Gilead Sciences, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted. Gilead is a research-based biopharmaceutical company, with major businesses in HIV, hepatitis C (HCV) and hepatitis B (HBV). Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior year-end | Change |
|---|---|---|---|
| Total revenue | $6.505 billion | $7.794 billion | Down 17% |
| Product sales | $6.377 billion | $7.681 billion | Down 17% |
| Operating income | $3.767 billion | $4.651 billion | Down 19% |
| Net income attributable to Gilead | $2.702 billion | $3.566 billion | Down 24% |
| Diluted EPS | $2.05 | $2.53 | Down 19% |
| Product gross margin | 85% | 84% | Up 1 percentage point |
| Operating cash flow | $2.925 billion | $4.130 billion | Down 29% |
| Cash, cash equivalents and marketable securities | $34.017 billion | $32.380 billion at December 31, 2016 | Up $1.637 billion |
| Working capital | $13.142 billion | $10.370 billion at December 31, 2016 | Up $2.772 billion |
| Long-term debt, net | $26.321 billion | $26.346 billion at December 31, 2016 | Little change |
Q1 investing activities provided $307 million, while financing activities used $1.244 billion, including $565 million for share repurchases and $687 million for dividends. Gilead reported no borrowings under its revolving credit facility and stated it was in compliance with debt covenants. Cash and marketable securities exceeded reported debt by approximately $7.7 billion, although $29.3 billion of liquidity was generated in foreign jurisdictions and intended for foreign operations.
Material changes and business drivers
- HCV sales fell to $2.6 billion from $4.3 billion. Harvoni sales declined 55% to $1.371 billion and Sovaldi sales declined 75% to $313 million; Epclusa contributed $892 million following its 2016 launch. Management attributed the HCV decline to lower patient starts and sales volumes across major markets.
- HIV and HBV sales rose to $3.3 billion from $2.9 billion, driven principally by uptake of TAF-based Genvoya, Descovy and Odefsey. Genvoya sales increased to $769 million from $158 million. Older regimens, including Truvada, Atripla and Stribild, generally declined.
- U.S. product sales increased to $4.5 billion from $4.4 billion, but Europe fell to $1.3 billion from $1.6 billion and sales in other locations fell to $661 million from $1.7 billion, primarily reflecting lower sales in Japan.
- R&D expense fell 26% to $931 million, chiefly because Q1 2016 included Galapagos collaboration costs and an in-process R&D impairment. SG&A rose 24% to $850 million, primarily because Q1 2016 benefited from a $191 million favorable adjustment to the branded prescription drug fee.
- Interest expense increased to $261 million from $230 million, mainly following the issuance of $5.0 billion of senior notes in September 2016. The effective tax rate was 25.4%, versus 20.8%, with the increase attributed primarily to geographic earnings mix.
Management said the product gross margin improvement primarily reflected a Q1 2016 sofosbuvir-related litigation charge that was reversed in Q2 2016; the improvement was partly offset by product mix as HCV sales represented a smaller share of sales.
Outlook, risks and contingencies
- Outlook: Management expected HCV patient starts to decline relative to 2016 in all major markets and expected total product sales to decline in 2017. It also cited competition, pricing pressure, payer access and shorter treatment durations as potential sales headwinds. The filing does not provide a clear numerical full-year revenue or earnings forecast.
- Pipeline: Gilead reported positive HIV study results for bictegravir plus FTC/TAF and positive 144-week Genvoya data. The SOF/VEL/VOX HCV regimen was under review in Europe; the FDA target action date was August 8, 2017. The European Commission authorized Vemlidy for HBV, and FDA approved pediatric HCV indications for Harvoni and Sovaldi.
- Idenix patent litigation: A jury found willful infringement of an Idenix patent and awarded $2.54 billion in past damages. Gilead disputed the verdict and was pursuing post-trial motions and appeal. It recorded no liability, concluding a loss was not probable, but disclosed a reasonably possible loss range of zero to $8.8 billion through March 31, 2017, including potential enhanced damages, royalties, interest and fees. An adverse outcome could materially affect results, cash flows and share price.
- Other legal and regulatory matters: Merck’s appeal could potentially revive a damages or royalty claim relating to sofosbuvir; the University of Minnesota also alleged patent infringement. Patent challenges and generic entry—particularly potential 2017 competition for TDF-related products and possible December 2017 generic filings for sofosbuvir—could affect exclusivity and sales. Gilead also disclosed a U.S. Department of Justice inquiry concerning patient-assistance programs and HCV patient financial assistance.
- Other risks: The company highlighted dependence on HIV and HCV products, competition and reimbursement pressure, wholesaler concentration, foreign-exchange exposure, manufacturing and supply-chain risks, product safety and development uncertainty, tax audits, and counterfeit products. Counterfeit bottles labeled Harvoni were found in Japan during Q1; Gilead said it was investigating and cooperating with authorities.
- Capital returns: The board’s quarterly dividend was $0.52 per share. The $12.0 billion repurchase authorization had $8.4 billion remaining at March 31, 2017; future dividends and repurchases were not assured.
Important facts for investors to verify
- Track HCV patient starts, payer access, net pricing and the performance of Epclusa against continued declines in Harvoni and Sovaldi.
- Assess whether TAF-based HIV/HBV growth can offset declines in older regimens and potential generic competition.
- Follow rulings and appeals in the Idenix matter, including the potential damages and royalties and the absence of an accrued liability.
- Monitor 2017 sales trends against management’s expectation of declining product sales; the filing gives no numerical full-year forecast.
- Review the geographic availability of liquidity, debt maturities, and the sustainability of dividends and repurchases amid lower operating cash flow.
- Check developments in patent challenges, generic filings, the DOJ inquiry, and the counterfeit-Harvoni investigation.