Gilead Sciences, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Financial amounts are in U.S. dollars; figures below are rounded where shown in billions.
Business context
Gilead is a research-based biopharmaceutical company focused primarily on HIV, hepatitis C (HCV) and hepatitis B, with other marketed medicines. Its results are reported as one operating segment. The quarter’s central trend was declining HCV sales, partly offset by growth in newer TAF-based HIV products.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $6.512B | $7.500B | $20.158B | $23.070B |
| Operating income | $3.812B | $4.399B | $11.833B | $13.588B |
| Net income attributable to Gilead | $2.718B | $3.330B | $8.493B | $10.393B |
| Diluted EPS | $2.06 | $2.49 | $6.44 | $7.59 |
| Product gross margin | 84% | 85% | 84% | 86% |
| Operating cash flow | $2.7B | Not stated for quarter | $9.145B | $13.508B |
- Cash and investments: $41.36B at September 30, 2017, versus $32.38B at December 31, 2016; working capital was $25.72B versus $10.37B.
- Debt: $29.26B carrying value at September 30, including $1.75B current debt. The company issued $3.0B of notes in September; the additional $6.0B term loan was drawn in October, after quarter-end.
- Capital returns: Nine-month dividends paid were $2.049B; share repurchases were $848M. The declared dividend was $0.52 per share for the quarter.
Material changes versus the prior comparable period
- Q3 revenue fell 13% and product sales fell 14% year over year. Nine-month revenue fell 13%.
- HCV product sales were $2.2B in Q3 versus $3.3B a year earlier; nine-month HCV sales were $7.6B versus $11.6B. Harvoni and Sovaldi declines reflected fewer patient starts and greater competition.
- HIV/HBV sales increased to $3.6B in Q3 from $3.5B, with growth in TAF-based products. Nine-month HIV/HBV sales rose to $10.5B from $9.5B. Genvoya Q3 sales increased to $988M from $461M.
- R&D expense declined to $789M from $1.141B in Q3, largely because the prior-year period included a $200M Nimbus milestone and a $117M in-process R&D impairment. SG&A was $879M, up from $831M.
- Net income and diluted EPS declined in both the quarter and nine-month period, reflecting lower sales and a higher effective tax rate, partly offset by lower expenses. Nine-month operating cash flow decreased $4.4B, primarily due to lower product sales.
Outlook, management commentary, risks and unusual items
- Management expected HCV patient starts to continue declining relative to 2016 and said increased competition’s effects on HCV pricing and market share would be more fully reflected beginning in Q4 2017. The filing provides no quantified revenue or earnings guidance.
- On October 3, 2017, Gilead completed its approximately $11.2B acquisition of Kite Pharma, funded with the September notes, the October $6.0B term-loan draw and cash. Kite’s axi-cel received FDA approval in October as Yescarta; the European application was pending, with approval expected in 2018 but not assured. Purchase-price allocation was not yet complete.
- A jury had awarded Idenix $2.54B in a patent case involving sofosbuvir. Gilead recorded no liability, concluding a loss was not probable, but disclosed a reasonably possible loss range of $0 to $3.6B through September 30, including potential royalties and interest. The outcome remained subject to post-trial rulings and appeal.
- Other material risks include generic entry and patent challenges affecting HIV/HCV products; pricing, reimbursement and payer-access pressure; product-development and regulatory uncertainty; and execution, manufacturing, safety and logistics risks for personalized CAR T therapy.
- Gilead reported $32.4B of cash, cash equivalents and marketable securities generated from foreign operations and intended for foreign use. It stated that it did not rely on those earnings to fund domestic needs.
- Three wholesalers accounted for 65% of Q3 revenue. The company also disclosed U.S. government inquiries concerning patient-assistance programs and Medicaid pricing methodology.
Important facts for investors to verify
- Whether HCV patient volumes, net pricing and market share deteriorate further, and how Q4 competition affects results.
- Developments in the Idenix litigation, including the potential $0–$3.6B exposure, and other HCV patent disputes.
- The completed Kite acquisition’s final purchase accounting, integration, Yescarta uptake and ability to manage CAR T safety and manufacturing requirements.
- Timing and effects of generic competition, including U.S. TDF and efavirenz exposure and potential generic filings for sofosbuvir.
- Whether cash generation, debt levels and capital returns remain sustainable as acquisition-related borrowing is reflected in subsequent periods.