Gilead Sciences, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; filed August 9, 2010. Gilead is a biopharmaceutical company focused on developing and commercializing therapeutics, with one reported business segment. Financial amounts below are in millions of U.S. dollars unless otherwise noted.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $1,927.2 | $1,647.2 | $4,013.1 | $3,177.6 |
| Product sales | $1,806.1 | $1,568.4 | $3,594.1 | $3,016.0 |
| Operating income | $992.6 | $761.1 | $2,153.8 | $1,569.4 |
| Net income attributable to Gilead | $712.1 | $571.4 | $1,567.0 | $1,160.5 |
| Diluted EPS attributable to Gilead | $0.79 | $0.61 | $1.71 | $1.24 |
| Cash from operating activities | Not presented by quarter | Not presented by quarter | $1,369.6 | $1,264.2 |
Q2 revenue grew 17%, product sales 15%, operating income 30%, and Gilead-attributable net income 25% year over year. Six-month revenue rose 26% and attributable net income 35%. Product gross margin was 75% in both Q2 and the first half, versus 76% in the comparable 2009 periods. Management attributed the decline primarily to Atripla’s efavirenz component, which is recorded at zero product gross margin; first-half margin was also affected by acquired-intangible amortization.
Revenue drivers and material changes
- Antiviral products generated $1,591.7 million of Q2 sales, up 13%. Atripla sales rose 26% to $715.8 million, while Truvada rose 6% to $641.7 million. Together Atripla and Truvada represented about 70% of total Q2 revenue.
- Letairis sales increased 37% to $60.3 million; Ranexa sales increased 68% to $60.5 million. Cayston contributed $10.5 million in its first full quarter of sales.
- Q2 royalty revenue increased 59% to $117.8 million, mainly from Tamiflu pandemic-planning sales. Management said Tamiflu royalties fell sharply from Q1 and expected approximately $35 million in Q3 2010.
- Foreign exchange reduced Q2 revenue by $16.3 million and pretax earnings by $19.5 million versus Q2 2009. European currency weakness, discount requirements and cost-containment measures weighed on sales.
- Q2 R&D expense fell 4% and SG&A fell 5% year over year, partly because of prior-year CV Therapeutics restructuring and acquisition costs. For the six-month period, R&D increased 4% and SG&A increased 10%.
Cash, liquidity and debt
- Cash, cash equivalents and marketable securities totaled $4,217.5 million at June 30, up $312.7 million from year-end 2009. Working capital was $2,603.3 million, down $337.6 million; the reported current ratio was approximately 1.84, calculated from the balance sheet.
- Six-month operating cash flow was $1,369.6 million. Investing activities used $135.8 million; financing activities used $1,149.5 million, primarily reflecting $1,854.1 million of share repurchases.
- Gilead borrowed $500 million under its $1.25 billion revolving credit facility in May to fund repurchases. Approximately $745.5 million remained available at June 30; the company said it expected to repay the borrowing by year-end using proceeds from July convertible-note issuance.
- The filing reports convertible senior notes due 2011 and 2013 and a June 30 carrying value of $1.19 billion in its fair-value note. The balance-sheet presentation includes $562.6 million of long-term convertible senior notes and $1,124.2 million of current other long-term obligations; the excerpt does not clearly reconcile these presentation amounts to the disclosed note carrying value.
- After quarter-end, Gilead issued $2.50 billion of convertible notes due 2014 and 2016, with 1.00% and 1.625% coupons, respectively. It purchased note hedges and sold warrants for a net cost of $207.2 million. Proceeds were intended for at least $1 billion of repurchases, debt repayment and further repurchases.
Outlook, risks and unusual items
- Management estimated U.S. healthcare reform would reduce 2010 U.S. net product sales by approximately $200 million, with most impact expected in the second half. For 2011, it expected a similar sales impact as a percentage of U.S. net sales, excluding the pharmaceutical excise tax, which it estimated at less than $50 million. The estimates depend on implementation details and payer mix.
- Gilead announced a Durham, North Carolina closure and consolidation of liver-disease research in Foster City, expected by December 2010, with approximately $24.3 million of total restructuring costs. It also expected a further $1.6 million of second-half costs for the CV Therapeutics restructuring plan.
- In July, Gilead completed its acquisition of CGI Pharmaceuticals for up to $120 million in cash, including clinical-development milestones. Purchase accounting values were not yet available.
- Key business developments included initiation of Phase 3 studies for a single-tablet HIV regimen containing elvitegravir, cobicistat and Truvada; continued development of a Truvada/TMC278 combination; and progress on Cayston clinical testing. Clinical outcomes and regulatory approvals remain uncertain.
- Material risks include reliance on HIV products, particularly Atripla and Truvada; falling Tamiflu royalties; healthcare reimbursement and European pricing pressure; foreign-exchange exposure; product safety and clinical-development risks; manufacturing and single-source supply dependencies; and generic-entry and patent litigation involving Truvada, Atripla, Viread and Ranexa.
- Teva patent litigation over generic versions of Truvada, Atripla and Viread remained ongoing; Gilead also sued Lupin over Ranexa patents. A proposed $8.25 million securities-litigation settlement was preliminarily approved and was to be considered for final approval in November 2010; insurance was expected to cover the payment. A government inquiry concerning Ranexa was ongoing, with no related accrual recorded.
- Gilead disclosed $806.8 million of receivables from Greece, Italy, Portugal and Spain, including $343.7 million more than 120 days past due. Greek public-hospital receivables included $102.9 million; settlement terms remained unresolved.
- A 2010 FDA inspection of the San Dimas facility raised observations concerning AmBisome aseptic processing, warehousing, batch sampling and quality-report timing. Gilead said it had addressed the concerns; the FDA might issue a Warning Letter, which could affect export or regulatory approvals.
Most important facts for investors to verify
- Whether Atripla and Truvada growth can continue, and the related concentration of revenue in HIV products.
- The timing and magnitude of Tamiflu royalty declines and the realized effects of healthcare reform, especially in the second half of 2010.
- European receivable collections, discounting and currency exposure, including the proposed Greek settlement.
- Patent-litigation outcomes and any resulting changes to generic-entry timing for key products.
- The effect of July’s $2.5 billion note issuance, related hedges and warrants, planned debt repayment and continued share repurchases on leverage and per-share results.
- Potential FDA action following the San Dimas inspection, and the status of critical single-source manufacturing and supply arrangements.