Gilead Sciences, Inc. — Q3 2009 Form 10-Q
Business context and reporting period
Gilead is a biopharmaceutical company focused on developing and commercializing therapies, led by HIV and hepatitis products. This unaudited filing covers the quarter and nine months ended September 30, 2009; comparisons are with the same 2008 periods. Amounts below are U.S. dollars, rounded to millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2009 | Q3 2008 | Change |
|---|---|---|---|
| Total revenue | $1,801.4 | $1,371.3 | +31% |
| Product sales | $1,649.0 | $1,338.5 | +23% |
| Operating income | $894.4 | $693.8 | +29% |
| Net income attributable to Gilead | $673.0 | $495.9 | +36% |
| Diluted EPS | $0.72 | $0.52 | +38% |
For the nine months, revenue was $4,979.0 million (up 27%), operating income $2,463.8 million (up 25%), and net income attributable to Gilead $1,833.5 million (up 29%); diluted EPS was $1.96 versus $1.47. Q3 product gross margin was 75%, down from 78%; nine-month product gross margin was 76%, versus 78%. The filing attributes the reduction principally to Atripla’s efavirenz component, recorded at zero gross margin, and amortization of acquired CV Therapeutics product intangibles.
For the first nine months, operating cash flow was $2,124.8 million, compared with $1,565.1 million. Investing cash outflow was $1,818.2 million, including the CV Therapeutics acquisition and capital spending; financing cash outflow was $727.4 million, including share repurchases and repayment of assumed notes. Cash and cash equivalents were $1,024.6 million at quarter-end. Cash, cash equivalents and marketable securities totaled $3,292.1 million, up $52.5 million from year-end 2008; working capital was $2,408.4 million, down $649.1 million.
At September 30, 2009, total assets were $8,937.0 million and stockholders’ equity was $5,752.2 million. Convertible senior notes, net, were $1,140.9 million. Gilead had borrowed $400 million under its revolving credit facility to help fund the acquisition and repaid $200 million; approximately $1.05 billion remained available. Management expected to repay the remaining $200 million in Q4 2009 from operating cash flow. The notes’ disclosed fair value was $1.67 billion.
Material changes and business developments
- Growth was led by antiviral products: Q3 Truvada sales rose 13% to $620.6 million and Atripla rose 42% to $605.3 million. Nine-month sales increased 18% and 52%, respectively. Hepsera sales declined 26% in Q3.
- Q3 royalty revenue rose to $142.1 million from $25.2 million, mainly because Tamiflu royalties from Roche were $113.5 million versus $8.6 million a year earlier, reflecting pandemic-planning demand. Nine-month royalties were $269.1 million, including $198.6 million from Tamiflu.
- On April 15, Gilead acquired CV Therapeutics for total consideration of $1,392.6 million. The acquisition added Ranexa and Lexiscan, as well as development programs; the acquired company’s post-acquisition operating results were not significant. Gilead recorded $951.2 million of marketed-product intangibles, $180.1 million of in-process R&D and $316.8 million of goodwill.
- Operating expenses rose: Q3 R&D increased 43% to $269.9 million, including $52.4 million of reimbursable TMC278 collaboration costs; SG&A increased 20% to $227.4 million. Foreign currency movements reduced Q3 revenue by about $51 million and pretax income by about $22.1 million versus Q3 2008.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management discusses expected commercialization and pipeline activity, but outcomes depend on clinical and regulatory progress.
- Gilead expects approximately $62 million of CV Therapeutics-related restructuring costs—$34 million for severance, $22 million for facilities and $6 million for relocation—primarily by the end of 2009, with costs expected through 2010. It recorded $32.5 million of restructuring expense in the first nine months.
- Aztreonam for inhalation (Cayston) received conditional marketing authorizations in the EU and Canada, while U.S. review remained uncertain: the FDA had requested another Phase 3 study and an advisory committee review was scheduled for December 2009. Darusentan’s Phase 3 results and development also remained material pipeline uncertainties.
- Key risks include reliance on Truvada and Atripla (68% of Q3 revenue together), volatility in Tamiflu royalties, pricing and reimbursement pressure, foreign-exchange exposure, product safety and regulatory risks, and dependence on partners and single-source suppliers.
- Trade receivables in Greece, Italy, Portugal and Spain totaled $723.8 million, including $247.4 million more than 120 days past due. Management said it believed the balances were collectible, but delays and government reimbursement practices create credit risk.
- Teva challenged patents covering emtricitabine in proposed generic versions of Truvada and Atripla. If Gilead is unsuccessful, U.S. patent protection could be shortened from 2021 to 2017. A separate securities class action continued; the court allowed claims against Gilead and certain individuals to proceed. Gilead also received a government subpoena concerning Ranexa; no amounts were accrued for either matter because outcomes could not be predicted.
- Auction-rate securities remained illiquid, with $103.4 million of student-loan-backed securities in unrealized loss positions. Gilead reported no other-than-temporary impairment and said it expected to hold them until recovery. Management also reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether growth in Truvada and Atripla reflects durable end-user demand, rather than distribution-channel inventory movements, and how product mix affects gross margin.
- The collectability and aging of European government-related receivables, particularly the $247.4 million over 120 days past due.
- Progress and financial contribution from the CV Therapeutics acquisition, including Ranexa, Lexiscan, acquired intangibles and remaining restructuring costs.
- Outcomes and timing of the Teva patent litigation, the securities litigation and the Ranexa government inquiry.
- Regulatory and clinical milestones for Cayston, darusentan and other pipeline programs, and the variability of Tamiflu royalty income.