Gilead Sciences, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results are presented against the comparable 2019 periods. Gilead is a biopharmaceutical company focused on viral diseases, oncology, and inflammatory and fibrotic diseases.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $5.143 billion | $5.685 billion | $10.691 billion | $10.966 billion |
| Operating income (loss) | ($2.983 billion) | $2.430 billion | ($581 million) | $4.667 billion |
| Net income (loss) attributable to Gilead | ($3.339 billion) | $1.880 billion | ($1.788 billion) | $3.855 billion |
| Diluted EPS | ($2.66) | $1.47 | ($1.42) | $3.01 |
| Product gross margin | 79% | 82% | 81% | 82% |
| Operating cash flow | $2.6 billion | Not stated here | $4.002 billion | $3.919 billion |
- Q2 R&D expense was $1.299 billion, up 31%; SG&A was $1.239 billion, up 13%. Acquired in-process R&D expense was $4.524 billion, primarily reflecting the Forty Seven acquisition charge.
- At June 30, cash, cash equivalents and marketable debt securities totaled $21.190 billion, versus $25.840 billion at December 31, 2019. Working capital was $14.079 billion, down from $20.537 billion.
- Debt, net, was $24.102 billion, including $2.999 billion current and $21.103 billion long-term. Gilead had no borrowings under its $2.5 billion revolving facility, refinanced in June with a new facility maturing in 2025.
- For the first six months, investing cash use was $5.367 billion and financing cash use was $3.485 billion. Cash dividends paid were $1.730 billion; common-stock repurchases were $1.382 billion.
Material changes versus the prior comparable period
- Q2 revenue declined 10%, mainly as HCV patient starts fell amid fewer healthcare-provider visits and screenings during COVID-19, Letairis and Ranexa faced generic competition, and approximately $160 million of prior-year favorable European rebate adjustments did not recur.
- Q2 HIV sales were down 1% to $4.0 billion, while first-half HIV sales rose 6% to $8.134 billion. Biktarvy continued to grow; Truvada-based product sales declined. HCV sales fell 47% in Q2 and 28% for the first half.
- The Forty Seven acquisition generated a $4.5 billion acquired IPR&D charge, driving the reported quarterly and first-half losses. The charge was non-deductible and contributed to reported effective tax rates of (12.5)% for Q2 and (86.4)% for the first half.
- Q2 product gross margin fell to 79% from 82%, which management attributed primarily to product mix. The first-half net loss also reflects the acquisition charge; operating cash flow remained positive and increased modestly year over year.
Outlook, management commentary, and risks
- Management said the COVID-19 business impact remained highly uncertain. It expected a gradual recovery in HIV PrEP and HCV patient starts to regain momentum in Q3 2020 and beyond. The filing provides no clear formal full-year revenue or EPS guidance.
- Remdesivir (Veklury) had an FDA Emergency Use Authorization for hospitalized patients with severe COVID-19, not full FDA approval; Japan had granted an exceptional approval and the European Commission granted conditional marketing authorization in July. Gilead reported completing its initial 1.5 million-dose donation and expected to manufacture more than two million treatment courses by year-end 2020, with several million more in 2021. It disclosed pricing of $390 per vial for developed-country governments and $520 for U.S. private insurers and others.
- COVID-19 reduced patient access and affected HIV prevention and HCV demand, while disrupting or delaying clinical trials. Gilead also warned of possible future supply-chain, regulatory, manufacturing, and workforce disruptions. Remdesivir development and manufacturing required substantial investment; the company expected its investment to exceed $1 billion by year-end 2020, with further investment dependent on clinical, regulatory, and pandemic developments.
- Gilead acquired Forty Seven for approximately $4.7 billion, net of acquired cash. Subsequent strategic transactions included Arcus and Pionyr, and a proposed Tizona transaction; these involve additional upfront, research, option, and contingent milestone commitments.
- Significant legal exposures include the Juno/Yescarta patent judgment. Gilead estimated a potential loss of approximately $1.3 billion through Q2 if the judgment were upheld in full, but said it had not accrued a material loss because it did not consider such a loss probable; Gilead appealed. The Biktarvy patent case was scheduled for trial in September 2020. Other disclosed matters include PrEP patent litigation, product-liability claims involving more than 16,000 plaintiffs, and government investigations and claims.
- Three U.S. wholesalers accounted for approximately 92% of U.S. product sales in the first half, creating customer and distribution-channel concentration. HIV products represented approximately 77% of first-half product sales. Generic competition, pricing and reimbursement pressure, and patent challenges are material business risks.
Important facts for investors to verify
- Whether HIV demand, particularly PrEP, and HCV patient starts recovered as management anticipated, and how much revenue remained affected by COVID-19.
- Remdesivir’s subsequent regulatory status, clinical evidence, realized sales and margins, supply capacity, and investment needs relative to disclosed production expectations.
- Progress and costs of the Arcus, Pionyr, and Tizona arrangements, including option decisions and contingent milestones.
- Developments in the Juno/Yescarta appeal and Biktarvy patent litigation, as well as the potential financial effects of other legal matters.
- Cash generation, liquidity, debt repayment, dividends, and repurchases in light of reduced cash and substantial strategic investment commitments.