Gilead Sciences, Inc. — Q2 2009 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2009. Gilead develops and commercializes therapeutics, with HIV medicines its principal business. Results include CV Therapeutics from April 15, following its acquisition.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Total revenue | $1,647.2 | $1,278.1 | $3,177.6 | $2,536.3 |
| Product sales | $1,568.4 | $1,217.2 | $3,016.0 | $2,358.5 |
| Operating income | $761.1 | $605.5 | $1,569.4 | $1,273.6 |
| Net income attributable to Gilead | $571.4 | $434.8 | $1,160.5 | $923.1 |
| Diluted EPS | $0.61 | $0.45 | $1.24 | $0.96 |
| Product gross margin | 76% | 78% | 76% | 79% |
- Q2 revenue increased 29%; product sales rose 29%, led by antiviral sales, up 26%. Atripla sales increased 60% to $569.1 million and Truvada sales rose 18% to $608.1 million. Letairis sales increased 79% to $44.1 million. Hepsera sales fell 26% to $67.1 million.
- Q2 operating income rose 26% and Gilead-attributable net income rose 31% year over year. First-half revenue and attributable net income increased 25% and 26%, respectively.
- Product gross margin narrowed as Atripla made up a larger share of sales; its efavirenz component is recorded at zero product gross margin. Amortization of acquired CV Therapeutics product intangibles also weighed on margin.
- Q2 R&D expense was $241.6 million, up 37%; SG&A was $261.4 million, up 19%. Increases reflected higher staffing, clinical activity, acquisition costs and restructuring.
- Six-month operating cash flow was $1,264.2 million, versus $1,046.6 million. Investing used $1,391.6 million, primarily reflecting the CV Therapeutics acquisition and capital spending; financing used $302.0 million.
- Cash, cash equivalents and marketable securities totaled $2,898.4 million at June 30, down from $3,239.6 million at year-end 2008. Working capital was $2,223.4 million, down from $3,057.4 million.
Balance sheet, liquidity and material changes
- Total assets were $8,387.1 million; current assets were $4,001.3 million and current liabilities $1,777.9 million. The resulting current ratio was approximately 2.25.
- Gilead reported $1,126.4 million of convertible senior notes, net, and $405.6 million of current other long-term obligations, primarily reflecting a $400 million revolver borrowing. The company had $846.2 million of available capacity under its $1.25 billion credit facility and was in covenant compliance.
- Management expected to repay the $400 million borrowing within 12 months from operating cash flow. The credit facility matures in December 2012.
- CV Therapeutics was acquired for total consideration of $1,392.6 million. The acquisition added $951.2 million of marketed-product intangible assets, $180.1 million of acquired in-process R&D and $316.8 million of goodwill. Gilead also repurchased $468.2 million of its shares during the first half.
- Accounts receivable increased to $1,242.9 million. Receivables from Greece, Italy, Portugal and Spain were $638.7 million, including $196.2 million more than 120 days past due; management stated it believed the balances were collectible.
Outlook, commentary and risks
- The filing provides no numerical full-year revenue or earnings guidance. Management said it expected the revolver borrowing to be repaid within 12 months from operating cash flow.
- Restructuring following the acquisition generated $24.1 million of Q2 expense. Management estimated total costs of approximately $30 million for employee severance and $25 million for facilities-related activities, primarily by the end of 2009, with costs expected through 2010.
- Foreign exchange movements reduced Q2 revenue by approximately $50 million and pretax income by $18.4 million compared with Q2 2008. Management also cited lower investment yields and hedging effects.
- Gilead identified dependence on Truvada and Atripla: together, they represented 71% of Q2 revenue. It warned that wholesaler inventory changes could cause sales and earnings to diverge from prescription demand; it expected U.S. wholesalers might reduce inventory in the second half of 2009.
- Other material risks include Teva challenges to patents covering Truvada and Atripla, which could shorten U.S. patent protection from 2021 to 2017 if Gilead is unsuccessful; uncertain clinical and regulatory outcomes, including additional U.S. trials required for inhaled aztreonam; pricing and reimbursement pressure; foreign exchange exposure; and reliance on collaborators and single-source suppliers.
- The filing also describes a securities class action proceeding, which continued after the district court allowed an amended complaint. No amount was accrued for this case because the outcome could not be predicted.
- In July 2009, Gilead entered a collaboration with Tibotec to develop a Truvada/TMC278 fixed-dose combination. Gilead may pay up to approximately $100 million toward TMC278 development costs; future product revenue depends on development and approval.
Key facts for investors to verify
- Whether growth in Truvada and Atripla sales is sustained, and how wholesaler inventory changes affect reported sales.
- Whether product gross margin stabilizes as the product mix and acquired-intangible amortization evolve.
- Collection timing for overdue European receivables and the associated government reimbursement exposure.
- Integration progress, restructuring spending and the commercial contribution of Ranexa and Lexiscan after the CV Therapeutics acquisition.
- Developments in the Teva patent litigation, clinical pipeline and aztreonam regulatory path.
- Operating cash generation, repayment of the $400 million revolver borrowing and liquidity available after acquisition and repurchases.