Biktarvy and newer HIV products can sustain growth as older regimens decline, and whether that growth offsets continuing HCV and generic-related sales erosion.
- How the Galapagos collaboration affects normalized R&D spending, cash needs and future milestone or royalty obligations, and what returns follow from the investment.
- Whether liquidity and debt remain manageable alongside dividends, buybacks, repayments and potential strategic investment requirements.
- Developments in pipeline approvals and trials, particularly filgotinib and Yescarta, and outcomes of material patent litigation, product-liability claims and government investigations.
- The effect of pricing, reimbursement, rebate estimates and concentrated U.S. wholesaler distribution on revenue and cash flow.