Gilead Sciences, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures are unaudited. Amounts are in U.S. dollars.
Business context
Gilead is a research-based biopharmaceutical company focused on HIV/AIDS, liver diseases, hematology/oncology, and inflammation/respiratory diseases. Antiviral products generated 89% of 2017 total revenue. The company acquired Kite Pharma in October, adding cellular therapies and the newly FDA-approved Yescarta CAR T treatment for certain adults with relapsed or refractory large B-cell lymphoma. Biktarvy received U.S. approval in February 2018, after the reporting year.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Total revenue | $26.1 billion | $30.4 billion | Down 14% |
| Product sales | $25.7 billion | $30.0 billion | Down 14% |
| Operating income | $14.1 billion | $17.6 billion | Down 20% |
| Net income attributable to Gilead | $4.6 billion | $13.5 billion | Down sharply, primarily reflecting lower sales and a $5.5 billion net tax-reform charge |
| Diluted EPS | $3.51 | $9.94 | Down 65% |
| Product gross margin | 83% | 86% | Lower, primarily due to product mix |
| Operating cash flow | $11.9 billion | $17.0 billion | Down, reflecting lower receipts and higher tax payments |
| Cash, cash equivalents and marketable securities | $36.7 billion | $32.4 billion | Up $4.3 billion |
| Total debt, including current portion | $33.5 billion | $26.3 billion | Higher following Kite-related borrowing |
| Working capital | $20.2 billion | $10.4 billion | Increased, mainly from short-term investments and cash classification changes |
HCV sales fell to $9.1 billion from $14.8 billion as competition intensified and patient starts declined. HIV and HBV sales increased to $14.2 billion from $12.9 billion, driven mainly by uptake of TAF-based products. Other product sales rose 5% to $2.3 billion. Gross-to-net deductions were $17.2 billion, or 40% of gross product sales, unchanged as a share from 2016. R&D expense declined 27% to $3.7 billion, while SG&A rose 14% to $3.9 billion.
Investing cash outflow was $16.1 billion, including $10.4 billion for acquisitions, primarily Kite. Financing cash flow was positive $3.4 billion, including debt proceeds; Gilead paid $2.7 billion in dividends and repurchased $954 million of shares. The company reported $6.0 billion of term loans drawn for Kite, of which $1.5 billion was repaid in December, and $3.0 billion of new notes. A $2.5 billion revolving credit facility was undrawn at year-end. Cash-like assets exceeded reported debt by approximately $3.2 billion, before considering other obligations.
Material changes and unusual items
- Total revenue declined from 2016, continuing the prior-year decrease, largely because of HCV market contraction, lower HCV pricing and competition. HCV sales fell about 39% year over year; product sales outside the United States also weakened, particularly in Japan.
- The Tax Cuts and Jobs Act produced a provisional $5.5 billion net tax expense in 2017, including a $5.8 billion transition-tax charge partly offset by a $308 million deferred-tax benefit. The effective tax rate rose to 65.7% from 21.1%. The estimates were subject to refinement; the federal transition-tax liability of $6.1 billion is payable over eight years.
- Kite was acquired for approximately $11.2 billion. The acquisition added $9.0 billion of identifiable intangible assets and $3.0 billion of goodwill on a preliminary basis. Yescarta approval led to reclassification of $6.2 billion of acquired R&D assets to a finite-lived intangible asset.
- In December, Gilead ended the U.S. and Canada Atripla collaboration with Bristol-Myers Squibb after generic efavirenz launched; Gilead became the sole owner of the joint venture and owes declining royalties for three years.
- Fourth-quarter 2017 net loss attributable to Gilead was $3.9 billion, principally reflecting the tax-reform charge. Full-year results remained profitable.
Outlook, commentary and risks
Management expected HCV sales to decline in all major markets in 2018 amid competition and fewer patient starts, with pricing and market share expected to stabilize around mid-year. The company planned to support the Biktarvy launch, continue promoting TAF-based HIV regimens and Truvada for PrEP, expand Yescarta in the United States and prepare for possible European approval, and advance Phase 3 studies of selonsertib for NASH and filgotinib for inflammatory diseases. No numerical 2018 revenue or earnings guidance is provided in the filing text.
- Revenue concentration remains material: HIV products were approximately 55% and HCV products approximately 36% of 2017 product sales. Management warned HCV revenue was difficult to forecast and exposed to reimbursement, payer mix, pricing and market-share changes.
- Generic competition threatens established products, including TDF-based medicines and potential U.S. generic competition for Letairis beginning in July 2018; Ranexa competition was expected from 2019.
- Yescarta brings execution and safety risks, including manufacturing scale-up, patient-specific cell logistics and chain of identity/custody, REMS compliance, severe toxicities, payer coverage and physician adoption.
- Material patent disputes include claims relating to sofosbuvir and Yescarta. In February 2018, a court invalidated the Idenix patent underlying a previously awarded $2.54 billion jury verdict, vacating that award; Idenix planned to appeal. The Merck and Juno matters also remained subject to litigation and appeal. Gilead reported no litigation accrual at year-end because it did not consider losses probable.
- Government inquiries and litigation concern patient assistance, pricing and reporting, marketing, reimbursement support, and promotional programs. The company said it was cooperating with investigations. Other risks include pricing and health-policy changes, foreign exchange, dependence on third-party manufacturers and suppliers, and clinical-development uncertainty.
- Management stated that existing capital resources and operating cash flow should meet foreseeable needs. Dividend and repurchase decisions remain subject to board approval and capital requirements.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Key facts for investors to verify
- Whether HIV growth, including Biktarvy uptake and TAF product mix, can offset continued HCV declines and generic erosion.
- Actual HCV patient starts, net pricing, payer mix and market share versus management’s 2018 expectations.
- The final tax-reform accounting, transition-tax payment schedule and any effect on the effective tax rate or cash taxes.
- Kite/Yescarta commercial adoption, manufacturing capacity, safety outcomes, reimbursement and European regulatory progress.
- Updates and potential financial exposure from the sofosbuvir, Yescarta and other patent cases, as well as government investigations.
- Debt maturities, interest costs, cash generation, and the sustainability of dividends and share repurchases amid lower operating cash flow.