Gilead Sciences, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Gilead is a biopharmaceutical company focused on developing and commercializing therapeutics, with revenue primarily from antiviral products. Financial amounts below are in U.S. dollars; billions are shown unless otherwise stated.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $2.122B | $1.938B | $6.185B | $5.951B |
| Product sales | $2.066B | $1.866B | $5.969B | $5.460B |
| Operating income | $1.004B | $0.979B | $2.922B | $3.133B |
| Net income attributable to Gilead | $0.741B | $0.705B | $2.138B | $2.272B |
| Diluted EPS | $0.95 | $0.83 | $2.66 | $2.55 |
| Product gross margin | 74% | 74% | 74% | 75% |
- Q3 revenue rose about 9.5% year over year, led by product-sales growth; Q3 net income attributable to Gilead increased about 5%. Nine-month revenue rose about 3.9%, while operating income and net income attributable to Gilead declined about 6.7% and 5.9%, respectively. Diluted EPS increased despite lower nine-month net income, alongside a lower weighted-average share count.
- Q3 Atripla sales were $794.7 million (+7%) and Truvada sales were $744.7 million (+11%). Combined, they represented approximately 73% of total revenue. Complera, launched after FDA approval in August, contributed $19.0 million in Q3 sales.
- Other notable Q3 product growth included Letairis (+31%) and Ranexa (+36%). Hepsera sales declined 25%. Royalty revenue fell 26% in Q3 and 57% for the nine-month period, principally because Tamiflu royalties fell to $3.7 million and $65.4 million, respectively, as pandemic-planning demand waned.
- Q3 operating margin was approximately 47.3%, compared with 50.5% a year earlier. R&D expense increased 26% in Q3 and 22% year to date; SG&A increased 18% and 17%, respectively. Management cited clinical-trial and contract-service spending, higher headcount, business growth, acquisitions and the pharmaceutical excise tax.
- Operating cash flow for the first nine months was $2.661B, up from $2.109B. Investing activities used $0.850B and financing activities used $1.763B. Financing outflows included $2.157B of share repurchases and $650M repayment of 2011 convertible notes; these were partly offset by $987M net proceeds from 2021 notes.
- Cash, cash equivalents and marketable securities totaled $5.482B at September 30, versus $5.318B at year-end 2010; working capital was $3.923B, versus $3.243B. Total debt, net, was $3.892B, implying net cash and securities of approximately $1.590B. The new senior notes carry a 4.50% coupon and mature in 2021. A $1.25B revolving credit facility was available, with $2.4M in letters of credit outstanding; the company reported covenant compliance.
Material changes and business developments
- Product-sales growth reflected demand for Atripla and Truvada in the U.S. and Europe and the launch of Complera. Management also reported conservative state AIDS Drug Assistance Program purchasing, European austerity measures, foreign-exchange effects and quarter-to-quarter channel inventory variation as factors affecting sales patterns.
- Gilead acquired Arresto Biosciences and Calistoga Pharmaceuticals in 2011, using $588.6M in aggregate cash for the acquisitions during the nine-month period. The acquisitions added development-stage programs, including GS 6224 and CAL-101; their operating results to date were not significant. Gilead also purchased a clinical biologics facility in Oceanside for $28.3M.
- Gilead completed its prior $5B repurchase program and began a new $5B program. It repurchased $2.16B of shares during the first nine months; $4.82B remained authorized at September 30.
Outlook, risks and contingencies
- The filing provides no specific revenue, earnings or EPS guidance. Management said existing funds, operating cash generation and financing access should meet capital needs for the foreseeable future.
- Pipeline and regulatory developments included FDA approval of Complera, positive Phase 3 results for the Quad, and submission of the U.S. application for the elvitegravir/cobicistat/Truvada regimen announced in October 2011. The filing also reported discontinuing GS 9190 dosing in certain hepatitis C combination studies, while other studies continued.
- Material business risks include reliance on HIV products—particularly Atripla and Truvada—pricing and reimbursement pressure, generic and patent challenges, clinical-trial and regulatory uncertainty, competition, foreign-exchange exposure, and reliance on collaborators and single-source suppliers. The filing also highlights variable wholesaler and public-payer purchasing patterns.
- Southern European government and hospital receivables were a notable collection risk: approximately $1.11B was outstanding in the cited countries, including $565.7M more than 120 days past due and $228.3M more than 365 days past due. Gilead was pursuing collections in Spain, Italy and Portugal. Greek government receivables were partly settled with zero-coupon bonds trading at a discount.
- A June 2011 subpoena from the U.S. Attorney’s Office sought documents concerning manufacturing, quality and distribution practices for several products. Gilead said it was cooperating; it could not estimate a possible loss or range at this early stage.
- Patent litigation includes generic challenges involving Truvada, Atripla, Viread, Ranexa, Hepsera and Tamiflu. Unsuccessful defense could shorten patent protection and affect sales. The filing also describes illiquid auction-rate securities and Greek government bonds; management did not expect their illiquidity to materially affect cash needs. The company reported no off-balance-sheet arrangements and effective disclosure controls.
Most important facts for investors to verify
- Whether Atripla and Truvada demand, pricing and market share remain durable, and whether newer regimens add meaningful growth.
- Progress, approval timing and commercial prospects for the Quad-related programs and other pipeline assets, including the acquired programs.
- Collection timing and potential credit exposure for overdue Southern European receivables.
- Developments in generic patent litigation and the U.S. government inquiry, including any quantified financial impact.
- Whether elevated R&D and SG&A spending, debt costs and share repurchases are sustainable alongside operating cash flow and liquidity.