Gilead Sciences, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results. Amounts are in U.S. dollars unless otherwise noted.
Business context
Gilead is a biopharmaceutical company focused primarily on HIV, hepatitis B and C, cardiovascular and respiratory diseases, and oncology/inflammation. Revenue remained highly concentrated in antiviral medicines: antiviral sales were $8.14 billion, or 84% of total revenue. Atripla and Truvada together generated $6.76 billion, or 70% of total revenue.
Financial performance and liquidity
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $9.70 billion | $8.39 billion | +16% |
| Product sales | $9.40 billion | $8.10 billion | +16% |
| Operating income | $4.01 billion | $3.79 billion | +6% |
| Net income attributable to Gilead | $2.59 billion | $2.80 billion | -8% |
| Diluted EPS | $1.64 | $1.77 | -7% |
| Operating cash flow | $3.19 billion | $3.64 billion | -12% |
Product gross margin was 74%, unchanged from 2011; operating margin was approximately 41% and net margin attributable to Gilead approximately 27%. R&D expense rose 43% to $1.76 billion, while SG&A increased 18% to $1.46 billion. Higher pipeline investment, acquisition-related stock compensation, increased interest expense and a higher effective tax rate contributed to lower annual net income despite revenue growth.
At year-end, cash, cash equivalents and marketable securities totaled $2.58 billion, down from $9.96 billion, and working capital was $1.89 billion. Total debt was $8.22 billion, including $1.17 billion classified as current; management reported debt-to-EBITDA of 1.9x. The company generated $3.19 billion in operating cash flow, used $11.85 billion in investing activities (primarily for Pharmasset), and had $12.65 billion in disclosed contractual obligations.
Fourth quarter: Revenue was $2.59 billion versus $2.20 billion in Q4 2011; net income attributable to Gilead was $763 million versus $665 million; diluted EPS was $0.47 versus $0.43.
Material changes and notable items
- Completed the $11.05 billion Pharmasset acquisition in January 2012, adding sofosbuvir and substantially increasing R&D investment and intangible assets.
- Antiviral sales increased 15% to $8.14 billion. Atripla sales rose 11% to $3.57 billion, Truvada rose 11% to $3.18 billion, and Complera/Eviplera reached $342 million. Stribild launched in the United States and recorded $58 million in sales.
- Letairis, Ranexa and AmBisome sales together reached $1.13 billion, up 20%. Hepsera sales declined 25% to $108 million.
- R&D increased to $1.76 billion from $1.23 billion, reflecting expanded and advancing clinical programs. The company reported more than 50 active Phase 3 studies at year-end.
- Cash and marketable securities fell sharply following the Pharmasset acquisition. Gilead repaid about $1.84 billion of debt during 2012 and repurchased $667 million of shares; it planned to suspend repurchases during the first half of 2013 to prioritize debt repayment.
- Unusual items included $193.9 million of Pharmasset-related accelerated stock compensation and a $40.1 million loss from Greece’s sovereign-debt restructuring. A $29.9 million gain from the sale of Spanish receivables partly offset SG&A expense.
Outlook, risks and contingencies
Management expected 2013 product sales to grow, supported by a full-year contribution from Stribild and continued growth in Complera/Eviplera and cardiovascular products. It also expected R&D and SG&A expenses to increase. No specific numerical revenue or earnings guidance is provided in the filing. Management planned to file for sofosbuvir approval by the second quarter of 2013 and anticipated a potential 2014 launch, subject to clinical, regulatory and commercial outcomes. The filing reported positive topline results for four Phase 3 sofosbuvir studies; results for the fixed-dose sofosbuvir/ledipasvir program remained a key upcoming milestone.
- Product and pipeline concentration: Results depend heavily on HIV products, especially Atripla and Truvada, and on successful development and approval of sofosbuvir and other candidates.
- Pricing and reimbursement: Government rebates, healthcare reform, ADAP funding constraints, payer mix shifts and international price controls may constrain net revenue and margins. The company estimated its 2013 pharmaceutical excise tax at $100–$120 million, versus approximately $85 million in 2012.
- Competition and patents: Generic challenges could affect Viread, Truvada, Atripla, Hepsera, Ranexa and other products. A February 2013 agreement in principle with Teva would permit generic Viread launch on December 15, 2017, subject to finalization and regulatory review.
- Legal and intellectual-property matters: The company disclosed a Department of Justice subpoena concerning manufacturing, quality and distribution practices; it could not estimate a possible loss. Roche asserted rights to sofosbuvir, which Gilead disputed. Idenix patent proceedings and former Pharmasset employee Jeremy Clark’s arbitration also could affect rights to sofosbuvir-related intellectual property.
- Receivables and foreign exchange: Southern European receivables were $822 million, including $332 million more than 120 days past due. More than 40% of product sales were generated outside the United States; currency movements had an unfavorable net-of-hedging revenue impact of $57 million in 2012.
- Supply and execution: Cayston supply constraints reduced sales and led to restricted access for new patients from February through September 2012. The company also relies on single-source suppliers for certain products and components.
Investor verification priorities
- Verify the pace and durability of core HIV-product growth, including the concentration of revenue in Atripla and Truvada and the uptake of Stribild and Complera/Eviplera.
- Track sofosbuvir and sofosbuvir/ledipasvir trial results, regulatory submissions, approval timing, launch plans and any resolution of related patent or licensing disputes.
- Assess cash generation, debt repayment and liquidity after the Pharmasset acquisition, including the May 2013 convertible-note maturity and the planned pause in share repurchases.
- Monitor net pricing, government rebates and ADAP funding, as well as Southern European collections and foreign-exchange effects.
- Follow the DOJ inquiry, generic-litigation outcomes and remediation of manufacturing or supply constraints, particularly for Cayston.