01—Abstract
Summary
Summary of the 10-K filed February 27, 2007. Cited figures are marked; the original filing is the authoritative source.
Gilead Sciences' FY2006 10-K shows a company transformed by scale but whose reported 2006 earnings were dominated by a one-time charge.
Total revenues rose 49% to $3.03 billiona, driven by HIV product sales of $2.13 billion (up 52%), with Truvada ($1.19 billion) overtaking Viread as the leading product and the Atripla single-tablet regimen launching in July 2006 with $206 million in first-half-year sales. Royalty revenue more than doubled to $416.5 million, mostly from Roche's Tamiflu, and product gross margin dipped to 83% from 86%. The headline result was a net loss of $1.19 billion ($2.59 per share), versus net income of $814 million in 2005.
The loss reflects $2.39 billionb of purchased in-process R&D from the acquisitions of Myogen ($2.44 billion purchase price, including ambrisentan for pulmonary arterial hypertension), Corus Pharma (aztreonam lysine for cystic fibrosis), and the Raylo manufacturing facility. Because the IPR&D is expensed and not tax-deductible, the company also booked a $552 million tax provision. Excluding that charge, the underlying business remained highly profitable, though stock-based compensation under SFAS 123R (about $134 million) and a 2007 guidance calling for lower gross margins and higher R&D and SG&A weigh on near-term earnings.
Investors should weigh the pipeline catalysts against balance sheet and concentration risks. Ambrisentan has a priority-review target date of June 2007, and aztreonam lysine's second Phase 3 readout is expected mid-2007.
Against that, the company carries $1.3 billionc of convertible notes, cash fell 40% to $1.39 billion after the acquisitions, and it secured covenant waivers after the IPR&D charge pushed it out of compliance. Revenue remains concentrated in HIV nucleosides, roughly 70% of total revenue, with exposure to European government payment delays, Medicare Part D pricing pressure, and a San Francisco U.S. Attorney subpoena concerning Truvada, Viread and Emtriva marketing.
02—Key points
Key Highlights
- Total revenues grew 49% to $3.03 billion in 2006, with product sales up 43% to $2.59 billion, led by HIV products up 52% to $2.13 billion.
- Net loss of $1.19 billion ($2.59 per share) versus 2005 net income of $814 million, driven by a $2.39 billion purchased IPR&D charge from the Myogen and Corus acquisitions and a $552 million tax provision.
- Truvada sales more than doubled to $1.19 billion, becoming the largest product; Viread declined 11% to $689 million as patients switched to Truvada and Atripla.
- Atripla launched in the U.S. in July 2006 and generated $206 million in sales; the EU filing is pending with BMS and Merck.
- Royalty revenue rose 112% to $416.5 million, of which $364.6 million came from Roche's Tamiflu sales, a concentration tied to flu and pandemic-planning demand.
- Pipeline catalysts for 2007 include the ambrisentan NDA (FDA priority review, target date June 2007) and aztreonam lysine Phase 3 data (mid-2007), with a potential filing in the second half of 2007.
- Balance sheet changed materially: $1.3 billion of 0.5%/0.625% convertible notes due 2011/2013 were issued, cash and marketable securities fell 40% to $1.39 billion, and covenant waivers were obtained after the IPR&D charge.
03—Questions
Frequently Asked Questions
Why did Gilead report a large net loss in 2006 after a profitable 2005?
The loss was caused by non-cash, one-time charges tied to acquisitions. Gilead expensed $2.39 billion of purchased in-process R&D, mainly from acquiring Myogen ($2.06 billion) and Corus ($335.6 million). Because this IPR&D is not federally tax-deductible, the company recorded a $551.8 million tax provision, producing a net loss of $1.19 billion. Excluding these items, operating performance was strong.
How concentrated is Gilead's revenue, and what are the main risks?
HIV products accounted for about 70% of 2006 total revenue, and Truvada and Viread represented about 88% of HIV sales. Risks include a shift in HIV treatment paradigms away from nucleosides, generic competition, and pricing pressure from Medicare Part D and European governments. Three wholesalers accounted for about 87% of U.S. product sales, and Greek, Italian, Portuguese and Spanish receivables were slow-paying, totaling $330.5 million in government-related accounts receivable.
What are the key near-term catalysts for investors?
The ambrisentan NDA for pulmonary arterial hypertension has FDA priority review with a target date in June 2007. The second Phase 3 study of inhaled aztreonam lysine for cystic fibrosis is due mid-2007, with an NDA planned for the second half of 2007 if positive. The Phase 3 hepatitis B studies comparing tenofovir disoproxil fumarate with Hepsera are expected in the second half of 2007. The GS 9137 integrase inhibitor is moving toward Phase 2/3.
What does the 2007 outlook imply for margins and expenses?
Management expects product gross margin to decline in 2007, reflecting a higher mix of Atripla, whose Sustiva component carries zero product gross profit. R&D and SG&A expenses are also expected to rise, driven by the ambrisentan launch sales force, global commercial expansion, and the operating costs of the Corus and Myogen acquisitions. Stock-based compensation under SFAS 123R, which was $133.8 million in 2006, will continue to weigh on reported earnings.
Does Gilead face any legal or regulatory overhang?
Yes. In November 2006 the U.S. Attorney's Office in San Francisco subpoenaed documents on marketing and medical education for Truvada, Viread and Emtriva. Gilead is also named in several state and county Medicaid average-wholesale-price suits, and the plaintiffs appealed the dismissal of a securities class action. In February 2007 the FDA also found irregularities at a third-party CRO performing bioanalytical work for some Gilead studies, and the company does not yet know whether this affects its clinical data.
04—Continue