Gilead Sciences, Inc. — Q2 2017 Form 10-Q
Business context and period: Gilead is a research-based biopharmaceutical company focused primarily on HIV, hepatitis C (HCV) and hepatitis B (HBV), with additional products in other therapeutic areas. This unaudited filing covers the quarter and six months ended June 30, 2017; comparisons are with the same 2016 periods. Dollar amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $7.141 billion | $7.776 billion | $13.646 billion | $15.570 billion |
| Product sales | $7.046 billion | $7.651 billion | $13.423 billion | $15.332 billion |
| Operating income | $4.254 billion | $4.538 billion | $8.021 billion | $9.189 billion |
| Net income attributable to Gilead | $3.073 billion | $3.497 billion | $5.775 billion | $7.063 billion |
| Diluted EPS | $2.33 | $2.58 | $4.38 | $5.11 |
| Product gross margin | 84% | 89% | 84% | 87% |
- Cash flow: Six-month operating cash flow was $6.451 billion, down from $9.115 billion. Investing cash use was $3.939 billion and financing cash use was $2.124 billion. Q2 operating cash flow was $3.5 billion.
- Liquidity: Cash, cash equivalents and marketable securities totaled $36.576 billion at June 30, 2017, versus $32.380 billion at year-end 2016. Working capital was $20.1 billion, compared with $10.4 billion. Management attributed much of the increase to shifting the duration of marketable securities to reduce interest-rate risk.
- Debt: Long-term debt, net, was $26.296 billion, broadly unchanged from year-end. No amounts were drawn on the revolving credit facility, and Gilead reported compliance with debt covenants. The filing gives estimated debt fair value of approximately $27.8 billion.
- Capital returns: Six-month dividends paid were $1.367 billion; the declared dividend was $0.52 per share in Q2. Gilead repurchased $695 million of shares during the first half and had $8.3 billion remaining under its $12 billion authorization at June 30.
Material changes and business drivers
- Q2 revenue declined 8% year over year and first-half revenue declined 12%. Attributable net income fell 12% in Q2 and 18% for the first half; diluted EPS fell 10% and 14%, respectively.
- HCV product sales were $2.9 billion in Q2, down from $4.0 billion, and $5.4 billion for the first half, down from $8.3 billion. Lower Harvoni and Sovaldi sales across major markets were partly offset by Epclusa.
- HIV/HBV sales grew: $3.6 billion in Q2 versus $3.1 billion, and $6.8 billion in the first half versus $6.0 billion. Growth was led by TAF-based products Genvoya, Descovy and Odefsey, partly offset by declining older regimens.
- Q2 U.S. product sales were $5.0 billion versus $4.9 billion, while sales in Europe and other locations declined. Japan sales were $181 million in Q2 versus $619 million, and $386 million in the first half versus $1.7 billion.
- Product gross margin decreased to 84%. Management cited product mix, including HCV products comprising a lower share of sales; the Q2 comparison also reflected a prior-year reversal of a litigation charge.
- R&D expense fell to $864 million in Q2 from $1.484 billion, mainly because the 2016 period included the Nimbus acquisition and an FDA priority review voucher. First-half R&D declined 35%, also reflecting prior-year Galapagos collaboration costs and in-process R&D impairments. First-half SG&A rose 11%, partly because of a favorable prior-year adjustment to the branded prescription drug fee.
Outlook, commentary and risks
- Management expected 2017 total product sales to decline, primarily because HCV patient starts were expected to fall from 2016 levels after rapid treatment and cure of patients. Competition, pricing and discounts, payer access and shorter treatment durations were also expected to pressure sales. The filing provides no specific numerical revenue or earnings guidance.
- Management expected operating cash flow to decrease in the second half of 2017, partly because of the timing of government and other rebate payments and other cash payments.
- Q2 pipeline and regulatory developments included expanded Epclusa labeling for adults co-infected with HIV, adolescent HCV indications for Harvoni and Sovaldi, and FDA and European Commission approval of Vosevi for adults with HCV who had previously failed DAA treatment. Bictegravir/FTC/TAF was under regulatory review, with an FDA application submitted.
- Significant litigation contingency: In the Idenix patent case, a jury had awarded $2.54 billion in past damages and found willful infringement. Gilead recorded no liability, concluding a loss was not probable, but disclosed a reasonably possible loss range of zero to $9.1 billion through June 30, 2017, including potential enhanced damages, interest, royalties and fees. Post-trial proceedings and appeals remained pending.
- Other material risks include ongoing patent challenges involving HCV and HIV products, possible generic entry, pricing and reimbursement pressure, clinical and regulatory uncertainty, manufacturing and supply dependence, foreign-exchange movements, and investigations into patient-assistance programs. The company was also under IRS examination for 2010–2014 and cooperating with a separate Department of Justice inquiry concerning patient assistance.
- Three U.S. wholesalers represented approximately 60% of Q2 total revenue; approximately 85% of U.S. product sales in the first half went to these three wholesalers. Management also reported $30.8 billion of cash, cash equivalents and marketable securities generated from foreign operations and intended for foreign use.
Important facts for investors to verify
- Whether HCV patient starts, market share, pricing and treatment duration develop as management expected, and whether growth in TAF-based HIV products offsets HCV declines and older-product erosion.
- Updates to the Idenix verdict, including post-trial rulings, appeals and any change to the disclosed potential exposure of up to $9.1 billion.
- Actual second-half operating cash flow and the timing and size of rebate payments.
- Generic-entry timing and outcomes of patent disputes affecting sofosbuvir, Truvada, Viread and other products.
- Changes in payer coverage, pricing pressure, wholesaler inventories, foreign-exchange effects and the status of government inquiries.