Gilead Sciences, Inc. — 2016 Form 10-K
Business context and reporting period. Gilead is a research-based biopharmaceutical company focused primarily on HIV, hepatitis C (HCV) and hepatitis B, with additional oncology, cardiovascular and inflammation/respiratory businesses. This annual report covers the fiscal year ended December 31, 2016; quarterly figures below identify the fourth quarter separately. Amounts are in U.S. dollars.
Financial performance and position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $30.390 billion | $32.639 billion | Down 7% |
| Product sales | $29.953 billion | $32.151 billion | Down 7% |
| Operating income | $17.633 billion | $22.193 billion | Down 21% |
| Net income attributable to Gilead | $13.501 billion | $18.108 billion | Down 25% |
| Diluted EPS | $9.94 | $11.91 | Down 17% |
| Product gross margin | 86% | 88% | Down 2 percentage points |
| Operating cash flow | $16.669 billion | $20.329 billion | Down $3.660 billion |
- Fourth quarter: Revenue was $7.320 billion versus $8.506 billion in Q4 2015. Net income attributable to Gilead was $3.108 billion versus $4.683 billion; diluted EPS was $2.34 versus $3.18.
- Revenue mix: HCV product sales were $14.8 billion, down from $19.1 billion. HIV and other antiviral sales were $12.9 billion, up from $11.1 billion; other product sales were $2.2 billion, up 14%.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $32.380 billion at year-end, versus $26.208 billion; working capital was $11.226 billion, versus $14.872 billion. Long-term debt, including current portion, was $26.346 billion, versus $22.055 billion. The company issued $5.0 billion of senior notes and reported no covenant violations; its $2.5 billion revolving facility was undrawn.
- Capital returns: Gilead repurchased 123 million shares for $11.0 billion and paid $2.5 billion in dividends during 2016.
Material changes versus the prior year
- Lower Harvoni and Sovaldi sales drove the revenue decline, partly offset by Epclusa and newer TAF-based HIV regimens. HCV sales fell to $14.8 billion from $19.1 billion; HIV and other antiviral sales rose 16%.
- Research and development expense rose 69% to $5.098 billion, reflecting clinical-program progression, collaboration and acquisition costs, an FDA priority review voucher, and $432 million of impairment charges for discontinued momelotinib and simtuzumab programs.
- Gross-to-net deductions increased to $20.3 billion, or 40% of gross product sales, from $18.1 billion, or 36%, primarily due to greater HCV discounts and a higher proportion of sales to more deeply discounted U.S. payer segments.
- Operating cash flow declined, while year-end cash and marketable securities increased, principally following the 2016 debt issuance and investment activity. Debt and interest expense also increased.
Outlook, commentary and key risks
- Management expects 2017 HCV patient starts and HCV revenue to decline from 2016 levels, citing the curative-market dynamic, competition, pricing pressure and shorter average treatment durations. It nevertheless expects HCV products to continue generating significant revenue and cash flow. The filing does not provide a clear numerical 2017 revenue or earnings forecast.
- Management plans to support TAF-based HIV regimens and Truvada for PrEP, advance late-stage programs including selonsertib for NASH, and pursue external licensing and acquisition opportunities.
- Major litigation contingency: A jury found willful infringement of an Idenix patent relating to sofosbuvir and awarded $2.54 billion in past damages. Gilead recorded no accrual, concluding a loss was not probable, but disclosed a possible loss range of zero to $8.5 billion through year-end 2016, excluding future royalties. Gilead planned post-trial motions and an appeal.
- Other material risks include HCV and HIV product concentration, further pricing and reimbursement pressure, anticipated generic competition for TDF and related products in 2017, patent challenges involving sofosbuvir, regulatory and clinical-development setbacks, foreign-exchange exposure, and reliance on major wholesalers and third-party manufacturers.
- The company reported that its financial statements received an unqualified audit opinion and that internal control over financial reporting was effective as of December 31, 2016.
Most important facts for investors to verify
- Whether HCV patient starts, net pricing and treatment duration follow management’s expected 2017 declines, and how quickly newer HIV products offset them.
- Developments in the Idenix appeal, potential enhanced damages and future royalty exposure; the disclosed potential loss range is material relative to earnings.
- Actual generic-entry timing and its impact on Truvada, Viread, Atripla and related products, as well as the outcome of other patent challenges.
- Whether gross-to-net deductions, payer mix and rebate accruals continue to rise, and how these affect reported sales and cash collection.
- Whether operating cash flow can support the company’s R&D plans, debt obligations, dividends and share repurchases as HCV revenue declines.