Gilead Sciences, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. Gilead is a research-based biopharmaceutical company focused on HIV/AIDS, liver diseases, hematology/oncology and inflammatory and respiratory diseases. This unaudited filing covers the three and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Gilead adopted ASC 606 in 2018 using the modified retrospective method, so prior-period revenue figures were not recast; management said the adoption’s current-period impact was not material.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $5.648 billion | $7.141 billion | $10.736 billion | $13.646 billion |
| Operating income | $2.280 billion | $4.254 billion | $4.433 billion | $8.021 billion |
| Net income attributable to Gilead | $1.817 billion | $3.073 billion | $3.355 billion | $5.775 billion |
| Diluted EPS | $1.39 | $2.33 | $2.55 | $4.38 |
| Product gross margin | 78% | 84% | 79% | 84% |
- Q2 product sales were $5.540 billion, down 21%. HIV product sales rose 13% to $3.7 billion, while HCV sales fell 65% to $1.0 billion, primarily due to competition. Yescarta generated $68 million of Q2 sales.
- Q2 R&D expense increased 38% to $1.192 billion; SG&A increased 9% to $980 million. Drivers included collaboration payments, a purchased FDA Priority Review Voucher, and Kite-related stock compensation and operating costs. Cost of goods sold rose 6% to $1.196 billion, including higher amortization of Kite-related intangibles.
- Six-month operating cash flow was $3.843 billion, versus $6.451 billion a year earlier. Investing activities provided $9.595 billion, mainly reflecting marketable-security maturities; financing activities used $7.747 billion, including debt repayment, dividends and share repurchases.
- At June 30, cash, cash equivalents and marketable debt securities totaled $31.656 billion; working capital was $21.816 billion. Total debt, net, was $29.060 billion, including $2.998 billion current. Gilead repaid $4.5 billion of Kite-related term loans in March; no borrowings were outstanding under the revolving credit facility, and the company reported covenant compliance.
- Gilead declared dividends of $0.57 per share in Q2. It repurchased $450 million of stock during the quarter; $6.6 billion remained authorized under its $12 billion repurchase program.
Material changes versus the prior comparable period
- Revenue and earnings contracted sharply: Q2 revenue declined 21%, operating income 46%, and diluted EPS 40%. The principal factor was lower HCV sales, partly offset by growth in newer TAF-based HIV products.
- For the first six months, revenue declined 21%; HIV product sales increased 10% to $6.8 billion, while HCV sales decreased 62% to $2.0 billion. Across product lines, Genvoya, Descovy and Odefsey grew; Harvoni, Epclusa and Viread fell substantially.
- Product gross margin decreased six percentage points in Q2, reflecting product mix and higher costs, including Kite-related intangible amortization.
- Six-month operating cash flow was lower by $2.6 billion, primarily from lower product sales and higher tax payments. Cash and marketable securities decreased $5.0 billion from year-end, while working capital increased $1.6 billion.
Outlook, management commentary, risks and unusual items
- Management expected HCV product sales in 2018 to decline versus 2017 in major markets due to increased competition. It described pricing and treatment duration as largely stabilized, but anticipated patient starts to continue a slight decline. The filing provides no clear numerical full-year revenue or earnings guidance.
- Management attributed HIV product growth to uptake of Descovy-based products, including Biktarvy, while noting generic competition and declining sales for older products. Letairis was expected to face U.S. generic competition beginning in Q3 2018, and Ranexa in Q1 2019.
- Q2 net income benefited by $202 million, or $0.15 per diluted share, from settlement of a tax examination for an acquired entity. The Q2 effective tax rate was 12.8%, compared with 25.4%; Tax Reform accounting remained provisional, and Gilead was evaluating the potential tax implications of a July 2018 appellate decision.
- Significant litigation and patent challenges remain, including disputes involving sofosbuvir, Yescarta and Biktarvy. A previously awarded $2.54 billion Idenix jury verdict was vacated after the patent was held invalid; Idenix appealed. Gilead recorded no accrual for the described significant matters because it did not consider losses probable; outcomes and potential exposure were generally not estimable.
- Other key risks include dependence on HIV and HCV product sales, pricing and reimbursement pressure, generic competition, clinical and regulatory uncertainty, and manufacturing and logistics challenges for cell therapy. Government inquiries into patient assistance, reimbursement support and promotional activities were ongoing; a separate False Claims Act matter was dismissed without prejudice in July 2018.
- In July 2018, Gilead announced CEO John Milligan would step down at year-end while the board searched for a successor. This was a post-quarter-end development disclosed in the filing.
Most important facts for investors to verify
- Whether HIV growth, particularly in TAF-based products and Biktarvy, can offset further HCV declines and generic erosion.
- Actual HCV patient starts, market share and net pricing relative to management’s outlook, and the timing and impact of generic entry for Letairis, Ranexa and other products.
- Cash generation and liquidity after tax payments, dividends, repurchases and debt maturities; reconcile the reported $31.656 billion of cash and marketable securities with total debt of $29.060 billion.
- Resolution and potential financial impact of the major patent litigation and government investigations, including whether any losses become probable or estimable.
- Final tax accounting under Tax Reform, the impact of the appellate tax decision, and whether the CEO transition affects execution of the company’s strategy.