Gilead Sciences, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; filed November 7, 2016. Gilead is a research-based biopharmaceutical company, with products concentrated in HIV and hepatitis C (HCV) therapies.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $7.50 billion | $8.30 billion | $23.07 billion | $24.13 billion |
| Operating income | $4.40 billion | $5.59 billion | $13.59 billion | $16.57 billion |
| Net income attributable to Gilead | $3.33 billion | $4.60 billion | $10.39 billion | $13.43 billion |
| Diluted EPS | $2.49 | $3.06 | $7.59 | $8.73 |
| Product gross margin | 85% | 87% | 86% | 88% |
- Q3 product sales fell 10% to $7.41 billion; total revenue fell 10%. For the first nine months, product sales fell 4% and revenue fell 4% year over year.
- Q3 operating cash flow was $4.3 billion. Nine-month operating cash flow was $13.18 billion, down from $15.46 billion; investing cash flow was negative $9.31 billion and financing cash flow negative $7.05 billion.
- At September 30, cash, cash equivalents and marketable securities totaled $31.61 billion, versus $26.21 billion at year-end 2015. Working capital was $10.35 billion, down from $14.87 billion.
- Debt carrying value was $27.07 billion, up from $22.06 billion at year-end; $700 million was current. Gilead issued $5.0 billion of senior notes in September and had no borrowings under its new $2.5 billion revolving facility. It reported no covenant violations.
- Q3 interest expense was $242 million, compared with $165 million. The nine-month effective tax rate was 21.2%, versus 17.3%.
Material changes and operating drivers
- HCV product sales declined as patient starts slowed after the initial Harvoni launch wave, with lower Harvoni and Sovaldi sales and lower net prices. Q3 HCV sales were $3.3 billion, versus $4.8 billion; nine-month HCV sales were $11.6 billion, versus $14.2 billion.
- HIV and other antiviral sales grew, supported by uptake of newer TAF-based products Genvoya, Descovy and Odefsey. Nine-month HIV and other antiviral sales were $9.5 billion, compared with $8.1 billion.
- R&D expense rose 54% in Q3 to $1.14 billion and 72% for the nine months to $3.89 billion. SG&A declined 8% in Q3 to $831 million, but increased 2% for the nine months to $2.41 billion.
- Foreign exchange, net of hedges, reduced product sales by $108 million in Q3 and $392 million for the first nine months. Japan implemented a 32% mandatory price reduction on Harvoni and Sovaldi effective April 1, 2016.
- Share repurchases totaled $10.0 billion in the first nine months, including a $5.0 billion accelerated repurchase; cash dividends paid were $1.84 billion. The company declared dividends of $0.47 per share in Q3.
Outlook, commentary and risks
- Management expected full-year 2016 total net product sales to be lower than 2015. It cited continued slowing of HCV treatment starts, payer and geographic mix shifts toward lower net prices, shorter treatment durations and possible market-share loss from competition.
- Management said existing capital resources and operating cash flows should meet capital needs for the foreseeable future, but expected operating cash flow to decrease as rebate liabilities are paid and pipeline milestone payments are made. Approximately $25.2 billion of cash and securities was generated in foreign jurisdictions and intended for foreign operations.
- Unusual R&D charges included a $117 million simtuzumab impairment in Q3, a $114 million momelotinib impairment earlier in 2016, and a $200 million development milestone expense relating to Nimbus Apollo. The $400 million Nimbus acquisition payment was also expensed in R&D. Galapagos-related license and collaboration costs contributed to nine-month R&D growth.
- Legal and intellectual-property exposure includes ongoing sofosbuvir-related cases. A jury had awarded Merck $200 million, but the court ruled Merck could not recover damages based on Gilead’s unclean-hands defense; appeals remained pending. A University of Minnesota infringement suit was filed in August 2016, and an Idenix-related Delaware trial was scheduled for December 2016. The company said outcomes and potential loss ranges could not be reasonably estimated.
- Other key risks include HCV/HIV pricing and reimbursement pressure, generic competition (including expected U.S. and EU TDF competition in 2017), patent challenges, product-development setbacks, manufacturing and supply dependencies, customer concentration, foreign-exchange exposure and ongoing government inquiries. Southern European receivables were approximately $566 million, including $132 million more than 120 days past due.
Most important facts for investors to verify
- Whether HCV patient starts, net pricing and product sales continue to decline, and whether newer HIV regimens offset that trend.
- Full-year 2016 sales performance against management’s expectation of lower product sales than in 2015.
- Cash-flow conversion and the timing of rebate payments and pipeline milestones, alongside the increase in debt and continued shareholder returns.
- Outcomes and financial implications of sofosbuvir patent litigation, appeals and other intellectual-property challenges.
- Whether foreign receivables, customer concentration, reimbursement pressure and expected generic entry materially affect collections, sales or margins.