Gilead Sciences, Inc. — 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. The filing also reports unaudited fourth-quarter results. Gilead is a biopharmaceutical company; its largest franchises are HIV therapies, particularly Truvada and Atripla.
Financial performance
| Metric | FY 2009 | FY 2008 | Change |
|---|---|---|---|
| Total revenue | $7.011 billion | $5.336 billion | +31% |
| Product sales | $6.469 billion | $5.085 billion | +27% |
| Royalty revenue | $491.8 million | $218.2 million | +125% |
| Operating income | $3.529 billion | $2.679 billion | +32% |
| Net income attributable to Gilead | $2.636 billion | $1.979 billion | +33% |
| Diluted EPS | $2.82 | $2.06 | +37% |
| Product gross margin | 75% | 78% | Down 3 percentage points |
Fourth quarter: Revenue was $2.032 billion, versus $1.428 billion in Q4 2008. Net income attributable to Gilead was $802.2 million and diluted EPS was $0.87, compared with $560.0 million and $0.59, respectively, a year earlier.
- Truvada sales rose 18% to $2.490 billion; Atripla rose 51% to $2.382 billion. Together, these products represented approximately 69% of total revenue.
- Hepsera sales fell 20% to $271.6 million. Letairis sales increased 63% to $183.9 million. Ranexa contributed $131.1 million from its acquisition date in April through year-end.
- Tamiflu royalties were $392.7 million, up from $155.5 million in 2008, largely due to pandemic-planning demand. Management said they accounted for about 11% of pretax income.
- R&D expense increased 30% to $939.9 million; SG&A rose 19% to $946.7 million. Total operating expenses increased 31%.
Cash flow, liquidity and debt
- Operating cash flow was $3.080 billion, up from $2.143 billion. Investing cash outflow was $2.216 billion, including the CV Therapeutics acquisition; financing cash outflow was $1.051 billion, primarily reflecting share repurchases and debt extinguishment.
- Cash, cash equivalents and marketable securities totaled $3.905 billion at year-end, up $665.2 million. Working capital was $2.941 billion, down from $3.057 billion.
- Convertible senior notes had a carrying value of $1.155 billion; contractual principal was approximately $1.300 billion. The company had no borrowings outstanding under its $1.25 billion revolving credit facility at year-end, which remained available through December 2012.
- Gilead repurchased approximately $998.5 million of shares in 2009 and completed its prior $3 billion program. In January 2010, the board authorized a new $1 billion repurchase program. The company did not anticipate paying cash dividends in the near future.
- European receivables from Greece, Italy, Portugal and Spain totaled $753.6 million, including $289.4 million more than 120 days past due. Management stated it had not experienced significant collection losses to date.
Material changes, outlook and risks
- CV Therapeutics acquisition: Completed in April 2009 for consideration of approximately $1.39 billion, adding Ranexa, Lexiscan and development programs. Gilead recorded $951.2 million of marketed-product intangible assets and $138.9 million of in-process R&D assets. It recorded $51.9 million in restructuring expenses in 2009 and expected a further $20.2 million in 2010.
- Outlook: No numerical 2010 revenue or earnings guidance is provided. Management expected product gross margin to be lower than in 2009, mainly due to a higher Atripla sales mix, and expected R&D and SG&A expenses to rise. Priorities included growing commercial products, advancing the pipeline and strengthening alliances. Gilead received U.S. approval for Cayston in February 2010; it had been conditionally approved in Europe and Canada in September 2009.
- Pipeline developments: The company planned Phase 3 studies for its elvitegravir/cobicistat/Truvada single-tablet regimen, subject to FDA discussions, and expected to submit U.S. and European applications for the Truvada/TMC278 combination in the second half of 2010, subject to positive trial results. It discontinued darusentan development for resistant hypertension after a Phase 3 trial missed co-primary endpoints.
- Concentration and commercial risks: HIV products, especially Truvada and Atripla, drive results. Product sales are exposed to competition, reimbursement and pricing pressure, safety findings, wholesaler inventory swings, foreign exchange movements and reliance on commercial partners. Tamiflu royalties are pandemic-planning dependent and may fluctuate sharply.
- Legal, patent and operating exposures: Teva challenged patents covering Truvada, Atripla and Viread in generic-drug applications; related litigation and patent challenges could shorten U.S. exclusivity. Gilead was appealing adverse tenofovir patent decisions in Brazil and India. The company also disclosed a securities class action and a Health and Human Services Inspector General subpoena concerning Ranexa; outcomes were uncertain and no amounts were accrued for these matters.
- Supply and investment risks: Certain products or components depend on single suppliers or facilities, including Cayston components and AmBisome cholesterol. Approximately $104.8 million of auction-rate securities remained illiquid; management did not expect this to materially affect cash requirements. The filing states that there were no off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether Truvada and Atripla continue to grow, and how much revenue and profit remain concentrated in these products.
- Whether elevated Tamiflu royalties persist or reverse as pandemic-planning demand changes.
- Progress and outcomes of Teva patent litigation and the Brazil and India tenofovir patent proceedings.
- Collection timing and credit exposure for overdue government-related European receivables.
- Whether forecast increases in R&D and SG&A, lower product margin and CV Therapeutics integration costs affect earnings and cash generation.
- Developments in the Ranexa government inquiry and securities litigation, and execution of the 2010 pipeline and product-launch plans.