Gilead Sciences, Inc. — Q1 2010 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended March 31, 2010, compared with the three months ended March 31, 2009. Gilead is a biopharmaceutical company focused on developing and commercializing therapies, with HIV products accounting for most product sales.
Financial performance and liquidity
| Metric | Q1 2010 | Q1 2009 / prior balance date | Change or context |
|---|---|---|---|
| Total revenue | $2.086 billion | $1.530 billion | Up 36% |
| Product sales | $1.788 billion | $1.448 billion | Up 24% |
| Royalty revenue | $293.7 million | $53.0 million | Up $240.6 million, largely from Tamiflu royalties |
| Operating income | $1.161 billion | $808.3 million | Operating margin was approximately 55.7%, versus 52.8% |
| Net income attributable to Gilead | $854.9 million | $589.1 million | Up 45%; diluted EPS was $0.92 versus $0.63 |
| Product gross margin | 75% | 77% | Lower mix-adjusted margin, primarily due to Atripla’s efavirenz component and acquired-product amortization |
| Operating cash flow | $670.6 million | $641.3 million | Up $29.2 million |
| Cash, cash equivalents and marketable securities | $4.620 billion | $3.905 billion at Dec. 31, 2009 | Up $715.1 million; cash and cash equivalents alone fell to $936.9 million |
| Working capital | $3.237 billion | $2.941 billion at Dec. 31, 2009 | Up $295.7 million |
| Convertible senior notes, net | $1.170 billion | $1.155 billion at Dec. 31, 2009 | Carrying value; fair value was $1.61 billion |
Investing activities used $1.069 billion, mainly reflecting net purchases of marketable securities; capital expenditures were $11.7 million. Financing activities provided $16.0 million, including employee stock-plan proceeds and offset by $162.5 million of share repurchases. The $1.25 billion revolving credit facility was substantially undrawn, with approximately $1.25 billion available at quarter-end; $4.5 million of letters of credit were outstanding. Gilead reported compliance with facility covenants.
Material changes and operating drivers
- Atripla sales rose 36% to $692.9 million and Truvada rose 11% to $657.8 million, driven mainly by volume growth in the United States and Europe. Together, Atripla and Truvada represented about 65% of total revenue.
- Antiviral product sales increased 19% to $1.597 billion. Letairis sales rose 40% to $55.5 million; Ranexa contributed $51.2 million following the 2009 CV Therapeutics acquisition. Hepsera sales fell 20% to $58.1 million.
- Tamiflu royalties from Roche were $246.3 million, compared with $33.2 million a year earlier, reflecting influenza-pandemic planning initiatives. Management cautioned that Tamiflu royalties are variable and depend on partner sales.
- R&D expense increased 16% to $218.7 million; SG&A increased 30% to $265.6 million, reflecting higher headcount and commercial activity, as well as restructuring-related facilities costs.
- Accounts receivable rose $101.8 million and inventory increased $172.2 million from year-end. The company attributed the inventory increase primarily to efavirenz purchases for its BMS joint ventures.
Outlook, commentary, risks and unusual items
- Healthcare reform: Gilead estimated a $29.4 million reduction in Q1 product sales and approximately $200 million less U.S. product sales for 2010. It expected most of the 2010 impact in Q3 and Q4; the 2011 product-sales impact, excluding the new industry fee, was estimated to be similar as a proportion of U.S. sales. The company said implementation details and the fee calculation remained uncertain.
- Pipeline: Gilead reported initiation of a Phase 3 study of its elvitegravir/cobicistat/Truvada single-tablet regimen and planned another Phase 3 cobicistat study. It reported terminating the Phase 2b GS 9450 hepatitis C trial after liver-toxicity laboratory abnormalities; future development was under review. Cayston received U.S. marketing approval in February 2010.
- Restructuring: Q1 included $12.6 million of SG&A and $2.1 million of R&D restructuring expense, primarily lease termination costs. Gilead expected a further $3.0 million of restructuring expense in 2010.
- Legal and regulatory matters: Gilead agreed to an $8.25 million proposed settlement of a securities class action, subject to court approval; insurers were to pay the settlement. The company was cooperating with an HHS Inspector General inquiry concerning Ranexa and had accrued no amount for its outcome. Teva challenged patents relating to Truvada, Atripla and Viread; outcomes could affect U.S. patent protection.
- Collections and investment liquidity: Receivables in Greece, Italy, Portugal and Spain totaled $806.7 million, including $310.3 million more than 120 days past due. Gilead considered the balances collectible but identified government reimbursement delays as a credit risk. Auction-rate securities remained illiquid; the filing reported $105.6 million of Level 3 securities and said the company did not expect the illiquidity to materially affect cash needs.
- Business concentration and other risks: HIV products remain central to revenue, while Tamiflu royalties contributed a material, potentially fluctuating amount. Other disclosed risks include pricing and reimbursement pressure, product safety and clinical-trial uncertainty, foreign exchange exposure, manufacturing and single-supplier reliance, and generic competition.
- Capital returns: The board authorized a $1.0 billion repurchase program in January. Gilead repurchased $162.5 million of shares in Q1 and completed the remaining $837.5 million in May 2010, after quarter-end.
Important facts for investors to verify
- How much of revenue and profit growth was recurring product demand versus the unusually high, pandemic-related Tamiflu royalty contribution?
- Whether the estimated $200 million 2010 U.S. product-sales impact from healthcare reform, and the expected 2011 impact, materialized as described.
- Collection trends for the $806.7 million of receivables in Greece, Italy, Portugal and Spain, especially the $310.3 million more than 120 days past due.
- Developments in Teva’s patent challenges and their potential implications for Truvada, Atripla and Viread.
- Clinical and regulatory progress in the HIV pipeline, and the review of GS 9450 following reported liver-toxicity abnormalities.
- The effect of completed May 2010 repurchases on cash, share count and capital allocation; and the court’s decision on the proposed securities settlement.