Gilead Sciences, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods unless stated otherwise. Gilead is a biopharmaceutical company, with sales concentrated in HIV therapies. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $1.94 billion | $1.80 billion | $5.95 billion | $4.98 billion |
| Product sales | $1.87 billion | $1.65 billion | $5.46 billion | $4.66 billion |
| Operating income | $979 million | $894 million | $3.13 billion | $2.46 billion |
| Net income attributable to Gilead | $705 million | $673 million | $2.27 billion | $1.83 billion |
| Diluted earnings per share | $0.83 | $0.72 | $2.55 | $1.96 |
- Growth and margins: Q3 revenue rose 8% and product sales 13%; nine-month revenue rose 20% and product sales 17%. Operating margin was approximately 50.5% for Q3 and 52.6% year to date, compared with 49.6% and 49.5%, respectively, in 2009. Product gross margin declined to 74% from 75% in Q3 and to 75% from 76% year to date, primarily because Atripla includes efavirenz, which Gilead records at zero gross margin.
- Cash flow: Operating cash flow was $2.11 billion for the first nine months, versus $2.12 billion in 2009. Investing used $1.53 billion; financing used $879 million. Cash and cash equivalents ended at $1.02 billion.
- Liquidity: Cash, cash equivalents and marketable securities totaled $5.05 billion at September 30, up 29% from year-end 2009; working capital was $3.44 billion, up 17%.
- Debt and capital allocation: Carrying value of convertible notes was approximately $3.45 billion, including $632 million classified as current. In July, Gilead issued $2.50 billion of 1.00% notes due 2014 and 1.625% notes due 2016, and bought note hedges and sold warrants for a net cost of $207 million. It repaid a $500 million credit-facility borrowing; approximately $1.25 billion remained available under the revolving facility. The company repurchased $3.41 billion of stock in the first nine months, retiring 93.6 million shares.
Material changes and business developments
- Antiviral sales were the main growth driver: Q3 Atripla sales increased 23% to $743 million and Truvada increased 8% to $669 million. Ranexa sales rose 23% to $60 million and Letairis rose 26% to $60 million.
- Q3 royalty revenue fell 51% to $69 million, chiefly as Roche’s Tamiflu sales and pandemic-related orders declined. Nine-month royalties rose 79% to $481 million, reflecting stronger Tamiflu royalties earlier in 2010.
- Research and development expense fell 15% in Q3 and 3% year to date, mainly because of lower reimbursement-related expense under the Tibotec collaboration and delayed clinical-trial spending. SG&A rose 10% in both periods, reflecting commercial expansion and restructuring-related costs.
- Gilead acquired CGI Pharmaceuticals in July for consideration valued at $102 million, including $11 million of contingent consideration. The acquisition added preclinical kinase research; its results were not significant in the reported period.
Outlook, commentary, risks and unusual items
- Outlook: The filing gives no broad earnings or revenue forecast. Based on Roche-reported sales, Gilead expected Tamiflu royalties of approximately $21 million in Q4 2010. Management estimated U.S. healthcare-reform effects would reduce 2010 U.S. net product sales by approximately $200 million; it expected a similar 2011 effect as a percentage of U.S. net product sales, excluding the excise tax. The estimated 2011 pharmaceutical excise tax was less than $50 million.
- Healthcare reform and pricing: Expanded rebates and discounts, the 2011 Medicare Part D coverage-gap discount, and the new industry fee may pressure sales and expenses. European price reductions and reimbursement controls also weigh on product economics.
- Product and regulatory risks: Gilead’s San Dimas facility received an FDA Warning Letter on September 24, 2010 concerning manufacturing conditions, quality controls and procedures. Gilead said it was addressing the issues; unresolved concerns could affect exports or approvals for certain products made there, including AmBisome and Cayston.
- Intellectual property and litigation: Generic manufacturers challenged patents for Truvada, Atripla, Viread, Ranexa and Hepsera. Unsuccessful defense could shorten U.S. patent protection and permit generic competition. A government inquiry concerning Ranexa marketing and sales remained ongoing; the outcome was not predictable. A proposed $8.25 million settlement of a securities class action was finally approved in November 2010 and was to be paid by insurers.
- Receivables and investments: Receivables from government-supported customers in Greece, Italy, Portugal and Spain totaled approximately $970 million; $455 million was more than 120 days past due. Gilead reported $120 million due from Greek public hospitals and expected settlement through zero-coupon bonds, which could trade below face value. Auction-rate student-loan securities remained illiquid; their fair value was $88 million, with $6 million of unrealized losses. Management did not consider them other-than-temporarily impaired and said it could hold them.
- Concentration and other risks: Atripla and Truvada together represented 73% of Q3 revenue. Three U.S. wholesalers accounted for 44% of total revenue, and Gilead reported that they represented approximately 81% of U.S. product sales. Foreign exchange reduced Q3 revenue by $44 million and pretax earnings by $37 million. Management also cited clinical-development, product-safety, manufacturing-supply, reimbursement, and patent risks.
- Restructuring: Gilead planned to close its Durham, North Carolina operations and consolidate liver-disease research in Foster City by year-end 2010, with an additional $13.5 million of expected Q4 costs. The earlier CV Therapeutics integration restructuring was expected to incur a further $0.4 million in Q4.
Important facts for investors to verify
- Whether core antiviral demand and growth in Atripla and Truvada can offset lower Tamiflu royalties, healthcare-reform discounts and pricing pressure.
- Developments and potential supply or approval consequences arising from the FDA Warning Letter for San Dimas.
- Collection timing and recoverability of overdue European government-related receivables, including the proposed Greek bond settlement.
- Outcomes and timelines of generic patent challenges, particularly those involving the major HIV products and Ranexa.
- Convertible-note obligations, the effect of continued share repurchases on liquidity and share count, and actual restructuring costs versus management estimates.