Gilead Sciences, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; the filing also reports fourth-quarter results and certain subsequent events through February 23, 2012. Gilead is a research-based biopharmaceutical company focused principally on HIV/AIDS, liver disease, cardiovascular/metabolic and respiratory conditions.
Financial performance
Amounts below are in U.S. dollars; figures are rounded. Comparisons are with 2010 unless noted.
| Metric | 2011 | Change / context |
|---|---|---|
| Total revenue | $8.385 billion | Up 5%; product sales growth was partly offset by lower royalties |
| Product sales | $8.102 billion | Up 10%; antiviral sales were $7.050 billion, up 8% |
| Royalty revenue | $268.8 million | Down 51%, primarily from reduced Tamiflu royalties |
| Operating income | $3.790 billion | Down 4%; operating margin was approximately 45% |
| Net income attributable to Gilead | $2.804 billion | Down 3%; diluted EPS rose 7% to $3.55, aided by share repurchases |
| Product gross margin | 74% | Down from 75%, primarily due to the Atripla partner revenue-share adjustment |
| Operating cash flow | $3.639 billion | Up from $2.834 billion |
| Cash, cash equivalents and marketable securities | $9.964 billion | At December 31, up from $5.318 billion |
| Working capital | $11.404 billion | At December 31, up from $3.243 billion |
| Long-term debt, net | $7.606 billion | At December 31; excludes debt raised in January 2012 |
Research and development expense increased 15% to $1.229 billion; selling, general and administrative expense increased 19% to $1.242 billion. Interest expense rose to $205.4 million from $109.0 million. The effective tax rate was 23.6%, versus 26.2% in 2010.
Fourth-quarter 2011 revenue was $2.200 billion and net income attributable to Gilead was $665.1 million, compared with $1.999 billion and $629.4 million, respectively, in fourth-quarter 2010.
Business developments and changes
- Atripla sales grew 10% to $3.225 billion and Truvada sales grew 8% to $2.875 billion. Together they represented approximately 73% of total revenue, underscoring concentration in HIV products.
- Letairis sales rose 22% to $293.4 million and Ranexa sales rose 33% to $320.0 million. Hepsera sales declined 28% to $144.7 million.
- Complera/Eviplera launched in 2011 and recorded $38.7 million in sales. The FDA accepted the Quad single-tablet regimen application for review, with a target decision date of August 27, 2012.
- Revenue growth was accompanied by lower reported profit: product sales rose, but royalty revenue fell sharply and operating costs increased. A $26.6 million R&D impairment related to CGI-acquired research assets was recorded in 2011; the comparable 2010 period included $136.0 million of impairments.
- In January 2012, Gilead completed its $11.1 billion Pharmasset acquisition, gaining the investigational HCV candidate GS-7977. The acquisition was financed with approximately $5.2 billion of cash, $2.2 billion of bank debt and $3.7 billion of senior notes.
- Gilead repurchased $2.38 billion of shares in 2011, retiring 59.9 million shares at an average $39.80 per share. A new three-year, $5.0 billion repurchase authorization began in September.
Outlook, risks and contingencies
- Management expected 2012 product sales to grow, citing the full-year contribution from Complera/Eviplera and a potential U.S. Quad launch in September, conditional on approval. It expected R&D and SG&A expenses to increase and product gross margin to be lower than 2011. No specific full-year revenue or earnings guidance was provided in the text.
- GS-7977 data were a major uncertainty. In February 2012, Gilead reported viral relapse in six of eight evaluable genotype 1 prior null responders after 12 weeks of GS-7977 plus ribavirin; management said this regimen and duration would not be sufficient to cure those patients. Further genotype 1 study results were expected during 2012, and outcomes could affect development timelines, costs and valuation.
- Gilead disclosed a Cayston supply shortage: delays in qualifying external manufacturing sites and expanding San Dimas production led it to restrict access for patients with new prescriptions in February 2012, with exceptions for specific medical needs. Management expected lost sales until supply improved.
- Southern European government and hospital receivables were a collection risk. At year-end, receivables in Greece, Italy, Portugal and Spain totaled approximately $1.10 billion, including $612.4 million more than 120 days past due and $250.7 million more than 365 days past due.
- Three U.S. wholesalers accounted for approximately 79% of U.S. product sales and 43% of worldwide revenue, creating customer and channel-inventory concentration. Foreign exchange, payer discounts, healthcare reform and government pricing pressure could also affect revenue and margins.
- A U.S. Attorney’s Office subpoena received in June 2011 sought records concerning manufacturing, quality and distribution practices for several products. Gilead was cooperating; it said a possible loss or range could not yet be estimated. Generic patent challenges involving key products were also ongoing.
- Teva challenged patents covering products including Truvada and Atripla; other generic challenges involved Viread, Ranexa, Hepsera and Tamiflu. Gilead cautioned that outcomes could shorten patent protection and that litigation could be costly. It also disclosed third-party patent and inventorship concerns relating to GS-7977.
- Debt increased substantially during 2011 to help finance Pharmasset. After year-end, Gilead borrowed $2.15 billion under new facilities; management expected interest expense to increase in 2012. The filing’s year-end debt and liquidity figures therefore predate this borrowing and the acquisition closing.
Most important facts for investors to verify
- Whether subsequent GS-7977 trial data support efficacy across HCV genotypes, and the resulting development cost, timing and commercial prospects.
- Whether Cayston manufacturing capacity recovered and the duration and revenue impact of the supply restriction.
- Collection progress and credit-loss assumptions for the overdue Southern European receivables.
- Post-Pharmasset cash, debt, interest expense and acquisition accounting, including the final allocation of the purchase price.
- Trends in Atripla and Truvada sales, product mix and gross margin, given the concentration of revenue in these products.
- Developments in the government inquiry and generic patent litigation, including any measurable financial exposure or changes to product exclusivity.