Gilead Sciences, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Unless otherwise noted, amounts are in U.S. dollars. The filing also reports fourth-quarter results; this is an annual filing, not a standalone quarterly report.
Business context
Gilead is a global biopharmaceutical company focused primarily on HIV/AIDS, liver diseases, hematology/oncology, and inflammation/respiratory diseases. Its 2018 portfolio remained heavily dependent on HIV and hepatitis C (HCV) medicines. HIV products represented about 67% of product sales and HCV products about 17%.
Financial performance
| Metric | FY 2018 | FY 2017 | Change / context |
|---|---|---|---|
| Total revenue | $22.127 billion | $26.107 billion | Down 15% |
| Product sales | $21.677 billion | $25.662 billion | Down 16% |
| Operating income | $8.200 billion | $14.124 billion | Operating margin about 37%, versus 54% |
| Product gross margin | 78% | 83% | Lower sales mix and higher costs, including inventory reserves |
| Net income attributable to Gilead | $5.455 billion | $4.628 billion | Up 18%; comparison is affected by a $5.5 billion tax-reform charge in 2017 |
| Diluted EPS | $4.17 | $3.51 | Up 19% |
| Operating cash flow | $8.400 billion | $11.898 billion | Down $3.5 billion, mainly from lower receipts and higher tax payments |
| Cash, cash equivalents and marketable debt securities | $31.512 billion | $36.694 billion | Down $5.2 billion |
| Total debt, including current portion | $27.322 billion | $33.542 billion | Down $6.2 billion; cash and marketable debt securities exceeded debt by about $4.2 billion |
| Working capital | $25.231 billion | $20.188 billion | Up $5.0 billion |
HIV product sales rose 12% to $14.6 billion, led by Biktarvy and continued uptake of TAF-based regimens. HCV sales fell 60% to $3.7 billion amid lower patient starts, pricing and competition. Yescarta sales were $264 million, compared with $7 million in 2017. Gross-to-net deductions were $16.5 billion, or 43% of gross product sales, versus $17.2 billion, or 40%, in 2017.
Research and development expense increased 34% to $5.018 billion, including an $820 million impairment charge after discontinuing KITE-585. Cost of goods sold rose 11% to $4.853 billion; 2018 inventory reserves totaled $572 million, including $440 million related to excess raw materials, primarily associated with lower Harvoni demand. The effective tax rate was 30.0%, compared with 65.7% in 2017, which included the tax-reform charge.
In the fourth quarter of 2018, revenue was $5.795 billion and net income attributable to Gilead was $3 million. The quarter included the KITE-585 impairment, a $588 million non-cash deferred tax charge related to acquired intangible assets, and $410 million of inventory reserves; the filing reports an unfavorable combined impact of $1.30 per diluted share from these items.
Material changes versus the prior year
- Revenue continued to contract, principally because HCV sales declined; HIV growth partially offset the decline.
- Product gross margin fell five percentage points, and operating income declined substantially as revenue fell and costs increased.
- Reported net income and EPS increased year over year largely because 2017 included the one-time tax-reform charge; operating performance should be assessed separately from this tax comparison.
- Operating cash flow declined, while debt fell after repayment of $4.5 billion of Kite-related term loans and $1.8 billion of senior notes at maturity.
- Gilead expanded its pipeline activity, reporting 119 active clinical studies, including 41 Phase 3 trials, and 26 collaborations, partnerships and strategic investments in 2018.
Outlook, risks and unusual items
Management expected HCV sales to decline again in 2019, but at a slower rate than in 2018, and prioritized continued promotion of Biktarvy and other HIV regimens. It planned to launch authorized generic versions of Epclusa and Harvoni in the United States through Asegua, support Yescarta in the United States and Europe, and pursue pipeline opportunities. Anticipated 2019 data included selonsertib (STELLAR-3), filgotinib and Descovy for PrEP. The filing provides no clear quantified 2019 revenue or earnings guidance.
- Development risk: STELLAR-4 for selonsertib in NASH failed its prespecified primary endpoint; KITE-585 was discontinued and impaired. FDA-requested safety work for filgotinib may affect the timing of a U.S. filing.
- Commercial risk: HIV and HCV concentration, generic competition, payer pricing and reimbursement pressure, changing patient starts and wholesaler inventory fluctuations could affect sales. Three U.S. wholesalers accounted for about 85% of U.S. product sales.
- Yescarta execution: Cell-therapy manufacturing, patient logistics, safety management, treatment-center capacity and reimbursement adequacy may constrain adoption.
- Legal and regulatory matters: The filing describes patent disputes involving HCV products, Yescarta and Biktarvy; government inquiries into patient assistance, pricing/reporting and promotional practices; and product-liability suits alleging kidney or bone injuries from TDF-containing medicines. Gilead reported no accrual for the described legal actions because it did not consider losses probable; outcomes and potential exposure were generally not estimable.
- Capital returns and leadership: Gilead repurchased $2.9 billion of stock and paid $3.0 billion in dividends in 2018. The board announced a quarterly dividend increase to $0.63 per share in February 2019. CEO Daniel O’Day was scheduled to take office March 1, 2019, following John Milligan’s departure.
- Tax, currency and operations: Transition-tax installments, tax examinations and potential tax-structure changes may affect cash flows or tax expense. Currency movements, manufacturing or supplier disruptions, cyber incidents and clinical or regulatory setbacks are additional risks.
Most important facts for investors to verify
- Whether HIV growth, particularly Biktarvy and other TAF-based regimens, can offset continued HCV declines and generic erosion.
- Whether 2019 HCV sales decline at the slower rate management anticipated, and how authorized generics affect access, pricing and branded sales.
- Pipeline readouts and filing timelines, especially STELLAR-3, filgotinib and Descovy for PrEP, alongside the implications of STELLAR-4 and KITE-585.
- Whether margins and operating cash flow stabilize after 2018 inventory reserves, lower revenue and elevated R&D spending.
- Developments in the cited patent litigation, government investigations and product-liability cases, including any change in the company’s assessment of probable loss.
- Debt maturities, cash deployment, dividends and repurchases relative to ongoing investment needs and business performance.
The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting as of December 31, 2018.