Gilead Sciences, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. Gilead is a biopharmaceutical company focused on developing and commercializing therapeutics, with HIV products as its largest business. This filing covers the quarter and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods unless noted. Dollar amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $2.137B | $1.927B | $4.063B | $4.013B |
| Product sales | $2.040B | $1.806B | $3.903B | $3.594B |
| Operating income | $1.017B | $993M | $1.919B | $2.154B |
| Net income attributable to Gilead | $746M | $712M | $1.397B | $1.567B |
| Diluted EPS | $0.93 | $0.79 | $1.73 | $1.71 |
| Operating cash flow | — | $1.764B | $1.370B |
- Q2 revenue rose 11%; product sales increased 13%. Atripla sales grew 15% to $822M and Truvada grew 11% to $711M. Management cited market-demand growth in the U.S. and Europe.
- Q2 operating income increased about 2%, while Gilead-attributable net income rose about 5%. Lower income-tax expense supported net income; the effective tax rate was 24.4%, versus 28.6% a year earlier.
- For the first half, revenue rose about 1%, but operating income and attributable net income each declined about 11%. Royalty revenue fell 63% to $153M, primarily because Tamiflu royalties declined after pandemic-related orders were fulfilled.
- Q2 product gross margin was 74%, versus 75%; management attributed the decline mainly to U.S. healthcare reform and European pricing pressure. Calculated operating margin was approximately 47.6%, versus 51.5% in Q2 2010.
- Cash, cash equivalents and marketable securities totaled $5.499B at June 30, up $181M from year-end; working capital was $3.908B, up $665M. Six-month operating cash flow increased to $1.764B from $1.370B.
- Debt carrying value was $3.871B, compared with $3.478B at year-end. Gilead issued $1.0B of 4.50% senior notes due 2021 and repaid $650M of convertible notes due in May. Its $1.25B revolving credit facility had approximately $1.25B available; the company reported covenant compliance.
Material changes and management commentary
- R&D expense increased 22% in Q2 to $282M, and selling, general and administrative expense increased 23% to $304M. Management cited higher staffing, clinical-study and professional-service costs, business growth, and the pharmaceutical excise tax.
- Management estimated the 2011 pharmaceutical excise tax at approximately $50M, recorded in SG&A. Healthcare reform also increased rebate and discount obligations and affected product gross margin.
- Gilead acquired Arresto in January and Calistoga in April 2011. The acquisitions used $589M of cash in aggregate; acquired pipeline assets included GS 6224 and CAL-101. Their post-acquisition operating results were not significant in the period.
- The company reported $1.27B of share repurchases in the first half, retiring 31.8M shares at an average $39.95. About $707M remained under the existing $5B authorization; a further $5B authorization was approved for use after the existing program is completed.
- Management stated that existing funds, operating cash generation and financing access should meet capital needs for the foreseeable future. The filing provides no specific revenue or earnings guidance.
Outlook, risks and contingencies
- Product and market concentration: Atripla and Truvada represented 72% of Q2 revenue. Their sales face risks from changing treatment standards, competition, generic entry, reimbursement constraints and pricing pressure. The filing also identifies wholesaler and government-program purchasing variability.
- European collections: Receivables from Greece, Italy, Portugal and Spain totaled approximately $1.12B; $547.9M was more than 120 days past due. Gilead cited sovereign funding and reimbursement delays. Greek receivables were partly settled in zero-coupon bonds that trade at a discount.
- Regulatory and manufacturing: A June 2011 subpoena from the U.S. Attorney’s Office sought documents concerning manufacturing, quality and distribution practices for several marketed and investigational products. Gilead said it was cooperating and could not predict the outcome. The filing also discusses an FDA Warning Letter concerning the San Dimas facility; Gilead believed it had addressed the concerns but was awaiting FDA confirmation.
- Patent litigation: Generic-drug challenges involve patents associated with Truvada, Atripla, Viread, Ranexa, Hepsera and Tamiflu. Adverse outcomes could shorten patent protection and permit earlier generic competition; outcomes were uncertain.
- Development risk: Gilead disclosed termination of Phase 3 studies of ambrisentan for idiopathic pulmonary fibrosis and Cayston for cystic fibrosis patients with Burkholderia. The Truvada/TMC278 single-tablet regimen had been re-filed after an FDA refuse-to-file notification.
- Other exposures: Foreign-exchange movements and hedging costs affected earnings; auction-rate securities and Greek bonds were illiquid. The company reported no off-balance-sheet arrangements and did not expect these illiquid holdings to materially affect near-term cash requirements.
Important facts for investors to verify
- Whether core HIV-product demand and pricing can sustain growth given the company’s dependence on Atripla and Truvada.
- Collections, aging and subsequent settlement of the large overdue Southern European receivables balance.
- Developments and potential consequences of the federal subpoena and the FDA’s review of San Dimas corrective actions.
- Progress and rulings in generic patent challenges, and the commercial outlook for the development pipeline.
- Effects of higher operating expenses, excise-tax and rebate obligations, and falling Tamiflu royalties on margins and earnings.