Gilead Sciences, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results; amounts are in U.S. dollars. Gilead is a research-based biopharmaceutical company focused principally on HIV/AIDS, liver diseases, hematology/oncology, and inflammation/respiratory diseases.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $5.685 billion | $5.648 billion | $10.966 billion | $10.736 billion |
| Operating income | $2.430 billion | $2.280 billion | $4.667 billion | $4.433 billion |
| Net income attributable to Gilead | $1.880 billion | $1.817 billion | $3.855 billion | $3.355 billion |
| Diluted EPS | $1.47 | $1.39 | $3.01 | $2.55 |
| Operating cash flow | Quarterly amount not separately stated here | — | $3.665 billion | $3.843 billion |
- Margins: Product gross margin was 82% in both Q2 and the first half of 2019, versus 78% and 79%, respectively, in 2018. Approximate Q2 operating margin was 42.7% versus 40.4%; approximate net margin attributable to Gilead was 33.1% versus 32.2%.
- Liquidity: Cash, cash equivalents and marketable debt securities totaled $30.234 billion at June 30, 2019, down from $31.512 billion at year-end 2018. Working capital was $24.766 billion, compared with $25.231 billion.
- Debt: Debt carrying value was $26.083 billion, including $1.999 billion current and $24.084 billion long-term. Gilead repaid $1.25 billion of notes at maturity in the first half and reported no covenant violations or borrowings under its $2.5 billion revolving facility.
- Cash uses: First-half investing cash flow was negative $6.153 billion, largely reflecting purchases of marketable securities; financing cash flow was negative $4.223 billion, including $1.422 billion of share repurchases, $1.617 billion of dividends paid and $1.25 billion of debt repayments.
Material changes versus prior comparable periods
- Q2 revenue increased 1%; first-half revenue increased 2%. HIV product sales rose 10% in Q2 and 12% in the first half, led by Biktarvy uptake. Biktarvy sales were $1.116 billion in Q2 and $1.909 billion in the first half.
- HCV sales declined 16% in Q2 and 20% in the first half, primarily reflecting lower U.S. prices, reduced market share and fewer patient starts. Ranexa and Letairis sales also fell following U.S. generic entry.
- Yescarta sales increased to $120 million in Q2 from $68 million, and to $216 million in the first half from $108 million.
- Q2 cost of goods sold declined 16% and first-half cost of goods sold declined 11%; management cited lower royalties, inventory reserves and Ranexa amortization. SG&A rose 12% in Q2 and 7% in the first half, including higher promotion and international expansion costs. First-half R&D rose 4%, partly due to collaboration expenses and cell-therapy investment.
- First-half operating cash flow decreased $178 million year over year, mainly due to lower receivable collections and a prior-year Bristol-Myers Squibb receivable collection; lower tax and rebate payments partly offset the decline.
Outlook, commentary, risks and unusual items
- Outlook: Management stated existing capital resources and operating cash flows should meet capital needs for the foreseeable future. It expected a significant reduction in cash and marketable securities in the second half of 2019 upon closing the Galapagos transaction: a $3.95 billion upfront payment and approximately $1.1 billion equity investment, subject to closing conditions. The filing expects further HCV sales declines in 2019 versus 2018; it provides no overall numerical revenue or earnings guidance in the text supplied.
- Strategic transaction: The Galapagos collaboration provides option rights to participate in development and commercialization of its pipeline. Potential additional option fees, milestones, royalties and shared development/commercialization costs are contingent on future events and elections.
- Unusual items: Q2 other income included $57 million of net unrealized gains on equity securities; first-half gains were $254 million. These fair-value changes contributed to higher other income. First-half results also included a $119 million tax benefit from settlements with taxing authorities. Q2 2018 benefited from a $202 million tax-examination settlement, affecting the year-over-year tax comparison. Prior-period sales rebate adjustments also boosted revenue, including $102 million more in Q2 and $296 million more in the first half than in the comparable 2018 periods.
- Contingencies: The company reported significant patent, product-liability, antitrust and government-inquiry matters, but recorded no accruals for the specified legal actions because it did not believe losses were probable. Outcomes and potential exposure generally could not be estimated. Notable matters include litigation concerning sofosbuvir, Yescarta and Biktarvy; government inquiries into patient assistance, pricing and marketing practices; and product-liability claims alleging kidney or bone injuries.
- Principal risks: Revenue concentration in HIV products and expected HCV declines; pricing, reimbursement and rebate pressure; generic competition and patent challenges; clinical-trial and regulatory uncertainty; product safety and manufacturing/supply risks; and litigation and government investigations. The filing also notes the planned CFO retirement effective March 2020 or earlier upon succession, and the Chief Scientific Officer’s announced departure effective August 2019.
Most important facts for investors to verify
- Whether Biktarvy and broader HIV portfolio growth can offset declining HCV, legacy HIV and generic-exposed product sales.
- The extent to which reported revenue and earnings growth depends on prior-period rebate adjustments and unrealized investment gains, rather than recurring product demand.
- Closing conditions, cash impact and contingent economics of the Galapagos collaboration and equity investment.
- Developments and potential financial exposure in material patent, product-liability, antitrust and government-investigation matters.
- Clinical and regulatory progress for key pipeline programs, including filgotinib and cell therapies, alongside risks from recent unsuccessful studies and program discontinuations.