Business context and reporting period
Gilead Sciences, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2021. The biopharmaceutical company develops and commercializes medicines, principally in HIV, viral hepatitis, COVID-19 and oncology. Comparisons below are with the three and nine months ended September 30, 2020, unless otherwise noted.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $7.421 billion | $6.577 billion | $20.061 billion | $17.268 billion |
| Operating income | $3.842 billion | $2.001 billion | $8.978 billion | $1.420 billion |
| Net income (loss) attributable to Gilead | $2.592 billion | $360 million | $5.843 billion | $(1.428) billion |
| Diluted EPS | $2.05 | $0.29 | $4.63 | $(1.14) |
| Product gross margin | 83.4% | 82.4% | 80.0% | 81.4% |
| Operating cash flow | Not separately provided | Not separately provided | $8.179 billion | $6.252 billion |
- Revenue mix: Q3 product sales rose 13% to $7.356 billion. Veklury sales were $1.923 billion, versus $873 million a year earlier; Biktarvy growth, cell therapy and Trodelvy also contributed. HIV sales fell 8% to $4.189 billion and HCV sales fell 8% to $429 million. For the first nine months, Veklury sales were $4.208 billion; HIV sales declined 7% and HCV sales declined 9%.
- Expenses and earnings: Q3 acquired in-process R&D expense was $19 million, versus $1.171 billion in Q3 2020; nine-month expense was $177 million versus $5.792 billion, including a $4.5 billion Forty Seven charge in 2020. Earnings also benefited from lower unrealized losses on equity investments. Q3 other expense, net, was $154 million; nine-month other expense was $696 million, including $667 million of net losses from equity securities.
- Cash, liquidity and debt: At September 30, cash and cash equivalents were $4.362 billion and marketable debt securities totaled $2.475 billion; together, $6.837 billion, compared with $7.910 billion at year-end 2020. Working capital was $3.746 billion, down from $4.599 billion. Total debt, net, including the liability related to future royalties, was $27.686 billion; the balance-sheet current portion was $2.511 billion and long-term debt was $25.175 billion. The $2.5 billion revolving facility was undrawn, and Gilead reported compliance with debt covenants.
- Cash uses: Nine-month investing cash outflow was $2.853 billion and financing outflow was $6.935 billion. Financing uses included $3.750 billion of debt repayments, $2.711 billion of dividends paid and $497 million of share repurchases. Gilead generated $8.179 billion of operating cash flow.
Material changes versus the prior comparable period
- Revenue growth was led by higher Veklury demand during increased COVID-19 hospitalizations. Management said this source of revenue was volatile and expected Veklury sales to decline significantly in Q4 2021 as hospitalization rates fell.
- HIV sales continued to face generic competition after U.S. loss of exclusivity for Truvada and Atripla in October 2020. Their combined sales were $528 million lower in Q3 and $1.2 billion lower in the first nine months than in the comparable periods.
- Cell therapy sales increased 51% in Q3 and 42% year to date. Trodelvy contributed $101 million in Q3 and $262 million year to date following its acquisition and 2021 U.S. approvals.
- Nine-month operating cash flow increased by $1.9 billion, which management attributed primarily to Veklury revenue growth and higher receivable collections. Cash and marketable debt securities decreased by $1.1 billion from year-end, reflecting debt repayments, dividends, the MYR acquisition, repurchases and other investing outlays.
- Q3 gross margin improved 100 basis points, partly due to a $175 million litigation accrual reversal and lower royalties; nine-month gross margin fell 140 basis points, primarily due to higher amortization of acquired intangible assets.
Outlook, commentary, risks and unusual items
- Management stated that existing capital resources and operating cash flows should be adequate for foreseeable capital needs. No numerical full-year revenue or earnings guidance is provided in the supplied filing text.
- Management expected Truvada sales to keep declining as additional generics entered the market. It also noted that U.S. HIV treatment volumes were recovering modestly but might take several quarters to return to pre-pandemic levels; HCV patient starts remained affected by COVID-19.
- Gilead completed its acquisition of MYR in Q1 2021 for approximately $1.6 billion, including contingent consideration of up to €300 million tied to FDA approval of Hepcludex. It also entered a Merck collaboration for investigational long-acting HIV treatments, with development and commercialization costs shared 60%/40%.
- Unusual items include a $212 million second-quarter donation of equity securities to the Gilead Foundation, recorded in SG&A, and the $175 million Q3 reversal of a previously recorded litigation accrual after a favorable court decision. The 2020 comparison included substantial acquired IPR&D charges and equity-investment losses.
- Legal and commercial exposure: ViiV sought billions of dollars in a U.S. patent case concerning Biktarvy, with trial scheduled for January 2022; Gilead stated an adverse outcome could include substantial damages and future royalties. The filing also describes litigation involving PrEP, HCV patents, product liability, antitrust matters and other proceedings. Gilead reported no material accruals for the described matters at quarter-end; outcomes and potential losses were generally not estimable.
- Key operating risks: COVID-19 could affect demand, clinical trials, supply and forecasts; Veklury demand was particularly uncertain. Other cited risks include generic competition and pricing/reimbursement pressure, product development and manufacturing, regulatory approvals, intellectual-property disputes, wholesaler inventory fluctuations and reliance on three wholesalers for approximately 92% of U.S. product sales.
Important facts for investors to verify
- How much revenue and cash generation can be sustained if Veklury sales fall as management anticipated, and how sensitive results are to pandemic trends.
- The pace of generic erosion in Truvada and Atripla and whether Biktarvy growth and newer oncology products offset pressure across HIV and hepatitis products.
- Potential outcomes and financial exposure in the Biktarvy/ViiV litigation and other patent, PrEP, product-liability and antitrust matters.
- Debt reduction, liquidity and dividend sustainability alongside acquisition-related obligations, including MYR contingent consideration and acquired-intangible amortization.
- Effects of COVID-19 on HIV and HCV treatment volumes, clinical timelines, supply and channel inventory, and the company’s progress in newer product launches and collaborations.