Gilead Sciences, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparative period is Q1 2018. Gilead is a research-based biopharmaceutical company focused primarily on HIV/AIDS, liver diseases, hematology/oncology, and inflammation/respiratory diseases. Financial amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $5.281 billion | $5.088 billion | +4% |
| Product sales | $5.200 billion | $5.001 billion | +4% |
| Income from operations | $2.237 billion | $2.153 billion | +4% |
| Net income attributable to Gilead | $1.975 billion | $1.538 billion | +28% |
| Diluted EPS | $1.54 | $1.17 | +32% |
| Operating cash flow | $1.444 billion | $2.270 billion | −$826 million |
- Product gross margin increased to 82% from 80%. Operating income was about 42% of revenue in both periods.
- HIV sales rose 14% to $3.618 billion, led by Biktarvy, which recorded $793 million in sales versus $35 million a year earlier. HCV sales fell 24% to $790 million, reflecting fewer patient starts, competition, and lower U.S. Medicare net prices.
- Yescarta sales increased to $96 million from $40 million. Ranexa sales declined following U.S. generic entry; U.S. generic competition for Letairis was expected to begin in Q2 2019.
- R&D expense rose 13% to $1.057 billion, primarily due to collaboration costs and cell-therapy investment. SG&A increased 3% to $1.030 billion.
- Other income, net, was $367 million versus $170 million, primarily reflecting $197 million in unrealized gains on equity securities in Q1 2019. The effective tax rate fell to 16.3% from 24.3%, including a $119 million benefit from settlements with tax authorities.
Liquidity, cash flow, and debt
- Cash, cash equivalents, and marketable debt securities totaled $30.125 billion at March 31, 2019, down from $31.512 billion at year-end 2018. Working capital was $24.627 billion, versus $25.231 billion.
- Cash from operations was $1.444 billion, down from $2.270 billion, primarily due to changes in operating assets and liabilities, including rebate accruals and a prior-year BMS receivable collection; lower tax payments partly offset the decline.
- Debt carrying value was $26.578 billion, including $2.498 billion current and $24.080 billion long-term. Gilead repaid $750 million of notes in March and reported no covenant violations or borrowings under its $2.5 billion revolving facility. It repaid a further $500 million at maturity in April 2019.
- Q1 financing included $817 million of cash dividends and $834 million of share repurchases; 12 million shares were repurchased and retired. $4.3 billion remained authorized under the repurchase program at quarter-end.
Material developments, outlook, and risks
- Management stated that it expects HCV sales to decline further in 2019 and HIV products to account for a higher share of product sales than in 2018. No numerical full-year financial guidance is provided in the supplied filing text.
- Gilead reported that STELLAR-3, a Phase 3 selonsertib study in NASH, failed its prespecified primary endpoint. Filgotinib Phase 3 studies FINCH 1 and FINCH 3 met their reported primary endpoints. The company also announced research collaborations and expanded cell-therapy manufacturing plans.
- Q1 collaboration arrangements involved $165 million of cash payments, including $126 million expensed upfront in R&D. Additional milestone and royalty payments may become payable if specified future events occur.
- Key business risks include reliance on HIV sales, continuing HCV declines, generic competition and pricing/reimbursement pressure, drug-development and regulatory uncertainty, and manufacturing or supply-chain disruption. Generic competition for Letairis was expected in Q2 2019; Teva was scheduled to launch generic Truvada and Atripla combinations in the U.S. on September 30, 2020 under a settlement.
- Significant litigation and investigations include patent disputes involving sofosbuvir, Yescarta, and Biktarvy; product-liability claims alleging kidney or bone injuries from certain HIV medicines; and government inquiries into patient assistance, reimbursement, and promotional practices. Gilead reported no accrual for the described matters because it did not consider losses probable; outcomes and potential exposure generally could not be estimated. Merck reimbursed Gilead under an agreement in March 2019, closing that matter.
- Gilead adopted the new lease standard on January 1, 2019, recording $441 million in right-of-use assets and $490 million in lease liabilities at adoption, with no material income-statement or cash-flow effect. The company said it expects no material impact from the new credit-loss standard, which becomes effective in 2020.
Investor verification priorities
- Track whether Biktarvy and broader HIV growth can offset continued HCV, legacy HIV, and generic-driven product declines.
- Reconcile earnings growth with lower operating cash flow, and monitor rebate, receivable, and other working-capital movements.
- Assess the sustainability of Q1’s favorable tax rate and unrealized equity-security gains when evaluating normalized earnings.
- Review debt maturities, planned capital returns, and the impact of litigation, patent outcomes, and generic launches on future cash flows.
- Monitor pipeline execution and commercialization risks, particularly the NASH setback, filgotinib regulatory path, and Yescarta uptake and reimbursement.