Gilead Sciences, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; filed May 8, 2013. Unless noted, amounts below are in U.S. dollars. Gilead is a research-based biopharmaceutical company focused principally on HIV, liver diseases, cardiovascular and respiratory conditions, and oncology/inflammation.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Total revenue | $2.532 billion | $2.282 billion | Up 11% |
| Product sales | $2.394 billion | $2.208 billion | Up 8% |
| Royalty revenue | $134.4 million | $71.1 million | Up 89%, mainly higher Tamiflu royalties from Roche |
| Operating income | $1.025 billion | $800.2 million | Up 28% |
| Net income attributable to Gilead | $722.2 million | $442.0 million | Up 63%; diluted EPS $0.43 vs. $0.28 |
| Product gross margin | 73% | 74% | Down one percentage point, primarily product mix |
| Operating cash flow | $672.1 million | $453.0 million | Higher year over year |
| Cash, cash equivalents and marketable securities | $2.631 billion | $2.582 billion at Dec. 31, 2012 | Up $48.9 million |
| Total debt, net | $7.998 billion | $8.224 billion at Dec. 31, 2012 | Down $226.4 million |
| Working capital | $2.373 billion | $1.886 billion at Dec. 31, 2012 | Up $486.6 million |
Research and development expense rose 9% to $497.6 million as clinical and outside-services spending increased, particularly in liver disease and oncology. Selling, general and administrative expense fell 16% to $374.3 million, primarily because Q1 2012 included substantial Pharmasset-related stock compensation. The effective tax rate was 23.7%, versus 34.6%, reflecting the reinstated federal research tax credit and other items.
Business drivers and changes versus prior period
- Antiviral sales grew 7% to $2.061 billion. Complera/Eviplera sales increased 184% to $148.2 million and Stribild contributed $92.1 million; Truvada declined 8% to $700.2 million and Atripla declined 1% to $877.1 million.
- Letairis and Ranexa sales increased 35% and 16%, respectively; combined cardiovascular sales rose 26% to $214.4 million.
- Despite year-over-year growth, product sales declined 5% sequentially, mainly because U.S. wholesalers reduced Truvada and Atripla inventories after prior-quarter inventory building. Management cautioned that channel inventories can cause quarterly sales fluctuations.
- Q1 2012 included the $10.75 billion Pharmasset acquisition outflow and related unusual stock-compensation charges. Q1 2013 investing cash use was $407.3 million, including the YM acquisition, net of cash acquired.
Liquidity, debt and capital allocation
- Cash provided by operations was $672.1 million; investing activities used $407.3 million and financing activities used $199.0 million.
- Gilead paid $378.6 million, net of acquired cash, for YM BioSciences and repaid debt during the quarter. Total debt was $8.0 billion, including $600 million outstanding under its revolving credit facility. The company reported compliance with debt covenants.
- Approximately $1.25 billion of cash, cash equivalents and marketable securities was generated in foreign jurisdictions and intended for foreign operations. Management said existing resources and operating cash flows should meet capital needs for the foreseeable future.
- Gilead repurchased $82.2 million of stock in Q1, but suspended repurchases to focus on debt repayment during the first half of 2013.
Outlook, notable developments and risks
- Hepatitis C: Gilead filed an FDA application for sofosbuvir in April 2013 and reported encouraging Phase 3 results. Management was advancing trials of sofosbuvir/ledipasvir. The filing gives no specific revenue or earnings guidance; outcomes and approval timing remain uncertain and may affect the company and share price materially.
- HIV regulatory update: In April, the FDA issued complete response letters for standalone elvitegravir and cobicistat applications, citing documentation and validation deficiencies from a facility inspection. Gilead said the FDA raised no safety-profile concerns and that the action did not affect Stribild’s authorization or use. Gilead said it was addressing the agency’s questions.
- Costs: Management expected headcount and other expenses to continue increasing through the remainder of 2013 as it prepared for a sofosbuvir launch.
- YM BioSciences: Acquired in February for $487.6 million; the principal acquired asset was momelotinib in-process R&D. Purchase accounting was preliminary, with completion expected in Q2 2013.
- Legal and intellectual-property matters: Roche initiated arbitration asserting rights to sofosbuvir; Gilead disputed the claim. An inventorship interference involving Idenix and a separate former-employee arbitration could also affect rights to sofosbuvir-related compounds. Gilead said it could not predict outcomes.
- Generic competition: Gilead and Teva reached an agreement in principle permitting Teva to launch generic Viread on December 15, 2017, subject to government review. Gilead also permitted Sigmapharm to launch generic Hepsera after FDA approval. Other patent challenges involving key products remain and could shorten protection and pressure revenue.
- Other exposures: A U.S. Department of Justice investigation concerning manufacturing, quality and distribution practices remained ongoing; Gilead could not estimate a possible loss. Southern European receivables totaled $849.6 million, including $348.5 million more than 120 days past due and $114.1 million more than 365 days past due. Management considered its allowance adequate but continued monitoring collection risk.
- Additional risks include dependence on HIV products (Atripla and Truvada together were 62% of total revenue), pricing and reimbursement pressure, foreign exchange, customer inventory swings, clinical-development and approval risks, manufacturing and single-supplier dependencies, and healthcare-policy changes. The filing estimated Gilead’s non-deductible pharmaceutical excise tax at $100–$120 million for 2013.
Important facts for investors to verify
- Subsequent FDA actions, approval timing and commercial prospects for sofosbuvir and related HCV combinations, and resolution of the elvitegravir/cobicistat application deficiencies.
- Progress and potential financial effects of the Roche arbitration, Idenix interference, former-employee arbitration, and generic-product patent disputes.
- HIV product demand and pricing, including whether lower Truvada/Atripla sales reflect temporary inventory movements or more persistent changes.
- Collection trends for Southern European receivables, particularly balances overdue more than 120 days, and any changes to the bad-debt allowance.
- Debt repayment, cash generation and planned resumption or continuation of share repurchases; assess cash held abroad separately from funds available for domestic needs.
- R&D and launch-related expense growth, product gross-margin trends, and the final purchase accounting for YM BioSciences.