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GILD > SEC Filings for GILD > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for GILEAD SCIENCES INC


8-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933, as amended (the Securities Act), and the Securities Exchange Act of 1934, as amended (the Exchange Act). The forward-looking statements are contained principally in this section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors." Words such as "expect," "anticipate," "target," "goal," "project," "hope," "intend," "plan," "believe," "seek," "estimate," "continue," "may," "could," "should," "might," variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements other than statements of historical fact are forward-looking statements, including statements regarding overall trends, operating cost and revenue trends, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions. We have based these forward-looking statements on our current expectations about future events. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Our actual results may differ materially from those suggested by these forward-looking statements for various reasons, including those identified below under "Risk Factors." Given these risks and uncertainties, you are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements included in this report are made only as of the date hereof. Except as required under federal securities laws and the rules and regulations of the Securities and Exchange Commission (SEC), we do not undertake, and specifically decline, any obligation to update any of these statements or to publicly announce the results of any revisions to any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions or otherwise. In evaluating our business, you should carefully consider the risks described in the section entitled "Risk Factors" under Part II, Item 1A below, in addition to the other information in this Quarterly Report on Form 10-Q. Any of the risks contained herein could materially and adversely affect our business, results of operations and financial condition. You should read the following management's discussion and analysis of our financial condition and results of operations in conjunction with our audited Consolidated Financial Statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2012 and our unaudited Consolidated Financial Statements for the three months ended March 31, 2013 and other disclosures (including the disclosures under "Part II. Item 1A. Risk Factors") included in this Quarterly Report on Form 10-Q. Our Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and are presented in U.S. dollars. Management Overview
Gilead Sciences, Inc. (Gilead, we or us), incorporated in Delaware on June 22, 1987, is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need. With each new discovery and experimental drug candidate, we seek to improve the care of patients suffering from life-threatening diseases around the world. Gilead's primary areas of focus include human immunodeficiency virus (HIV), liver diseases such as hepatitis B virus (HBV) and hepatitis C virus (HCV), serious cardiovascular and respiratory conditions and oncology/inflammation. Headquartered in Foster City, California, we have operations in North America, Europe and Asia-Pacific. We continue to add to our existing portfolio of products through our internal discovery and clinical development programs and through our product acquisition and in-licensing strategy.
Our product portfolio is comprised of Stribild®, Complera®/Eviplera®, Atripla®, Truvada®, Viread®, Hepsera®, Emtriva®, Letairis®, Ranexa®, AmBisome®, Cayston® and Vistide®. We have U.S. and international commercial sales operations, with marketing subsidiaries in North America, Europe and Asia-Pacific. In addition, we also sell and distribute certain products through our corporate partners under royalty-paying collaborative agreements. Business Highlights
During the first quarter of 2013, our product sales increased 8% over the same quarter in 2012, and we continued to advance our product pipeline across all therapeutic areas. We believe the combination of our existing internal research programs and our recent acquisitions and partnerships will allow us to continue to bring innovative therapies to individuals who are living with unmet medical needs. During the quarter, we made the following announcements:
HIV Program
• Initiated two Phase 3 clinical trials evaluating a single tablet regimen containing tenofovir alafenamide (TAF) for the treatment of HIV-1 infection in treatment-naïve adults;

• Announced Phase 2 study results evaluating a once-daily single tablet regimen containing TAF was similar to a regimen of Stribild;


• Reached an agreement with Teva Pharmaceuticals (Teva) to settle ongoing patent litigation under which Teva will be allowed to launch a generic version of Viread on December 15, 2017; and

• The scientific committee of the European Medicines Agency adopted a positive opinion on our marketing authorisation application for Stribild.

In April, the U.S. Food and Drug Administration (FDA) issued complete response letters on our new drug applications (NDAs) for elvitegravir and cobicistat for us as part of HIV treatment regimens. The letters noted that the FDA cannot approve the applications in their current form due to deficiencies in documentation and validation of certain observations noted during a recent inspection. We are taking all necessary steps to address the agency's questions and move the applications forward. The FDA did not raise any concerns with the safety profiles of elvitegravir and cobicistat. This regulatory action does not affect the marketing authorization or continued use of Stribild. HCV Program
• Announced full clinical trial results of the Phase 2 ELECTRON study that confirmed all patients achieved a sustained virologic response (SVR) four weeks after stopping therapy;

• Initiated and provided an update on the Phase 3 ION-1 study evaluating a once-daily fixed-dose combination of sofosbuvir/ledipasvir with and without ribavirin (RBV) for 12 or 24 weeks in treatment naïve genotype 1 HCV patients. A planned review by the study's Data and Safety Monitoring Board of safety data concluded that the trial should continue without modification;

• Began screening and completed enrollment in the second Phase 3 ION-2 study evaluating sofosbuvir/ledipasvir with RBV for 12 weeks, and with and without RBV for 24 weeks, in treatment-experienced genotype 1 HCV patients;

• Enrolled patients in the Phase 2 LONESTAR study of sofosbuvir/ledipasvir with and without RBV for eight weeks and of sofosbuvir/ledipasvir for 12 weeks in genotype 1 treatment-naïve patients;

• Announced topline results from the Phase 3 FISSION study, evaluating therapy with either a 12-week course of sofosbuvir plus RBV or standard of care with 24 weeks of treatment with pegylated interferon (peg-IFN) plus RBV in genotype 2 or 3 HCV patients which met its primary efficacy endpoint of non-inferiority; and

• Announced topline results from the Phase 3 NEUTRINO and FUSION studies, evaluating 12- and 16-week courses of various therapies with sofosbuvir, RBV and peg-IFN in genotypes 1, 2, 3, 4, 5 and 6 HCV patients. The studies met their primary efficacy endpoints of superiority compared to a predefined historic control SVR rate.

In April, we filed a new drug application with the FDA for approval of sofosbuvir, a once-daily oral nucleotide analogue for the treatment of chronic HCV infection. The data submitted, primarily from four phase 3 studies, NEUTRINO, FISSION, POSITRON and FUSION, support the use of sofosbuvir and RBV as an all-oral therapy for patients with genotype 2 and 3 HCV infection and sofosbuvir in combination with RBV and peg-IFN for treatment-naïve patients with genotype 1, 4, 5 and 6 infection.
Cardiovascular Program
In March, we announced data from the Phase 4 TERISA (Type 2 Diabetes Evaluation of Ranolazine In Subjects With Chronic Stable Angina) study, which demonstrated that the addition of ranolazine to background antianginal therapy in chronic angina patients with type 2 diabetes significantly reduced the frequency of weekly angina episodes compared to background antianginal therapy alone. Acquisition
We completed the acquisition of YM BioSciences Inc. (YM) for $487.6 million in cash on February 8, 2013, at which time YM became a wholly-owned subsidiary of Gilead. YM was a drug development company primarily focused on advancing momelotinib (formally known as CYT387), an orally administered, once-daily candidate for hematologic cancers. The acquisition of YM represents an opportunity to add a complementary clinical program in the area of hematologic cancers to our oncology portfolio.
Currently, the purchase accounting is preliminary as management is in the process of reviewing the forecasts that support the valuation. We expect to finalize the purchase accounting during the second quarter of 2013. The preliminary purchase accounting attributed $362.7 million to in-process research and development, $127.2 million to goodwill, $108.8 million to deferred tax liabilities and $108.9 million to cash acquired.


Financial Highlights
During the first quarter of 2013, total revenues increased 11% to $2.53 billion, compared to $2.28 billion in the first quarter of 2012, driven by strong underlying demand for our products and an increase in royalty revenues. Total product sales were $2.39 billion for the first quarter of 2013, an increase of 8% compared to the same period in 2012, due primarily to growth in our antiviral franchise, which increased 7% to $2.06 billion. Cardiovascular product sales, which include Letairis and Ranexa, totaled $214.4 million, an increase of 26% compared to the same period in 2012. Royalty revenues from our collaborations with corporate partners were $134.4 million, an increase of 89% compared to the prior year, due primarily to higher Tamiflu royalty revenues from Roche. Research and development (R&D) expenses increased 9% to $497.6 million for the first quarter of 2013 compared to the same period in 2012 as we continued to progress and invest in the expansion of our product pipeline, particularly in liver disease and oncology. Selling, general and administrative (SG&A) expenses were $374.3 million for the first quarter of 2013, a decrease of $68.8 million or 16% compared to the first quarter of 2012. The decrease in operating expenses was primarily due to stock-based compensation expense of $198.1 million related to our acquisition of Pharmasset, Inc. (Pharmasset) in January 2012. Net income attributable to Gilead for the first quarter of 2013 was $722.2 million or $0.43 per diluted share, a 63% increase compared to the same period in 2012, primarily due to an increase in total revenues driven by strong underlying demand for our products and a decrease in SG&A expenses, partially offset by an increase in R&D expenses. Additionally, our effective tax rate for the first quarter of 2013 decreased primarily due to the passage of the American Taxpayer Relief Act of 2012 in January 2013 which retroactively reinstated the federal research tax credit for 2012.
As of March 31, 2013, cash, cash equivalents and marketable securities totaled $2.63 billion, an increase of $48.9 million compared to December 31, 2012. During the first quarter of 2013, we generated $672.1 million of operating cash flows, utilized $378.6 million for the acquisition of YM and repaid $247.1 million in debt, net of proceeds from convertible note hedges. Results of Operations
Total Revenues
Total revenues include product sales, royalty revenues, and contract and other revenues. Total revenues for three months ended March 31, 2013 were $2.53 billion, up 11% compared to $2.28 billion for the same period in 2012. The increase in total revenues was driven by strong underlying demand for our products and higher royalty revenues from our collaborations with corporate partners.
Product Sales
Total product sales were $2.39 billion for the three months ended March 31, 2013, an increase of 8% compared to total product sales of $2.21 billion for the same period in 2012, driven primarily by an increase in antiviral and cardiovascular product sales. Sequentially, total product sales decreased 5% due primarily to declines in wholesaler and sub-wholesaler inventories of Truvada and Atripla in the United States.
Product sales in the United States increased by 10% for the three months ended March 31, 2013 compared to the same period in 2012, primarily driven by higher underlying demand for our antiviral products, specifically Complera and Stribild and our cardiovascular products, Letairis and Ranexa. Sequentially, total product sales in the United States decreased 7% due primarily to lower wholesaler and sub-wholesaler inventory levels. We believe the decrease was due in part to inventory-build in the prior quarter and measured purchases by the VA in the current quarter. As inventory held by our customers fluctuates from quarter to quarter, we may continue to see fluctuations in our quarterly product sales in the future.
More than 40% of our product sales are generated outside of the United States and as a result, we face exposure to adverse movements in foreign currency exchange rates, primarily in Euro. We used foreign currency exchange forward contracts to hedge a percentage of our foreign currency exposure. Foreign currency exchange, net of hedges, had an unfavorable impact of $7.3 million on our first quarter 2013 product sales compared to the same period in 2012. Product sales in Europe increased by 7% for the three months ended March 31, 2013 to $818.3 million compared to $763.9 million for the same period in 2012, primarily driven by strong underlying demand for our antiviral products and increased sales of cardiovascular products, including Letairis and Ranexa. Antiviral product sales in Europe totaled $750.4 million for the three months ended March 31, 2013, an increase of 8% compared to $696.5 million for the same period in 2012, primarily driven by the sales of Eviplera, Truvada and Atripla. Foreign currency exchange, net of hedges, had an unfavorable impact of $7.0 million on our European product sales for the three months ended March 31, 2013 compared to the same period in 2012.


Recently, many countries in the European Union have increased the amount of discounts required on our products and these efforts could continue as countries attempt to manage healthcare expenditures, especially in light of the severe fiscal and debt crises experienced by many countries in the European Union. For example, France implemented a mandatory price decrease on HIV drugs effective April 2013.
The following table summarizes the period over period changes in our product sales (in thousands):

                               Three Months Ended
                                    March 31,
                               2013           2012       Change
Antiviral products:
Atripla                    $   877,073    $   887,596      (1 )%
Truvada                        700,242        758,263      (8 )%
Viread                         210,332        191,693      10  %
Complera/Eviplera              148,189         52,180     184  %
Stribild                        92,148              -       -
Hepsera                         26,423         29,297     (10 )%
Emtriva                          6,671          6,777      (2 )%
Total antiviral products     2,061,078      1,925,806       7  %
Letairis                       118,107         87,288      35  %
Ranexa                          96,286         83,201      16  %
AmBisome                        85,275         84,764       1  %
Other                           32,822         27,283      20  %
Total product sales        $ 2,393,568    $ 2,208,342       8  %

Antiviral Products
Antiviral product sales increased by 7% for the three months ended March 31, 2013 compared to the same period in 2012.
• Atripla

Atripla sales decreased by 1% for the three months ended March 31, 2013 compared to the same period in 2012, due primarily to the timing of purchases in Latin America. Atripla sales accounted for 43% and 46% of our total antiviral product sales for the three months ended March 31, 2013 and 2012, respectively. The efavirenz component of Atripla, which has a gross margin of zero, comprised $328.1 million and $326.4 million of our Atripla sales for the three months ended March 31, 2013 and 2012, respectively.
• Truvada

Truvada sales decreased by 8% for the three months ended March 31, 2013 compared to the same period in 2012, due primarily to declines in wholesaler and sub-wholesaler inventories in the United States. Truvada sales accounted for 34% and 39% of our total antiviral product sales for the three months ended March 31, 2013 and 2012, respectively.
• Complera/Eviplera

Complera/Eviplera sales increased by 184% for the three months ended March 31, 2013 compared to the same period in 2012, primarily due to sales volume growth in Europe and the United States.
• Stribild

Sales of Stribild were $92.1 million for the three months ended March 31, 2013. Stribild was approved in the United States in August 2012. Cardiovascular Products
Cardiovascular product sales increased 26% during the first quarter of 2013 compared to the same period in 2012. During the three months ended March 31, 2013, sales of Letairis increased by 35% and sales of Ranexa increased by 16% compared to the same period in 2012, primarily due to increases in underlying demand.


Royalty Revenues
The following table summarizes the period over period changes in our royalty revenues (in thousands):

Three Months Ended
March 31,
2013 2012 Change
Royalty revenues $ 134,407 $ 71,105 89 %

Royalty revenues increased 89% for the three months ended March 31, 2013 compared to the same period in 2012, driven primarily by higher Tamiflu royalty revenues from Roche. We recognize royalties on Tamiflu sales by Roche in the quarter following the quarter in which the corresponding sales occur. Cost of Goods Sold and Product Gross Margin The following table summarizes the period over period changes in our product sales (in thousands), cost of goods sold (in thousands) and product gross margin:

                            Three Months Ended
                                 March 31,
                           2013            2012        Change
Total product sales    $ 2,393,568     $ 2,208,342       8 %
Cost of goods sold     $   634,448     $   580,931       9 %
Product gross margin            73 %            74 %

Our product gross margin for the three months ended March 31, 2013 was 73%, a decrease of 1% compared to the same period in 2012, due primarily to changes in our product mix.

Research and Development Expenses
                                        Three Months Ended
                                            March 31,
(In thousands, except percentages)      2013          2012      Change
Research and development             $  497,632    $ 458,211      9 %

We manage our R&D expenses by identifying the R&D activities we anticipate will be performed during a given period and then prioritizing efforts based on scientific data, probability of successful development, market potential, available human and capital resources and other considerations. We continually review our R&D pipeline and the status of development and, as necessary, reallocate resources among the R&D portfolio that we believe will best support the future growth of our business.
R&D expenses summarized above consist primarily of clinical studies performed by contract research organizations (CROs), materials and supplies, licenses and fees, milestone payments under collaboration arrangements, personnel costs, including salaries, benefits and stock-based compensation and overhead allocations consisting of various support and facilities-related costs. R&D expenses for the three months ended March 31, 2013 increased by $39.4 million or 9% compared to the same period in 2012, due primarily to a $93.9 million increase in clinical studies and outside services expenses. This change was partially offset by a $64.7 million decrease in personnel expenses which included $100.1 million in stock-based compensation expense related to our acquisition of Pharmasset in January 2012. Selling, General and Administrative Expenses Three Months Ended March 31, (In thousands, except percentages) 2013 2012 Change Selling, general and administrative $ 374,296 $ 443,121 (16 )%

SG&A expenses relate to sales and marketing, finance, human resources, legal and other administrative activities. Expenses are primarily comprised of facilities and overhead costs, outside marketing, advertising and legal expenses and other general and administrative costs.


SG&A expenses for the three months ended March 31, 2013 decreased by $68.8 million or 16%, compared to the same period in 2012, due primarily to an $88.8 million decrease in stock-based compensation expense which included $98.0 million resulting from our acquisition of Pharmasset in January 2012. This change was partially offset by increased headcount related and other expenses to support the ongoing growth of our business. As we prepare for the launch of sofosbuvir, we expect headcount and other expenses to continue to increase throughout the remainder of the year.
Interest Expense
Interest expense for the three months ended March 31, 2013 was $81.8 million and decreased by $15.5 million compared to the same period in 2012. The decrease was primarily due to bridge financing costs associated with our acquisition of Pharmasset in January 2012 which did not reoccur in the current period and the repayment of bank debt totaling $1.40 billion in 2012. Other Income (Expense), Net
Other income (expense), net for the three months ended March 31, 2013 was a net expense of $(3.3) million compared to a net expense of $(34.1) million for the three months ended March 31, 2012, due primarily to a $40.1 million loss on Greek bonds related to Greece's restructuring of its sovereign debt in the same period in 2012.
Provision for Income Taxes
Our provision for income taxes was $222.4 million and $231.3 million for the three months ended March 31, 2013 and 2012, respectively. Our effective tax rate was 23.7% and 34.6% for the three months ended March 31, 2013 and 2012, respectively. The effective tax rate for the three months ended March 31, 2013 was lower than the effective tax rate for the same period in 2012 as a result of the retroactive extension of the 2012 federal research tax credit in January 2013 and the first quarter of 2012 stock-based compensation expense related to the Pharmasset acquisition for which we receive no tax benefit.
The effective tax rate for the three months ended March 31, 2013 differed from the U.S. federal statutory rate of 35% due primarily to the retroactive extension of the 2012 federal research tax credit in January 2013 and certain operating earnings from non-U.S. subsidiaries that are considered indefinitely reinvested, partially offset by state taxes and our portion of the non-deductible pharmaceutical excise tax. We do not provide for U.S. income taxes on undistributed earnings of our foreign operations that are intended to be indefinitely reinvested in our foreign subsidiaries.
In January 2013, the U.S. Congress passed the American Taxpayer Relief Act of 2012 which retroactively reinstated the federal research tax credit for 2012 and 2013. As a result, our income tax provision for the first quarter of 2013 included a discrete tax benefit related to the federal research tax credit for 2012.


Liquidity and Capital Resources
We believe that our existing capital resources, supplemented by our cash flows
generated from operating activities will be adequate to satisfy our capital
needs for the foreseeable future. The following table summarizes our cash, cash
equivalents and marketable securities, our working capital and our cash flow
activities as of the end of, and for each of, the periods presented (in
thousands):

                                                          March 31, 2013       December 31, 2012
Cash, cash equivalents and marketable securities        $      2,631,030     $         2,582,086
Working capital                                         $      2,372,882     $         1,886,327


                                  Three Months Ended
                                      March 31,
                                2013            2012
Cash provided by (used in):
Operating activities        $  672,101     $     452,969
Investing activities        $ (407,256 )   $ (10,743,116 )
Financing activities        $ (199,001 )   $   1,855,590

Cash, Cash Equivalents and Marketable Securities As of March 31, 2013, cash, cash equivalents and marketable securities totaled $2.63 billion, an increase of $48.9 million or 2% from December 31, 2012. During the first quarter of 2013, we generated $672.1 million in cash flows from operations, utilized $378.6 million for the acquisition of YM and repaid $247.1 million in debt, net of proceeds from convertible note hedges.
Of the total cash, cash equivalents and marketable securities at March 31, 2013, approximately $1.25 billion was generated from operations in foreign jurisdictions and is intended for use in our foreign operations. We do not rely on unrepatriated earnings as a source of funds for our domestic business as we expect to have sufficient cash flow and borrowing capacity in the United States to fund our domestic operational and strategic needs. Working Capital
Working capital was $2.37 billion at March 31, 2013. The increase of $486.6 million in working capital from December 31, 2012 was primarily due to a decrease in the current portion of long-term debt and other obligations, net related to the repayment of our bank debt and conversions of our convertible senior notes due in May 2013 and an increase in accounts receivable, net, primarily driven by the timing of sales during the quarter. Cash Provided by Operating Activities
Cash provided by operating activities of $672.1 million for the three months ended March 31, 2013 primarily related to net income of $717.7 million, adjusted for non-cash items such as $74.3 million of depreciation and amortization expenses and $61.8 million of stock-based compensation expenses. This was partially offset by $227.4 million of net cash outflow related to changes in operating assets and liabilities.
Cash provided by operating activities of $453.0 million for the three months . . .

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