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GILD > SEC Filings for GILD > Form 10-Q on 1-Aug-2013All Recent SEC Filings

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Form 10-Q for GILEAD SCIENCES INC


1-Aug-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, and the Securities Exchange Act of 1934, as amended. 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, 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 Condensed Consolidated Financial Statements for the three and six months ended June 30, 2013 and other disclosures (including the disclosures under "Part II. Item 1A. Risk Factors") included in this Quarterly Report on Form 10-Q. Our Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles 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 investigational drug candidate, we seek to improve the care of patients living with 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 research and clinical development programs and through our product acquisition and in-licensing strategy. Our portfolio of 15 marketed products is comprised of Stribild®, Complera®/Eviplera®, Atripla®, Truvada®, Viread®, Hepsera®, Emtriva®, Letairis®, Ranexa®, AmBisome®, Cayston®, Vistide®, Tamiflu®, Lexiscan® and Macugen®. 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 second quarter of 2013, our product sales increased 14% 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, 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:


HCV Program
• We filed a new drug application (NDA) with the U.S. Food and Drug Administration (FDA) for the approval of sofosbuvir, a once-daily oral nucleotide analogue inhibitor for the treatment of chronic HCV infection. The FDA has granted priority review status and has set a target review date under the Prescription Drug User Fee Act of December 8, 2013. The NDA is supported primarily by results from four Phase 3 studies (NEUTRINO, FISSION, POSITRON and FUSION) evaluating sofosbuvir in nearly 1,000 patients with HCV as part of an all-oral 12-week or 16-week treatment regimen in combination with ribavirin (RBV) in genotypes 2 and 3, or with RBV and pegylated interferon for 12 weeks in genotypes 1, 4, 5 and 6.

• We reported interim data from the Phase 2 LONESTAR study, which evaluated eight- and 12-week courses of therapy with the once-daily fixed-dose combination of sofosbuvir/ledipasvir with and without RBV. All patients in the 12-week arm achieved a sustained virologic response (SVR) four weeks after completing therapy and 40/41 patients achieved a SVR eight weeks after completing therapy. Two additional cohorts in the study evaluated a 12-week course of the fixed-dose combination of sofosbuvir/ledipasvir with or without RBV in 40 patients who had previously failed therapy. Four weeks after completing therapy, 95% of patients in both arms achieved a SVR.

• We announced plans to initiate a Phase 3 study called ION-3, which will evaluate eight- and 12-week therapies of our fixed-dose combination tablet of sofosbusvir/ledipasvir for the treatment of HCV infection with and without RBV and a 12-week therapy with RBV in non-cirrhotic, treatment-naive genotype 1 HCV-infected patients.

• We announced that the European Medicines Agency (EMA) has validated our Marketing Authorisation Application for sofosbuvir for the treatment of HCV which was submitted on April 17, 2013, and is now under assessment.

HIV Program
• The FDA issued complete response letters on our 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 addressing the agency's concerns to move the applications forward. The FDA did not raise any concerns with the safety profiles of elvitegravir and cobicistat.

• The EMA granted marketing authorization for Stribild which allows for the marketing of our complete, once-daily single tablet regimen for HIV-1 infection for treatment-naïve adults across all 27 countries of the European Union.

Oncology Program
• We announced response data from a Phase 2 study (Study 101-08) evaluating idelalisib (formerly GS-1101) in treatment-naïve patients with chronic lymphocytic leukemia who achieved a complete response rate of 19% and an overall response rate of 97%, with estimated progression-free survival at 24 months of 93%.

• We announced interim results from a single-arm, open-label Phase 2 study (Study 101-09) evaluating idelalisib for treatment of patients with indolent non-Hodgkin's lymphoma that is non-responsive to rituximab and chemotherapy. In the study, single-agent treatment achieved an overall response rate of 54%, with a median duration of response at this interim analysis of 11.9 months.

Acquisition
We completed the acquisition of YM BioSciences Inc. (YM) for total consideration transferred of $487.6 million 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 purchase accounting is preliminary as management is awaiting data needed to finalize its review of the deferred tax assets and related valuation allowances. We expect to finalize the purchase accounting during the second half of 2013. The preliminary fair values of acquired assets and assumed liabilities include primarily in-process research and development (IPR&D) of $362.7 million, goodwill of $127.2 million, deferred tax liabilities of $108.8 million and cash acquired of $108.9 million. Pro forma results of operations for the acquisition of YM have not been presented because this acquisition is not material to our consolidated results of operations. See Note 7, Intangible Assets and Goodwill in our Notes to the Condensed Consolidated Financial Statements for a description of the IPR&D acquired.


Financial Highlights
During the second quarter of 2013, total revenues increased 15% to $2.77 billion, compared to $2.41 billion in the second quarter of 2012, driven by higher underlying demand across all therapeutic areas, the continued expansion and uptake of our HIV portfolio and an increase in royalty revenues. Total product sales were $2.66 billion for the second quarter of 2013, an increase of 14% compared to the same period in 2012, due primarily to growth in our antiviral franchise, which increased 15% to $2.31 billion. Cardiovascular product sales, which include Letairis and Ranexa, totaled $234.9 million, an increase of 19% compared to the same period in 2012. Royalty revenues from our collaborations with corporate partners were $106.5 million, an increase of 31% compared to the prior year, due primarily to higher Tamiflu royalty revenues from Roche.
Research and development (R&D) expenses increased 32% to $523.9 million for the second quarter of 2013 compared to the same period in 2012 as we continued to invest in our product pipeline, particularly in oncology and liver disease. Selling, general and administrative (SG&A) expenses increased 22% to $405.0 million for the second quarter of 2013 compared to the same period in 2012, primarily due to the ongoing growth and expansion of our business.
Net income attributable to Gilead for the second quarter of 2013 increased 9% to $772.6 million or $0.46 per diluted share, compared to the same period in 2012, primarily due to an increase in total revenues driven by underlying demand for our products partially offset by an increase in R&D and SG&A expenses. As of June 30, 2013, cash, cash equivalents and marketable securities totaled $2.98 billion, an increase of $393.7 million compared to December 31, 2012. During the first half of 2013, we generated $1.63 billion of operating cash flows, repaid $929.6 million in debt, net of proceeds from convertible note hedges, and utilized $378.6 million for the acquisition of YM, net of cash acquired.
Results of Operations
Total Revenues
Total revenues include product sales, royalty revenues, and contract and other revenues. Total revenues for three months ended June 30, 2013 were $2.77 billion, up 15% compared to $2.41 billion for the same period in 2012. Total revenues for the six months ended June 30, 2013 were $5.30 billion, up 13% compared to $4.69 billion in the same period in 2012. Increases in total revenues for both periods were driven by growth in product sales and royalty revenues.
Product Sales
Total product sales were $2.66 billion for the three months ended June 30, 2013, an increase of 14% compared to the same period in 2012. Total product sales were $5.05 billion for the six months ended June 30, 2013, an increase of 12% compared to the same period in 2012. Increases in product sales for both periods were driven by an increase in antiviral and cardiovascular product sales. Sequentially, total product sales increased 11% due primarily to increases in sales growth in the United States as sub-wholesalers increased inventories and higher levels of purchasing in Europe in advance of the summer holidays. Product sales in the United States increased by 20% and 15% for the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012, primarily driven by higher underlying demand for our antiviral products, specifically Complera and Stribild.
Approximately 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 $21.0 million on our product sales for the three months ended June 30, 2013 and an unfavorable impact of $28.3 million on our product sales for the six months ended June 30, 2013 compared to the same periods in 2012.
Product sales in Europe increased by 4% and 6% for the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012, primarily driven by sales growth in our antiviral products, specifically Eviplera and Viread. Foreign currency exchange, net of hedges, had an unfavorable impact of $20.7 million and $27.7 million on our European product sales for the three and six months ended June 30, 2013 compared to the same periods in 2012.
In light of the continued fiscal and debt crises experienced by several countries in the European Union, several governments have announced or implemented measures to manage healthcare expenditures. We continue to experience pricing pressure such as increases in the amount of discounts required on our products and delayed reimbursement which could negatively impact our future product sales and results of operations.


The following table summarizes the period over period changes in our product sales (in thousands):

                                    Three Months Ended                         Six Months Ended
                                         June 30,                                  June 30,
                                   2013            2012        Change        2013            2012         Change
Antiviral products:
Atripla                        $   938,108     $   904,023        4  %   $ 1,815,181     $ 1,791,619         1  %
Truvada                            807,779         785,933        3  %     1,508,021       1,544,196        (2 )%
Viread                             250,188         215,414       16  %       460,520         407,107        13  %
Complera/Eviplera                  188,683          72,909      159  %       336,872         125,089       169  %
Stribild                            99,394               -        -          191,542               -         -
Hepsera                             21,456          26,191      (18 )%        47,879          55,488       (14 )%
Emtriva                              6,639           7,813      (15 )%        13,310          14,590        (9 )%
Total antiviral products         2,312,247       2,012,283       15  %     4,373,325       3,938,089        11  %
Letairis                           128,257         101,634       26  %       246,364         188,922        30  %
Ranexa                             106,597          95,555       12  %       202,883         178,756        13  %
AmBisome                            75,137          83,653      (10 )%       160,412         168,417        (5 )%
Other                               35,047          28,115       25  %        67,869          55,398        23  %
Total product sales            $ 2,657,285     $ 2,321,240       14  %   $ 5,050,853     $ 4,529,582        12  %

Antiviral Products
Antiviral product sales increased by 15% and 11% for the three and six months ended June 30, 2013 compared to the same period in 2012 which reflects higher underlying demand for our new single-tablet regimen products, specifically Complera/Eviplera and Stribild.
• Atripla

Atripla sales increased by 4% and 1% for the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012, due to an increase in the average net selling price and sales volume. Atripla sales accounted for 41% and 42% of our total antiviral product sales for the three and six months ended June 30, 2013, respectively. The efavirenz component of Atripla, which has a gross margin of zero, comprised $352.1 million of our Atripla sales for the three months ended June 30, 2013 and $680.2 million for the six months ended June 30, 2013. For the three months ended June 30, 2012, the efavirenz component of Atripla comprised $333.5 million of our Atripla sales and $659.9 million for the six months ended June 30, 2012.
A generic version of Bristol-Myers Squibb Company's Sustiva (efavirenz), a component of our Atripla, is being made available in Europe and Canada in late 2013 and in the United States in 2014. As a result, we may start to observe a negative impact from competition on our future Atripla sales.
• Truvada

Truvada sales increased by 3% for the three months ended June 30, 2013 compared to the same period in 2012, due to an increase in the average net selling price. Truvada sales decreased by 2% for the six months ended June 30, 2013 compared to the same period in 2012, due primarily to declines in wholesaler and sub-wholesaler inventories in the United States during the first quarter of 2013, partially offset by the increase in the average net selling price during the second quarter of 2013. Truvada sales accounted for 35% and 34% of our total antiviral product sales for the three and six months ended June 30, 2013, respectively.
• Complera/Eviplera

Complera/Eviplera sales increased by 159% and 169% for the three and six months ended June 30, 2013, respectively, compared to the same period in 2012, primarily due to sales growth in Europe and the United States.
• Stribild

Sales of Stribild were $99.4 million for the three months ended June 30, 2013 and $191.5 million for the six months ended June 30, 2013. Stribild was approved in the United States in August 2012 and Europe in May 2013. Cardiovascular Products
Cardiovascular product sales increased 19% and 22% during the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012, primarily due to increases in underlying demand. During the three months ended June


30, 2013, sales of Letairis increased by 26% and 30% during the six months ended June 30, 2013 compared to the same periods in 2012. During the three months ended June 30, 2013, sales of Ranexa increased by 12% and 13% during the six months ended June 30, 2013 compared to the same periods in 2012. Royalty Revenues
The following table summarizes the period over period changes in our royalty revenues (in thousands):

Three Months Ended Six Months Ended
June 30, June 30,
2013 2012 Change 2013 2012 Change
Royalty revenues $ 106,514 $ 81,106 31 % $ 240,921 $ 152,211 58 %

Royalty revenues increased 31% for the three months ended June 30, 2013 and 58% for the six months ended June 30, 2013 compared to the same periods in 2012, due primarily to higher royalty revenues from F. Hoffmann-La Roche Ltd (Roche) as a result of an increase in the number of patients treated for influenza with Tamiflu in the first quarter of 2013. 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                          Six Months Ended
                                 June 30,                                   June 30,
                           2013            2012         Change        2013            2012         Change
Total product sales    $ 2,657,285     $ 2,321,240        14 %    $ 5,050,853     $ 4,529,582        12 %
Cost of goods sold     $   684,663     $   617,345        11 %    $ 1,319,111     $ 1,198,276        10 %
Product gross margin            74 %            74 %                       74 %            74 %

Our product gross margin for the three and six months ended June 30, 2013 and 2012 was 74%, remaining essentially flat as a percentage of total product sales when compared to the same periods in 2012. Research and Development Expenses

                            Three Months Ended                         Six Months Ended
                                 June 30,                                  June 30,
(In thousands,
except percentages)        2013            2012        Change        2013            2012        Change
Research and
development            $   523,902     $  396,244        32 %    $ 1,021,534     $  854,455        20 %

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, 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 June 30, 2013 increased by $127.7 million or 32% compared to the same period in 2012, due primarily to $82.3 million related to an increase in clinical studies and $29.9 million related to personnel expenses to support the number of programs in late-stage development, specifically in oncology and liver disease.
R&D expenses for the six months ended June 30, 2013 increased by $167.1 million or 20% compared to the same period in 2012, due primarily to a $176.2 million related to an increase in clinical studies and $65.3 million related to personnel expenses to support the number of programs in late-stage development, specifically in liver disease and oncology. These increases were partially offset by a $100.1 million decrease in stock-based compensation expense related to our acquisition of Pharmasset Inc. (Pharmasset) in January 2012.


Selling, General and Administrative Expenses
                               Three Months Ended                        Six Months Ended
                                    June 30,                                 June 30,
(In thousands, except
percentages)                  2013            2012        Change        2013           2012        Change
Selling, general and
administrative            $   404,991     $  332,505        22 %    $  779,287     $  775,626         0 %

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 June 30, 2013 increased by $72.5 million or 22%, compared to the same period in 2012, due primarily to a $37.4 million increase in headcount related and other expenses to support the ongoing growth and expansion of our business and a $19.0 million increase in bad debt expense. In the second quarter of 2012, we recorded a net reduction in bad debt expense of $15.2 million following a factoring arrangement where we sold accounts receivable balances in Spain. We continue to monitor the macroeconomic environment, particularly in Southern Europe for collectability issues related to our outstanding receivables.
SG&A expenses for the six months ended June 30, 2013 increased by $3.7 million, compared to the same period in 2012, due primarily to a $70.3 million increase in headcount related and other expenses to support the ongoing growth of our business. The total increase was partially offset by an $86.1 million decrease in stock-based compensation expense, which included $98.0 million in stock-based compensation related to our acquisition of Pharmasset in January 2012. We expect SG&A expenses to increase through the remainder of 2013 as we build our commercial organization in preparation for the anticipated launch of sofosbuvir.
Interest Expense
Interest expense for the three months ended June 30, 2013 was $78.0 million, a decrease of $10.4 million compared to the same period in 2012. Interest expense for the six months ended June 30, 2013 was $159.8 million, a decrease of $25.9 million compared to the same period in 2012. The decreases for both periods were primarily due to the maturity of our convertible senior notes due in May 2013 (May 2013 Notes), repayment of revolving credit facilities and conversions of our May 2013 Notes and senior convertible notes due in May 2014 (May 2014 Notes).
Other Income (Expense), Net
Other income (expense), net for the three months ended June 30, 2013 and 2012 was not significant for both periods. Other income (expense), net for the six months ended June 30, 2013 was a net expense of $(3.6) million compared to a net expense of $(35.2) million for the same period in 2012, which included a $40.1 million loss on Greek bonds related to Greece's restructuring of its sovereign debt.
Provision for Income Taxes
Our provision for income taxes was $308.0 million and $530.4 million for the three and six months ended June 30, 2013, respectively, compared to $263.5 million and $494.8 million for the same periods in 2012, respectively. Our effective tax rate was 28.6% and 26.3% for the three and six months ended June 30, 2013, respectively, compared to 27.2% and 30.2% for the same periods in 2012, respectively. The effective tax rate for the three months ended June 30, 2013 was higher than the effective tax rate for the same period in 2012 due primarily to lower earnings from non-U.S. subsidiaries that are considered indefinitely reinvested, offset by the extension of the 2013 federal research tax credit. The effective tax rate for the six months ended June 30, 2013 was lower than the effective tax rate for the same period in 2012 as a result of the retroactive extension of the 2012 and 2013 federal research tax credit in . . .

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