Gilead Sciences, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Gilead is a biopharmaceutical company focused on viral, inflammatory and oncology diseases.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $6.577bn | $5.604bn | $17.268bn | $16.570bn |
| Net income (loss) attributable to Gilead | $360m | ($1.165bn) | ($1.428bn) | $2.690bn |
| Diluted EPS | $0.29 | ($0.92) | ($1.14) | $2.10 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $6.252bn | $6.564bn |
- Q3 operating income was $2.001bn, versus an operating loss of $1.473bn a year earlier. Product gross margin was 82.4%, up from 81.2%; nine-month product gross margin was 81.4%, down from 81.7%.
- Q3 acquired in-process R&D (IPR&D) expense was $1.171bn; nine-month expense was $5.792bn. Other expense, net, was $940m in Q3, primarily reflecting a $923m unrealized loss on the Galapagos investment.
- At September 30, cash, cash equivalents and marketable debt securities totaled $26.049bn; working capital was $21.417bn. Cash and cash equivalents alone were $12.886bn.
- Debt carrying value was $29.290bn, including $1.498bn current and $27.792bn long-term, versus $24.593bn total at December 31, 2019. Gilead issued $7.25bn of senior notes in September and had no revolving-credit borrowings at quarter-end.
- Nine-month investing cash outflow was $5.638bn and financing cash inflow was $639m. Gilead paid $2.591bn in dividends and repurchased $1.583bn of stock during the period.
Business performance and changes versus prior period
- Q3 revenue increased 17% year over year, driven by product sales, up 18%. Nine-month revenue rose 4%.
- Veklury generated $873m of sales in Q3 and year to date; it had no comparable 2019 sales. Management attributed the Q3 increase partly to Veklury and stronger HIV product sales.
- HIV sales rose 8% in Q3 to $4.547bn and 7% for the nine months to $12.681bn. Biktarvy sales increased 50% in Q3 to $1.891bn, with continued uptake also supporting Descovy-based products.
- HCV sales fell 31% in Q3 to $464m and 29% for the nine months to $1.641bn. Gilead cited reduced patient starts and healthcare-provider visits during the pandemic, as well as lower average net selling prices.
- Cell-therapy sales increased 25% in Q3 to $147m. Other product sales declined, including due to generic competition for Letairis and Ranexa. Gilead expected significant Truvada sales declines after the first U.S. generic became available October 2, 2020.
- Reported earnings were affected by large, nonrecurring acquisition-related IPR&D charges and investment-value changes. The nine-month 2020 loss included a $4.5bn IPR&D charge for Forty Seven; Q3 2019 included $3.96bn of IPR&D charges, primarily related to Galapagos.
Outlook, material events and risks
- No numerical full-year revenue or earnings guidance is provided in the supplied filing text. Management said it believed existing capital resources and operating cash flows would meet capital needs for the foreseeable future, while expecting working capital to decline in Q4 following the Immunomedics acquisition.
- Gilead agreed to acquire Immunomedics for approximately $21bn; the acquisition closed October 23, 2020, after quarter-end. It was financed mainly with September note proceeds, an additional $1bn term loan and cash. Trodelvy, Immunomedics’ cancer therapy, received FDA accelerated approval for metastatic triple-negative breast cancer.
- Management reported that the pandemic reduced access to care and demand, particularly for HCV treatment and HIV prevention, and disrupted or delayed some clinical trials. Supply-chain disruption had not been significant to date, but could emerge. Gilead noted uncertainty in future Veklury demand, revenue, manufacturing and distribution, and expected its remdesivir investment to exceed $1bn by year-end 2020, continuing into 2021 and beyond.
- Filgotinib received an FDA complete response letter for rheumatoid arthritis; Gilead said it would meet with FDA and determine next steps in Q4 2020. Other material business uncertainties include generic competition, drug-pricing and reimbursement actions, and the outcome of clinical and regulatory programs.
- Contingencies include significant intellectual-property, product-liability, antitrust and government-related matters. In the Yescarta patent case, Gilead recorded no material accrual, concluding a material loss was not probable; it estimated a loss of about $1.3bn through Q3 2020 if the judgment were upheld in full on appeal, and stated the loss would be zero if reversed.
- Three U.S. wholesalers each accounted for at least 10% of revenue; together they represented 71% of Q3 revenue. This creates customer-concentration exposure.
Important facts for investors to verify
- Whether Veklury demand, pricing and sales persist, and how they compare with the substantial development and manufacturing investment.
- The effect of the Immunomedics acquisition on debt, cash, purchase accounting, integration costs and future results.
- The pace of HIV growth versus Truvada generic erosion, and whether pandemic-related weakness in HCV and PrEP demand recovers.
- Changes in the Galapagos investment’s fair value and the impact of investment volatility and unusual IPR&D charges on reported earnings and taxes.
- Developments in the Yescarta appeal and other material litigation, as well as pricing, reimbursement and clinical-trial risks.