Gilead Sciences, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Gilead is a research-based biopharmaceutical company focused principally on antiviral medicines, including treatments for hepatitis C (HCV) and HIV. Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|
| Total revenue | $8,244 | $6,535 | $15,838 | $11,534 |
| Product sales | $8,126 | $6,413 | $15,531 | $11,284 |
| Operating income | $5,616 | $4,412 | $10,987 | $7,455 |
| Net income attributable to Gilead | $4,492 | $3,656 | $8,825 | $5,883 |
| Diluted earnings per share | $2.92 | $2.20 | $5.68 | $3.52 |
| Product gross margin | 88% | 86% | 88% | 85% |
- Q2 revenue increased 26% year over year; first-half revenue increased 37%. Management attributed growth primarily to Harvoni, launched in late 2014.
- Q2 HCV product sales were $4.9 billion, up 41% year over year. Harvoni sales were $3.6 billion; Sovaldi sales were $1.3 billion, down 63%. HIV product sales were $2.7 billion, up 8%.
- R&D expense rose 40% to $818 million in Q2; SG&A rose 32% to $812 million. Management cited clinical-program expansion and acquisition-related expense for R&D growth, and business expansion and the branded prescription drug fee for SG&A growth.
| Liquidity and debt | June 30, 2015 | December 31, 2014 |
|---|
| Cash, cash equivalents and marketable securities | $14.7 billion | $11.7 billion |
| Working capital | $9.2 billion | $12.0 billion |
| Total debt, net | $12.274 billion | $12.404 billion |
| Current debt portion | $352 million | $483 million |
- For the six months, operating cash flow was $11.359 billion, investing cash flow was negative $5.851 billion, and financing cash flow was negative $8.063 billion. Cash and cash equivalents declined $2.610 billion to $7.417 billion.
- Working capital fell $2.8 billion, primarily as accrued government and other rebates and accounts payable increased. Accrued government and other rebates were $4.367 billion at quarter-end, versus $2.316 billion at year-end.
- No amounts were drawn on the revolving credit facility, and Gilead reported compliance with debt covenants. Approximately $9.4 billion of cash, cash equivalents and marketable securities was generated abroad and intended for foreign operations.
Material changes and capital allocation
- Harvoni became the largest growth driver: it generated $3.608 billion in Q2 sales, while Sovaldi sales declined amid patients switching to Harvoni or a competitor. The product mix raised product gross margin to 88% from 86% in Q2 2014.
- Foreign currency exchange, net of hedges, reduced product sales by $254 million in Q2 and $377 million in the first half versus the comparable 2014 periods.
- Gilead paid $3.9 billion to settle 46 million warrants tied to its May 2016 convertible notes. It also repurchased $3.9 billion of common stock during the first half, including $900 million under the new $15 billion program in Q2. The program had $14.1 billion remaining at June 30.
- The company declared and paid its first quarterly dividend of $0.43 per share; cash dividends paid in the first half totaled $633 million. The board later declared another $0.43 dividend, payable in September 2015.
- The warrant settlement was recorded in equity and reduced additional paid-in capital to zero, with the excess charged to retained earnings. A portion of the May 2016 notes was settled, including $140 million of principal; the remaining carrying value was $352 million.
Outlook, risks and contingencies
- Outlook: The filing provides no specific financial guidance. Management said available capital resources and operating cash flows should meet capital needs for the foreseeable future. It cautioned that interim results may not indicate full-year performance.
- Management expected HCV pricing pressure to continue. Payer discounts and rebates agreed during the first half were expected to have their full impact in the second half of 2015. Competition, reimbursement limits and changes in formulary access could affect Harvoni and Sovaldi demand and revenue.
- HCV and HIV products represented major revenue concentrations: Harvoni and Sovaldi accounted for approximately 61% of first-half product sales; HIV products accounted for more than 33%. Three wholesalers represented approximately 89% of U.S. product sales, creating exposure to distributor inventory and purchasing fluctuations.
- Southern European receivables were approximately $1.5 billion, including $118 million more than 120 days past due and $29 million more than 365 days past due. Gilead reported no significant collection losses to date, but said it would continue monitoring collection risk.
- Material patent and generic challenges involve sofosbuvir/Sovaldi and Harvoni, including disputes with Idenix/Merck and AbbVie, and European opposition to Gilead’s sofosbuvir patent. Gilead said outcomes and potential losses could not be predicted or reasonably estimated; adverse rulings could require licenses or royalties, or threaten exclusivity.
- Other disclosed risks include HCV pricing and reimbursement investigations by the U.S. Senate Finance Committee, generic challenges to Truvada, Viread, Atripla and Letairis, and an appeal in a False Claims Act matter after the court dismissed the amended complaint. The Department of Justice had declined to intervene in that case.
- Pipeline updates included U.S. filings for investigational TAF-based HIV regimens and Japanese approval of Harvoni. These candidates remain subject to regulatory review and development risks. The company also reported that simtuzumab Phase 2 studies did not show clinical benefit in several cancers.
- The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Harvoni sales, HCV treatment demand and realized prices withstand competition and the expected step-up in payer rebates and discounts.
- How HCV and HIV revenue concentration, wholesaler inventory shifts and foreign-exchange movements affect subsequent quarters.
- Cash conversion as rebate liabilities are paid, and the collectability and aging of Southern European receivables.
- Progress and outcomes in the major sofosbuvir and Harvoni patent disputes and generic challenges, including possible effects on exclusivity, royalties and sales.
- Future capital returns and liquidity after warrant settlement, share repurchases and dividends; the filing states future dividends and repurchases remain subject to board decisions and available capital.
