Is Gilead's 2004 profit sustainable, or was it boosted by one-time items?

Part of the improvement is a comparison effect: 2003 included a $488.6 million non-cash in-process R&D charge from the Triangle acquisition. Smaller 2004 items cut both ways: a $20.6 million gain on Eyetech warrants and a $14.2 million tax valuation allowance release helped, while a $7.4 million make-whole payment on the redeemed 2% convertible notes hurt. The underlying growth in Viread and Truvada sales is the more durable driver, though the effective tax rate of 31.5% and the coming SFAS 123R expense will affect future earnings.

How concentrated is Gilead's revenue, and what could hurt it?

Very concentrated. Viread alone was 63% of product sales, and HIV products plus AmBisome were about 90%. Risks include competition from GSK's fixed-dose combinations and BMS's Reyataz, generic price erosion (Retrovir generics expected in 2005), mandatory discounts in Germany and Italy, compulsory licensing in developing countries, and parallel imports. Three U.S. wholesalers account for roughly 81% of U.S. product sales, so inventory swings can cause quarterly volatility.

What is the outlook for the BMS joint venture and the pipeline?

In December 2004 Gilead and Bristol-Myers Squibb formed a joint venture to develop and sell a once-daily fixed-dose combination of Truvada and Sustiva in the U.S. Gilead will consolidate it from 2005, with BMS holding a minority interest, and the filing says there was no financial information to consolidate in 2004. Beyond that, the pipeline is early: R&D rose 23% to $223.6 million, and the company added hepatitis C collaborations with Achillion and Genelabs, which management says will take many years and extensive investment.

What are the main regulatory or pricing risks in Europe?

European governments are pushing prices down, and Gilead said it saw significant price decreases across much of Europe in 2004 that it expects to continue. Some countries, notably Germany and Italy, are considering or have enacted mandatory discounts on reimbursed drugs. Payment delays from government-supported customers in Southern Europe are significant, and cross-border trade rules in the EU allow arbitrage that could cut sales in higher-priced markets. Truvada launched in the EU only after approval in February 2005, so its European ramp is still ahead.

GILD 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 14, 2005. Cited figures are marked; the original filing is the authoritative source.

Gilead Sciences' 2004 Form 10-K shows a company that crossed from growth story into profitability.

Total revenues rose 53% to $1.32 billion^a in 2004 (from $867.9 million in 2003), and net income swung to $449.4 million, or $0.99 per diluted share, versus a net loss of $72.0 million in 2003. That 2003 loss was driven by a $488.6 million in-process R&D charge tied to the Triangle Pharmaceuticals acquisition, so the 2004 comparison is flattered by a non-recurring base. Operating cash flow was $511.4 million, and cash plus marketable securities ended the year at $1.25 billion, up from $707.0 million.

Note that 2004 net income also benefited from a $157.8 million^b-style non-operating gain pattern only in 2001; in 2004 the relevant one-offs were a $20.6 million Eyetech warrant gain, a $7.4 million make-whole charge, and a $14.2 million valuation allowance release. The business is concentrated. HIV products (Viread, Emtriva, and the newly launched Truvada) generated $908.4 million, or 73% of product sales, and AmBisome contributed another $211.7 million, so roughly 90% of product sales came from two franchises.

Viread alone was 63% of product sales. Management guided 2005 HIV product sales to $1.2^c–1.25 billion, AmBisome to $195–205 million, R&D to $240–260 million, and SG&A to $350–370 million. The company also flagged that the 2005 effective tax rate and earnings will be affected by SFAS 123R stock option expensing beginning in the third quarter of 2005, which management expects to have a material impact.

Investors should weigh several risks alongside the growth. Competition is intensifying in HIV and AmBisome, with generic Videx already on the market and GSK, BMS, and Merck products pressuring share. Roughly half of product sales are outside the U.S., exposing results to currency moves, and receivables from government-supported customers in Greece, Italy, Portugal and Spain stood at $231.9 million^d, with $166.6 million past due.

Litigation includes Medicaid average wholesale price suits and a federal securities class action. The company's pipeline is thin relative to its revenue base, with most near-term growth tied to existing products and the planned BMS fixed-dose combination with Sustiva.

02—Key points

Key Highlights

Revenue grew 53% to $1.32 billion in 2004, led by Viread (+38% to $782.9 million) and the first Truvada and expanded Emtriva sales (Emtriva rose to $57.6 million from $10.0 million).
Net income reached $449.4 million ($0.99 diluted EPS) versus a $72.0 million loss in 2003, which included a $488.6 million in-process R&D charge from the Triangle acquisition, so the year-over-year comparison is inflated.
HIV products were 73% of product sales ($908.4 million) and AmBisome was 17% ($211.7 million); together they make up about 90% of product revenue, a meaningful concentration risk.
Operating cash flow of $511.4 million (up from $234.6 million) and cash plus marketable securities of $1.25 billion (up from $707.0 million) give the company substantial financial flexibility.
Guidance for 2005 calls for HIV product sales of $1.2–1.25 billion, AmBisome of $195–205 million, R&D of $240–260 million, and SG&A of $350–370 million, with SFAS 123R stock option expensing expected to materially reduce earnings starting Q3 2005.
Europe is a key exposure: about half of product sales are non-U.S., receivables from Greece, Italy, Portugal and Spain reached $371.2 million in total AR with $166.6 million past due, and European price cuts continued through 2004.
Legal overhang includes multiple Medicaid average wholesale price suits (many co-defendants, not yet quantified or accrued) and a federal securities class action that was dismissed with leave to amend in January 2005.

03—Questions

Frequently Asked Questions

Is Gilead's 2004 profit sustainable, or was it boosted by one-time items?
Part of the improvement is a comparison effect: 2003 included a $488.6 million non-cash in-process R&D charge from the Triangle acquisition. Smaller 2004 items cut both ways: a $20.6 million gain on Eyetech warrants and a $14.2 million tax valuation allowance release helped, while a $7.4 million make-whole payment on the redeemed 2% convertible notes hurt. The underlying growth in Viread and Truvada sales is the more durable driver, though the effective tax rate of 31.5% and the coming SFAS 123R expense will affect future earnings.
How concentrated is Gilead's revenue, and what could hurt it?
Very concentrated. Viread alone was 63% of product sales, and HIV products plus AmBisome were about 90%. Risks include competition from GSK's fixed-dose combinations and BMS's Reyataz, generic price erosion (Retrovir generics expected in 2005), mandatory discounts in Germany and Italy, compulsory licensing in developing countries, and parallel imports. Three U.S. wholesalers account for roughly 81% of U.S. product sales, so inventory swings can cause quarterly volatility.
What is the outlook for the BMS joint venture and the pipeline?
In December 2004 Gilead and Bristol-Myers Squibb formed a joint venture to develop and sell a once-daily fixed-dose combination of Truvada and Sustiva in the U.S. Gilead will consolidate it from 2005, with BMS holding a minority interest, and the filing says there was no financial information to consolidate in 2004. Beyond that, the pipeline is early: R&D rose 23% to $223.6 million, and the company added hepatitis C collaborations with Achillion and Genelabs, which management says will take many years and extensive investment.
What are the main regulatory or pricing risks in Europe?
European governments are pushing prices down, and Gilead said it saw significant price decreases across much of Europe in 2004 that it expects to continue. Some countries, notably Germany and Italy, are considering or have enacted mandatory discounts on reimbursed drugs. Payment delays from government-supported customers in Southern Europe are significant, and cross-border trade rules in the EU allow arbitrage that could cut sales in higher-priced markets. Truvada launched in the EU only after approval in February 2005, so its European ramp is still ahead.

04—Continue

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