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GILD > SEC Filings for GILD > Form 10-K on 25-Feb-2014All Recent SEC Filings

Show all filings for GILEAD SCIENCES INC

Form 10-K for GILEAD SCIENCES INC


25-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, our audited Consolidated Financial Statements and the accompanying notes to the Consolidated Financial Statements and other disclosures included in this Annual Report on Form 10-K (including the disclosures under Item 1A, Risk Factors). Our 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 experimental drug candidate, we strive to transform and simplify care for people with life-threatening illnesses around the world. Gilead's primary areas of focus include human immunodeficiency virus (HIV), liver diseases such as hepatitis B virus (HBV) infection and hepatitis C virus (HCV) infection, oncology/inflammation and serious cardiovascular and respiratory conditions. 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 discovery and clinical development programs and through a product acquisition and in-licensing strategy.
Our product portfolio is comprised of Stribild®, Complera®/Eviplera®, Atripla®, Truvada®, Viread®, Emtriva®, Tybost®, Sovaldi®, Hepsera®, Vitekta®, Letairis®, Ranexa®, Cayston®, AmBisome® and Vistide®. Business Highlights
During 2013, we continued to advance our product pipeline across all therapeutic areas. We made significant progress, particularly in our Phase 3 studies in oncology, liver diseases and HIV. The combination of our existing internal research programs, acquisitions and partnerships will allow us to continue bringing innovative therapies to individuals who are living with unmet medical needs. Below is a summary of our key accomplishments:
• expanded our single tablet regimen (STR) products with the European launch of Stribild in 14 countries;

• received U.S. Food and Drug Administration (FDA) and European Medicines Agency (EMA) approval of Complera/Eviplera for use among certain adult patients switching from another stable antiretroviral regimen;

• received EMA approval for once-daily Tybost, a pharmacokinetic enhancer that boosts blood levels of certain HIV medicines;

• received EMA approval for Vitekta, an integrase inhibitor for the treatment of HIV-1 infection in adults without known mutations associated with resistance to elvitegravir;

• advanced the clinical development of tenofovir alafenamide (TAF) as a once-daily single tablet regimen for the treatment of HIV-1 infection to Phase 3 clinical trials;

• received approval from the FDA and Health Canada in December 2013 for Sovaldi (sofosbuvir), a once daily oral regimen for the treatment of HCV as a component of a combination of antiviral treatment regimens; received approval from the EMA for Sovaldi in January 2014;

• announced positive interim results from three Phase 3 clinical studies (ION-1, ION-2 and ION-3) evaluating the once-daily fixed-dose combination of ledipasvir/sofosbuvir (LDV/SOF), with and without ribavirin (RBV), for the treatment of genotype 1 HCV infection; filed a new drug application (NDA) for the fixed-dose combination of LDV/SOF in February 2014;

• submitted an NDA to the FDA for approval of idelalisib for the treatment of patients with indolent non-Hodgkin's lymphoma (iNHL) and chronic lymphocytic leukemia (CLL). We also filed for approval of idelalisib for treatment of iNHL and CLL with the EMA on October 28, 2013. In January 2014, the FDA accepted our NDA for iNHL and set a target review date of September 11, 2014 under the Prescription Drug User Fee Act (PDUFA). In February 2014, the FDA, which previously granted Breakthrough Therapy designation for idelalisib in CLL, accepted our NDA and set a target review date of August 6, 2014 under the PDUFA; and

• completed the acquisition of YM Biosciences Inc. (YM), through which we acquired momelotinib, an orally administered, once-daily candidate for hematologic cancers and advanced the clinical development of momelotinib to Phase 3 clinical trials.


Outlook 2014
In 2014, we will continue to focus on our key operating objectives which include continued progression of our product pipeline and continued uptake of our commercial products. From a research and development (R&D) perspective, we will continue to invest in our various ongoing clinical studies, which support both our existing products and pipeline of new drug candidates. We expect to move forward on a number of late-stage clinical studies for new product candidates and plan to file
marketing applications for various therapeutic areas.
From a commercial perspective, during 2013, we began to build-out our commercial organization to support the launch of Sovaldi in the United States and Canada in December 2013. In January 2014, we received approval from the EMA for Sovaldi in all 28 countries of the European Union. Sovaldi represents a significant shift in the treatment paradigm for certain HCV patients around the world. During 2014, we plan to further the build-out and expansion of our international commercial infrastructure particularly in Europe and Asia to support the Sovaldi launches and increase marketing and sales efforts related to the anticipated launch of our first oncology product, idelalisib.
We continue to monitor conditions in the macroeconomic environment that could affect our ability to achieve our goals, such as changes in the reimbursement and payor landscape as well as legislation that may delay or impact funding for AIDS Drug Assistance Programs (ADAPs) in the United States, a worsening of economic conditions in certain key markets, particularly in Europe, patent expirations of competitive products and the launch of generic competitors, government pricing pressures internationally and the potential volatility in foreign currency exchange rates. We will adjust our business processes, as appropriate, to attempt to mitigate these risks to our business. We expect that our product pipeline investments and expanding commercial infrastructure will enable us to execute on our 2014 operating objectives. 2013 Financial Highlights
During 2013, we delivered strong financial performance and continued to invest in our product pipeline. Total revenues grew 15% to $11.20 billion and total product sales grew 15% to $10.80 billion, compared to 2012 driven primarily by an increase in antiviral product sales.
R&D expenses increased 20% to $2.12 billion for 2013 compared to 2012 due to progression of our clinical studies, particularly Phase 3 studies in oncology, liver diseases and HIV. Selling, general and administrative (SG&A) expenses increased 16% to $1.70 billion for 2013 compared to 2012 due to the ongoing growth and expansion of our business, including commercial expansion related to the launch of Sovaldi.
Net income attributable to Gilead for 2013 was $3.07 billion or $1.81 per diluted share, compared to $2.59 billion or $1.64 per diluted share in 2012, due to the increase in total revenues, partially offset by an increase in R&D and SG&A expenses.
During 2013, we generated $3.10 billion in operating cash flows, paid $1.04 billion for the warrants related to our May 2013 Notes that settled in August 2013, repaid $1.67 billion 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 increased 15% to $11.20 billion in 2013, compared to 2012 and increased 16% to $9.70 billion in 2012 compared to $8.39 billion in 2011. Product sales represented 96% of total revenues in 2013 and 97% of total revenues in 2012 and 2011. Royalty revenues represented 3% of total revenues during 2013, 2012 and 2011.
Product Sales
Total product sales were $10.80 billion in 2013, an increase of 15% over total product sales of $9.40 billion in 2012, driven primarily by the continued uptake of our STR products, primarily Stribild and Complera/Eviplera. Cardiovascular product sales consisting of Letairis and Ranexa, increased 24% to $968.6 million in 2013 compared to $783.0 million in 2012. Total product sales were $9.40 billion in 2012, an increase of 16% over total product sales of $8.10 billion in 2011, driven primarily by continued growth in sales of our antiviral products, including Atripla, Truvada and Complera/Eviplera.
Product sales in the United States increased 20% for 2013 to $6.65 billion compared to $5.54 billion in 2012, driven by sales growth of our STR products, specifically Stribild and Complera as well as the launch of our newest product, Sovaldi.


During the fourth quarters of 2013 and 2012, we noted strong wholesaler and sub-wholesaler purchases in anticipation of price increases effective January 1. We estimate that during the fourth quarter of 2013, sales exceeded demand by approximately $130 - $150 million and $80 - $100 million during the same period in 2012. Based on our observations during the first quarter of 2013, this may result in inventory draw-downs during the first quarter of 2014.
Approximately 40% of our product sales are generated outside the United States and as a result, we face exposure to adverse movements in foreign currency exchange rates, primarily in the 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 $64.8 million on our 2013 revenues compared to 2012 and an unfavorable impact of $57.1 million on our 2012 revenues compared to 2011.
Product sales in Europe increased 6% in 2013 to $3.33 billion compared to $3.14 billion in 2012, driven primarily by higher underlying demand for our antiviral products, specifically Eviplera, partially offset by decreases in the average net selling price. Product sales in Europe increased 6% in 2012 to $3.14 billion compared to $2.96 billion in 2011, driven primarily by higher underlying demand in our antiviral franchise. Antiviral product sales in Europe totaled $2.87 billion in 2012, an increase of 6% compared to $2.71 billion in 2011, driven primarily by the sales of Atripla and Truvada. Foreign currency exchange, net of hedges, had an unfavorable impact of $55.3 million on our European product sales in 2013 compared to 2012 and an unfavorable impact of $68.9 million on our European product sales in 2012 compared to 2011.
In light of the fiscal and debt crises experienced by several countries in the European Union, several governments have announced or implemented measures to manage healthcare expenditures. Although to date, we have paid rebates in countries outside the United States, payments made to foreign governments do not represent a significant portion of our government rebates and chargebacks or percentage of total product sales in foreign locations. However, 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.
We expect our total product sales to grow in 2014, as we realize the full year impact of sales of Sovaldi and continued uptake of our commercial products, primarily our single tablet regimens. We believe this growth could be tempered by pricing pressures in certain European territories, the impact of generic efavirenz, now available in Canada and Europe, potential volatility in foreign currency exchange rates and changes in the macroeconomic environment. Government Rebates and Chargebacks
U.S. government rebates and chargebacks deducted from gross product sales increased 19% to $3.08 billion in 2013 from $2.59 billion in 2012 and increased 39% from $1.86 billion in 2011, representing 21% of total gross product sales in both 2013 and 2012 and 17% of total gross product sales in 2011. In March 2010, healthcare reform legislation was adopted in the United States that required further rebates or discounts on products reimbursed or paid for by various public payers, such as Medicaid and other entities eligible to purchase discounted products. As a result of this legislation and the impact of the economic downturn, our total rebates and chargebacks have increased as we have experienced changes in our payer mix. Specifically, we believe that certain patients previously covered by private insurance have moved to public reimbursement programs. As a result, we expect government rebates and chargebacks as a percentage of total gross product sales will continue to increase.


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

(In thousands, except percentages)        2013          Change          2012          Change          2011
Antiviral products:
Atripla                              $  3,648,496            2  %   $ 3,574,483           11  %   $ 3,224,518
Truvada                                 3,135,771           (1 )%     3,181,110           11  %     2,875,141
Viread                                    958,969           13  %       848,697           15  %       737,867
Complera/Eviplera                         809,452          137  %       342,200          783  %        38,747
Stribild                                  539,256          837  %        57,536            -  %             -
Sovaldi                                   139,435            -  %             -            -  %             -
Hepsera                                    81,095          (25 )%       108,315          (25 )%       144,679
Emtriva                                    27,405           (7 )%        29,449            2  %        28,764
Total antiviral products                9,339,879           15  %     8,141,790           15  %     7,049,716
Letairis                                  519,966           27  %       410,054           40  %       293,426
Ranexa                                    448,624           20  %       372,949           17  %       320,004
AmBisome                                  351,827            1  %       346,646            5  %       330,156
Other products                            143,399           13  %       126,932           16  %       109,057
Total product sales                  $ 10,803,695           15  %   $ 9,398,371           16  %   $ 8,102,359

Antiviral Products
Antiviral product sales increased by 15% in 2013 compared to 2012 and 2012 compared to 2011.
• Atripla

In 2013, increases in Atripla sales were driven primarily by an increase in the average net selling price. In 2012, Atripla sales were driven primarily by sales volume growth in the United States. Atripla sales accounted for 39%, 44% and 46% of our total antiviral product sales for 2013, 2012 and 2011, respectively. The efavirenz component of Atripla, which has a gross margin of zero, comprised $1.40 billion, $1.34 billion and $1.21 billion of our Atripla sales in 2013, 2012 and 2011, respectively.
A generic version of Bristol-Myers Squibb Company's Sustiva (efavirenz), a component of our Atripla, was made available in Canada and Europe in 2013 and will be made available in the United States in 2015. As a result, we expect increased competitive pricing pressure on our future Atripla sales.
• Truvada

In 2013, decreases in Truvada sales were due to a decrease in sales volume, partially offset by an increase in average net selling price. In 2012, Truvada sales were driven primarily by sales volume growth in the United States. Truvada sales accounted for 34%, 39% and 41% of our total antiviral product sales for 2013, 2012 and 2011, respectively. Future sales of Truvada could be impacted by patients switching to a different STR regimen.
• Complera/Eviplera

In 2013, increases in Complera/Eviplera sales were driven primarily by sales volume growth in Europe and the United States. In 2012, Complera/Eviplera sales increased due primarily to sales volume growth in the United States. Complera was approved in the United States in August 2011, and Eviplera was approved in the European Union in November 2011. During 2013, we estimate that Complera became the number two most-prescribed regimen in treatment naïve HIV patients in the United States and the number one most-prescribed regimen in treatment naïve HIV patients in Europe's Big 5 markets, the United Kingdom, France, Germany, Italy and Spain.
• Stribild

In 2013 and 2012, increases in sales of Stribild were driven primarily by sales volume growth in the United States. Stribild was approved in the United States in August 2012 and in Europe in May 2013. During 2013, we estimate that Stribild became the number one most-prescribed regimen in treatment naïve HIV patients in the United States.
• Sovaldi

In December 2013, the FDA approved Sovaldi for the treatment of HCV. Sovaldi sales totaled $139.4 million in 2013, of which we estimate that approximately half related to initial inventory stocking by wholesalers and sub-wholesalers.


Cardiovascular Products
Our cardiovascular products, which include Letairis and Ranexa increased due primarily to sales volume growth.
Royalty Revenues
The following table summarizes the period over period changes in our royalty revenues:
(In thousands, except percentages) 2013 Change 2012 Change 2011 Royalty revenues $ 383,849 32 % $ 290,523 8 % $ 268,827

Royalty revenues increased 32% for 2013 compared to 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. Royalty revenues increased 8% for 2012 compared to 2011, driven primarily by higher royalty revenues from GlaxoSmithKline, Inc., Japan Tobacco Inc. and Astellas US LLC partially offset by lower Tamiflu royalties from Roche. Tamiflu royalties from Roche contributed $134.7 million, $43.7 million and $75.5 million to total royalty revenues in 2013, 2012 and 2011 respectively. 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, cost of goods sold and product gross margin:

(In thousands, except percentages)          2013        Change        2012        Change        2011
Total product sales                    $ 10,803,695       15 %    $ 9,398,371       16 %    $ 8,102,359
Cost of goods sold                     $  2,858,502       16 %    $ 2,471,363       16 %    $ 2,124,410
Product gross margin                             74 %                      74 %                      74 %

Our product gross margin for 2013 was consistent with our product gross margin for 2012 and 2011. Our product gross margin for the fourth quarter of 2013 was 71.8% and included $58.3 million in amortization expense related to the transition of the in-process research and development (IPR&D) asset, from an indefinite-lived to finite-lived intangible asset upon the FDA approval and commercial launch of Sovaldi. In 2014, we expect to recognize the full year impact of amortization of approximately $700.0 million related to Sovaldi. Research and Development Expenses
The following table summarizes the period over period changes in R&D expenses:
(In thousands, except percentages) 2013 Change 2012 Change 2011 Research and development $ 2,119,756 20 % $ 1,759,945 43 % $ 1,229,151

We do not track total R&D expenses by product candidate, therapeutic area or development phase. However, 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 product 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. The following table provides a breakout of R&D expenses by major cost type:

(In thousands, except percentages)                           2013            2012            2011
Clinical studies and outside services                    $ 1,147,169     $   828,278     $   570,302
Personnel and infrastructure expenses                        714,027         686,091         412,463
Facilities, IT and other costs                               258,560         245,576         219,756
In-process research and development impairment charges             -               -          26,630
Total                                                    $ 2,119,756     $ 1,759,945     $ 1,229,151


In 2013, R&D expenses increased $359.8 million or 20% compared to 2012, due primarily to a $318.9 million increase in clinical studies and a $27.9 million increase in personnel and infrastructure expenses to support the continued progression of our clinical studies, particularly Phase 3 studies in oncology, liver diseases and HIV. These increases were partially offset by a $100.1 million decrease in stock-based compensation expense due to the acceleration of vested stock options related to our acquisition of Pharmasset, Inc. (Pharmasset) in January 2012.
In 2012, clinical studies and outside services increased $258.0 million compared to 2011 due to progression and expansion of our Phase 3 studies, particularly in liver diseases and oncology. Additionally, personnel expenses increased $273.6 million due to higher headcount to support our product pipeline and study progression.
During 2011, we recorded $26.6 million of impairment charges related to certain IPR&D assets acquired from CGI Pharmaceuticals, Inc.. These impairment charges were a result of changes in the anticipated market share related to the spleen tyrosine kinase (Syk) compound.
In 2014, we expect R&D expenses to increase over 2013 due primarily to continued investment in advancing our product pipeline, driven primarily by the progression of our clinical studies in oncology, liver diseases and HIV. Selling, General and Administrative Expenses The following table summarizes the period over period changes in SG&A expenses:
(In thousands, except percentages) 2013 Change 2012 Change 2011 Selling, general and administrative $ 1,699,431 16 % $ 1,461,034 18 % $ 1,241,983

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.
In 2013, SG&A expenses increased $238.4 million or 16% compared to 2012. The increase was due primarily to a $308.0 million increase in headcount-related and other expenses to support the ongoing growth of our business, legal expenses and pharmaceutical excise tax resulting from U.S. healthcare reform. This increase was partially offset by a $98.0 million decrease in stock-based compensation due to the acceleration of vested stock options related to our acquisition of Pharmasset in January 2012. Sequentially, SG&A expenses in the fourth quarter of 2013 increased $106.4 million or 26% compared to the third quarter of 2013 due primarily to increased marketing activities related to the launch of Sovaldi. In 2012, SG&A expenses increased $219.1 million or 18% compared to 2011. The increase was due primarily to a $100.5 million increase in costs associated with the growth of our business which include personnel and headcount-related expenses, a $98.0 million increase in stock-based compensation expenses primarily resulting from the acquisition of Pharmasset and an increase of $38.2 million in the pharmaceutical excise tax resulting from U.S. healthcare reform. This increase was partially offset by a reduction in bad debt provisions of $34.3 million, which included a gain of $29.9 million related to the sale of our accounts receivables balances in Spain in the second quarter of 2012. In 2014, we expect SG&A expenses to increase over 2013 to support our continued build-out and expansion of our commercial infrastructure in Europe and Asia to support our Sovaldi launches, increased sales and marketing efforts related to the anticipated launch of our first oncology product, idelalisib and an increase in the pharmaceutical excise tax. We estimate our portion of the pharmaceutical excise tax to be approximately $150 - $170 million in 2014, compared to approximately $110 million in 2013 and approximately $85 million in 2012. Interest Expense
In 2013, interest expense decreased to $306.9 million compared to $360.9 million in 2012. The decrease was due primarily to the repayment of our May 2013 Notes, conversions of our convertible senior notes due in May 2014 and May 2016 (May 2014 Notes and May 2016 Notes), and the repayment of revolving credit facilities. In 2012, interest expense increased to $360.9 million compared to $205.4 million in 2011. The increase was due primarily to the additional debt we issued in connection with our acquisition of Pharmasset, which included $3.70 billion in senior unsecured notes issued in December 2011 and $2.15 billion in bank debt issued in January 2012.
Other Income (Expense), Net
For 2013, other income (expense), net was a net expense of $(8.9) million compared to a net expense of $(37.3) million in 2012 and net income of $66.6 million in 2011. The changes in other income (expense), net were due primarily to a $40.1 million loss on Greek bonds related to Greece's restructuring of its sovereign debt in the first quarter of 2012.


Provision for Income Taxes
Our provision for income taxes was $1.15 billion, $1.04 billion and $861.9 million in 2013, 2012 and 2011, respectively. The 2013 effective tax rate of 27.3% 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, the 2013 federal research tax credit and certain operating earnings from non-U.S. subsidiaries that are considered indefinitely reinvested, partially offset by state taxes, our portion of the non-tax deductible pharmaceutical excise tax and amortization expense related to the Pharmasset acquisition and contingent consideration expense related to certain acquisitions for which we receive no tax benefit. We do not provide for U.S. income taxes on undistributed earnings of our foreign operations that are intended to be indefinitely . . .

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