Gilead Sciences, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; interim financial statements are unaudited. Gilead is a research-based biopharmaceutical company focused on antiviral and other medicines. Results were driven primarily by the launch of Sovaldi for hepatitis C.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $6.535B | $2.767B | $11.534B | $5.299B |
| Operating income | $4.413B | $1.154B | $7.455B | $2.179B |
| Net income attributable to Gilead | $3.656B | $0.773B | $5.883B | $1.495B |
| Diluted EPS | $2.20 | $0.46 | $3.52 | $0.89 |
| Product gross margin | 86% | 74% | 85% | 74% |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $5.753B | $1.625B |
- Q2 product sales were $6.413B, up 141%; Sovaldi contributed $3.480B. Six-month Sovaldi sales were $5.755B. Management estimated about 80,000 patients in the U.S. and Europe had started treatment since launch.
- Q2 R&D expense was $584M, up 11%; SG&A was $614M, up 51%. For the first half, R&D rose 15% to $1.179B and SG&A rose 49% to $1.162B. Cost of goods sold increased more slowly than product sales, while Sovaldi mix lifted product gross margin.
- Q2 effective tax rate was 15.2%; first-half rate was 19.1%, versus 28.6% and 26.3%, respectively, in the comparable 2013 periods. The filing cites foreign earnings intended to remain overseas and tax credits among the drivers, partly offset by state taxes, the pharmaceutical excise tax and non-deductible sofosbuvir amortization.
Liquidity, debt and capital allocation
- At June 30, cash, cash equivalents and marketable securities totaled $9.581B; working capital was $9.271B. Cash and equivalents alone were $8.731B.
- Total debt, net, was $9.505B, including $1.572B current and $7.933B long-term; the revolving credit facility had no balance. The company reported compliance with debt covenants. Approximately $3.76B of cash and securities was generated abroad and intended for foreign operations.
- First-half investing cash outflow was $648M, including $254M of capital expenditures. Financing cash inflow was $1.513B, reflecting $3.966B net proceeds from March note issuance, offset in part by debt repayments and $1.650B of share repurchases.
- Gilead issued $4.0B of senior notes in March at fixed rates of 2.05% to 4.80%, with maturities in 2019, 2024 and 2044. It repurchased $1.20B of stock in Q2; $1.70B remained under the prior authorization, and the board approved an additional $5.0B program.
- After quarter-end, Gilead elected cash settlement of warrants expiring in 2014 and expected a Q3 cash payment of approximately $3.14B–$3.69B.
Changes, outlook and management commentary
- Revenue and earnings rose sharply versus 2013, principally because Sovaldi launched in late 2013; Sovaldi represented 58% of Q2 antiviral sales. HIV product performance was mixed: Stribild and Complera/Eviplera grew substantially, while Atripla declined.
- Management said it expected R&D and SG&A expenses to increase through the second half of 2014, reflecting expanded clinical activity, Sovaldi operations and anticipated product launches. The filing provides no specific full-year revenue or earnings guidance.
- In Q2, FDA approved Zydelig for three B-cell cancers; the fixed-dose ledipasvir/sofosbuvir application received priority review with an October 10, 2014 target date. Gilead planned a Japan filing for that combination by year-end and reported positive clinical data. These were forward-looking regulatory and development plans, not guaranteed outcomes.
- Management cautioned that early Sovaldi sales may not predict future results. Demand may be affected by reimbursement and pricing restrictions, and some physicians may defer treatment while awaiting ledipasvir/sofosbuvir or competing all-oral regimens. European pricing and reimbursement approvals were still proceeding country by country.
Risks, contingencies and unusual items
- Sovaldi intellectual property disputes: Roche arbitration and claims involving Idenix, Merck and AbbVie could result in royalties, licensing requirements or restrictions on commercialization if adverse outcomes occur. Gilead disputed the claims; the filing said the range of potential losses could not be estimated.
- Pricing and reimbursement: The U.S. Senate Finance Committee requested Sovaldi pricing information in July 2014, and Gilead was cooperating. The company warned that payer restrictions, public scrutiny and European cost controls could affect demand, pricing and coverage.
- Receivables: Southern European accounts receivable were $652.4M; $173.0M was over 120 days past due and $53.6M over 365 days past due. Gilead reported no significant collection losses to date but continued monitoring.
- Customer concentration: Three U.S. wholesalers accounted for 64% of Q2 revenue (AmerisourceBergen 27%, McKesson 25%, Cardinal Health 12%). Inventory movements can cause reported sales to diverge from end-user demand.
- Other exposure: Risks include generic challenges to established products, foreign-exchange movements, product safety and regulatory compliance, clinical-trial uncertainty, and reliance on third-party manufacturers and suppliers. The IRS was examining tax years 2010–2012. The Department of Justice declined to intervene in a False Claims Act suit brought by former employees; Gilead moved to dismiss it.
Important facts for investors to verify
- Whether Sovaldi demand, reimbursement access and net pricing remained durable after its exceptional initial launch, including the effects of new competitors and the ledipasvir/sofosbuvir launch.
- Progress and financial exposure in the Roche, Idenix, Merck and AbbVie disputes, and any effects on Sovaldi or combination-product commercialization.
- Collection of overdue Southern European receivables and movements in wholesaler inventories and customer concentration.
- The cash impact of the expected $3.14B–$3.69B warrant settlement, alongside repurchases, debt maturities and the new repurchase authorization.
- Whether anticipated increases in R&D and SG&A, product approvals and clinical programs translate into sustainable growth and margins.