Gilead Sciences, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. Gilead is a global biopharmaceutical company focused on viral diseases, inflammatory and fibrotic diseases, and oncology.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $22.449 billion | $22.127 billion | +1% |
| Product sales | $22.119 billion | $21.677 billion | +2% |
| Income from operations | $4.287 billion | $8.200 billion | -48% |
| Net income attributable to Gilead | $5.386 billion | $5.455 billion | -1% |
| Diluted EPS | $4.22 | $4.17 | +1% |
| Product gross margin | 79% | 78% | +1 percentage point |
| Operating cash flow | $9.144 billion | $8.400 billion | +$744 million |
- HIV sales rose 12% to $16.438 billion, led by Biktarvy, whose sales reached $4.738 billion. HIV products accounted for approximately 74% of product sales.
- HCV sales fell 20% to $2.936 billion, reflecting lower prices and, in Europe, fewer patient starts. Sales of Ranexa and Letairis declined following generic entry; Yescarta sales increased 73% to $456 million.
- R&D expense rose 81% to $9.106 billion, including $3.9 billion of upfront collaboration and licensing expense for Galapagos. SG&A increased 8% to $4.381 billion. Cost of goods sold declined 4% to $4.675 billion.
- Other income was $1.868 billion, including approximately $1.2 billion in net unrealized gains on equity securities, largely related to Galapagos. A $1.2 billion deferred tax benefit from intangible-asset transfers contributed to a reported income tax benefit of $204 million and a negative 4.0% effective tax rate.
Liquidity, debt and capital returns
- Cash, cash equivalents and marketable debt securities totaled $25.840 billion at year-end, down from $31.512 billion. Working capital was $20.537 billion; current assets were $30.296 billion and current liabilities were $9.759 billion.
- Debt, including current maturities, was $24.593 billion net carrying value. Cash and marketable debt securities exceeded that carrying amount by about $1.247 billion. Gilead repaid $2.8 billion of debt during 2019 and had no borrowings on its $2.5 billion revolving credit facility.
- Cash uses included $5.6 billion for Galapagos collaboration and equity investments, $3.2 billion in dividends and $1.7 billion in share repurchases. The 2019 dividend was $2.52 per share; in February 2020, the quarterly dividend was raised to $0.68 per share. A new $5.0 billion repurchase authorization was approved for use after the existing program is completed.
Material changes and unusual items
- Revenue growth was modest and increasingly dependent on HIV: HIV sales grew while HCV, older HIV regimens and certain other products faced falling prices, volume declines or generic competition.
- Operating income fell substantially, principally reflecting sharply higher R&D expense, including the Galapagos upfront charge. Net income was nearly flat because favorable tax effects and investment gains offset much of the operating decline.
- Gilead recorded an $800 million impairment of acquired in-process R&D assets in 2019, primarily associated with axicabtagene ciloleucel development for indolent non-Hodgkin lymphoma. Inventory write-downs totaled $649 million, including $547 million related primarily to lower long-term HCV demand.
- Fourth-quarter revenue was $5.879 billion and net income attributable to Gilead was $2.696 billion, or $2.12 diluted EPS. The quarter included a $1.2 billion favorable tax effect and $929 million of pretax net equity-security gains, partly offset by an $800 million impairment and $500 million of inventory write-downs. The third quarter recorded a $1.165 billion attributable net loss, including the $3.92 billion Galapagos collaboration expense.
Outlook, commentary and principal risks
- Management’s strategy targets 10 or more transformative therapies by 2030. For 2020, it expected underlying growth in the base business to offset the full-year impact of cardiopulmonary product loss of exclusivity and the anticipated late-2020 U.S. launch of generic Truvada. The filing provides no specific numerical revenue or earnings guidance.
- Planned investment included Biktarvy growth, the Descovy-for-PrEP launch, potential filgotinib launches pending approval, cell therapy, pipeline programs and external partnerships. Management highlighted clinical readouts expected in 2020; outcomes and regulatory approvals remain uncertain.
- Gilead’s dependence on HIV products, payer pricing and reimbursement pressure, generic competition, unpredictable wholesaler purchasing, clinical-trial failure, manufacturing and supply-chain disruption, foreign-exchange exposure, and regulatory or healthcare-policy changes are key business risks.
- A jury found willful infringement of a patent related to Yescarta and awarded $585 million upfront plus a 27.6% royalty through the verdict date. Gilead disputed the verdict, recorded no material accrual because it did not consider a material loss probable, and estimated a possible loss of up to approximately $1.6 billion through year-end 2019 if the verdict were upheld in full, excluding certain additional amounts. Biktarvy patent litigation was also pending, with trial scheduled for September 2020.
- Potential U.S. generic competition for Truvada, litigation outcomes, and the commercial and clinical performance of the pipeline could materially affect results. The filing also describes ongoing product-liability, patent, antitrust and government-investigation matters.
Important facts for investors to verify
- Whether Biktarvy and the broader HIV franchise can sustain growth amid pricing pressure and the expected generic Truvada launch.
- The status and potential financial exposure of the Yescarta verdict and Biktarvy patent litigation, including any subsequent rulings or appeals.
- Whether Galapagos-related programs and other R&D investments produce clinical progress, approvals and commercial returns sufficient to justify the associated spending.
- The assumptions underlying the $1.2 billion deferred tax benefit, the fair value of Galapagos and other equity investments, and future impairment or inventory-write-down risk.
- Debt maturities, capital returns and liquidity after collaboration spending, dividends, repurchases and other potential legal or strategic commitments.