Gilead Sciences, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are with the same 2022 periods. Amounts are in U.S. dollars unless noted. Gilead is a global biopharmaceutical company focused on HIV, viral hepatitis, COVID-19 and cancer.
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $7.051 billion | $7.042 billion | $20.002 billion | $19.892 billion |
| Operating income | $2.623 billion | $2.837 billion | $5.993 billion | $5.063 billion |
| Net income attributable to Gilead | $2.180 billion | $1.789 billion | $4.236 billion | $2.952 billion |
| Diluted EPS | $1.73 | $1.42 | $3.37 | $2.34 |
| Product gross margin | 77.6% | 80.0% | 77.8% | 78.3% |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $5.837 billion | $6.505 billion |
Revenue mix and trends: Q3 HIV sales rose 4% to $4.667 billion; oncology rose 33% to $769 million, including Cell Therapy up 22% to $486 million and Trodelvy up 58% to $283 million. Liver Disease sales fell 10% to $706 million, and Veklury fell 31% to $636 million. For the nine months, HIV sales increased 9% to $13.482 billion and oncology increased 42% to $2.167 billion, while Veklury declined 50% to $1.465 billion.
Cash, liquidity and debt: Cash and cash equivalents were $5.705 billion at September 30, 2023, versus $5.412 billion at year-end 2022. Cash, cash equivalents and marketable debt securities totaled $8.0 billion, compared with $7.6 billion. Current assets were $15.980 billion and current liabilities $11.945 billion. Total debt, net, including the future-royalty liability, was $24.982 billion; senior unsecured notes had a carrying value of $23.830 billion. Gilead issued $2.0 billion of notes in September and repaid $2.25 billion of notes at maturity. Its $2.5 billion revolving credit facility had no borrowings outstanding.
Cash uses and capital returns: Nine-month investing cash outflow was $1.538 billion and financing cash outflow was $4.026 billion. The company paid $2.866 billion in dividends, repurchased $850 million of stock and spent $873 million on acquisitions, net of cash acquired. Nine-month operating cash flow declined year over year, which management attributed primarily to higher inventory and operating spend, including HIV antitrust litigation payments, partly offset by the prior-year $1.25 billion bictegravir litigation settlement payment.
Changes versus the comparable period
- Revenue was essentially flat in Q3 and up 1% for the nine months. Growth in HIV and oncology was offset mainly by lower Veklury sales and, for the year-to-date period, lower Liver Disease and royalty, contract and other revenue.
- Q3 net income attributable to Gilead rose 22%, despite lower operating income, primarily because of lower income tax expense and higher interest income. The quarterly effective tax rate was 6.3%, versus 26.6% a year earlier, mainly reflecting resolution of certain tax positions.
- Nine-month net income rose 44%. The comparison benefited substantially from the absence of a $2.7 billion IPR&D impairment recorded in 2022 and from lower unrealized losses on equity investments; higher operating costs partly offset these benefits.
- Product gross margin declined in both periods, primarily due to Trodelvy intangible-asset amortization following approval of an additional indication and product mix.
Outlook, management commentary and material risks
- Outlook: The supplied filing text does not provide a clear numerical revenue or earnings forecast or updated guidance. Management notes that interim results are not necessarily indicative of full-year results.
- Pipeline and business updates: FDA placed a partial clinical hold on magrolimab studies in AML, and Gilead discontinued the Phase 3 ENHANCE-2 study in first-line TP53-mutated AML. R&D spending increased 27% in Q3, mainly from oncology clinical activity, trial progression and launches, and costs related to discontinuing two magrolimab studies.
- Acquisitions and collaborations: Nine-month acquired IPR&D expense was $808 million, including charges related to XinThera, Tmunity and the Arcellx collaboration. Potential future milestone, royalty and other collaboration payments could add costs; amounts depend on development and commercial outcomes.
- Legal contingencies: Gilead accrued and paid $525 million in 2023 to settle certain HIV antitrust claims. Other antitrust claims remain, including Phase II claims for which the outcome is uncertain. More than 25,000 active plaintiffs are involved in product-liability actions alleging kidney, bone or tooth injuries associated with certain older HIV medicines. The company says the ultimate outcomes of significant matters cannot be predicted.
- Commercial and regulatory risks: HIV products represented approximately 68% of nine-month product sales. Veklury demand remains tied to COVID-19 infection and hospitalization trends. Generic challenges to Biktarvy, Symtuza and Genvoya, pricing and reimbursement pressures, and reliance on three U.S. wholesalers are significant risks; those wholesalers collectively represented 66% of Q3 revenue.
- Operations and controls: Gilead began phased deployment of a new ERP and related systems in August 2023 and expects implementation to continue over several years. Management reported disclosure controls were effective as of September 30, while noting implementation risks to operations and financial reporting controls.
Most important facts for investors to verify
- Whether HIV and oncology growth can offset continued declines in Veklury and mature product categories, and how much reported sales reflect end-user demand versus channel inventory.
- Future product gross margin, including the effect of Trodelvy amortization and the expected $2.392 billion of intangible-asset amortization in 2024.
- Cash conversion and working-capital trends, particularly inventory growth and the timing of tax and rebate payments.
- Debt maturity and interest-cost exposure, and the scale of future dividends, repurchases, acquisitions and contingent collaboration payments.
- Developments in magrolimab and other pipeline programs, and potential effects of trial outcomes on R&D plans and acquired intangible assets.
- Resolutions, exposure and timing for remaining antitrust, product-liability, patent and tax matters; the filing does not provide a clear estimate of potential losses for most unresolved cases.