Business Context and Reporting Period
Company: Gilead Sciences, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: Gilead is a biopharmaceutical company focused on developing and commercializing therapeutics for life-threatening diseases, primarily HIV (Truvada, Atripla, Viread, Emtriva), Hepatitis B (Hepsera, Viread), and other conditions including fungal infections (AmBisome) and pulmonary arterial hypertension (Letairis). The company operates in one business segment.
Key Financial Metrics
| Metric (in thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $1,530,460 | $1,258,152 |
| Net Income Attributable to Gilead | $589,112 | $488,300 |
| Diluted EPS | $0.63 | $0.51 |
| Operating Cash Flow | $641,330 | $605,511 |
| Cash & Cash Equivalents (End of Period) | $1,663,646 | $722,884 |
| Total Cash, Equivalents & Marketable Securities | $3,608,889 | $N/A (Derived: $3,239,639 at Dec 31, 2008) |
| Convertible Senior Notes (Net) | $1,111,866 | $1,098,025 |
| Working Capital | $3,354,118 | $3,057,416 (Dec 31, 2008) |
Product Gross Margin: 77.2% for Q1 2009 (down from 79.0% in Q1 2008).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 22% year-over-year, driven by a 27% increase in product sales. Antiviral product sales rose 28% to $1.34 billion.
- Product Mix Shift: Atripla sales surged 57% to $509.9 million, while Truvada sales grew 23% to $590.4 million. Conversely, royalty revenues dropped 52% to $53.0 million, primarily due to a significant decrease in Tamiflu royalties from Roche ($33.2M vs $93.4M in prior year) linked to reduced pandemic planning sales.
- Margin Compression: Product gross margin decreased to 77.2% from 79.0%. This was caused by the higher proportion of Atripla sales, which includes an efavirenz component purchased from a partner at net selling price, resulting in zero gross margin for that portion.
- Expense Increases: Operating expenses increased 12% to $392.7 million. R&D expenses rose 22% ($188.8M) and SG&A expenses rose 5% ($204.0M), reflecting higher headcount and increased clinical study activity.
- Accounting Changes: The company adopted FSP APB 14-1 and SFAS 160 on January 1, 2009, on a retrospective basis. This resulted in reclassifications of noncontrolling interest to equity and adjustments to interest expense and deferred tax assets.
Outlook, Risks, and Unusual Items
- Acquisition of CV Therapeutics: In March 2009, Gilead signed an agreement to acquire CV Therapeutics for approximately $1.4 billion ($20.00/share), closing in April 2009. This expands Gilead into cardiovascular therapeutics. The company borrowed $400 million under its credit facility to partially fund this deal.
- Regulatory Challenges: The FDA and European Medicines Agency (EMEA) have requested additional clinical studies for aztreonam for inhalation solution (cystic fibrosis treatment), delaying approval. The FDA reiterated its position in February 2009, and the EMEA adopted a negative opinion in March 2009.
- Patent Litigation: Teva Pharmaceuticals has submitted ANDAs for generic versions of Truvada and Atripla, challenging the validity of emtricitabine patents. Gilead has filed lawsuits against Teva. If unsuccessful, patent protection could expire in 2017 instead of 2021.
- Stock Repurchases: The company continued its $3.0 billion share repurchase program. In Q1 2009, it repurchased approximately 16.2 million shares under an accelerated agreement and an additional 5.0 million shares via open market transactions. Approximately $768.1 million remained authorized under the program as of March 31, 2009.
- Liquidity Risks: The company holds auction rate securities (Level 3 assets) valued at $102.6 million. While these continue to earn interest, failed auctions have created liquidity concerns. Management intends to hold these to maturity.
Investor Verification Checklist
- Patent Expiration Dates: Verify the status of the Teva litigation regarding Truvada and Atripla patents and the potential impact on the 2021 expiration date.
- Aztreonam Development Costs: Assess the financial impact of the required additional Phase 3 clinical studies for aztreonam and the timeline for potential approval.
- CV Therapeutics Integration: Monitor the integration progress and financial performance of the newly acquired CV Therapeutics business.
- Auction Rate Securities: Review the liquidity status and fair value adjustments of the $102.6 million in auction rate securities held in the investment portfolio.
- European Receivables: Evaluate the risk associated with $179.5 million in European accounts receivable that are more than 120 days past due, particularly in Greece, Italy, Portugal, and Spain.