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GILD > SEC Filings for GILD > Form 10-Q on 31-Oct-2013All Recent SEC Filings

Show all filings for GILEAD SCIENCES INC

Form 10-Q for GILEAD SCIENCES INC


31-Oct-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 nine months ended September 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 respiratory and cardiovascular conditions, cancer and inflammation. Headquartered in Foster City, California, we have operations in North and South 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 16 marketed products is comprised of Stribild®, Complera®/Eviplera®, Atripla®, Truvada®, Viread®, Tybost®, 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 and South 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 third quarter of 2013, our product sales increased 15% compared to the same quarter in 2012, and we continued to advance our product pipeline across our 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:


HIV Program
• We announced results from a Phase 2 study (Study 102) evaluating an investigational once-daily single tablet regimen (STR) of elvitegravir 150 mg/cobicistat 150 mg/emtricitabine 200 mg/tenofovir alafenamide 10 mg for the treatment of HIV-1 infection. At 48 weeks, the regimen was found to be similar to Stribild based on the percentage of patients with HIV RNA levels less than 50 copies/mL and was associated with more favorable renal and bone safety markers. These results were presented at the 53rd Interscience Conference on Antimicrobial Agents and Chemotherapy in Denver.

• The European Commission granted marketing authorization for once-daily Tybost (cobicistat 150 mg tablets), a pharmacokinetic enhancer that boosts blood levels of certain HIV medicines. Tybost is indicated as a boosting agent for the HIV protease inhibitors atazanavir 300 mg once daily and darunavir 800 mg once daily as part of antiretroviral combination therapy in adults with HIV-1 infection. This approval allows for the marketing of Tybost in all 28 countries of the European Union.

Oncology Program
• We submitted a New Drug Application (NDA) to the U.S. Food and Drug Administration (FDA) for marketing approval to support the use of idelalisib, an investigational, targeted, oral inhibitor of PI3K delta, for the treatment of indolent non-Hodgkin's lymphoma (iNHL) for patients with iNHL that is refractory (non-responsive) to rituximab and to alkylating-agent-containing chemotherapy.

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 was finalized during the third quarter of 2013. The 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 assets of $53.0 million with a full valuation allowance, 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 Condensed Consolidated Financial Statements for a description of the IPR&D acquired. Sofosbuvir
In January 2012, we acquired Pharmasset. Through the acquisition, we acquired sofosbuvir (formerly known as GS-7977). During the second quarter of 2013, we filed an NDA with the FDA for the approval of sofosbuvir, a once-daily oral nucleotide analogue inhibitor for the treatment of chronic HCV infection. The FDA granted priority review status and has set a target review date under the Prescription Drug User Fee Act (PDUFA) 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.
In October 2013, the Antiviral Drugs Advisory Committee of the FDA, voted unanimously to support the approval of sofosbuvir in combination with RBV for the treatment of chronic HCV in adult patients with genotype 2 and 3 infection and sofosbuvir in combination with pegylated interferon and RBV for the treatment of chronic HCV in treatment-naïve adult patients with genotype 1 and 4 infection. The recommendations of the Advisory Committee are not binding, but will be considered by the FDA as the agency completes its review of our NDA for sofosbuvir.
Financial Highlights
During the third quarter of 2013, total revenues increased 15% to $2.78 billion, compared to $2.43 billion in the third quarter of 2012, driven by higher underlying demand across all therapeutic areas, primarily the continued uptake of our STR products. Total product sales were $2.71 billion for the third quarter of 2013, an increase of 15% compared to the same period in 2012, driven by growth in our antiviral franchise, which increased 14% to $2.33 billion. Cardiovascular product sales, which include Letairis and Ranexa, totaled $250.9 million for the third quarter of 2013, an increase of 25% compared to the same period in 2012.


Research and development (R&D) expenses increased 17% to $546.2 million for the third quarter of 2013 compared to the same period in 2012 due to the progression of our clinical studies, particularly in oncology and HIV. SG&A expenses increased 27% to $406.9 million for the third quarter of 2013 compared to the same period in 2012, due to the ongoing growth and expansion of our business. Net income attributable to Gilead for the third quarter of 2013 increased 17% to $788.6 million or $0.47 per diluted share, compared to the same period in 2012, due to an increase in total revenues driven by underlying demand for our products, partially offset by the increase in R&D and SG&A expenses. As of September 30, 2013, cash, cash equivalents and marketable securities totaled $2.76 billion, an increase of $173.5 million compared to December 31, 2012. During the nine months ended September 30, 2013, we generated $2.38 billion of operating cash flows, paid $1.04 billion to settle the warrants related to our convertible senior notes due in May 2013 (May 2013 Notes), repaid $966.9 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 the three months ended September 30, 2013 were $2.78 billion, up 15% compared to $2.43 billion for the same period in 2012. Total revenues for the nine months ended September 30, 2013 were $8.08 billion, up 14% compared to $7.11 billion in the same period in 2012. Increases in total revenues for both periods were driven by growth in product sales. Product Sales
Total product sales were $2.71 billion for the three months ended September 30, 2013, an increase of 15% compared to the same period in 2012. Total product sales were $7.76 billion for the nine months ended September 30, 2013, an increase of 13% compared to the same period in 2012. Increases in product sales for both periods were driven primarily by an increase in antiviral and cardiovascular product sales.
Product sales in the United States increased by 20% and 17% for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012, driven by higher underlying demand for our new STR products, specifically Stribild and Complera.
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 $17.5 million on our product sales for the three months ended September 30, 2013 and an unfavorable impact of $45.6 million on our product sales for the nine months ended September 30, 2013 compared to the same periods in 2012.
Product sales in Europe increased by 5% and 6% for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012, driven primarily by sales growth in our antiviral products, specifically Eviplera. Foreign currency exchange, net of hedges, had an unfavorable impact of $13.8 million and $41.3 million on our European product sales for the three and nine months ended September 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                         Nine Months Ended
                                       September 30,                             September 30,
                                   2013            2012        Change        2013            2012         Change
Antiviral products:
Atripla                        $   899,669     $   865,378        4  %   $ 2,714,850     $ 2,656,997         2  %
Truvada                            813,652         804,190        1  %     2,321,673       2,348,386        (1 )%
Viread                             231,555         214,909        8  %       692,075         622,016        11  %
Complera/Eviplera                  210,736          99,297      112  %       547,608         224,386       144  %
Stribild                           143,953          17,511      722  %       335,495          17,511     1,816  %
Hepsera                             20,316          27,319      (26 )%        68,195          82,807       (18 )%
Emtriva                              6,846           7,229       (5 )%        20,156          21,819        (8 )%
Total antiviral products         2,326,727       2,035,833       14  %     6,700,052       5,973,922        12  %
Letairis                           135,072         105,054       29  %       381,436         293,976        30  %
Ranexa                             115,815          95,066       22  %       318,698         273,822        16  %
AmBisome                            97,812          87,448       12  %       258,224         255,865         1  %
Other                               34,226          34,577       (1 )%       102,095          89,975        13  %
Total product sales            $ 2,709,652     $ 2,357,978       15  %   $ 7,760,505     $ 6,887,560        13  %

Antiviral Products
Antiviral product sales increased by 14% and 12% for the three and nine months ended September 30, 2013 compared to the same period in 2012 which reflects higher underlying demand for our new STR products, specifically Stribild and Complera/Eviplera.
• Atripla

Atripla sales increased by 4% for the three months ended September 30, 2013 compared to the same period in 2012, due primarily to an increase in the average net selling price. Also contributing to the increase was sales volume in Latin America and the United States. Atripla sales increased 2% for the nine months ended September 30, 2013 compared to the same periods in 2012, due to an increase in the average net selling price. Atripla sales accounted for 39% and 41% of our total antiviral product sales for the three and nine months ended September 30, 2013, respectively. The efavirenz component of Atripla, which has a gross margin of zero, comprised $334.7 million of our Atripla sales for the three months ended September 30, 2013 and $1.01 billion for the nine months ended September 30, 2013. For the three months ended September 30, 2012, the efavirenz component of Atripla comprised $316.9 million of our Atripla sales and $976.8 million for the nine months ended September 30, 2012.
A generic version of Bristol-Myers Squibb Company's Sustiva (efavirenz), a component of our Atripla, was made available in Canada during the third quarter of 2013 and will be made available in Europe in late 2013 and in the United States in 2015. As a result, we may start to observe increased pricing pressure from competition on our future Atripla sales.
• Truvada

Truvada sales increased by 1% for the three months ended September 30, 2013 compared to the same period in 2012, due to sales volume in Latin America and the United States. Truvada sales decreased by 1% for the nine months ended September 30, 2013 compared to the same period in 2012, due to a decrease in sales volume, partially offset by an increase in the average net selling price during the second quarter of 2013. During the first quarter of 2013, we experienced declines in wholesaler and sub-wholesaler inventories in the United States. Truvada sales accounted for 35% of our total antiviral product sales for both the three and nine months ended September 30, 2013.
• Complera/Eviplera

Complera/Eviplera sales increased by 112% for the three months ended September 30, 2013 compared to the same period in 2012, due primarily to sales volume in Europe. Complera/Eviplera sales increased by 144% for the nine months ended September 30, 2013 compared to the same period in 2012, due primarily to sales volume in the United States.


• Stribild

Sales of Stribild were $144.0 million, an increase of 722% for the three months ended September 30, 2013 and $335.5 million, an increase of 1,816% for the nine months ended September 30, 2013. The increase was due to sales volume in the United States. Stribild was approved in the United States in August 2012 and in Europe in May 2013.
Cardiovascular Products
Cardiovascular product sales increased 25% and 23% during the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012, due primarily to increases in underlying demand. During the three months ended September 30, 2013, sales of Letairis increased by 29% and 30% during the nine months ended September 30, 2013 compared to the same periods in 2012. During the three months ended September 30, 2013, sales of Ranexa increased by 22% and 16% during the nine months ended September 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 Nine Months Ended
September 30, September 30,
2013 2012 Change 2013 2012 Change
Royalty revenues $ 69,779 $ 63,915 9 % $ 310,700 $ 216,126 44 %

Royalty revenues increased 9% for the three months ended September 30, 2013 compared to the same period in 2012, due to higher Volibris royalty revenues from GlaxoSmithKline Inc. Royalty revenues increased 44% for the nine months ended September 30, 2013 compared to the same period in 2012, due 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. Sequentially, royalty revenues for the three months ended September 30, 2013 decreased $36.7 million or 34% compared to the three months ended June 30, 2013 due primarily to seasonality in the royalty revenues from Roche for Tamiflu. 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                          Nine Months Ended
                               September 30,                              September 30,
                           2013            2012         Change        2013            2012         Change
Total product sales    $ 2,709,652     $ 2,357,978        15 %    $ 7,760,505     $ 6,887,560        13 %
Cost of goods sold     $   681,868     $   597,269        14 %    $ 2,000,979     $ 1,795,545        11 %
Product gross margin            75 %            75 %                       74 %            74 %

Product gross margin remained essentially flat as a percentage of total product sales for the three and nine months ended September 30, 2013 when compared to the same periods in 2012.
Research and Development Expenses

                            Three Months Ended                         Nine Months Ended
                              September 30,                              September 30,
(In thousands,
except percentages)        2013            2012        Change        2013            2012         Change
Research and
development            $   546,244     $  465,831        17 %    $ 1,567,778     $ 1,320,286        19 %

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 September 30, 2013 increased by $80.4 million or 17% compared to the same period in 2012, due to $68.0 million related to an increase in clinical studies and $32.0 million related to personnel and infrastructure expenses to support a larger number of Phase 2 and 3 programs in oncology and Phase 3 programs in HIV. This increase was partially offset by a $28.8 million decrease in the estimated value of our contingent consideration liabilities related to the development of acquired compounds.
R&D expenses for the nine months ended September 30, 2013 increased by $247.5 million or 19% compared to the same period in 2012, due to a $244.2 million related to an increase in clinical studies and $97.3 million related to personnel and infrastructure expenses to support a larger number of Phase 2 and 3 programs in oncology and liver disease. 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. We expect R&D expenses to increase through the remainder of 2013 due to the continued progression of our clinical studies.
Selling, General and Administrative Expenses

                               Three Months Ended                         Nine Months Ended
                                 September 30,                              September 30,
(In thousands, except
percentages)                  2013            2012        Change        2013            2012         Change
Selling, general and
administrative            $   406,860     $  319,583        27 %    $ 1,186,147     $ 1,095,209         8 %

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 September 30, 2013 increased by $87.3 million or 27%, compared to the same period in 2012, due to a $72.8 million increase in headcount related and other expenses to support the ongoing growth and expansion of our business and a $15.0 million increase in bad debt expense. SG&A expenses for the nine months ended September 30, 2013 increased by $90.9 million or 8%, compared to the same period in 2012, due to a $143.1 million increase in headcount related and other expenses to support the ongoing growth of our business and a $23.0 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. The total increase in SG&A expenses was also partially offset by an $82.5 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. Included in SG&A expenses is the pharmaceutical excise tax, which we estimate our portion to be $100-$120 million in 2013 compared to approximately $85 million in 2012. Interest Expense
Interest expense for the three months ended September 30, 2013 was $73.9 million, a decrease of $15.4 million compared to the same period in 2012. Interest expense for the nine months ended September 30, 2013 was $233.7 million, a decrease of $41.3 million compared to the same period in 2012. The decreases for both periods were due primarily to the repayment of the May 2013 Notes and the repayment of revolving credit facilities. Other Income (Expense), Net
Other income (expense), net for the three months ended September 30, 2013 and 2012 was not significant for both periods. Other income (expense), net for the nine months ended September 30, 2013 was net income of $2.2 million compared to a net expense of $(38.7) 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 $294.5 million and $824.9 million for the three and nine months ended September 30, 2013, respectively, compared to $280.1 million and $774.9 million for the same periods in 2012, respectively. Our effective tax rates were 27.3% and 26.6% for the three and nine months ended September 30, 2013, respectively, compared to 29.4% and 29.9% for the same periods in 2012, respectively. The effective tax rates for the three and nine months ended September 30,


2013 were lower than the effective tax rates for the same periods in 2012 as a result of the retroactive extension of the 2012 and 2013 federal research tax credit in January 2013 and the stock-based compensation expense related to the Pharmasset acquisition for which we receive no tax benefit in the first quarter . . .

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