Gilead Sciences, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; compared with the corresponding 2012 periods. Gilead is a research-based biopharmaceutical company, with a portfolio centered on HIV and other antiviral medicines, alongside cardiovascular and other products.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $2.783B | $2.427B | $8.082B | $7.114B |
| Operating income | $1.148B | $1.044B | $3.327B | $2.903B |
| Net income attributable to Gilead | $788.6M | $675.5M | $2.283B | $1.829B |
| Diluted EPS | $0.47 | $0.43 | $1.35 | $1.17 |
| Operating cash flow | Not reported separately for the quarter | Not reported separately for the quarter | $2.378B | $2.489B |
- Q3 product sales were $2.710B, up 15%; royalty revenue was $69.8M. Product gross margin was 75% in Q3 and 74% for the nine-month period, unchanged from the comparable 2012 periods.
- Q3 R&D expense rose 17% to $546.2M and SG&A rose 27% to $406.9M. Management attributed the increases primarily to clinical programs and business expansion.
- At September 30, cash, cash equivalents and marketable securities totaled $2.756B; working capital was $2.073B. Total debt, net, was $7.313B, down from $8.224B at December 31, 2012. The company reported compliance with debt covenants.
- Nine-month investing cash use was $470.8M, including $378.6M for the YM BioSciences acquisition, net of cash acquired. Financing cash use was $1.699B, including debt repayments and $1.040B to settle warrants.
Changes versus comparable periods
- Q3 revenue increased 15% and Gilead-attributable net income increased 17%; nine-month revenue rose 14% and attributable net income rose 25%.
- Growth was led by newer HIV single-tablet regimens: Q3 Complera/Eviplera sales rose 112% to $210.7M and Stribild sales reached $144.0M. Cardiovascular sales, including Letairis and Ranexa, increased 25% in Q3.
- Truvada sales were broadly flat year over year in Q3 and down 1% for the first nine months. Atripla rose 4% in Q3. Nine-month royalty revenue grew 44%, partly reflecting higher Tamiflu royalties; the filing notes seasonal variability.
- Operating cash flow was lower by $110.8M year over year for the first nine months. The 2012 comparison included $349.7M from a sale of Spanish receivables; 2013 cash generation also reflected higher receivables and inventory.
Outlook, developments and risks
- Management said it expects R&D expense to increase through the remainder of 2013 as clinical studies progress, and capital spending to rise with facility construction into 2014. It stated existing capital resources and operating cash flows should meet capital needs for the foreseeable future. The filing gives no specific full-year revenue or earnings guidance.
- Sofosbuvir, then under FDA priority review for chronic hepatitis C, had a December 8, 2013 target review date. An FDA advisory committee unanimously supported specified treatment uses; its recommendation was nonbinding. The company also expected, subject to positive trial results, to seek approval of the sofosbuvir/ledipasvir combination in Q2 2014.
- FDA inspections identified manufacturing and quality-system observations at the Foster City facility. Gilead said it had submitted responses to the observations from the sofosbuvir pre-approval inspection and did not expect them to delay approval, while warning that unresolved deficiencies could affect product approvals or marketed products.
- Material legal and intellectual-property uncertainties include Roche’s arbitration claim asserting rights to sofosbuvir, Gilead’s declaratory-judgment action against Merck, and patent proceedings with Idenix. The company said it believed the claims were without merit; adverse outcomes could affect commercialization, royalties, revenue or earnings. A Department of Justice inquiry concerning manufacturing, quality and distribution practices remained ongoing, with no estimable loss range.
- Patent challenges and potential generic competition pose risks to established products. Settlements permit Teva to launch generic Viread in the U.S. on December 15, 2017, and, subject to conditions, Lupin to launch generic Ranexa on February 27, 2019. Generic Hepsera received FDA approval in September 2013.
- Southern European accounts receivable were approximately $939.9M, including $429.3M more than 120 days past due and $179.9M more than 365 days past due. Gilead reported no significant collection losses to date but highlighted continuing collection risk.
- Other risks include pricing and reimbursement pressure, foreign-exchange exposure, customer and wholesaler concentration, clinical-development uncertainty, and reliance on suppliers and manufacturing partners. The three largest U.S. wholesalers each accounted for at least 15% of Q3 revenue; together they accounted for about 80% of U.S. product sales.
Important facts for investors to verify
- Progress and regulatory decisions for sofosbuvir, and whether manufacturing observations affect approval timing or launch.
- Developments in the Roche, Merck and Idenix disputes, and any resulting effect on Gilead’s rights to commercialize HCV products.
- Trends in HIV product demand, generic competition, reimbursement discounts and U.S. wholesaler or non-retail inventory levels.
- Collection of long-aged Southern European receivables and the adequacy of related credit-loss allowances.
- Cash flow, debt repayment and planned facility investment; also monitor the disclosed $100–$120M estimate for Gilead’s 2013 pharmaceutical excise tax.