Gilead Sciences, Inc. — Q2 2012 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2012, compared with the same 2011 periods. Gilead develops and commercializes medicines, with a major focus on HIV/AIDS and viral hepatitis. Pharmasset, acquired in January 2012, added the investigational hepatitis C candidate GS-7977.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $2,405 | $2,137 | $4,688 | $4,063 |
| Product sales | $2,321 | $2,040 | $4,530 | $3,903 |
| Operating income | $1,059 | $1,017 | $1,859 | $1,919 |
| Net income attributable to Gilead | $712 | $746 | $1,154 | $1,397 |
| Diluted EPS | $0.91 | $0.93 | $1.48 | $1.73 |
| Product gross margin | 74% | 74% | 74% | 74% |
- Revenue increased 13% in Q2 and 15% for the first half; product sales rose 14% and 16%, respectively. Antiviral sales grew 14% and 16%, driven by Atripla, Truvada and the launch of Complera/Eviplera.
- Q2 net income attributable to Gilead fell 5%; first-half net income fell 17%. Higher R&D and interest costs, Pharmasset-related compensation expense, and the Greek bond loss weighed on results. Q2 operating income rose about 4%, while first-half operating income declined about 3%.
- Q2 product sales included Atripla of $904 million and Truvada of $786 million. Together, Atripla and Truvada represented about 70% of total revenue, underscoring product concentration.
- R&D expense was $396 million in Q2, up 40%, and $854 million for six months, up 59%. SG&A was $333 million in Q2, up 9%, and $776 million for six months, up 29%.
Cash, liquidity and debt
- At June 30, cash, cash equivalents and marketable securities totaled $2.27 billion, down 77% from $9.96 billion at year-end 2011, primarily after the $11.1 billion Pharmasset acquisition. Working capital was $857 million, versus $11.40 billion at year-end.
- Six-month operating cash flow was $1.74 billion, compared with $1.76 billion in 2011. Investing cash use was $11.38 billion, principally for Pharmasset; financing provided $1.38 billion.
- Total debt, net, was $9.10 billion, including $1.97 billion classified as current and $7.13 billion long term. Debt increased with acquisition financing; Gilead repaid $700 million of term-loan borrowings during the first half. The company reported compliance with debt covenants.
- Gilead said existing capital resources and operating cash flow should be adequate for foreseeable capital needs. About $1.43 billion of cash and marketable securities was generated abroad and intended for foreign operations.
Material changes, outlook and risks
- Pharmasset: Acquired in January for $11.1 billion, funded with cash, $3.7 billion of senior notes and approximately $2.2 billion of bank debt. The acquired GS-7977 in-process R&D asset was valued at $10.72 billion. Accelerated option vesting generated $193.9 million of stock-based compensation expense.
- Pipeline and outlook: Management reported Phase 3 GS-7977 studies underway and anticipated filing for regulatory approval by mid-2013 if results were positive. It planned to start a Phase 3 study of the GS-7977/GS-5885 fixed-dose combination in Q4 2012, subject to Phase 1 data, and projected a possible filing by mid-2014 if subsequent studies succeeded. These are conditional expectations, not guaranteed outcomes. The filing reported FDA approval of Truvada for HIV pre-exposure prophylaxis in July 2012 and an August 27, 2012 FDA target review date for Quad.
- One-time and unusual items: The Greek sovereign debt restructuring caused a $40.1 million first-half loss. A one-time sale of Spanish receivables generated $349.7 million cash proceeds and a $29.9 million gain recorded as an offset to SG&A.
- Receivables and market exposure: Southern European receivables were approximately $792 million; $291 million were more than 120 days past due and $115 million more than 365 days past due. Currency movements, government payment delays and purchasing patterns may affect sales and collections.
- Legal, regulatory and operating risks: The company disclosed generic patent challenges to several products, an Idenix patent interference affecting GS-7977-related metabolites, arbitration over ownership of a Pharmasset patent, and a continuing U.S. Department of Justice inquiry into manufacturing, quality and distribution practices. Potential outcomes and losses were uncertain. Gilead also reported a Cayston supply constraint and risks from clinical-trial results, competition, reimbursement pressure and reliance on third-party suppliers.
- Subsequent event: In July 2012, Gilead signed a conditional agreement to acquire a Foster City office building for approximately $180 million.
Most important facts for investors to verify
- Whether GS-7977 and the GS-7977/GS-5885 combination meet clinical endpoints and follow the projected study and filing timelines.
- Whether core HIV product demand and sales remain resilient after unusually strong public-program purchasing in early 2012.
- Whether Southern European receivables are collected and whether payment delays or further restructuring create additional losses.
- How Pharmasset financing, debt maturities and ongoing R&D investment affect cash generation and earnings.
- Developments in generic patent litigation, the Idenix interference, the former Pharmasset employee arbitration and the government inquiry.