GILEAD SCIENCES, INC. quarterly report, Q3 FY2015

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Gilead Sciences, Inc. — Q3 2015 Form 10-Q

Business context and reporting period. Gilead is a research-based biopharmaceutical company focused primarily on antiviral medicines, including treatments for hepatitis C (HCV) and HIV. This unaudited filing covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. Amounts are U.S. dollars.

Financial performance and position

  • Q3 revenue: $8.295 billion, up 37% year over year; product sales were $8.211 billion. Nine-month revenue: $24.133 billion, up 37%.
  • HCV product sales: $4.8 billion in Q3 versus $2.8 billion a year earlier. Q3 Harvoni sales were $3.332 billion; Sovaldi sales were $1.466 billion. For nine months, Harvoni sales were $10.519 billion and Sovaldi sales were $3.729 billion.
  • Profit: Q3 operating income was $5.585 billion and net income attributable to Gilead was $4.600 billion; diluted EPS was $3.06. For nine months, operating income was $16.572 billion, attributable net income was $13.425 billion and diluted EPS was $8.73.
  • Margins: Product gross margin was 87% in Q3 and 88% for nine months, compared with 83% and 84%, respectively, in 2014. Management attributed the improvement to product mix, including increased HCV sales. Operating margin was approximately 67% for Q3 and 69% for nine months, calculated from reported operating income and revenue.
  • Costs and taxes: Q3 R&D expense rose 18% to $743 million; SG&A declined 4% to $903 million. Nine-month R&D rose 25% to $2.257 billion and SG&A rose 12% to $2.360 billion. Q3 and nine-month effective tax rates were 16.1% and 17.3%, versus 19.2% and 19.1% in 2014.
  • Cash flow: Nine-month operating cash flow was $15.455 billion, up from $9.797 billion. Investing used $10.037 billion, mainly reflecting net purchases of marketable securities; financing used $1.419 billion. Cash and cash equivalents ended the period at $13.965 billion.
  • Liquidity and debt: Cash, cash equivalents and marketable securities totaled $25.114 billion; working capital was $16.550 billion. Total debt, net of issuance costs, was $22.225 billion, including $21.894 billion long-term debt. The company had no borrowings under its revolving credit facility and reported compliance with covenants.
  • Capital returns: Gilead repurchased $7.0 billion of common stock and paid $1.3 billion in dividends during the first nine months. The January 2015 repurchase authorization had $11.1 billion remaining at quarter-end.

Material changes versus the prior comparable period

  • Harvoni’s launch drove much of the revenue increase, while Sovaldi sales fell as patients shifted to Harvoni. Sovaldi Q3 sales declined 48% year over year; Harvoni was approved in Japan in July 2015, and Sovaldi there in March.
  • HIV sales showed mixed trends: Stribild grew 56% in Q3 and Complera/Eviplera grew 9%, while Atripla declined 9%, primarily as physicians prescribed newer regimens.
  • Revenue growth was partly offset by foreign-exchange effects: currency movements, net of hedges, reduced product sales by $195 million in Q3 and $559 million for nine months compared with 2014.
  • Debt increased substantially after Gilead issued $10.0 billion of senior unsecured notes in September. Total debt, net, rose from $12.404 billion at December 31, 2014 to $22.225 billion at September 30, 2015.
  • Q3 SG&A comparison was affected by a $337 million cumulative Branded Prescription Drug Fee catch-up recorded in Q3 2014. The 2015 quarter’s lower SG&A therefore should not be read as a simple like-for-like underlying cost decline.

Outlook, commentary, risks and contingencies

  • Management said HCV sales are difficult to forecast and that U.S. new-patient starts had diminished since Q1 2015; the rate of starts late in 2015 might better indicate the pace in 2016. The filing provides no numerical revenue or earnings guidance.
  • Management expected existing capital resources and operating cash generation to meet capital needs for the foreseeable future. It also noted that operating cash flow could decrease as payments for accrued government and other rebates continue.
  • Gilead cited ongoing HCV pricing pressure, discounts and rebates, payer coverage and reimbursement uncertainty, and competition. HCV and HIV products represented approximately 60% and 34%, respectively, of nine-month product sales, creating material product-concentration risk.
  • Southern European accounts receivable were approximately $1.8 billion; $198 million was over 120 days past due, including $27 million over 365 days. The company reported no significant collection losses to date and considered its allowance adequate, while continuing to monitor collection risk.
  • Material patent disputes involve sofosbuvir/Sovaldi and Harvoni, including claims by Idenix, Merck and AbbVie; outcomes and potential losses could not be reasonably estimated. European oppositions could narrow or revoke Gilead’s sofosbuvir patent. Generic challenges also affect HIV products and Letairis. After quarter-end, a Canadian court ruled Idenix’s patent invalid and Gilead’s patent valid; Gilead was awaiting decisions in other proceedings.
  • Other risks include generic entry, regulatory approval and safety risks, manufacturing and supply constraints, foreign-exchange exposure, tax examinations, and healthcare cost controls. A Senate Finance Committee inquiry into Sovaldi pricing was ongoing; Gilead said it was cooperating and could not predict the outcome.
  • Pipeline highlights included positive Phase 3 results for investigational sofosbuvir/velpatasvir for HCV, progress on tenofovir alafenamide (TAF)-based HIV regimens, and FDA approval of Letairis in combination with tadalafil for pulmonary arterial hypertension. These are development or approval milestones, not quantified financial guidance.

Important facts for investors to verify

  • Whether HCV patient starts, payer access, discounts and competition support future Harvoni and Sovaldi sales—and how quickly Sovaldi declines are offset by Harvoni and international growth.
  • Whether reported growth in cash flow and earnings is sustainable, including the effects of rebate payments, working-capital movements and product mix.
  • The implications of the $10.0 billion note issuance, resulting debt and interest expense, alongside planned dividends and share repurchases.
  • Updates on major HCV patent litigation and European patent oppositions, generic challenges, and any resulting royalties, restrictions or changes to exclusivity.
  • Collections on Southern European receivables, and any changes to payer rebates, foreign-exchange impacts or the company’s outlook for 2016 patient starts.