Gilead Sciences, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013. Gilead is a research-based biopharmaceutical company focused principally on antiviral medicines, including treatments for HIV and hepatitis C. Results are unaudited.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $5.00 billion | $2.53 billion | +97% |
| Product sales | $4.87 billion | $2.39 billion | +104% |
| Operating income | $3.04 billion | $1.03 billion | +197% |
| Net income attributable to Gilead | $2.23 billion | $722.2 million | +208% |
| Diluted earnings per share | $1.33 | $0.43 | +209% |
| Operating cash flow | $1.57 billion | $672.1 million | +133% |
| Cash, cash equivalents and marketable securities | $6.86 billion | $2.57 billion at Dec. 31, 2013 | +167% |
| Total debt, net | $9.80 billion | $6.64 billion at Dec. 31, 2013 | +48% |
Product gross margin rose to 83% from 73%, mainly reflecting the product mix from Sovaldi, partly offset by amortization of the acquired sofosbuvir intangible asset. Operating margin was approximately 60.9% versus 40.5%; net margin attributable to Gilead was approximately 44.6% versus 28.5%. The effective tax rate was 24.6%, compared with 23.7%.
Research and development expense increased 20% to $595.0 million, mainly from clinical activity in oncology and HIV and related personnel and infrastructure. Selling, general and administrative expense increased 46% to $548.1 million, reflecting business expansion, Sovaldi launches and preparation for idelalisib.
Business drivers and changes versus prior period
- Sovaldi, approved in the United States in December 2013 and in Europe in January 2014, generated $2.27 billion in first-quarter sales, including $2.10 billion in the United States and $163.7 million in Europe. Gilead estimated approximately 30,000 U.S. patients had begun treatment since launch.
- Antiviral sales increased 119% to $4.51 billion. Stribild sales rose 134% to $215.3 million; Complera/Eviplera rose 69% to $250.7 million; and Truvada rose 8% to $759.7 million. Atripla declined 11% to $779.6 million, partly due to lower channel inventory and net selling price.
- U.S. product sales rose 159% to $3.63 billion; European sales rose 25% to $1.02 billion. Approximately 25% of product sales were outside the United States.
- Royalty, contract and other revenue declined 7% to $128.0 million, primarily reflecting seasonality in Tamiflu royalties.
- Operating cash flow increased, but cash conversion was affected by working-capital outflows, including a $1.12 billion increase in accounts receivable. Investing cash outflow was $160.9 million, mainly capital expenditure; financing cash inflow was $2.88 billion, largely from debt issuance.
Liquidity, debt and capital allocation
Working capital was $7.06 billion, up from $948.3 million at year-end, driven chiefly by cash raised from debt issuance and higher receivables. March 31 cash, equivalents and marketable securities included approximately $1.88 billion generated in foreign jurisdictions and intended for foreign operations. Management stated that existing resources and operating cash flows should meet capital needs for the foreseeable future.
In March, Gilead issued $4.00 billion of senior unsecured notes: $500 million due 2019 at 2.05%, $1.75 billion due 2024 at 3.70%, and $1.75 billion due 2044 at 4.80%. The company repaid the $600 million revolver balance. It repurchased $450.1 million of stock during the quarter. After quarter-end, the board authorized an additional $5.00 billion buyback, alongside approximately $2.90 billion remaining under the prior program.
May 2014 convertible notes matured on May 1, 2014. The filing said Gilead expected to settle related warrants during Q3 2014 and estimated a potential cash payment of approximately $2.85 billion to $3.15 billion based on the then-current share price.
Outlook, risks and unusual items
- No quantitative full-year revenue or earnings guidance is provided in the supplied filing text. Management cautioned that Sovaldi’s first full quarter may not predict future sales. Demand may be affected by coverage and reimbursement, pricing decisions, treatment timing ahead of LDV/SOF or competitor regimens, and country-by-country European access.
- Gilead submitted its ledipasvir/sofosbuvir application to the FDA; the filing reported an October 10, 2014 target review date and an EMA application under assessment. Idelalisib applications were under FDA review, with target dates of August 6 and September 11, 2014 for separate indications.
- Material intellectual-property and contract disputes concern sofosbuvir, including proceedings involving Roche, Idenix, Merck and AbbVie. Gilead disputes the claims; adverse outcomes could require licenses or royalties or impair commercialization. A decision in the Roche arbitration was expected by year-end 2014. The filing states potential losses could not be estimated.
- Other risks include generic challenges to established products, reimbursement and pricing pressure, concentration in antiviral products, product safety and regulatory approval, manufacturing and supplier disruptions, and foreign-exchange exposure.
- Three U.S. wholesalers accounted for 63% of total revenue: AmerisourceBergen 27%, McKesson 23%, and Cardinal Health 13%. Southern European receivables were approximately $602.8 million; $156.8 million were more than 120 days past due and $50.6 million more than 365 days past due. Management said its allowance was adequate but would continue monitoring collection risk.
- The Department of Justice declined to intervene in a False Claims Act suit brought by former employees; Gilead said it intended to move to dismiss. The company also disclosed FDA inspection observations involving quality testing and validation at its Foster City facility, and said remediation and regulatory review could affect product approvals or operations.
- On April 9, 2014, a court confirmed an arbitration award in Gilead’s favor in the Jeremy Clark dispute. On March 21, a Norwegian court invalidated Idenix’s relevant patent and upheld Gilead’s challenged patent; Idenix indicated it would appeal.
Most important facts for investors to verify
- Whether Sovaldi’s launch-quarter revenue can be sustained as reimbursement decisions, treatment patterns and competition evolve.
- How much of the reported earnings and margin expansion reflects Sovaldi mix versus recurring performance, including the effects of sofosbuvir amortization and other costs.
- Cash conversion and receivables collection, particularly the aged Southern European balances and the sharp increase in accounts receivable.
- Debt-service and potential warrant-settlement cash needs, alongside the company’s expanded share-repurchase authorization.
- Developments in sofosbuvir-related litigation, generic challenges, FDA remediation and pending product reviews, all of which could affect sales, costs or access to market.