Gilead Sciences, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparative results are for the three months ended March 31, 2011. Amounts are U.S. dollars. Gilead is a biopharmaceutical company focused primarily on HIV/AIDS and liver diseases, alongside cardiovascular, respiratory and oncology programs.
Financial performance
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Total revenue | $2.282 billion | $1.926 billion; up 19% |
| Product sales | $2.208 billion | $1.864 billion; up 19% |
| Operating income | $800.2 million | $902.0 million |
| Net income attributable to Gilead | $442.0 million | $651.1 million; down 32% |
| Diluted EPS | $0.57 | $0.80; down 29% |
| Operating cash flow | $453.0 million | $820.5 million |
| Capital expenditures | $23.2 million | $14.9 million |
| Product gross margin | 74% | 75% |
- Antiviral product sales rose 18% to $1.926 billion. Atripla sales increased 19% to $887.6 million and Truvada increased 13% to $758.3 million; Complera/Eviplera contributed $52.2 million. Letairis and Ranexa sales grew 40% and 22%, respectively. Hepsera sales declined 23%.
- Research and development expense increased 80% to $458.2 million; selling, general and administrative expense increased 50% to $443.1 million. The increases included Pharmasset-related accelerated stock-option expense and higher clinical, personnel and business-growth costs.
- Interest expense rose to $97.3 million from $41.2 million, primarily reflecting acquisition financing. Other expense was $34.1 million, including a $40.1 million loss from Greece’s sovereign-debt restructuring.
Balance sheet, liquidity and financing
- At March 31, cash and cash equivalents were $1.452 billion; cash, cash equivalents and marketable securities totaled $1.500 billion, down $8.464 billion from December 31, 2011. Working capital fell to $1.639 billion from $11.404 billion, largely because of the Pharmasset purchase and debt classified as current.
- Total debt, net, was $9.427 billion, including $1.350 billion current and $8.077 billion long-term, compared with $7.606 billion at year-end. The filing reports variable-rate term-loan and revolving-credit borrowings; the short-term revolver matures in January 2013, subject to a possible extension, and the term loan’s final installment is due in January 2015.
- Operating cash flow was $453.0 million. Investing activities used $10.743 billion, mainly for Pharmasset. Financing activities provided $1.856 billion, including bank borrowing; Gilead repaid $350 million of term debt during the quarter.
- Management stated that existing capital resources and operating cash flows should be adequate for capital needs for the foreseeable future. The company reported no off-balance-sheet arrangements.
Material changes and unusual items
- Gilead completed its acquisition of Pharmasset in January for approximately $11.1 billion in cash, funded with cash on hand, bank debt and senior notes issued in December 2011. The acquisition added $10.72 billion of acquired in-process research and development, principally related to investigational HCV drug GS-7977, to intangible assets.
- Q1 results included $193.9 million of stock-based compensation expense from accelerated Pharmasset option vesting, plus $24.7 million of other acquisition-related costs incurred in the quarter. These items, increased R&D investment, higher interest expense and the Greek bond loss contributed to lower reported earnings.
- Product gross margin declined one percentage point, which management attributed mainly to higher efavirenz costs and product mix. Foreign exchange, net of hedges, reduced Q1 revenue by $16.4 million versus the prior-year quarter.
Outlook, commentary and risks
- The filing does not provide a clear numerical full-year revenue or earnings forecast. Management expected further GS-7977 clinical data in Q2 and Q3 2012; it said a genotype 2/3 NDA in 2013, potentially for approval in late 2013 or early 2014, depended on supportive Phase 3 results. These were expectations, not assurances.
- At the time of the filing, FDA target review dates were June 15, 2012 for Truvada for HIV pre-exposure prophylaxis and August 27, 2012 for the Quad HIV regimen; regulatory decisions and commercial outcomes remained uncertain.
- HCV development is a significant opportunity but carries efficacy, safety, regulatory, competition and intellectual-property risks. The filing disclosed an Idenix patent interference and a former Pharmasset employee’s arbitration concerning patent ownership; adverse outcomes could require licenses or royalties for GS-7977 and RG7128.
- Southern European customer receivables were approximately $1.25 billion at quarter-end; $719.5 million was more than 120 days past due and $313.3 million more than 365 days past due. Gilead cited government funding and reimbursement delays and recognized the Greek restructuring loss.
- Gilead disclosed a U.S. Attorney’s Office inquiry into manufacturing, quality and distribution practices for several products; it said the inquiry was at an early stage and a possible loss range could not be determined. It also faced generic-patent challenges affecting several marketed products.
- Cayston supply constraints led Gilead to suspend access for patients with new prescriptions in February, subject to certain medical-need exceptions. Other stated risks include product and pipeline dependence on HIV therapies, payer and pricing pressures, wholesaler purchasing variability, foreign-exchange exposure, manufacturing and supply constraints, and clinical-trial uncertainty.
Investor verification priorities
- Assess the assumptions and eventual development, regulatory and commercial results underlying Pharmasset’s $10.72 billion GS-7977 in-process R&D valuation.
- Track GS-7977 trial outcomes and the status of the Idenix interference and Clark arbitration, as well as the Quad and Truvada PrEP FDA reviews.
- Monitor collection of overdue Southern European receivables and the adequacy of credit-loss allowances.
- Review debt repayment, variable interest-rate exposure and liquidity after the acquisition; the filing identifies $1.35 billion of debt as current.
- Separate recurring operating trends from acquisition-related stock compensation and costs, the Greek debt loss, and changes in R&D spending and product mix.