Gilead Sciences, Inc. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This is an annual filing, not a standalone fourth-quarter report; quarterly figures below are included for context. Amounts are U.S. dollars.
Business context
Gilead is a biopharmaceutical company focused on HIV/AIDS, liver disease, respiratory and cardiovascular/metabolic conditions. Its business is highly concentrated in antiviral products: Atripla and Truvada together generated approximately $5.58 billion, or 70% of total 2010 revenue. The company reported one operating segment.
Financial performance and liquidity
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total revenue | $7.949 billion | $7.011 billion | +13% |
| Product sales | $7.390 billion | $6.469 billion | +14% |
| Operating income | $3.962 billion | $3.529 billion | +12% |
| Net income attributable to Gilead | $2.901 billion | $2.636 billion | +10% |
| Diluted EPS | $3.32 | $2.82 | +18% |
| Operating cash flow | $2.834 billion | $3.080 billion | -8% |
- Product gross margin was 75%, unchanged from 2009, but below 78% in 2008. Management expected a lower margin in 2011, mainly due to a higher Atripla sales mix.
- R&D expense rose 14% to $1.073 billion; SG&A rose 10% to $1.044 billion. A $136 million acquired in-process R&D impairment was included in 2010 R&D expense.
- Cash, cash equivalents and marketable securities totaled $5.318 billion at year-end, up from $3.905 billion. Working capital was $3.243 billion, versus $2.941 billion.
- Convertible senior notes had a $3.478 billion carrying value, including $639 million classified as current. The company also had a $1.25 billion revolving credit facility, with approximately $1.25 billion available at year-end; it reported compliance with covenants.
- Gilead repurchased $4.02 billion of stock in 2010, retiring 109.9 million shares at an average $36.57 per share. It issued $2.5 billion principal amount of convertible notes during the year.
- Fourth-quarter revenue was $1.999 billion, compared with $2.032 billion in fourth-quarter 2009. Net income attributable to Gilead was $629 million versus $802 million, and diluted EPS was $0.76 versus $0.87.
Material changes versus 2009
- Atripla sales increased 23% to $2.927 billion; Truvada increased 6% to $2.650 billion. Hepsera sales fell 26% to $201 million.
- Letairis sales rose 31% to $240 million, Ranexa sales rose 83% to $240 million, and Cayston contributed $47.5 million in its first year of sales.
- Tamiflu royalties declined to $386.5 million from $392.7 million as pandemic-planning orders eased. Total royalty revenue nevertheless increased 11% to $546 million, supported by other royalties.
- Operating cash flow declined despite higher net income, primarily reflecting working-capital movements. Foreign exchange reduced 2010 revenue by $93.7 million and pretax earnings by $79.8 million relative to 2009.
Outlook, commentary and principal risks
- Management expected total product sales to continue growing in 2011 and anticipated higher R&D and SG&A spending. Priorities included expanding commercial products and advancing HIV single-tablet regimens and hepatitis C candidates. No specific total-revenue or EPS forecast was provided in the filing text.
- Management expected a possible second-half 2011 launch of the Truvada/TMC278 single-tablet regimen, subject to FDA review. The FDA had issued a “refuse to file” notice requesting additional Chemistry, Manufacturing and Controls information; Gilead re-filed in February 2011 and awaited a response.
- Healthcare reform reduced 2010 U.S. net product sales by approximately $200 million. For 2011, the company estimated a 5–6% impact on U.S. net product sales, excluding an estimated $30–50 million pharmaceutical excise tax classified as SG&A.
- Key concentration and commercial risks include reliance on HIV products, especially Atripla and Truvada; competition and potential generics; reimbursement and pricing pressure; foreign exchange; and variable wholesaler and government purchasing patterns.
- European government customers in Greece, Italy, Portugal and Spain owed approximately $965.9 million at year-end, including $428.5 million more than 120 days past due. Gilead agreed to accept discounted zero-coupon bonds for most Greek hospital receivables.
- The FDA issued a Warning Letter concerning the San Dimas facility in September 2010. A November–December re-inspection had no additional Form 483 observations, but Gilead was still awaiting FDA confirmation that issues were resolved; export and application approvals for certain aseptic products could be affected.
- Patent disputes and generic challenges affected Truvada, Atripla, Viread, Ranexa and Hepsera; additional risks included pending patent challenges in Brazil and India, single-source manufacturing dependencies, and clinical development failures. A $136 million impairment followed termination or abandonment of acquired programs; the company also closed its Durham research operations.
- Gilead completed its CGI acquisition in 2010 and completed the Arresto acquisition in January 2011. It announced a proposed Calistoga acquisition in February 2011, subject to closing.
Important facts for investors to verify
- Whether HIV franchise growth can offset product concentration, Hepsera declines, pricing pressure and generic competition.
- Progress and timing of FDA review for the re-filed Truvada/TMC278 application, and clinical and regulatory milestones across the pipeline.
- Collection of overdue European receivables, including the timing and realized value of Greek government bonds.
- FDA confirmation of San Dimas remediation and any resulting supply, export or approval restrictions.
- Cash generation and liquidity after stock repurchases, convertible-note obligations and planned acquisitions; also monitor the impact of the 2011 healthcare-reform costs.