GILEAD SCIENCES, INC. annual report, FY2020

Business context and reporting period

Gilead Sciences, Inc. is a global biopharmaceutical company focused on HIV, viral hepatitis, oncology and other areas. This Form 10-K covers the fiscal year ended December 31, 2020; quarterly figures below are for Q4 2020. The financial statements received an unqualified audit opinion.

Financial performance and key metrics

FY 2020 revenue rose 10%, chiefly from Veklury sales and growth in HIV products. Net income attributable to Gilead fell sharply, reflecting acquired in-process R&D expense, acquisition-related costs, a $1.83 billion unrealized loss on the Galapagos investment, and the absence of a $1.2 billion tax benefit recorded in 2019. The 2020 effective tax rate was 94.7%.

Q4 2020 revenue was $7.421 billion, versus $5.879 billion in Q4 2019. Net income attributable to Gilead was $1.551 billion, versus $2.696 billion. Q4 included $628 million of unrealized equity-investment losses and $615 million of acquisition-related expenses, primarily intangible amortization, inventory step-up and accelerated stock compensation.

Revenue mix and operating drivers

• HIV product sales: $16.938 billion, up 3%; approximately 70% of product sales. Biktarvy sales were $7.259 billion, up 53%.
• Veklury: $2.811 billion in 2020 sales, primarily in the U.S. and Europe.
• HCV products: $2.064 billion, down 30%, amid reduced patient starts, pandemic-related care disruption and ongoing market declines.
• Cell therapy products: $607 million, up 33%. Trodelvy contributed $49 million after the Immunomedics acquisition closed in October.
• Gross-to-net deductions were $15.3 billion, 39% of gross product sales, versus 41% in 2019.

Material changes versus the prior comparable period

• Revenue growth was driven by Veklury and newer HIV products, partly offset by HCV weakness, generic competition and declines in older products.
• Truvada and Atripla lost U.S. exclusivity in October 2020; multiple generics were expected to enter beginning in Q2 2021.
• Gilead acquired Forty Seven for approximately $4.7 billion and Immunomedics for approximately $20.6 billion, expanding its oncology portfolio. The Immunomedics acquisition added Trodelvy and $3.991 billion of goodwill.
• Acquisitions and other investments used $25.7 billion of cash. Cash and marketable debt securities declined $17.9 billion, while debt increased by $6.8 billion.
• Gilead issued $7.25 billion principal amount of senior notes and borrowed $1.0 billion under a term loan in connection with the Immunomedics acquisition; it repaid $2.5 billion of debt in 2020.
• Dividends paid were $3.4 billion, or $2.72 per share; stock repurchases were $1.6 billion. The company announced a quarterly dividend increase to $0.71 per share for 2021.

Outlook, commentary, risks and contingencies

Management expected a gradual recovery in underlying market dynamics beginning in Q2 2021. It identified Biktarvy, Trodelvy, Vemlidy and cell therapy as expected 2021 growth drivers, while anticipating continued Truvada and Atripla declines. Veklury demand and revenue were described as highly uncertain and dependent on the pandemic, hospitalizations, vaccines and alternative treatments. No numerical 2021 revenue or earnings guidance is provided in the filing text.

• Management cited pandemic-related disruption to patient access, HIV prevention and HCV treatment, clinical trials, supply chains and revenue predictability.
• Key risks include drug pricing and reimbursement pressure, generic competition and patent expirations, dependence on HIV products, product development and regulatory uncertainty, manufacturing and supplier reliance, and foreign-currency movements.
• Litigation includes a Yescarta patent judgment; Gilead estimated a loss of approximately $1.4 billion through Q4 2020 if the judgment is upheld, but concluded a material loss was not probable and recorded no material accrual. ViiV’s Biktarvy patent case seeks billions in alleged damages; trial was scheduled for January 2022.
• The filing also describes product-liability, government-investigation, antitrust and other patent disputes. Management states outcomes are uncertain; no material accruals were recorded for the described matters.
• Contractual obligations totaled $55.6 billion, including $46.4 billion of debt principal and interest and $4.5 billion of transition tax payable. A further approximately $1.4 billion MYR acquisition payment was expected in Q1 2021 and excluded from that table.
• Gilead reported no covenant violations and no off-balance-sheet arrangements. Its $2.5 billion revolving credit facility was undrawn at year-end.

Important facts for investors to verify

1. How much of Veklury’s 2020 contribution is repeatable, given the filing’s stated uncertainty about pandemic-driven demand.
2. Whether Biktarvy, Trodelvy, Vemlidy and cell therapy growth can offset the expected generic-driven decline in Truvada and Atripla.
3. Acquisition integration, Trodelvy’s commercial and pipeline prospects, and the recoverability of significant acquired intangible assets and goodwill.
4. Liquidity after the major acquisitions: year-end cash and marketable debt securities of $7.9 billion, debt of $31.4 billion, and the scheduled debt maturities and acquisition payment.
5. Developments in the Yescarta and Biktarvy litigation and other material legal matters, including potential damages, royalties or restrictions.
6. Changes in payer mix, rebates and gross-to-net deductions, and the effect of pricing and reimbursement policy changes.