Gilead Sciences, Inc. — Q2 2013 Form 10-Q
Business context and reporting period. Gilead is a research-based biopharmaceutical company focused principally on HIV, liver diseases, cardiovascular and respiratory conditions, and oncology/inflammation. This unaudited report covers the quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $2.767B | $2.405B | $5.299B | $4.688B |
| Product sales | $2.657B | $2.321B | $5.051B | $4.530B |
| Operating income | $1.154B | $1.059B | $2.179B | $1.859B |
| Net income attributable to Gilead | $772.6M | $711.6M | $1.495B | $1.154B |
| Diluted earnings per share | $0.46 | $0.46 | $0.89 | $0.74 |
| Operating cash flow | Not presented separately | Not presented separately | $1.625B | $1.744B |
Q2 revenue rose 15% year over year and Gilead-attributable net income rose 9%; for the first half, revenue grew 13% and attributable net income grew 30%. Product gross margin was 74% in both comparable periods. Q2 R&D increased 32% to $523.9M and SG&A increased 22% to $405.0M. First-half R&D rose 20% to $1.022B; SG&A was broadly flat at $779.3M.
Balance sheet and liquidity at June 30, 2013
- Cash, cash equivalents and marketable securities: $2.976B, up $393.7M from December 31, 2012. Working capital was $2.135B, up $249.1M.
- Total debt, net: $7.338B, down from $8.224B at year-end; current portion was $1.488B and long-term debt was $5.850B. Gilead reported compliance with applicable debt covenants.
- Total assets were $22.624B and total stockholders’ equity was $11.343B.
- First-half investing cash outflow was $462.7M, including $378.6M for the YM acquisition, net of cash acquired. Financing cash outflow was $756.6M.
Material changes and business developments
- Growth was led by antiviral products: Q2 antiviral sales rose 15% to $2.312B. Complera/Eviplera sales increased 159% to $188.7M, while Stribild contributed $99.4M. Letairis sales rose 26% and Ranexa 12%.
- Q2 royalty revenue increased 31% to $106.5M, primarily from higher Tamiflu royalties related to influenza treatment in the first quarter.
- Gilead acquired YM BioSciences in February for $487.6M. Preliminary purchase accounting included $362.7M of acquired in-process R&D and $127.2M of goodwill; accounting was expected to be finalized in the second half of 2013.
- The May 2013 convertible notes matured; Gilead also repaid or converted portions of its 2014 and 2016 convertible notes and repaid $150M on its revolving facility. The share repurchase program was suspended in February to focus on debt repayment.
Outlook, risks and contingencies
- Pipeline and outlook: Gilead had filed an FDA application for sofosbuvir, with priority review and a target FDA decision date of December 8, 2013; its EU application was under assessment. Management anticipated filing for approval of the sofosbuvir/ledipasvir combination for genotype 1 HCV in Q2 2014. Management expected SG&A to rise through the rest of 2013 as it prepared for an anticipated sofosbuvir launch. These outcomes and timelines were subject to regulatory and clinical risk.
- Regulatory/manufacturing: FDA complete response letters for elvitegravir and cobicistat cited documentation and validation deficiencies noted in an inspection; the agency did not raise safety concerns. Gilead was addressing the issues. The filing also describes manufacturing capacity and supplier dependence, including prior Cayston supply constraints.
- Patent and legal matters: Teva settlement terms allowed a generic Viread launch on December 15, 2017, subject to government review. Other generic patent cases remained pending. Roche asserted in arbitration an exclusive license claim to sofosbuvir, which Gilead disputed; adverse resolution could affect expected product revenue. The sofosbuvir-related Idenix patent interference was ongoing. A Department of Justice inquiry into manufacturing, quality and distribution practices remained open; the possible loss could not be estimated.
- Commercial and collection risks: Atripla and Truvada together represented 63% of Q2 revenue. Management warned that generic efavirenz competition could affect Atripla sales, with generic availability expected in Europe and Canada in late 2013 and the U.S. in 2014. Southern European receivables totaled about $891.2M, including $383.8M over 120 days past due and $135.4M over 365 days past due. Pricing pressure, reimbursement changes, foreign exchange, wholesaler inventory movements and customer concentration were also cited risks.
- Other notable items: Gilead expected to pay approximately $1.04B to settle warrants related to the May 2013 notes after their August 2013 expiration. The filing reports a 2013 estimated pharmaceutical excise tax of $100–$120M. No off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- Regulatory decisions, launch timing and commercial uptake for sofosbuvir, and progress of the sofosbuvir/ledipasvir program.
- Resolution and potential financial impact of Roche arbitration, the Idenix dispute, generic patent litigation and the DOJ inquiry.
- Collection trends for Southern European receivables and any resulting bad-debt expense.
- HIV product demand, generic competition, pricing/reimbursement pressure and inventory-related sales variability.
- Debt repayment, the expected warrant settlement, and whether cash generation remains sufficient to fund operations and pipeline investment.