Gilead Sciences, Inc. — 2013 Form 10-K
Business context and reporting period: Annual report for the fiscal year ended December 31, 2013; quarterly figures below are for the fourth quarter. Gilead is a research-based biopharmaceutical company focused principally on HIV and liver diseases, alongside oncology/inflammation, cardiovascular and respiratory conditions. Its results remained heavily dependent on antiviral medicines. The financial statements were audited by Ernst & Young, which issued an unqualified opinion.
Financial performance
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Total revenue | $11.20 billion | $9.70 billion | +15% |
| Product sales | $10.80 billion | $9.40 billion | +15% |
| Operating income | $4.52 billion | $4.01 billion | +13% |
| Net income attributable to Gilead | $3.07 billion | $2.59 billion | +19% |
| Diluted earnings per share | $1.81 | $1.64 | +10% |
| Operating cash flow | $3.10 billion | $3.19 billion | −3% |
| Research and development expense | $2.12 billion | $1.76 billion | +20% |
| Selling, general and administrative expense | $1.70 billion | $1.46 billion | +16% |
- Margins: Product gross margin was 74% for the year, unchanged from 2012. Fourth-quarter 2013 product gross margin was 71.8%, including $58.3 million of Sovaldi amortization. Operating margin was approximately 40% of revenue; net income attributable to Gilead was approximately 27% of revenue.
- Fourth quarter: Revenue was $3.12 billion versus $2.59 billion in Q4 2012. Net income attributable to Gilead was $791 million versus $763 million; diluted EPS was $0.47 versus $0.47.
- Revenue concentration and drivers: Antiviral sales were $9.34 billion, or 83% of revenue. Atripla, Truvada, Stribild and Complera/Eviplera together generated $8.13 billion, or 73% of revenue. Growth reflected uptake of Stribild and Complera/Eviplera and the December launch of Sovaldi. Sovaldi recorded $139 million in 2013 sales, about half of which management estimated related to initial channel stocking.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $2.57 billion at year-end; working capital was $948 million. Debt, net, was $6.64 billion, including $2.70 billion classified as current. The company reported compliance with debt covenants. Management said existing resources and operating cash flows should meet foreseeable capital needs.
- Capital allocation: Gilead repurchased $582 million of stock in 2013. It repaid debt and settled convertible-note-related obligations; approximately $1.04 billion was paid to settle May 2013 note warrants.
Material changes versus the prior year
- Revenue and earnings increased, led by antiviral products and newer HIV regimens; Truvada sales declined 1%, while Atripla sales rose 2%.
- Sovaldi received U.S. approval in December 2013 and generated initial sales. The $10.72 billion acquired sofosbuvir in-process R&D asset was reclassified as a finite-lived intangible asset after approval; Gilead expected approximately $700 million of Sovaldi amortization in 2014.
- Operating cash flow declined from $3.19 billion to $3.10 billion, while year-end working capital fell by about $970 million, primarily reflecting higher current debt and accrued liabilities.
- Net debt declined from $8.22 billion to $6.64 billion. Cash and marketable securities were broadly unchanged year over year.
Outlook, risks and unusual items
- 2014 outlook: Management expected total product sales to grow, supported by a full year of Sovaldi sales and continued uptake of single-tablet HIV regimens. No numerical revenue or earnings guidance was provided. R&D expense was expected to rise as late-stage studies advanced; SG&A was expected to increase with commercial expansion in Europe and Asia, Sovaldi launches and preparation for a potential idelalisib launch.
- Launch and pipeline execution: The ledipasvir/sofosbuvir combination (LDV/SOF) NDA was filed in February 2014, with approval and uptake uncertain. Idelalisib applications were under review, and momelotinib advanced to Phase 3. Clinical trial outcomes, regulatory timing and commercial adoption remain uncertain.
- Manufacturing and regulatory matters: FDA inspections in 2013 identified deficiencies in quality-testing documentation and procedures at the Foster City facility. The observations had already contributed to Complete Response Letters for standalone elvitegravir and cobicistat applications. Gilead submitted responses, but unresolved deficiencies could affect product approvals or supply.
- Legal and contingencies: Several patent disputes and an arbitration involving sofosbuvir could result in licensing costs, royalties or restrictions if resolved adversely; the company said outcomes and a loss range could not be estimated. A Department of Justice investigation into manufacturing, quality and distribution practices remained ongoing; a possible loss could not be determined.
- Receivables and demand volatility: Southern European accounts receivable were approximately $846 million, including $402 million over 120 days past due and $176 million over 365 days past due. Fourth-quarter 2013 wholesaler and sub-wholesaler purchases exceeded estimated demand by $130–$150 million, potentially prompting first-quarter 2014 inventory drawdown.
- Other exposures: Pricing and reimbursement pressure, generic competition, dependence on a few U.S. wholesalers, foreign-exchange movements, and reliance on third-party manufacturers and certain single-source supplies could weigh on results. The company estimated its non-deductible pharmaceutical excise tax at $150–$170 million for 2014, versus approximately $110 million in 2013.
- Near-term financing: Based on the stock price at filing, Gilead expected to pay approximately $3.10–$3.40 billion in 2014 to settle the principal of its May 2014 convertible notes and related warrants.
Important facts for investors to verify
- Whether Sovaldi demand, pricing, reimbursement coverage and net sales develop as anticipated, distinguishing patient demand from channel stocking.
- Timing and regulatory outcomes for LDV/SOF and idelalisib, and the clinical and commercial prospects of the broader pipeline.
- Progress in remediating FDA inspection observations and any impact on manufacturing, supply or pending approvals.
- Developments in sofosbuvir-related intellectual-property disputes, the DOJ investigation and generic challenges to established products.
- Collection of overdue Southern European receivables and the effect of wholesaler inventory changes on reported sales.
- 2014 cash requirements, including convertible-note and warrant settlements, debt maturities, Sovaldi amortization and planned increases in R&D and commercial spending.