Gilead Sciences, Inc. — Q1 2011 Form 10-Q
Business context and reporting period
Gilead is a biopharmaceutical company focused on developing and commercializing therapies, particularly in HIV/AIDS, liver disease, respiratory and cardiovascular/metabolic conditions. This filing covers the three months ended March 31, 2011; income and cash flow comparisons are against Q1 2010. Balance-sheet comparisons are against December 31, 2010.
Key financial metrics
Amounts are in U.S. dollars; financial statement amounts below are in millions except per-share data and percentages.
| Metric | Q1 2011 / March 31, 2011 | Prior comparable period / date |
|---|---|---|
| Total revenue | $1,926.1 | $2,085.9 in Q1 2010 |
| Product sales | $1,863.6 | $1,788.1 in Q1 2010 |
| Operating income | $902.0 | $1,161.1 in Q1 2010 |
| Net income attributable to Gilead | $651.1 | $854.9 in Q1 2010 |
| Diluted EPS | $0.80 | $0.92 in Q1 2010 |
| Product gross margin | 75% | 75% in Q1 2010 |
| Cash from operating activities | $820.5 | $670.6 in Q1 2010 |
| Cash, cash equivalents and marketable securities | $6,356.3 | $5,318.1 at December 31, 2010 |
| Working capital | $4,082.4 | $3,243.1 at December 31, 2010 |
| Total debt, net | $4,497.4 | $3,477.6 at December 31, 2010 |
Operating margin was approximately 46.8%, down from approximately 55.7% in Q1 2010, calculated as operating income divided by total revenue. Cash used in investing activities was $300.4 million and cash provided by financing activities was $485.1 million. Gilead had $1.25 billion available under its revolving credit facility at quarter-end and reported compliance with its covenants.
Material changes versus Q1 2010
- Total revenue declined about 8%, despite 4% growth in product sales, as royalty revenue fell 80% to $58.7 million. Tamiflu royalties from Roche were $11.1 million versus $246.3 million, reflecting reduced pandemic-planning orders.
- Product growth was led by Atripla, up 7% to $744.5 million, and Truvada, up 2% to $673.1 million. Ranexa rose 33% to $68.3 million and Letairis rose 12% to $62.2 million. Hepsera sales fell 34% and Viread fell 7%.
- Operating income decreased about 22%; net income attributable to Gilead decreased about 24%, and diluted EPS declined from $0.92 to $0.80. Management said diluted EPS would have increased approximately 9% year over year excluding the impact of Tamiflu royalties.
- R&D increased 16% to $254.4 million and SG&A increased 11% to $295.6 million. Management cited collaboration-related costs, business growth and headcount, the healthcare-reform pharmaceutical excise tax, and higher bad-debt expense, partly offset by lower restructuring costs.
- Cash and marketable securities increased by about $1.04 billion. Sources included operating cash flow and $987.4 million net proceeds from a new senior-note issuance; uses included the Arresto acquisition and $548.7 million of share repurchases.
- Debt rose following issuance of $1.0 billion principal amount of 4.50% senior unsecured notes due 2021. The $650 million principal balance of convertible notes due 2011 matured May 1, 2011, after quarter-end.
Outlook, commentary, risks and unusual items
- The filing provides no consolidated full-year revenue or earnings guidance. Management stated that existing funds, operating cash generation and financing access should meet capital needs for the foreseeable future.
- Management reported antiviral market-demand growth of 11% in the U.S. and 9% in Europe year over year, but described product sales as affected by U.S. healthcare reform, European austerity measures, wholesaler inventory movements and lower purchases by some AIDS Drug Assistance Program entities.
- For 2011, Gilead estimated healthcare reform would reduce U.S. net product sales by approximately 5–6%, excluding the pharmaceutical excise tax, and estimated that tax at $30–50 million. These are estimates, not guaranteed outcomes.
- European collection risk is significant: receivables in Greece, Italy, Portugal and Spain totaled approximately $1.06 billion at March 31, 2011, including $525.7 million more than 120 days past contractual due dates. Gilead also received substantially all of Greek government zero-coupon bonds settling receivables; the bonds trade infrequently and at a discount.
- Marketable securities included illiquid auction-rate securities and Greek government bonds. Management reported it intended and expected to be able to hold these investments and did not identify other-than-temporary impairment, but noted potential limits on liquidity.
- Material business and legal risks include dependence on Atripla and Truvada (together 74% of Q1 revenue), generic patent challenges involving several products, pricing and reimbursement pressure, and clinical-development uncertainty. The San Dimas facility remained subject to an FDA Warning Letter; Gilead said the reinspection resulted in no additional Form 483 observations but it was awaiting FDA confirmation that corrective actions were accepted.
- Arresto was acquired in January for $225 million plus potential milestone payments; purchase accounting was preliminary, with most consideration recorded as goodwill pending valuation. Calistoga, acquired April 1 for $375 million plus up to $225 million in milestones, was a subsequent event and its acquired asset and liability values were not yet available.
- Pipeline developments included FDA acceptance with Priority Review of the refiled Truvada/TMC278 application and an August 10, 2011 PDUFA date, and Phase III elvitegravir results meeting the stated non-inferiority endpoint. Gilead also disclosed termination of the Phase III ambrisentan trial for idiopathic pulmonary fibrosis and, in April, the Cayston trial for cystic fibrosis patients with Burkholderia.
Most important facts for investors to verify
- Whether product-sales growth can offset the sharp, volatile decline in Tamiflu royalties and other royalty revenue.
- Collection timing and recoverability of overdue southern European receivables, including the valuation and liquidity of Greek bonds.
- Regulatory resolution of the San Dimas Warning Letter and any effect on exports, manufacturing or pending applications.
- Outcomes and timing of generic patent litigation, especially challenges affecting major HIV products and other established brands.
- Final purchase accounting and subsequent integration or milestone obligations for Arresto and Calistoga, and the cash and debt impact of repaying the 2011 notes.