Gilead Sciences, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 5, 2020. Gilead is a research-based biopharmaceutical company focused on viral, inflammatory and fibrotic diseases and oncology, with one operating segment. Dollar amounts below are U.S. dollars.
Financial performance
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $5.548 billion | $5.281 billion; up 5% |
| Product sales | $5.467 billion | $5.200 billion; up 5% |
| Operating income | $2.402 billion | $2.237 billion |
| Net income attributable to Gilead | $1.551 billion; diluted EPS $1.22 | $1.975 billion; diluted EPS $1.54 |
| Operating cash flow | $1.436 billion | $1.577 billion |
| Cash, cash equivalents and marketable debt securities | $24.314 billion at March 31 | $25.840 billion at December 31, 2019 |
| Working capital | $18.071 billion at March 31 | $20.537 billion at December 31, 2019 |
| Total debt, net carrying amount | $24.097 billion | $24.593 billion at December 31, 2019 |
Net income fell despite higher operating income, primarily because other income/expense shifted to a $158 million expense from $367 million of income. The filing attributes $480 million of unfavorable year-over-year changes in equity investment fair values, including Galapagos, to this movement. The effective tax rate was 23.2%, versus 16.3%, in part because the prior-year quarter included a $119 million tax benefit from tax settlements.
HIV sales rose 14% to $4.134 billion, led by Biktarvy, whose sales more than doubled to $1.693 billion. HCV sales declined 8% to $729 million; Yescarta sales increased 46% to $140 million. Ranexa and Letairis sales declined following generic competition.
Cash, debt and capital allocation
Cash and cash equivalents were $10.051 billion; short- and long-term marketable securities were $10.734 billion and $3.529 billion, respectively. Current liabilities were $8.879 billion. Gilead generated $1.436 billion of operating cash, used $344 million in investing activities and used $2.611 billion in financing activities. Financing included $1.328 billion of share repurchases, $874 million of dividends and $500 million of debt repayments. The company reported no borrowings under its $2.5 billion revolving credit facility and no covenant violations.
Material changes, outlook and unusual items
- COVID-19 did not materially affect Q1 results, but increased customer buying and prescription patterns added about $200 million to HIV sales, which management expected to reverse in subsequent quarters. Reduced access to care could depress HIV, HIV PrEP, HCV and cell-therapy demand; management said the duration and scale of the effect remained uncertain.
- Remdesivir development and manufacturing scale-up added about $50 million to Q1 R&D costs. Gilead said its 2020 investment could reach $1 billion or more, depending on clinical and regulatory outcomes. On May 1, 2020, after quarter-end, the FDA granted remdesivir emergency use authorization for certain hospitalized patients; the drug was not fully FDA-approved at filing.
- Gilead acquired Forty Seven on April 7 for approximately $4.9 billion in cash. It expected to expense substantially all of the purchase price as acquired in-process R&D in Q2 2020.
- Management considered existing capital resources and operating cash flows adequate for foreseeable capital needs, but did not provide a quantified revenue or earnings forecast in this filing. It said the pandemic made a fuller near-term outlook premature.
- In the Yescarta patent case, a post-quarter April court judgment affirmed infringement, enhanced past damages by 50% and maintained a 27.6% future-sales royalty. Gilead estimated potential loss through Q1 at about $1.2 billion if the judgment is upheld, but said a material loss was not probable and recorded no material accrual; it planned to appeal.
- Other material legal and commercial risks include litigation concerning HIV PrEP patents, Biktarvy and generic TAF products; ongoing investigations; generic competition; reliance on HIV products, which were 76% of product sales; and concentrated U.S. wholesaler sales. Three wholesalers each represented at least 10% of total revenue.
Most important facts for investors to verify
- Whether the approximately $200 million COVID-related Q1 HIV sales uplift reverses, and how patient access and prescription trends affect later quarters.
- Remdesivir trial, regulatory, production and distribution developments, and the resulting investment, expense and potential recovery of costs.
- The appeal outcome and potential financial exposure in the Yescarta litigation, alongside developments in Biktarvy and PrEP patent cases.
- Whether Biktarvy growth and other HIV products offset declines from generic entry, product mix shifts and pricing pressure.
- Post-acquisition cash, debt and earnings effects of Forty Seven, including the expected Q2 R&D charge.