Gilead Sciences, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with the three months ended March 31, 2015 unless otherwise noted. Gilead is a research-based biopharmaceutical company focused primarily on HIV, hepatitis and other serious diseases.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior balance-sheet date |
|---|---|---|
| Total revenue | $7.794 billion | $7.594 billion, up 3% |
| Product sales | $7.681 billion | $7.405 billion, up 4% |
| Operating income | $4.651 billion | $5.371 billion |
| Net income attributable to Gilead | $3.566 billion | $4.333 billion |
| Diluted EPS | $2.53 | $2.76 |
| Product gross margin | 84% | 88% |
| Cash from operating activities | $3.913 billion | $5.701 billion |
| Cash, cash equivalents and marketable securities | $21.322 billion | $26.208 billion at Dec. 31, 2015 |
| Working capital | $8.357 billion | $14.872 billion at Dec. 31, 2015 |
| Total debt, net | $22.030 billion | $22.055 billion at Dec. 31, 2015 |
- Operating expenses rose to $3.143 billion from $2.223 billion. R&D increased 82% to $1.265 billion; SG&A increased 6% to $685 million. Interest expense rose 50% to $230 million. The effective tax rate was 20.8%, versus 17.3%.
- Cash used in investing activities was $2.109 billion; cash used in financing activities was $8.396 billion. Financing outflows included $8.0 billion of share repurchases and $587 million of dividends paid. Cash and cash equivalents ended the quarter at $6.315 billion.
- Current liabilities were $10.910 billion, including $4.766 billion of accrued government and other rebates. No amounts were outstanding under the revolving credit facility, and Gilead reported compliance with debt covenants.
Material changes versus the prior period
- HCV products Harvoni and Sovaldi represented approximately 56% of product sales. Harvoni sales declined 16% to $3.017 billion, while Sovaldi sales rose 31% to $1.277 billion. Management attributed HCV sales pressure to lower net prices, payer and geographic mix, shorter treatment durations, and higher-than-expected rebate claims, despite an increase in patient starts.
- Antiviral sales increased 3% to $7.183 billion, with growth in Sovaldi, Truvada, Stribild and newer products including Genvoya; this was partly offset by lower Harvoni and Atripla sales. U.S. product sales were $4.4 billion versus $5.2 billion, while Japan sales were $1.1 billion, reflecting HCV launches.
- Cost of goods sold increased to $1.193 billion, including a $200 million reserve following a jury verdict for Merck concerning sofosbuvir-containing products. Product gross margin fell four percentage points, also reflecting lower average net selling prices.
- R&D expense included $368 million of Galapagos collaboration and equity-investment-related charges and a $114 million impairment of the momelotinib in-process R&D asset. The Galapagos agreement involved a $300 million upfront license fee and a $425 million equity investment.
- Operating cash flow fell to $3.913 billion from $5.701 billion, partly because the prior-year period included a larger cash inflow from changes in operating assets and liabilities. Cash and securities declined by $4.9 billion, primarily amid substantial buybacks, dividends and investment activity.
Outlook, management commentary and risks
- Management said existing capital resources and operating cash flows should be adequate for capital needs for the foreseeable future. The filing provides no specific full-year revenue or earnings guidance.
- Management cited continued pricing and reimbursement pressure in HCV, reduced new-patient starts from the earlier treatment surge, payer mix changes and rebate uncertainty. Japan’s mandatory 32% price reduction for Sovaldi and Harvoni took effect April 1, 2016.
- Gilead reported FDA approval of Descovy and Odefsey, European authorization for Descovy, and priority review for the sofosbuvir/velpatasvir HCV application, with an FDA target action date of June 28, 2016. TAF applications for chronic hepatitis B were under review. These are development and regulatory updates, not guarantees of future revenue.
- Key legal exposure includes the Merck verdict and potential ongoing royalties if it stands; Gilead was awaiting court rulings on defenses and post-verdict matters. Other HCV patent disputes include Idenix and AbbVie claims. The company stated that it could not reasonably estimate maximum exposure or possible loss for the significant litigation matters.
- Other risks include dependence on HCV and HIV products, competition and generic entry, clinical and regulatory uncertainty, patent challenges, healthcare pricing actions, foreign-exchange exposure, and manufacturing or supply disruptions. Southern European receivables totaled approximately $819 million, including $237 million more than 120 days past due. Gilead noted that collection losses had not been significant to date.
- Gilead completed its $15 billion 2015 repurchase program in April 2016 and authorized a new $12 billion program; no purchases under the new program had occurred by March 31. The filing describes an intended quarterly dividend of $0.47 per share, subject to board declaration.
Important facts for investors to verify
- Whether HCV patient starts, realized prices, payer mix and rebates support management’s expectations, and how the Japanese price reduction affects sales.
- The outcome and financial consequences of the Merck litigation, including any ongoing royalty, and material developments in Idenix, AbbVie and other patent proceedings.
- Whether HIV and newer TAF-based products can offset HCV sales pressure and sustain revenue and margins.
- Cash generation and liquidity after repurchases, dividends and strategic investments; also assess the amount and location of cash and securities, with about $19.3 billion intended for foreign operations.
- Collection of Southern European receivables and the adequacy of rebate accruals, as well as the effect of foreign exchange and future pricing or reimbursement actions.