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GILD > SEC Filings for GILD > Form 10-K on 27-Feb-2017All Recent SEC Filings

Show all filings for GILEAD SCIENCES INC

Form 10-K for GILEAD SCIENCES INC


27-Feb-2017

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 Consolidated Financial Statements and other disclosures included in Item 8 of this Annual Report on Form 10-K (including the disclosures under Part I, 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 investigational drug candidate, we strive to transform and simplify care for people with life-threatening illnesses around the world. We have operations in more than 30 countries worldwide, with headquarters in Foster City, California. Gilead's primary areas of focus include human immunodeficiency virus (HIV), liver diseases such as chronic hepatitis C virus (HCV) infection and chronic hepatitis B virus (HBV) infection, hematology/oncology, cardiovascular and inflammation/respiratory diseases. We seek to add to our existing portfolio of products through our internal discovery and clinical development programs and through product acquisition and in-licensing strategies.
Our portfolio of marketed products includes AmBisome®, Atripla®, Cayston®, Complera®/Eviplera®, Descovy®, Emtriva®, Epclusa®, Genvoya®, Harvoni®, Hepsera®, Letairis®, Odefsey®, Ranexa®, Sovaldi®, Stribild®, Truvada®, Tybost®, Vemlidy®, Viread®, Vitekta®, and Zydelig®. We have U.S. and international commercial sales operations, with marketing subsidiaries in over 30 countries. We also sell and distribute certain products through our corporate partners under royalty-paying collaborative agreements.
2016 Business Highlights
During 2016, we continued to advance our product pipeline across our therapeutic areas with the goal of delivering best-in-class drugs that advance the current standard of care and/or address unmet medical need. Highlights of our 2016 activities include:
• Submission of marketing authorization applications for the once-daily, single-tablet regimen of sofosbuvir 400 mg, velpatasvir 100 mg and voxilaprevir 100 mg for the treatment of HCV-infected patients to U.S. Food and Drug Administration (FDA) and the European Commission.

• FDA and Japanese Ministry of Health, Labour and Welfare (MHLW) approval of Vemlidy, a once-daily treatment for adults with HBV infection with compensated liver disease.

• European Commission approval of marketing authorization for once-daily Truvada in combination with safer-sex practices to reduce the risk of sexually acquired HIV-1 infection among uninfected adults at high risk, a strategy known as pre-exposure prophylaxis, or PrEP.

• FDA and European Commission approval of Epclusa, the first all-oral, pan-genotypic, single-tablet regimen for the treatment of adults with genotype 1-6 chronic HCV infection.

• FDA and the European Commission approval of two tenofovir alafenamide (TAF)-based regimens, Odefsey and Descovy, a fixed-dose combination for the treatment of HIV-1 infection.

• Purchase of Nimbus Apollo, Inc. (Nimbus), a wholly-owned subsidiary of Nimbus Therapeutics, and its Acetyl-CoA Carboxylase (ACC) inhibitor program. The Nimbus program includes the lead candidate NDI-010976, an ACC inhibitor, and other pre-clinical ACC inhibitors for the potential treatment of non-alcoholic steatohepatitis (NASH), hepatocellular carcinoma and other diseases.

• Closed on a license and collaboration agreement with Galapagos NV (Galapagos), a clinical-stage biotechnology company based in Belgium, for the development and commercialization of filgotinib, a JAK1-selective inhibitor being investigated for inflammatory disease indications.

2016 Financial Highlights
During 2016, total revenues decreased to $30.4 billion and total product sales decreased to $30.0 billion, compared to $32.6 billion and $32.2 billion in 2015, respectively, primarily due to lower sales of Harvoni and Sovaldi, partially offset by sales of Epclusa and TAF-based products, Genvoya, Descovy and Odefsey. In the United States, product sales were $19.3 billion in 2016, compared to $21.2 billion in 2015. In Europe, product sales were $6.1 billion in 2016, compared to $7.2 billion in 2015. In Japan, product sales were $2.5 billion, compared to $1.9 billion in 2015. Sales in other international locations were $2.1 billion in 2016, compared to $1.9 billion in 2015.


Research and development (R&D) expenses increased 69% to $5.1 billion for 2016 compared to 2015, primarily due to the overall progression of clinical studies, including ongoing milestone payments, our purchase of an FDA priority review voucher, up-front collaboration expenses related to our license and collaboration agreement with Galapagos and our purchase of Nimbus. In addition, we recorded in-process R&D (IPR&D) impairment charges related to momelotinib and simtuzumab.
Selling, general and administrative (SG&A) expenses were $3.4 billion for 2016 and 2015. Declines in our branded prescription drug (BPD) fee expense were offset by higher costs to support new product launches and our geographic expansion.
Net income attributable to Gilead for 2016 was $13.5 billion or $9.94 per diluted share, compared to $18.1 billion or $11.91 per diluted share in 2015, primarily due to lower product sales and higher R&D expenses. Year-over-year earnings per share were favorably impacted by our share repurchase activities. During 2016, we repurchased a total of 123 million shares for $11.0 billion, of which 54 million shares or $5.0 billion were repurchased under an accelerated stock repurchase program.
As of December 31, 2016, we had $32.4 billion of cash, cash equivalents and marketable securities, compared to $26.2 billion as of December 31, 2015. This increase was primarily due to the issuance of $5.0 billion aggregate principal amount of senior unsecured notes in September 2016 (the 2016 Notes). During 2016, we generated $16.7 billion in operating cash flow, utilized $11.0 billion to repurchase stock and paid cash dividends of $2.5 billion. Outlook 2017
In 2017, we will continue to maintain our strong operating and financial discipline. From a R&D perspective, we will continue to invest in conducting new and ongoing clinical studies, which support both our existing products and our product candidates. We expect to move forward on a number of late-stage clinical studies for new product candidates, including progress of our Phase 3 studies of selonsertib for NASH. In order to further develop our product pipeline, we will focus on leveraging our capital to pursue external licensing and acquisition opportunities which fit into our long-term strategic plan.
From a commercial perspective, we will continue to focus on supporting the uptake of our recently launched TAF-based regimens and continue to promote the use of our existing commercial products. We also hired a field-based team to promote Truvada for PrEP as we believe it will continue to be an integral part of our growth in HIV in the United States as communities embrace the public health benefits of prevention. In HCV, it is very difficult for us to accurately predict our revenue because HCV is a cure market. We expect patient starts to decline relative to 2016 in all major markets, and this will be the primary driver of our expected decline in total product sales. We also expect product sales to be impacted by the effects of competition on market share and net price, as well as a continued decrease in the average duration of treatment as fewer patients are treated for 24 or 12 weeks and more patients are treated for 8 weeks. While we anticipate HCV revenues in 2017 to decline from prior year levels, there are still many patients to treat and we expect our HCV products to generate significant revenues and cash flows in the future. We will continue to focus on helping HCV patients get diagnosed and into treater care. In addition, we will continue to invest strategically and selectively in educational programs that raise awareness and access to our medications.
We will continue to focus on ensuring patient access to our products around the world. Our progress on all of these initiatives is subject to a number of uncertainties, including, but not limited to, the continuation of an uncertain global macroeconomic environment; additional pricing pressures from payers and competitors; slower than anticipated growth in our HIV franchise; an increase in discounts, chargebacks and rebates due to ongoing contracts and future negotiations with commercial and government payers; market share and price erosion caused by the introduction of generic versions of Truvada outside the United States and Viread later in 2017; inaccuracies in our HCV patient start estimates; potential amendments to the Affordable Care Act or other government action that could have the effect of lowering prices; a larger than anticipated shift in payer mix to more highly discounted payer segment; and volatility in foreign currency exchange rates.


2016 Results of Operations

Total Revenues
The following table summarizes the period over period changes in our product
sales and royalty, contract and other revenues:
(In millions, except percentages)        2016      Change      2015      Change      2014
Revenues:
Product sales                          $ 29,953      (7 )%   $ 32,151      31 %    $ 24,474
Royalty, contract and other revenues        437     (10 )%        488      17 %         416
Total revenues                         $ 30,390      (7 )%   $ 32,639      31 %    $ 24,890


Product Sales
2016 Compared to 2015

Total product sales were $30.0 billion in 2016, compared to $32.2 billion in 2015, primarily due to a decrease in antiviral product sales.
Antiviral product sales, which include sales of our HIV and other antiviral products and our HCV products, were $27.7 billion in 2016, compared to $30.2 billion in 2015. HIV and other antiviral product sales were $12.9 billion in 2016, compared to $11.1 billion in 2015. The increase was primarily driven by the continued uptake of our TAF-based products, Genvoya, Descovy and Odefsey, partially offset by decreases in sales of tenofovir disoproxil (TDF)-based products. HCV product sales, which consist of Harvoni, Sovaldi and Epclusa, were $14.8 billion in 2016, compared to $19.1 billion in 2015. The declines were due to lower sales of Harvoni and Sovaldi, partially offset by sales of Epclusa, which was launched in 2016 across various locations.
Other product sales, which include sales of Letairis, Ranexa and AmBisome, were $2.2 billion in 2016, an increase of 14% compared to $1.9 billion in 2015. Of our product sales in 2016, 36% were generated outside the United States. We faced exposure to movements in foreign currency exchange rates, primarily in the Euro and Yen. We used foreign currency exchange contracts to hedge a percentage of our foreign currency exposure. Foreign currency exchange, net of hedges, had an unfavorable impact of $498 million on our 2016 product sales compared to 2015.
We record product sales net of estimated mandatory and supplemental discounts to government payers, in addition to discounts to private payers, including rebates, chargebacks, cash discounts for prompt payment, distributor fees and other related costs. These deductions are generally referred to as gross-to-net deductions and totaled $20.3 billion or 40% of gross product sales in 2016, compared to $18.1 billion or 36% in 2015. Of the $20.3 billion in 2016, $19.1 billion or 38% of gross product sales was related to government and other rebates and chargebacks, and $1.2 billion was related to cash discounts for prompt payment, distributor fees and other related costs. The increase in our 2016 gross-to-net deductions was primarily due to an increase in discounts and a higher percentage of sales to more deeply discounted segments for our HCV products in the United States.
Product sales in the United States decreased by 9% to $19.3 billion in 2016, compared to $21.2 billion in 2015. Declines in sales of our HCV products were partially offset by increases in sales of our HIV and other antiviral products. The increases in the sales of our HIV and other antiviral products were primarily driven by sales of our newly launched TAF-based products and a favorable revision to our rebate reserves of $332 million, primarily related to our TDF-based products.
Product sales in Europe decreased by 15% to $6.1 billion in 2016, compared to $7.2 billion in 2015, primarily due to lower Harvoni and Sovaldi sales volume. Foreign currency exchange, net of hedges, had an unfavorable impact of $503 million on our product sales in 2016 compared to 2015.
Product sales in Japan, which consist of Sovaldi and Harvoni, increased by 31% to $2.5 billion in 2016, compared to $1.9 billion in 2015. The increase was primarily driven by higher sales volume of Harvoni, which was launched in September 2015, partially offset by a mandatory price reduction of 32% for Sovaldi and Harvoni that was effective April 1, 2016.
Product sales in other international locations increased by 10% to $2.1 billion in 2016, compared to $1.9 billion in 2015, primarily driven by continued launches of our HCV and TAF-based products across various locations. 2015 Compared to 2014
Total product sales were $32.2 billion in 2015, compared to $24.5 billion in 2014, primarily driven by an increase in antiviral product sales.


Antiviral product sales were $30.2 billion in 2015, compared to $22.8 billion in 2014. The increase was primarily driven by the launch of Harvoni across various geographies, partially offset by a decline in Sovaldi sales with patients being prescribed Harvoni instead of Sovaldi. HIV products also contributed to the sales increases primarily due to increased sales of our newer HIV single-tablet regimens, Stribild, Complera/Eviplera and Genvoya, partially offset by declines in Atripla sales volumes.
Other product sales, which include sales of Letairis, Ranexa, AmBisome and Zydelig, were $1.9 billion in 2015, an increase of 16% compared to $1.7 billion in 2014.
Of our product sales in 2015, 34% were generated outside the United States. Foreign currency exchange, net of hedges, had an unfavorable impact of $737 million on our 2015 product sales compared to 2014.
Our gross-to-net deductions totaled $18.1 billion or 36% in 2015, compared to $7.3 billion or 23% in 2014. Of the $18.1 billion in 2015, $16.4 billion or 33% of gross product sales was related to government and other rebates and chargebacks, and $1.7 billion was related to cash discounts for prompt payment, distributor fees and other related costs. Our 2015 gross-to-net deductions attributable to our HCV product sales exceeded our overall gross-to-net of 36% in order to obtain formulary status or expand access for patients. Product sales in the United States increased by 17% to $21.2 billion in 2015, compared to $18.1 billion in 2014, primarily due to sales of Harvoni and increases in sales of Stribild, Truvada and Complera, partially offset by declines in sales of Sovaldi.
Product sales in Europe increased by 39% to $7.2 billion in 2015, compared to $5.1 billion in 2014, primarily due to sales of Harvoni. Foreign currency exchange, net of hedges, had an unfavorable impact of $611 million on our product sales in 2015 compared to 2014.
Product sales in other international locations increased to $3.8 billion in 2015 compared to $1.2 billion in 2014, primarily due to the launch in Japan of Sovaldi in May 2015 and Harvoni in September 2015.
The following table summarizes the period over period changes in our product sales:

(In millions, except percentages)     2016      Change      2015      Change      2014
Antiviral products:
HCV products
Harvoni                             $  9,081     (34 )%   $ 13,864       *      $  2,127
Sovaldi                                4,001     (24 )%      5,276     (49 )%     10,283
Epclusa                                1,752       *             -       *             -
HIV and other antiviral products
Truvada                                3,566       3  %      3,459       4  %      3,340
Atripla                                2,605     (17 )%      3,134     (10 )%      3,470
Stribild                               1,914       5  %      1,825      52  %      1,197
Genvoya                                1,484       *            45       *             -
Complera/Eviplera                      1,457       2  %      1,427      16  %      1,228
Viread                                 1,186       7  %      1,108       5  %      1,058
Odefsey                                  329       *             -       *             -
Descovy                                  298       *             -       *             -
Other antiviral                           72       4  %         69     (22 )%         88
Total antiviral products              27,745      (8 )%     30,207      33  %     22,791
Other products:
Letairis                                 819      17  %        700      18  %        595
Ranexa                                   677      15  %        588      15  %        510
AmBisome                                 356       2  %        350     (10 )%        388
Zydelig                                  168      27  %        132       *            23
Other                                    188       8  %        174       4  %        167
Total product sales                 $ 29,953      (7 )%   $ 32,151      31  %   $ 24,474
_______________________

* Percentage not meaningful


The following is additional discussion of our results by product:
• Harvoni

Harvoni was approved by FDA in October 2014, by the European Commission in November 2014 and by the Japanese MHLW in July 2015.
Harvoni sales accounted for 33%, 46% and 9% of our total antiviral product sales for 2016, 2015 and 2014, respectively. In 2016, product sales were $4.9 billion in the United States, $1.8 billion in Europe, $1.8 billion in Japan and $491 million in other international locations. In 2015, product sales were $10.1 billion in the United States, $2.2 billion in Europe, $1.0 billion in Japan and $545 million in other international locations. In 2014, product sales were $2.0 billion in the United States and $103 million in Europe.
In the United States, the decrease in 2016 compared to 2015 was primarily due to lower sales volume and a lower average net selling price, which was partially offset by a favorable revision to our sales return reserve of $181 million recorded during the second quarter of 2016. The number of patients that started treatment with Harvoni in the United States peaked in the first half of 2015, as many warehoused patients initiated treatment after the product launch. In Europe, the decrease in 2016 compared to 2015 was primarily due to lower sales volume and unfavorable foreign currency exchange, net of hedges. In Japan, the increase in 2016 compared to 2015 was driven by higher sales volume, partially offset by a mandatory price reduction of 32% that was effective April 1, 2016. In other international locations, the decrease in 2016 compared to 2015 was primarily due to a lower average net selling price, partially offset by the continued launches of Harvoni across various locations.
The increase in product sales in 2015 compared to 2014 was primarily due to the launch of Harvoni in the United States, Europe and Japan.
• Sovaldi

Sovaldi was approved by FDA in December 2013, by the European Commission in January 2014 and by the Japanese MHLW in March 2015.
Sovaldi sales accounted for 14%, 17% and 45% of our total antiviral product sales for 2016, 2015 and 2014, respectively. In 2016, product sales were $1.9 billion in the United States, $891 million in Europe, $635 million in Japan and $580 million in other international locations. In 2015, product sales were $2.4 billion in the United States, $1.6 billion in Europe, $878 million in Japan and $409 million in other international locations. In 2014, product sales were $8.5 billion in the United States, $1.5 billion in Europe and $230 million in other international locations.
In the United States, the decrease in 2016 compared to 2015 was primarily due to lower sales volume, partially offset by a favorable revision to our sales return reserve of $98 million recorded during the second quarter of 2016. In Europe, the decrease in 2016 compared to 2015 was primarily due to lower sales volume. In Japan, the decrease in 2016 compared to 2015 was primarily due to a mandatory price reduction of 32% that was effective April 1, 2016 and lower sales volume. In other international locations, the increase in 2016 compared to 2015 was primarily driven by higher sales volume.
The decrease in product sales in 2015 compared to 2014 was primarily due to volume declines in the United States with patients being prescribed Harvoni instead of Sovaldi, partially offset by volume increases in Japan and Europe due to the launch of Sovaldi.
• Epclusa

Epclusa was launched in the United States and Europe in June and July 2016, respectively, and accounted for 6% of our total antiviral product sales. In 2016, product sales were $1.8 billion, primarily driven by sales in the United States of $1.6 billion.
• Truvada

Truvada sales accounted for 13%, 11% and 15% of our total antiviral product sales for 2016, 2015 and 2014, respectively. In 2016, product sales were $2.4 billion in the United States, $913 million in Europe and $269 million in other international locations. In 2015, product sales were $2.1 billion in the United States, $1.1 billion in Europe and $284 million in other international locations. In 2014, product sales were $1.8 billion in the United States, $1.3 billion in Europe and $278 million in other international locations. Truvada sales increased by 3% to $3.6 billion in 2016, compared to $3.5 billion in 2015, primarily due to a higher average net selling price and higher sales volume in the United States, as a result of the increased usage of Truvada for PrEP. Truvada sales increased by 4% in 2015, compared to $3.3 billion in 2014, primarily due to sales volume growth and an increase in the average net selling price in the United States.


• Atripla

Atripla sales accounted for 9%, 10% and 15% of our total antiviral product sales for 2016, 2015 and 2014, respectively. In 2016, product sales were $1.9 billion in the United States, $520 million in Europe and $187 million in other international locations. In 2015, product sales were $2.2 billion in the United States, $694 million in Europe and $218 million in other international locations. In 2014, product sales were $2.4 billion in the United States, $888 million in Europe and $225 million in other international locations. Atripla sales decreased by 17% to $2.6 billion in 2016, compared to $3.1 billion in 2015 and by 10% in 2015, compared to $3.5 billion in 2014, primarily due to declines in sales volume as doctors prescribed newer regimens, including TDF- and TAF-based regimens. The efavirenz component of Atripla, which has a gross margin of zero, comprised $966 million, $1.2 billion and $1.3 billion of our Atripla sales in 2016, 2015 and 2014, respectively.
A generic version of Bristol-Myers Squibb Company's Sustiva (efavirenz) was made available in Canada and Europe in 2013 and will be made available in the United States in 2017. While we have observed some pricing pressure related to the efavirenz component of our Atripla sales, we have not yet observed any meaningful splitting of the Atripla single-tablet regimen.
• Stribild

Stribild sales accounted for 7%, 6% and 5% of our total antiviral product sales for 2016, 2015 and 2014, respectively. In 2016, product sales were $1.5 billion in the United States and $314 million in Europe. In 2015, product sales were $1.5 billion in the United States and $282 million in Europe. In 2014, product sales were $1.0 billion in the United States and $145 million in Europe. Stribild sales increased by 5% to $1.9 billion in 2016, compared to $1.8 billion in 2015, primarily due to a favorable revision to our rebate reserves of $223 million during the third quarter of 2016, partially offset by lower sales volume as a result of the continued launch of our new TAF-based product, Genvoya. Stribild sales increased by 52% in 2015, compared to $1.2 billion in 2014, primarily due to higher sales volume in the United States and Europe.
• TAF-based regimens - Genvoya, Descovy and Odefsey

Genvoya was launched in the United States and Europe in November 2015. Descovy was launched in the United States and Europe in April 2016. Odefsey was launched in the United States in March 2016 and launched in Europe in July 2016. Our newly launched TAF-based regimens accounted for 8% of our total antiviral product sales for 2016. In 2016, product sales of our TAF-based regimens were $2.1 billion, primarily driven by sales in the United States of $1.8 billion.
• Complera/Eviplera

Complera/Eviplera sales accounted for 5% of our total antiviral product sales for 2016, 2015 and 2014. In 2016, product sales were $821 million in the United States and $580 million in Europe. In 2015, product sales were $796 million in the United States and $576 million in Europe. In 2014, product sales were $663 million in the United States and $513 million in Europe.
Complera/Eviplera sales increased by 2% to $1.5 billion in 2016, compared to $1.4 billion in 2015, primarily due to a favorable revision to our rebate reserves of $89 million during the third quarter of 2016. Complera/Eviplera increased by 16% in 2015, compared to $1.2 billion in 2014, driven primarily by higher sales volume in the United States and Europe. Royalty, Contract and Other Revenues
The following table summarizes the period over period changes in our royalty, contract and other revenues:
(In millions, except percentages) 2016 Change 2015 Change 2014 Royalty, contract and other revenues $ 437 (10 )% $ 488 17 % $ 416

Royalty, contract and other revenues declined by 10% to $437 million in 2016, compared to $488 million in 2015 and increased by 17% in 2015, compared to $416 million in 2014. The changes were primarily due to royalty revenues from F. Hoffman-La Roche Ltd for sales of Tamiflu. The majority of our royalties are recognized in the quarter following the quarter in which the corresponding product 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 millions, except percentages)      2016      Change       2015      Change       2014
Total product sales                 $ 29,953      (7 )%    $ 32,151       31 %    $ 24,474
Cost of goods sold                  $  4,261       6  %    $  4,006        6 %    $  3,788
Product gross margin                      86 %                   88 %                   85 %

Our product gross margin for 2016 decreased compared to 2015 primarily due to changes in product mix, as our HCV product sales decreased as a percentage of total product sales. Our product gross margin for 2015 increased compared to 2014 primarily due to changes in product mix, as Atripla sales, which include . . .

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