Gilead Sciences, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with the three months ended March 31, 2014 unless otherwise noted. Gilead is a research-based biopharmaceutical company focused on antiviral and other medicines.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $7.594 billion | $4.999 billion | +52% |
| Product sales | $7.405 billion | $4.871 billion | +52% |
| Operating income | $5.371 billion | $3.043 billion | +76% |
| Net income attributable to Gilead | $4.333 billion | $2.227 billion | +95% |
| Diluted EPS | $2.76 | $1.33 | +108% |
| Operating cash flow | $5.701 billion | $1.568 billion | +264% |
| Product gross margin | 88% | 83% | +5 percentage points |
- Harvoni sales were $3.579 billion in its first full reported quarter; Sovaldi sales were $972 million, down 57% year over year. Combined HCV product sales were approximately $4.551 billion, about double the prior-year level.
- HIV product sales were $2.4 billion, up 9%. Stribild sales increased 66%; Complera/Eviplera increased 27%; Atripla declined 6%.
- R&D expense rose 17% to $696 million and SG&A rose 18% to $645 million, reflecting clinical program growth, business expansion and product launches. Interest expense increased to $153 million from $76 million, primarily reflecting debt issued in 2014.
- Effective tax rate was 17.3%, versus 24.6%, primarily due to higher earnings from non-U.S. subsidiaries considered indefinitely reinvested.
Financial position and cash flow
- At March 31, 2015, cash, cash equivalents and marketable securities totaled $14.514 billion, up from $11.726 billion at December 31, 2014. Working capital was $12.634 billion, compared with $11.953 billion.
- Total debt, net, was $12.363 billion, including $442 million current and $11.921 billion long-term; no amounts were outstanding under the revolving credit facility, and Gilead reported covenant compliance.
- Operating cash flow of $5.701 billion reflected higher earnings, collections of receivables related to initial Harvoni sales, and increased accrued rebates. Accrued government and other rebates rose to $4.020 billion from $2.316 billion; management said future cash flow would be affected as those accrued amounts are paid.
- Investing activities used $2.299 billion, mainly net purchases of marketable securities. Financing activities used $2.722 billion, principally $3.001 billion of share repurchases. Capital expenditures were $124 million.
Material changes, outlook and key risks
- HCV pricing and demand: Growth was driven by Harvoni and continued Sovaldi launches. Gilead reported increased discounts and rebates from payer contracting and expected their full effect to be felt in Q2 and later 2015. It provided no quantified full-year revenue or earnings guidance in the supplied filing text.
- Competition and concentration: Management cited competing HCV regimens, continuing pricing pressure, payer coverage restrictions and uncertainty in forecasting demand. Three U.S. wholesalers represented 63% of total revenue; about 91% of U.S. product sales went to three wholesalers.
- International and credit exposure: Approximately 30% of product sales were outside the United States. Foreign exchange, net of hedges, reduced product sales by $122 million year over year. Southern European receivables were about $765 million, including $132 million more than 120 days past due and $42 million more than 365 days past due.
- Legal and regulatory contingencies: Gilead faces significant patent disputes involving Sovaldi/sofosbuvir and Harvoni, including litigation with Idenix, Merck and AbbVie, as well as generic challenges to Truvada, Viread, Atripla and Letairis. Outcomes and possible losses could not be reasonably estimated. The filing also describes a False Claims Act matter and a Senate Finance Committee inquiry concerning Sovaldi pricing.
- Other risks: The filing highlights product safety, clinical and regulatory outcomes, manufacturing and supply constraints, reimbursement and healthcare reform, foreign exchange, and reliance on third-party partners. Gilead noted FDA inspection observations and related responses concerning manufacturing and quality systems.
- Capital returns and development: Gilead completed its prior $5.0 billion repurchase authorization and announced a new $15.0 billion five-year program, with repurchases beginning in April. On April 30, it declared its first quarterly dividend of $0.43 per share. Pipeline developments included an FDA application for an HIV regimen containing TAF and positive reported trial results; the filing also reported that simtuzumab Phase 2 studies did not show clinical benefit.
Investor verification priorities
- Track HCV prescriptions, competitor uptake, payer contracting, rebate accruals and the resulting cash payments.
- Assess how much Q1 cash generation reflects sustainable operations versus working-capital timing, especially accrued rebates and receivables.
- Monitor Southern European receivable aging, collection experience and any allowance changes.
- Follow outcomes and potential financial exposure from HCV patent litigation and generic challenges; the filing does not provide a clear estimate of potential losses.
- Review progress on TAF and other pipeline programs, as well as FDA manufacturing observations and product supply capacity.
- Confirm the pace and funding of the new repurchase program and dividend, alongside debt maturities and continuing capital needs.