Gilead Sciences, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Financial amounts are in U.S. dollars; unless noted, amounts below are in millions.
Business context and reporting period
Gilead is a biopharmaceutical company focused on HIV, viral hepatitis, COVID-19 and cancer treatments. Results are compared with the same periods in 2022. HIV products generated approximately 68% of product sales in the first half of 2023.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Total revenue | $6,599 | $6,260 | $12,951 | $12,850 |
| Operating income | $1,665 | $2,029 | $3,370 | $2,226 |
| Net income attributable to Gilead | $1,045 | $1,144 | $2,055 | $1,163 |
| Diluted EPS | $0.83 | $0.91 | $1.63 | $0.92 |
| Operating cash flow | Not separately presented for the quarter | $4,082 | $3,642 |
- Q2 revenue rose 5%; first-half revenue rose 1%. Q2 net income attributable to Gilead and diluted EPS fell 9%; first-half net income and diluted EPS increased 77%, largely because the prior-year period included a $2.7 billion IPR&D impairment.
- Product gross margin was 78.0% in Q2 and 77.9% in the first half, versus 76.5% and 77.4%, respectively, in 2022.
- First-half investing cash outflow was $1,309 and financing cash outflow was $2,507. Financing included $1,913 of dividends and $550 of share repurchases.
- At June 30, cash and cash equivalents were $5,704; marketable debt securities were $2,297; total cash, cash equivalents and marketable debt securities were approximately $8.0 billion. Current assets were $14,287 and current liabilities $13,964.
- Total debt, including the future-royalties liability, was $25,246; $4,037 was classified as current. Senior unsecured notes had a carrying value of $24,096. No amounts were drawn on the $2.5 billion revolving credit facility, and Gilead reported compliance with debt covenants.
Material changes versus prior comparable periods
- HIV sales increased 9% in Q2 and 11% in the first half, led by Biktarvy and Descovy for PrEP.
- Oncology sales increased 38% in Q2 and 48% in the first half. Cell therapy sales grew with Yescarta and Tecartus demand; Trodelvy sales rose 63% and 58%, respectively, reflecting expanded use and adoption.
- Veklury sales fell 43% in Q2 and 58% in the first half as COVID-19 hospitalizations and demand declined. Management noted future Veklury sales remain dependent on infection and hospitalization trends, vaccination and alternative treatments.
- R&D expense increased 28% in Q2 and 25% in the first half, primarily due to oncology clinical activity. SG&A increased 36% and 30%, including a $525 million HIV antitrust litigation accrual and higher commercial activity.
- First-half acquired IPR&D expense was $717, primarily related to XinThera, Tmunity and the Arcellx collaboration. The comparable 2022 first half included the $2.7 billion impairment charge, which did not recur.
- Q2 other income was $152, compared with expense of $284 in Q2 2022, reflecting equity investment gains versus losses and higher interest income. The first-half effective tax rate rose to 29.9% from 15.1%, partly reflecting nondeductible acquisition-related IPR&D and the prior-year impairment’s tax effect.
Outlook, management commentary, risks and unusual items
- The supplied filing text does not provide a clear quantified full-year revenue or earnings guidance figure. Management cautions that interim results are not necessarily indicative of full-year results.
- Gilead acquired XinThera for approximately $200 million net of cash acquired, with potential development and regulatory milestone payments of up to approximately $760 million. Tmunity was acquired for approximately $300 million, with potential future payments of up to approximately $1.0 billion plus royalties. The Arcellx collaboration included a $212 million upfront charge and potential milestone payments of up to $835 million.
- The company recorded a $525 million accrual for HIV antitrust settlements, agreed to pay in the second half of 2023. A jury returned a verdict for Gilead on Phase I claims; Phase II claims remain unresolved. The settlement is not an admission of liability and is subject to stated conditions.
- Other material legal exposures include product-liability cases involving more than 25,000 active plaintiffs and patent disputes. Gilead states outcomes are uncertain and that it generally cannot estimate potential losses; no other material accruals for the described matters were recorded.
- Gilead reported that the Phase 3 ENHANCE study of magrolimab in higher-risk MDS was discontinued for futility. Trodelvy received European Commission approval for a specified breast-cancer indication; Hepcludex received full EC marketing authorization for chronic HDV in adults with compensated liver disease.
- Key risks include dependence on HIV products, competition and generic entry, drug pricing and reimbursement pressure, clinical-trial and regulatory uncertainty, manufacturing and supply constraints, foreign-exchange exposure, litigation, and uncertainty in Veklury demand. The Inflation Reduction Act may increase rebates and constrain pricing, though its full impact remains uncertain.
- Disclosure controls were assessed as effective at June 30, 2023. Gilead anticipated beginning a phased ERP implementation in August 2023 and noted related control changes may follow.
Important facts for investors to verify
- Whether growth in HIV and oncology sales can offset continued Veklury declines and any pricing, competition or generic-related erosion.
- The timing and cash impact of the $525 million HIV antitrust settlement, the status of Phase II claims, and developments in product-liability and patent litigation.
- Whether rising R&D, commercial and acquisition-related costs translate into pipeline progress and sustainable earnings growth.
- Debt maturities and liquidity: $4,037 of debt and other obligations was classified as current, while cash and marketable debt securities totaled approximately $8.0 billion.
- The outcomes and potential obligations associated with the XinThera, Tmunity and Arcellx arrangements, and the execution risks of the planned ERP implementation.