Gilead Sciences, Inc. — Q3 2018 Form 10-Q
Business context and reporting period
Gilead is a research-based biopharmaceutical company focused primarily on HIV/AIDS, liver diseases, hematology/oncology, and inflammation/respiratory diseases. This unaudited report covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless noted. Gilead adopted Topic 606 in 2018 using the modified retrospective method, so 2017 revenue figures were not restated; management said the standard’s impact on 2018 results was not material.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $5.596 billion | $6.512 billion | $16.332 billion | $20.158 billion |
| Operating income | $2.623 billion | $3.812 billion | $7.056 billion | $11.833 billion |
| Net income attributable to Gilead | $2.097 billion | $2.718 billion | $5.452 billion | $8.493 billion |
| Diluted EPS | $1.60 | $2.06 | $4.15 | $6.44 |
| Operating cash flow | Not separately stated | Not separately stated | $6.055 billion | $9.145 billion |
- Q3 revenue fell 14%; nine-month revenue fell 19%. Product sales declined 15% and 19%, respectively. HIV sales increased 12% in Q3 and 10% year to date, while HCV sales fell 59% and 61%, respectively, largely due to competition.
- Product gross margin was 80% in Q3 versus 84% a year earlier, and 79% for the nine months versus 84%. Higher Kite-related amortization and product mix contributed to the declines.
- R&D expense rose 19% in both comparison periods: to $939 million in Q3 and $3.068 billion year to date. SG&A rose 8% in Q3 to $948 million and 11% year to date to $2.925 billion. Management attributed increases mainly to Kite-related costs and stock-based compensation.
- Effective tax rates were 21.2% for Q3 and 19.5% for the nine months, compared with 26.1% and 25.6% in 2017. The nine-month 2018 rate benefited partly from a $202 million tax benefit related to settlement of an acquired entity’s tax examination.
- Cash, cash equivalents and marketable securities totaled $30.844 billion at September 30, 2018, down from $36.694 billion at December 31, 2017. Working capital was $24.802 billion, up from $20.188 billion.
- Total debt, net, was $27.316 billion, including $2.746 billion current and $24.570 billion long-term. Gilead repaid $4.5 billion of Kite-related term loans and $1.8 billion of notes during the nine months; no revolving credit borrowings were outstanding, and the company reported covenant compliance.
- Investing activities provided $11.620 billion, principally reflecting securities maturities and portfolio activity; financing activities used $10.648 billion, including debt repayments, $1.938 billion in share repurchases and $2.235 billion in dividends paid.
Material changes and management outlook
- HCV product sales continued to contract amid greater competition and lower volume and net pricing. Management expected further HCV sales declines in Q4 2018 versus Q4 2017, with patient starts expected to decline slightly over time; treatment duration and pricing were described as largely stabilized.
- Growth in Descovy-based HIV products and the 2018 Biktarvy launch partly offset HCV declines. Biktarvy sales were $386 million in Q3; Yescarta sales were $75 million in Q3 and $183 million year to date.
- Gilead expected U.S. generic competition for Letairis following the July 2018 patent expiration and for Ranexa beginning in Q1 2019. Management anticipated U.S. sales declines for both products after generic entry.
- The company stated existing capital resources and operating cash flows should meet capital needs for the foreseeable future. It continued quarterly dividends, with future dividends and repurchases subject to board approval and capital needs; $6.1 billion remained authorized under the repurchase program at quarter-end.
- Business and pipeline developments included European Commission approval of Yescarta, Biktarvy approvals in additional markets, and progress in filgotinib studies. Gilead also reported terminating its Phase 3 andecaliximab gastric cancer study after insufficient evidence of benefit.
Risks, contingencies and unusual items
- Key commercial risks include dependence on HIV and HCV products, sustained HCV competition, generic erosion, pricing and reimbursement pressure, payer coverage decisions, and unpredictable wholesaler or government purchasing patterns. Three U.S. wholesalers accounted for approximately 86% of U.S. product sales during the first nine months.
- Yescarta faces execution, safety, manufacturing, logistics and reimbursement risks. The filing cautions that Medicare and other payer reimbursement may not cover hospitals’ full treatment costs; CAR T coverage limitations could also affect uptake.
- Significant intellectual-property matters include the appeal of the ruling invalidating Idenix’s patent and vacating its $2.54 billion jury award, and Juno/Sloan Kettering litigation concerning Yescarta. Gilead reported no accrual for the described matters because it did not believe losses were probable; outcomes and potential exposure were generally not estimable. The filing also describes claims concerning Biktarvy, sofosbuvir and generic challenges.
- Government inquiries and litigation involve patient assistance, reimbursement support, marketing and related practices. Gilead said it was cooperating with several inquiries. A False Claims Act case was dismissed without prejudice in July 2018.
- Tax Reform estimates remained provisional; Gilead was evaluating its Global Minimum Tax accounting election and expected to finalize its analysis in Q4 2018. The company also noted possible material, non-recurring deferred-tax adjustments from contemplated legal-entity changes.
- Other notable items: Gilead repatriated $29.7 billion of cash, cash equivalents and marketable securities during the nine months; unrealized gains on marketable equity securities contributed to other income; and CEO John Milligan announced he would step down after a successor was named or by year-end 2018.
Important facts for investors to verify
- Whether HIV portfolio growth can offset continuing HCV declines and expected generic erosion in other products.
- Subsequent Biktarvy and Yescarta uptake, clinical progress, and Yescarta reimbursement and operational constraints.
- Updates in Idenix, Juno, Biktarvy, sofosbuvir and generic-product litigation, including any change in loss assessments or accruals.
- Cash generation, debt reduction, dividend and repurchase levels, and the effect of tax payments and tax-accounting updates.
- Whether customer inventory and purchasing patterns, payer rebates, or pricing changes materially alter reported sales versus underlying patient demand.