GILEAD SCIENCES, INC. The following discussion and analysis is intended to provide material information around events and uncertainties known to management relevant to an assessment of the financial condition and results of operations of Gilead and should therefore be read 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 endedDecember 31, 2021 and our unaudited Condensed Consolidated Financial Statements for the three and six months endedJune 30, 2022 and related notes thereto (including Note 1. Organization and Summary of Significant Accounting Policies and Note 6. Acquisitions, Collaborations and Other Arrangements) and other disclosures (including Part II, Item 1A. Risk Factors) included in this Quarterly Report on Form 10-Q where other material events and uncertainties not otherwise discussed below are disclosed. Certain amounts and percentages herein may not sum or recalculate due to rounding.
MANAGEMENT OVERVIEW
Gilead Sciences, Inc. ("Gilead," "we," "our" or "us") is a biopharmaceutical company that has pursued and achieved breakthroughs in medicine for more than three decades, with the goal of creating a healthier world for all people. We are committed to advancing innovative medicines to prevent and treat life-threatening diseases, including HIV, viral hepatitis and cancer. We operate in more than 35 countries worldwide, with headquarters inFoster City, California . Business Highlights(1) Virology •InJuly 2022 , we announcedU.S. Food and Drug Administration ("FDA") accepted for review the New Drug Application resubmission for investigational lenacapavir for the treatment of HIV-1 infection in heavily treatment-experienced people with multidrug resistant HIV-1 infection. FDA has assigned a Prescription Drug User Fee Act date ofDecember 27, 2022 . •InJuly 2022 , we received a positive opinion fromEuropean Medicines Agency's ("EMA") Committee for Medicinal Products for Human Use ("CHMP") for Veklury to be granted full marketing authorization for the treatment of coronavirus disease 2019 ("COVID-19") in adults and adolescents with pneumonia requiring supplemental oxygen and adults who do not require supplemental oxygen and are at increased risk of developing severe COVID-19.
•In
•InMay 2022 , we announced FDA lifted the clinical hold placed on the Investigational New Drug Application to evaluate injectable lenacapavir for HIV treatment and pre-exposure prophylaxis following the agency's review of the storage and compatibility data of lenacapavir injection with an alternate vial made from aluminosilicate glass. •InApril 2022 , FDA approved a supplemental new drug application for Veklury for the treatment of pediatric patients under 12 years of age for the treatment of COVID-19. Oncology •InAugust 2022 , we received updated National Comprehensive Cancer Network ("NCCN") recommendations for sacituzumab govitecan-hziy to a category 1 preferred recommendation in second-line and later metastatic triple-negative breast cancer ("TNBC") and was added as a category 2A preferred recommendation in the investigational indication of HR+/HER2- advanced breast cancer by the NCCN Guidelines® for Breast Cancer. Category 1 is the highest recommendation by NCCN, indicating that based upon high-level evidence, there is uniform NCCN consensus that the intervention is appropriate. The use of Trodelvy in patients with HR+/HER2- breast cancer is investigational, and Trodelvy has not been approved by FDA for this use.
•In
•InJune 2022 , theEuropean Commission approved Yescarta for the treatment of adult patients with r/r follicular lymphoma ("FL") after three or more lines of systemic therapy.
•In
________________________________
(1) We announced and discussed these updates in further detail in press
releases available on our website at www.gilead.com. Readers are also encouraged
to review all other press releases available on our website mentioned above. The
content on the referenced websites does not constitute a part of and is not
incorporated by reference into this Quarterly Report on Form 10-Q.
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•In April 2022 , FDA granted approval to Yescarta as initial treatment for adults
with large B-cell lymphoma ("LBCL") that is refractory to or relapses within 12
months of first-line chemoimmunotherapy.
Corporate
•InAugust 2022 , we entered into an agreement to acquire all of the outstanding share capital ofMiroBio Ltd , a privately-heldU.K. -based biotechnology company focused on restoring immune balance with agonists targeting immune inhibitory receptors, for a total of$405 million in cash consideration, subject to customary adjustments. Closing of the transaction is subject to antitrust clearances required by theU.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other customary conditions. •InApril 2022 , we entered into a strategic research collaboration agreement (the "Dragonfly Collaboration Agreement") withDragonfly Therapeutics, Inc. ("Dragonfly") to develop natural killer cell engager-based immunotherapies for oncology and inflammation indications. Upon closing of the Dragonfly Collaboration Agreement, we made a$300 million upfront payment to Dragonfly.
Quarterly Financial Highlights
Three Months Ended Six Months Ended
June 30, June 30,
(in millions, except percentages and
per share amounts) 2022 2021 Change 2022 2021 Change
Total revenues $ 6,260 $ 6,217 1 % $ 12,850 $ 12,640 2 %
Net income attributable to Gilead $ 1,144 $ 1,522 (25) % $ 1,163 $ 3,251 (64) %
Net income per share attributable to
Gilead common stockholders - diluted $ 0.91 $ 1.21 (25) % $ 0.92 $ 2.58 (64) %
Total revenues increased by 1% and 2% to $6.3 billion and $12.8 billion for the
three and six months ended June 30, 2022 , respectively, compared to the same
periods in 2021, primarily due to higher product sales in HIV, cell therapy and
Trodelvy, partially offset by lower sales of Veklury and lower chronic hepatitis
C virus ("HCV") product sales.
Net income attributable to Gilead was $1.1 billion , or $0.91 diluted earnings
per share, for the three months ended June 30, 2022 , compared to $1.5 billion ,
or $1.21 diluted earnings per share for the same period in 2021. The decrease
was primarily due to higher total costs and expenses driven by an upfront
payment related to the Dragonfly collaboration and higher net unrealized losses
from our equity investments, partially offset by higher revenues.
Net income attributable to Gilead was $1.2 billion , or $0.92 diluted earnings
per share, for the six months ended June 30, 2022 , compared to $3.3 billion , or
$2.58 diluted earnings per share for the same period in 2021. The decrease was
primarily due to a partial in-process research and development ("IPR&D")
impairment charge of $2.7 billion during the three months ended March 31, 2022
related to assets we acquired from Immunomedics, Inc. ("Immunomedics") in 2020,
partially offset by lower income tax expense and higher revenues.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
Revenues
The following table summarizes the period-over-period changes in our Total
revenues:
Three Months Ended June 30, 2022 Three Months Ended June 30, 2021
(in millions, except
percentages) U.S. Europe Other International Total U.S. Europe Other International Total Change
Product sales:
HIV $ 3,383 $ 562 $ 282 $ 4,228 $ 3,044 $ 596 $ 298 $ 3,938 7 %
Veklury 41 126 278 445 416 264 149 829 (46) %
HCV 263 94 91 448 327 93 129 549 (18) %
Chronic hepatitis B
virus ("HBV") /
hepatitis delta virus
("HDV") 100 30 104 234 90 24 123 237 (1) %
Cell therapy 246 105 17 368 140 70 9 219 68 %
Trodelvy 120 35 3 159 89 - - 89 79 %
Other 101 88 67 256 107 100 84 291 (12) %
Total product sales 4,254 1,042 842 6,138 4,213 1,147 792 6,152 - %
Royalty, contract and
other revenues 85 34 2 122 20 45 - 65 87 %
Total revenues $ 4,339 $ 1,076 $ 844 $ 6,260 $ 4,233 $ 1,192 $ 792 $ 6,217 1 %
Six Months Ended June 30, 2022 Six Months Ended June 30, 2021
(in millions, except
percentages) U.S. Europe Other International Total U.S. Europe Other International Total Change
Product sales:
HIV $ 6,245 $ 1,112 $ 577 $ 7,935 $ 5,830 $ 1,174 $ 584 $ 7,588 5 %
Veklury 843 430 708 1,980 1,236 652 397 2,285 (13) %
HCV 462 189 196 847 585 228 246 1,059 (20) %
HBV/HDV 180 57 232 470 171 47 239 457 3 %
Cell therapy 418 197 27 642 259 135 16 410 57 %
Trodelvy 240 61 5 305 161 - - 161 90 %
Other 195 169 129 493 211 186 135 532 (7) %
Total product sales 8,582 2,216
1,873 12,672 8,453 2,422 1,617 12,492 1 %
Royalty, contract and
other revenues 112 61 5 178 40 106 2 148 20 %
Total revenues $ 8,694 $ 2,277 $ 1,878 $ 12,850 $ 8,493 $ 2,528 $ 1,619 $ 12,640 2 %
________________________________
See Note 2. Revenues of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further disaggregation of revenue by product.
HIV
HIV product sales increased by 7% and 5% to$4.2 billion and$7.9 billion for the three and six months endedJune 30, 2022 , respectively, compared to the same periods in 2021, primarily due to changes in product and channel mix leading to higher average realized price and continued higher demand for Biktarvy worldwide, partially offset by lower demand for Truvada, as expected, primarily due to the continued generic competition following theOctober 2020 loss of exclusivity in theU.S. , and for Genvoya, primarily due to patients switching to Biktarvy. We expect that our HIV business will continue to recover from the COVID-19 pandemic in 2022. 30 --------------------------------------------------------------------------------
Veklury
Veklury product sales decreased by 46% and 13% to$445 million and$2.0 billion for the three and six months endedJune 30, 2022 , respectively, compared to the same periods in 2021, primarily due to lower demand driven by reduced hospitalization rates in theU.S. andEurope , partially offset by higher demand in Other International. Sales of Veklury are generally affected by COVID-19 related rates of infections and hospitalizations as well as the availability, uptake and effectiveness of vaccinations and alternative treatments for COVID-19. As a result, future sales of Veklury are difficult to predict and may vary significantly from one period to the next.
HCV
HCV product sales decreased by 18% and 20% to$448 million and$847 million for the three and six months endedJune 30, 2022 , respectively, compared to the same periods in 2021, primarily due to channel mix leading to lower average realized price and fewer patient starts.
HBV / HDV
HBV and HDV product sales decreased by 1% to$234 million for the three months endedJune 30, 2022 , compared to the same period in 2021, primarily due to lower Vemlidy sales in Other International, partially offset by the continued uptake of Hepcludex inEurope .
HBV and HDV product sales increased by 3% to
Cell therapy product sales increased by 68% and 57% to$368 million and$642 million for the three and six months endedJune 30, 2022 , respectively, compared to the same periods in 2021, primarily due to the continued uptake of Yescarta for the treatment of r/r LBCL in theU.S. andEurope , and FL in theU.S. The increase was also driven by higher Tecartus sales volumes resulting from expansion of use inEurope for mantle cell lymphoma and continued adoption in adult patients with r/r ALL in theU.S.
Trodelvy
Trodelvy product sales increased by 79% and 90% to$159 million and$305 million for the three and six months endedJune 30, 2022 , respectively, compared to the same periods in 2021 primarily due to the continued uptake in the second- and third-line setting for the treatment of metastatic TNBC in theU.S. andEurope as well as second-line metastatic urothelial cancer in theU.S.
Other
Other product sales decreased by 12% and 7% to$256 million and$493 million for the three and six months endedJune 30, 2022 , respectively, compared to the same periods in 2021, primarily due to lower demand for Letairis, driven by the continued generic competition following the loss of exclusivity in 2019. The decrease for the three months endedJune 30, 2022 was also driven by lower demand for AmBisome.
Foreign Currency Exchange Impact
Of our total product sales, 31% and 32% were generated outside theU.S. for the three months endedJune 30, 2022 and 2021, respectively. We generally face exposure to movements in foreign currency exchange rates, primarily in the Euro. We use foreign currency exchange contracts to hedge a portion of our foreign currency exposures. Foreign currency exchange, net of hedges, had an unfavorable impact on our total product sales of$85 million for the three months endedJune 30, 2022 , based on a comparison using foreign currency exchange rates from three months endedJune 30, 2021 . Of our total product sales, 32% were generated outside theU.S. for both the six months endedJune 30, 2022 and 2021. Foreign currency exchange, net of hedges, had an unfavorable impact on our total product sales of$182 million for the six months endedJune 30, 2022 , based on a comparison using foreign currency exchange rates from six months endedJune 30, 2021 . 31 --------------------------------------------------------------------------------
Costs and Expenses
The following table summarizes the period-over-period changes in our costs and
expenses:
Three Months Ended Six Months Ended
June 30, June 30,
(in millions, except percentages) 2022 2021 Change 2022 2021 Change
Cost of goods sold $ 1,442 $ 1,390 4 % $ 2,866 $ 2,751 4 %
Product gross margin 76.5 % 77.4 % -89 bps 77.4 % 78.0 % -62 bps
Research and development expenses $ 1,102 $ 1,092 1 % $ 2,280 $ 2,142 6 %
Acquired in-process research and
development expenses $ 330 $ 138 139 % $ 338 $ 205 65 %
In-process research and development
impairment $ - $ - NM $ 2,700 $ - NM
Selling, general and administrative
expenses $ 1,357 $ 1,351 - % $ 2,440 $ 2,406 1 %
_______________________________
NM - Not Meaningful
Product Gross Margin
Product gross margin for the three months endedJune 30, 2022 decreased to 76.5% compared to 77.4% for the same period in 2021, primarily due to higher royalty expenses driven by Biktarvy royalties, and unfavorable manufacturing variances. Product gross margin for the six months endedJune 30, 2022 decreased to 77.4% compared to 78.0% for the same period in 2021, primarily due to changes in product mix, restructuring costs for the closing of aNew Jersey manufacturing site, higher acquisition-related expenses from amortization of finite-lived intangible assets and higher royalty expenses driven by Biktarvy royalties, partially offset by lower inventory reserve adjustments.
Research and Development Expenses
Research and development expenses for the three months ended
Research and development expenses increased by 6% to$2.3 billion for the six months endedJune 30, 2022 , compared to the same period in 2021, primarily due to higher clinical development spend related mostly to Trodelvy and the Arcus Biosciences, Inc. collaboration.
Acquired IPR&D expenses increased by 139% and 65% to$330 million and$338 million for the three and six months endedJune 30, 2022 , respectively, compared to the same periods in 2021, primarily due to an upfront payment related to the Dragonfly collaboration, which we entered into inApril 2022 , as compared to smaller upfront payments made in the prior year. 32 --------------------------------------------------------------------------------
In connection with our acquisition of Immunomedics in 2020, we allocated a portion of the purchase price to acquired IPR&D intangible assets. Approximately$8.8 billion was assigned to IPR&D intangible assets related to Trodelvy for treatment of patients with HR+/HER2- metastatic breast cancer. InMarch 2022 , we received data from the Phase 3 TROPiCS-02 study evaluating Trodelvy in patients with HR+/HER2- metastatic breast cancer who have received prior endocrine therapy, CDK4/6 inhibitors and two to four lines of chemotherapy ("third-line plus patients"). Based on our evaluation of the study results, and in connection with the preparation of the financial statements for the first quarter, we updated our estimate of the fair value of our HR+/HER2- IPR&D intangible asset to$6.1 billion as ofMarch 31, 2022 . Our estimate of fair value used a probability-weighted income approach that discounts expected future cash flows to the present value. The expected cash flows included cash flows from HR+/HER2- metastatic breast cancer for third-line plus patients and patients in earlier lines of therapy which are the subject of separate clinical studies. Our revised discounted cash flows were lower primarily due to a delay in launch timing for third-line plus patients which caused a decrease in our market share assumptions based on the expected competitive environment. There were no changes in our plans or assumptions related to our estimated cash flows for patients in the earlier lines of therapy. We determined the revised estimated fair value was below the carrying value of the asset and, as a result, we recognized a partial impairment charge of$2.7 billion in In-process research and development impairment on our Condensed Consolidated Statements of Income during the three months endedMarch 31, 2022 . The remaining balance of the IPR&D intangible asset for the HR+/HER2- metastatic breast cancer indication can be ascribed to cash flows from earlier lines of therapy, where we have Phase 3 pivotal studies in development, in addition to the revised cash flows related to the third-line plus patient setting. If future events result in adverse changes in the key assumptions used in determining fair value, including the timing of product launches, information on the competitive landscape of treatments in this indication, changes to the probability of technical or regulatory success, failure to obtain anticipated regulatory approval or discount rate, among others, additional impairments may be recorded and could be material to our financial statements. No IPR&D impairment charges were recorded during the three months endedJune 30, 2022 and the six months endedJune 30, 2021 .
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three and six months endedJune 30, 2022 remained relatively unchanged compared to the same periods in 2021. Higher expenses related to grants, information technology projects and promotional and marketing activities in 2022 were largely offset by a reduction in donations to theGilead Foundation .
Interest Expense and Other Income (Expense), Net
The following table summarizes the period-over-period changes in Interest expense and Other income (expense), net:
Three Months Ended Six Months Ended
June 30, June 30,
(in millions, except percentages) 2022 2021 Change 2022 2021 Change
Interest expense $ (242) $ (256) (6) % $ (480) $ (513) (6) %
Other income (expense), net $ (284) $ (173) 64 % $ (395) $ (542) (27) %
Interest expense for the three and six months endedJune 30, 2022 decreased by 6% to$242 million and$480 million , respectively, compared to the same periods in 2021, primarily due to lower debt balances. The changes in Other income (expense), net for the three and six months endedJune 30, 2022 compared to the same periods in 2021 primarily reflect higher and lower net unrealized losses from equity securities, respectively.
Income Taxes
The following table summarizes the period-over-period changes in Income tax
expense:
Three Months Ended Six Months Ended
June 30, June 30,
(in millions, except percentages) 2022 2021 Change 2022 2021 Change
Income before income taxes $ 1,503 $ 1,817 $ (314) $ 1,351 $ 4,081 $ (2,730)
Income tax expense $ (368) $ (300) $ 68 $ (204) $ (842) $ (638)
Effective tax rate 24.5 % 16.5 % 8.0 % 15.1 % 20.6 % (5.5) %
Income tax expense and effective tax rate differed for the three months ended
June 30, 2022 compared to the same period in 2021, primarily due to a discrete
deferred tax benefit related to an intra-entity transfer of intangible assets
recorded in the three months ended June 30, 2021 and an increase in current
quarter unfavorable changes in the fair value of our equity investments that are
non-deductible for income tax purposes.
33
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Income tax expense and effective tax rate differed for the six months ended June
30, 2022 compared to the same period in 2021, primarily due to a partial IPR&D
impairment charge of $2.7 billion recorded in the six months ended June 30,
2022 .
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable debt securities as of
Cash Flows
The following table summarizes our cash flow activities:
Six Months Ended
June 30,
(in millions) 2022 2021
Net cash provided by (used in):
Operating activities $ 3,642 $ 4,926
Investing activities $ (1,378) $ (2,619)
Financing activities $ (2,797) $ (3,408)
Operating Activities
Net cash provided by operating activities is derived by adjusting our net income
for non-cash items and changes in operating assets and liabilities. Net cash
provided by operating activities was $3.6 billion for the six months ended June
30, 2022 compared to $4.9 billion for the same period in 2021. The decrease was
primarily due to the $1.25 billion payment made in the first quarter of 2022 in
connection with the legal settlement related to bictegravir litigation.
Investing Activities
Net cash used in investing activities was$1.4 billion for the six months endedJune 30, 2022 compared to$2.6 billion for the same period in 2021. The decrease was primarily due to lower net purchases of marketable debt and equity securities and fewer payments related to acquisitions, including IPR&D.
Financing Activities
Net cash used in financing activities was$2.8 billion for the six months endedJune 30, 2022 compared to$3.4 billion for the same period in 2021. During the six months endedJune 30, 2022 , we utilized cash for$500 million of debt repayments,$1.9 billion of dividend payments and$424 million of common stock repurchases. During the six months endedJune 30, 2021 , we utilized cash for$1.25 billion of debt repayments,$1.8 billion of dividend payments and$352 million of common stock repurchases.
Debt and Credit Facilities
A summary of our borrowings under various financing arrangements is included in Note 9. Debt and Credit Facilities of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. We may choose to repay certain of our long-term debt obligations prior to maturity dates based on our assessment of current and long-term liquidity and capital requirements. InFebruary 2022 , we repaid$500 million of senior unsecured notes prior to theMarch 2022 maturity by exercising a par call option. Additionally, inJuly 2022 , we repaid$1.0 billion of senior unsecured notes prior to theSeptember 2022 maturity by exercising a par call option. No new debt was issued during the three and six months endedJune 30, 2022 . We are required to comply with certain covenants under our note indentures governing our senior unsecured notes. As ofJune 30, 2022 , we were not in violation of any covenants.
Capital Resources and Material Cash Requirements
A summary of our capital resources and material cash requirements is presented in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . As ofJanuary 1, 2022 , forU.S. tax purposes, research and development expenses are required to be capitalized and amortized rather than immediately deducted. As a result, our annual cash tax payments to theU.S Treasury may increase in the current year. See Notes 6. Acquisitions, Collaborations and Other Arrangements, 9. Debt and Credit Facilities, 10. Commitments and Contingencies and 13. Income Taxes of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for any other material changes to our capital resources and material cash requirements during the three and six months endedJune 30, 2022 . 34 --------------------------------------------------------------------------------
CRITICAL ACCOUNTING ESTIMATES
The preparation of our Condensed Consolidated Financial Statements in accordance withU.S. GAAP requires management to make estimates and judgments that affect the reported amounts in the financial statements and related disclosures. On an ongoing basis, we evaluate our significant accounting policies and estimates. We base our estimates on historical experience and on various market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates are assessed each period and updated to reflect current information. Actual results may differ significantly from these estimates. A summary of our critical accounting policies and estimates is presented in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021. With the exception of our revised estimates related to our HR+/HER2- IPR&D intangible assets as described in "Result of Operations" above, there were no material changes to our critical accounting policies and estimates during the six months endedJune 30, 2022 .
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