Gilead Sciences, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
Gilead is a research-based biopharmaceutical company focused primarily on HIV/AIDS, liver diseases, hematology/oncology, and inflammation/respiratory diseases. This unaudited report covers the three months ended March 31, 2018; year-over-year comparisons are to Q1 2017 unless noted. Gilead adopted ASC Topic 606 on January 1, 2018 using the modified retrospective method, so prior-year revenue figures were not recast.
Financial and operating metrics
| Metric | Q1 2018 | Q1 2017 or prior balance | Change / context |
|---|---|---|---|
| Total revenue | $5.088 billion | $6.505 billion | Down 22% |
| Product sales | $5.001 billion | $6.377 billion | Down 22% |
| Operating income | $2.153 billion | $3.767 billion | Down 43%; operating margin approximately 42% versus 58% |
| Net income attributable to Gilead | $1.538 billion | $2.702 billion | Down 43% |
| Diluted EPS | $1.17 | $2.05 | Down 43% |
| Product gross margin | 80% | 85% | Down 5 percentage points |
| Operating cash flow | $2.270 billion | $2.925 billion | Down $655 million |
| Cash, cash equivalents and marketable securities | $32.102 billion | $36.694 billion at Dec. 31, 2017 | Down $4.592 billion |
| Working capital | $19.588 billion | $20.188 billion at Dec. 31, 2017 | Down $600 million |
| Total debt, net | $29.054 billion | $33.542 billion at Dec. 31, 2017 | Down $4.488 billion, including repayment of $4.5 billion in term loans |
Research and development expense was $937 million, up 1%; selling, general and administrative expense was $997 million, up 17%. Increases included Kite-related stock compensation, support for Biktarvy and Yescarta launches, and business expansion. Interest expense rose to $290 million from $261 million. The effective tax rate was 24.3%, compared with 25.4%.
Operating cash flow was affected by lower sales and a $500 million payment related to the first annual installment of the Tax Reform transition tax. Investing activities provided $4.354 billion, mainly from marketable-security maturities; financing activities used $6.595 billion, including debt repayment, $1.039 billion of share repurchases and $753 million of dividends.
Material changes versus the prior comparable period
- HCV product sales fell 59% to about $1.0 billion, primarily from lower Harvoni and Sovaldi sales and increased competition; U.S. Epclusa sales also declined amid competition.
- HIV and HBV sales increased 2% to $3.3 billion, led by uptake of Descovy-based regimens. Descovy, Genvoya and Odefsey sales rose 44%, 41% and 51%, respectively. Biktarvy, approved in the U.S. in February, generated $35 million in sales.
- Yescarta, acquired through the 2017 Kite acquisition, generated $40 million in sales. Kite-related amortization added $88 million to cost of goods sold.
- Other product sales were $626 million versus $536 million, including higher Ranexa and AmBisome sales.
- Gilead repaid its $4.5 billion Kite-related term loan in March. Cash and securities declined despite $2.3 billion of operating cash generation, reflecting repayment, buybacks and dividends.
ASC 606 adoption increased opening retained earnings by $190 million; its effect on Q1 2018 revenue versus the former standard was an increase of $5 million. The comparison also reflects the different revenue accounting standards in the two periods.
Outlook, commentary, risks and contingencies
- Management expects HCV sales to decline in 2018 versus 2017 in major markets due to competition. It expects market share to stabilize by mid-2018, with patient starts more predictable but slightly declining; pricing and treatment duration were described as largely stabilized. No full-year numerical revenue or earnings guidance is provided in the supplied filing text.
- Management expects operating cash flow to decrease in Q2 2018 because of anticipated tax-related payments. It states existing capital resources and operating cash flows should meet capital needs for the foreseeable future.
- Letairis is expected to face U.S. generic competition beginning in July 2018; Ranexa is expected to face U.S. generic competition in 2019. Generic competition and pricing/reimbursement pressure are material risks to sales and margins.
- Key product and pipeline risks include patent challenges involving sofosbuvir/HCV products, Yescarta and bictegravir (Biktarvy); clinical, regulatory and commercialization uncertainty; and the manufacturing, logistics, safety-management and reimbursement demands associated with CAR T-cell therapy.
- Gilead disclosed multiple government inquiries and litigation concerning, among other matters, product marketing, patient assistance and reimbursement support. It was cooperating with several inquiries. The company reported no accruals for the specified significant litigation because it did not consider losses probable; it generally said outcomes and potential exposures could not be estimated.
- The $2.54 billion jury award in the Idenix matter was vacated after the patent was held invalid; Idenix appealed. The U.S. Supreme Court denied review of a separate Idenix patent decision in April 2018. In the Merck matter, the Federal Circuit affirmed the unclean-hands ruling in April 2018; further review remained possible.
- Tax Reform accounting estimates remained provisional. Gilead was under IRS examination for 2010–2014 and said unrecognized tax benefits could decrease by approximately $800 million over the next 12 months due to potential settlements and statute expirations.
- Gilead repatriated $28.0 billion of cash, cash equivalents and marketable securities in February. Its three largest U.S. wholesalers accounted for approximately 89% of U.S. product sales, creating customer concentration and inventory-pattern risk.
Most important facts for investors to verify
- Whether HCV sales and patient starts stabilize as management anticipated, and the pace of ongoing competitive and generic erosion.
- Whether growth in Descovy-based HIV regimens, Biktarvy and Yescarta can offset declines in mature products; review launch uptake, access and reimbursement.
- Whether gross margin and operating cash flow recover, including the effects of product mix, Kite-related costs and tax payments.
- Developments in the material patent disputes and government investigations, including potential financial or commercial consequences; no clear maximum exposure is provided for most matters.
- Finalization of Tax Reform estimates, potential tax settlements, and the effect of repurchases and dividends on liquidity and capital allocation.