Gilead Sciences, Inc. — 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter filing; fourth-quarter figures are included below where reported. Amounts are in U.S. dollars.
Business context
Gilead is a research-based biopharmaceutical company focused principally on HIV, hepatitis C (HCV) and hepatitis B, with additional cardiovascular, hematology/oncology and inflammation/respiratory businesses. Its 2015 performance was driven largely by HCV medicines Harvoni and Sovaldi and HIV products. Antiviral products generated $30.2 billion, or 93% of total revenue. The company reported one operating segment.
Financial results and key metrics
| Metric | 2015 | 2014 | Change or context |
|---|---|---|---|
| Total revenue | $32.639 billion | $24.890 billion | Up 31% |
| Product sales | $32.151 billion | $24.474 billion | Up 31% |
| Operating income | $22.193 billion | $15.265 billion | Up 45% |
| Net income attributable to Gilead | $18.108 billion | $12.101 billion | Up 50% |
| Diluted EPS | $11.91 | $7.35 | Up 62% |
| Product gross margin | 88% | 85% | Higher HCV mix and lower Atripla sales contributed |
| R&D expense | $3.014 billion | $2.854 billion | Up 6% |
| SG&A expense | $3.426 billion | $2.983 billion | Up 15% |
| Operating cash flow | $20.329 billion | $12.818 billion | Up $7.511 billion |
Fourth-quarter 2015 revenue was $8.506 billion versus $7.314 billion in fourth-quarter 2014. Net income attributable to Gilead was $4.683 billion versus $3.487 billion; diluted EPS was $3.18 versus $2.18.
Revenue mix and changes: Harvoni sales were $13.864 billion in 2015, compared with $2.127 billion in 2014. Sovaldi sales declined 49% to $5.276 billion as patients shifted to Harvoni, partly offset by overseas launches. HIV sales benefited from Stribild, Complera/Eviplera and newly launched Genvoya; Atripla sales declined 10%. U.S. product sales were $21.2 billion, European sales $7.2 billion, and other international sales $3.8 billion. Foreign exchange, net of hedges, reduced 2015 revenue by $737 million versus 2014.
Margins and costs: Gross-to-net deductions were $18.1 billion, or 36% of gross product sales, versus $7.3 billion, or 23%, in 2014, reflecting substantially higher rebates and chargebacks, particularly on HCV products. The 2015 effective tax rate was 16.4%, compared with 18.8% in 2014. Interest expense rose to $688 million from $412 million, primarily following new debt issuance.
Liquidity and debt: Cash, cash equivalents and marketable securities totaled $26.208 billion at year-end, up from $11.726 billion. Working capital was $14.872 billion, compared with $11.953 billion. Total debt was $22.178 billion, including $983 million current and $21.195 billion long-term; the company had no borrowings under its revolving credit facility and reported compliance with covenants. Operating cash flow was $20.329 billion; investing cash outflow was $12.475 billion and financing cash outflow was $4.963 billion. Approximately $15.7 billion of cash, cash equivalents and marketable securities was generated overseas and intended for foreign operations.
Capital returns and other items: Gilead repurchased 95 million shares for $10.0 billion and paid $1.9 billion in dividends during 2015. It issued $10.0 billion of senior unsecured notes and paid $3.9 billion to settle warrants. The Branded Prescription Drug fee expense was $414 million, down from $590 million in 2014; 2014 included an acceleration of expense recognition. In January 2016, the Galapagos collaboration became effective, including a $300 million upfront payment and $425 million equity investment.
Outlook, commentary and key risks
- Management did not provide a numerical 2016 revenue or earnings forecast in the supplied filing text. It expected R&D and SG&A expenses to increase, citing expanded clinical studies and global commercial infrastructure.
- Management planned to support Genvoya and prepare for potential launches of F/TAF and R/F/TAF, and to advance SOF/VEL for HCV, subject to regulatory approval. The filing reports 180 active clinical studies at year-end, including 61 Phase 3 studies.
- HCV sales are a major concentration: Harvoni and Sovaldi represented approximately 60% of 2015 product sales. Management noted fewer warehoused patients, uncertain treatment starts, increased competition and continuing pricing and reimbursement pressure. Japan pricing discounts were expected to begin affecting sales in the first half of 2016.
- Pricing scrutiny is material. A Senate Finance Committee report issued in December 2015 criticized Gilead’s Sovaldi pricing strategy; Gilead disagreed with many conclusions. The Massachusetts Attorney General requested HCV-related documents in February 2016. Potential effects include reputational harm, reduced demand or coverage, and further pricing pressure.
- Significant intellectual-property disputes concern sofosbuvir and Harvoni, including proceedings involving Merck, Idenix and AbbVie, as well as challenges to Gilead’s European sofosbuvir patent. The company stated that outcomes and potential losses could not be predicted or reasonably estimated. Several rulings favored Gilead in certain jurisdictions, but appeals and other cases remained pending.
- Other risks include competition and generic entry, payer restrictions and rebates, foreign-exchange exposure, customer payment delays in Southern Europe, reliance on suppliers and contract manufacturers, and clinical-trial or regulatory setbacks. In January 2016, Gilead reported terminating a Phase 2 simtuzumab study for idiopathic pulmonary fibrosis after finding no treatment benefit.
Most important facts for investors to verify
- Whether HCV patient starts, market share and net pricing support revenue after the rapid treatment of previously warehoused patients and entry of competing therapies.
- How gross-to-net deductions, rebate accruals and payer mix evolve; 2015 deductions were 36% of gross product sales, and accrued government and other rebates were $4.118 billion at year-end.
- Whether HIV product growth and launches of TAF-based regimens offset declines in older products and competitive or generic pressures.
- The status and potential financial impact of sofosbuvir, Harvoni and generic-related litigation, and the HCV pricing investigations; the filing does not provide a clear estimate of possible losses.
- Whether operating cash generation remains sufficient to fund debt service, dividends, buybacks, R&D and strategic investment, particularly given $22.178 billion of debt and substantial shareholder returns.
- Collection of Southern European receivables: $1.3 billion was outstanding at year-end, including $218 million more than 120 days past due.