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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-19731
GILEAD SCIENCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3047598
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 LAKESIDE DRIVE, FOSTER CITY, 94404
CALIFORNIA (Zip Code)
(Address of principal executive offices)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 415-574-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK $.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based upon the closing price of the Common Stock on the Nasdaq Stock
Market on February 28, 1997 was $648,610,804.*
The number of shares outstanding of the Registrant's Common Stock was
28,996,918 as of February 28, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's annual report to security holders furnished to the Securities
and Exchange Commission (the "Commission") pursuant to Rule 14a-3(b) in
connection with Registrant's 1997 Annual Meeting of Stockholders to be held on
May 13, 1997 (the "1997 Annual Meeting") is attached hereto as Exhibit 13.1 and
portions are incorporated herein by reference into Part II of this Report.
Portions of Registrant's Definitive Proxy Statement filed with the
Commission pursuant to Regulation 14A in connection with the 1997 Annual Meeting
are incorporated herein by reference into Part III of this Report.
Certain Exhibits filed with the Registrant's Registration Statements on Form
S-1 (Registration Nos. 33-44534 and 33-55680), as amended, the Registrant's
Registration Statement on Form S-3 (No. 333-868), as amended, the Registrant's
Registration Statements on Form S-8 (Registration Nos. 33-46058 and 33-62060),
the Registrant's Annual Reports on Form 10-K for the fiscal years ended March
31, 1994 and December 31, 1996, and the Registrant's Quarterly Reports on Form
10-Q for the fiscal quarters ended September 30, 1993, September 30, 1994,
December 31, 1994, June 30, 1996 and September 30, 1996, are incorporated herein
by reference into Part IV of this Report.
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* Based on a closing price of $30.50 per share. Excludes 7,730,990 shares of the
Registrant's Common Stock held by executive officers, directors and
stockholders whose ownership exceeds 5% of the Common Stock outstanding at
February 28, 1997. Exclusion of such shares should not be construed to
indicate that any such person possesses the power, direct or indirect, to
direct or cause the direction of the management or policies of the Registrant
or that such person is controlled by or under common control with the
Registrant.
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PART I
ITEM 1. BUSINESS
THIS REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO
CLINICAL AND REGULATORY DEVELOPMENTS (INCLUDING ANTICIPATED TRIAL COMMENCEMENT
AND FDA FILING DATES), MARKETING AND SALES MATTERS, FUTURE EXPENSE LEVELS AND
FINANCIAL RESULTS. THESE STATEMENTS INVOLVE INHERENT RISKS AND UNCERTAINTIES.
THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED
IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS", PARTICULARLY
THOSE RELATING TO THE DEVELOPMENT, APPROVAL AND MARKETING OF PHARMACEUTICAL
PRODUCTS.
GENERAL
Gilead Sciences, Inc. ("Gilead" or the "Company") is a biopharmaceutical
company dedicated to the discovery, development and commercialization of
treatments for human diseases. The Company's business and scientific endeavors
are focused on making new therapies available to patients, physicians and the
healthcare system. Gilead's expertise has resulted in proprietary therapeutics
for important viral diseases, including a currently available therapy for
cytomegalovirus retinitis, and products in development to treat diseases caused
by human immunodeficiency virus, hepatitis B virus, herpes simplex virus, human
papillomavirus and influenza virus. Gilead's research programs seek treatments
for these and other viral infections, vascular diseases and cancer.
The successful development and commercialization of the Company's products
will require substantial and ongoing efforts at the forefront of the life
sciences industry. The Company is pursuing preclinical or clinical development
of a number of product candidates. Even if these product candidates appear
promising during various stages of development, they may not reach the market
for a number of reasons. Such reasons include the possibilities that the
potential products will be found ineffective or cause harmful side effects
during preclinical or clinical trials, fail to receive necessary regulatory
approvals, be difficult or uneconomical to manufacture on a commercial scale,
fail to achieve market acceptance or be precluded from commercialization by
proprietary rights of third parties.
The Company faces significant challenges and risks in an industry undergoing
rapid change, including the risks inherent in its research and development
programs, uncertainties in obtaining and enforcing patents, the lengthy and
expensive regulatory approval process, reliance on third party manufacturers,
intense competition from pharmaceutical and biotechnology companies, dependence
on collaborative relationships, increasing pressure on pharmaceutical pricing
from payors, patients and government agencies, and uncertainties associated with
the commercial success of VISTIDE or the market acceptance of any of the
Company's products in development.
The Company was incorporated in Delaware in 1987. The Company's principal
executive offices are located at 333 Lakeside Drive, Foster City, California
94404 and its telephone number is (415) 574-3000, or (800) GILEAD5
(800-445-3235).
FOR A MORE DETAILED DISCUSSION OF THE RISK FACTORS RELATING TO THE COMPANY
SUMMARIZED ABOVE, SEE "RISK FACTORS" AT THE END OF THIS ITEM 1 (PAGES 23 THROUGH
28 OF THIS REPORT). STOCKHOLDERS AND PROSPECTIVE INVESTORS IN THE COMPANY SHOULD
CAREFULLY CONSIDER THESE RISK FACTORS.
OVERVIEW OF NUCLEOTIDES
Nucleotides exist in every human cell and are the building blocks of the
nucleic acids DNA and RNA. A single nucleotide is called a mononucleotide, and
several nucleotides linked together are called an oligonucleotide. Nucleotides
are involved in the metabolism and regulation of certain activities of cells and
microorganisms. Oligonucleotides are the material containing genetic
information.
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Natural oligonucleotides are coupled to one another in a specific manner to
form DNA or RNA strands. The specific sequences of nucleotides that compose each
strand of DNA contain the genetic codes for the different proteins produced by
the cell. Proteins perform most of the normal physiologic functions of humans,
viruses and other organisms. However, when the production or activity of
proteins becomes aberrant, numerous diseases, such as vascular disease,
inflammatory disease or cancer, can result. Diseases may also result from a
foreign organism, such as a virus, which directs a cell to produce proteins
necessary for viral replication.
Protein production begins in the nucleus of a cell with transcription, a
process in which a segment of DNA, called a gene, is copied (transcribed) into a
"messenger" molecule. This molecule, which is also composed of nucleotides, is
called messenger RNA ("mRNA"). The mRNA moves from the nucleus into the cell's
cytoplasm, where it is translated into a protein.
Natural nucleotides are a versatile class of compounds that can be
chemically modified to inhibit the production or activity of disease-causing
proteins. Natural nucleotides have three molecular components: a sugar, a
phosphate group and a base. Every nucleotide in DNA has the same sugar and
phosphate group but a different base. Nucleotide analogues designed to be
therapeutic compounds can work by a number of different mechanisms.
Mononucleotides can be designed to interfere with the metabolism of cells or
with the replication of viruses. Oligonucleotides can be designed to interfere
with transcription or translation by binding to DNA or RNA.
The Company believes that the precise interaction of nucleotides in binding
to DNA, RNA and proteins provides the chemical basis for the development of
therapeutic products with high specificity and potency and long duration of
action.
VISTIDE
In June 1996, Gilead received U.S. Food and Drug Administration ("FDA")
clearance to market its first product, VISTIDE-Registered Trademark- (cidofovir
injection) for the treatment of cytomegalovirus ("CMV") retinitis in patients
with AIDS. The active ingredient in VISTIDE is cidofovir, a mononucleotide
analogue that has demonstrated activity in preclinical studies and clinical
trials against several viruses in the herpesvirus family. In addition to
VISTIDE, cidofovir is under development in different formulations for a variety
of indications. See "Gilead's Product Development Programs."
Cytomegalovirus is a common viral opportunistic infection in patients with
AIDS. CMV is a systemic infection that may infect several sites in the body,
including the retina, gastrointestinal tract, lungs, liver and central nervous
system. Retinitis is the most frequent manifestation of CMV infection. The
incidence of CMV retinitis in AIDS patients may be declining as a result of more
effective therapeutics for AIDS, as well as the use of oral ganciclovir for CMV
prophylaxis. There were an estimated 225,000 patients with AIDS in the United
States in 1996.
VISTIDE was cleared for marketing by the FDA based on the results of three
pivotal clinical trials. These trials demonstrated that VISTIDE has a
statistically significant effect in delaying the progression of CMV retinitis
lesions in newly diagnosed patients, and in previously treated patients who had
failed other therapies. In addition, these studies indicate a more convenient
dosing regimen than the other intravenous CMV treatments. VISTIDE is
administered by intravenous infusion once per week for the first two weeks as
induction therapy, and then once every other week as maintenance therapy until
progression of the disease or intolerance to the therapy. Other intravenous
treatments must be administered once or multiple times per day and often require
the surgical implantation of a chronic catheter in the patient's chest for the
daily infusions.
Renal toxicity is the primary dose-limiting side effect of VISTIDE
administration. Prior to each administration, patients must be monitored for
urinary protein and serum creatinine (laboratory markers of renal toxicity). In
addition, patients receive intravenous saline hydration and oral probenecid on
each
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<PAGE>
treatment day, to mitigate the potential for toxicity. VISTIDE is
contraindicated in patients receiving other agents with nephrotoxic potential,
and patients are required to undergo a "wash out" period of seven days after
completing therapy with such agents and before receiving VISTIDE. In certain
animal studies, cidofovir, the active ingredient in VISTIDE, was carcinogenic.
VISTIDE is marketed and sold in the United States by Gilead's sales force of
antiviral specialists. This group currently consists of 26 sales representatives
and three regional directors who call directly on physicians, hospitals,
clinics, pharmacies and other healthcare providers involved in the treatment of
patients with CMV retinitis. VISTIDE is sold by Gilead to wholesalers and
specialty distributors, who in turn sell the product to hospitals, home
healthcare companies, pharmacies and other healthcare providers. See "Marketing
and Sales."
In December 1995, Gilead filed a marketing authorisation application ("MAA")
with the European Medicines Evaluation Agency ("EMEA"), seeking marketing
approval for VISTIDE throughout the European Union under the EMEA's centralized
procedure. In August 1996, Gilead licensed commercial rights to Pharmacia &
Upjohn S.A. ("Pharmacia & Upjohn") to market and sell VISTIDE in all territories
outside of the United States. The Committee for Proprietary Medicinal Products
("CPMP") recommended that VISTIDE be cleared for marketing in Europe in December
1996, and final marketing approval from the EMEA is pending. If marketing
approval is obtained, Pharmacia & Upjohn will be responsible for obtaining
pricing and reimbursement approvals required in certain European countries, and
will then launch VISTIDE on a country-by-country basis during 1997 and 1998.
Pharmacia & Upjohn will pay Gilead a royalty on net sales. Pharmacia & Upjohn is
also pursuing regulatory approval of VISTIDE in several other countries outside
of the United States and Europe. See "Collaborative Relationships--Pharmacia &
Upjohn."
There are several approved therapies that compete with VISTIDE in the CMV
retinitis market. Ganciclovir, marketed by Roche Laboratories, is the most
widely used treatment for CMV retinitis. Ganciclovir is available in intravenous
and oral formulations, and the oral formulation is approved for both prophylaxis
and maintenance treatment of CMV retinitis. A ganciclovir ocular implant,
marketed by Chiron Corporation, provides local therapy to an affected eye and is
implanted through a surgical procedure. Astra U.S. markets foscarnet, the other
approved intravenous therapy for CMV retinitis. There are also several products
in clinical development for the treatment of CMV retinitis. Although the Company
believes that VISTIDE has competitive advantages over these products,
particularly with regard to dosing convenience and efficacy, there can be no
assurance that the Company will be successful in maintaining or increasing
VISTIDE's share of the CMV retinitis treatment market. See "Competition."
GILEAD'S PRODUCT DEVELOPMENT PROGRAMS
Gilead's product development efforts are conducted by a scientific team with
the multidisciplinary skills that the Company believes are critical for the
discovery and development of nucleotide-based therapeutics. Gilead has focused
its research and development efforts on potential therapeutic products derived
from three nucleotide-based programs: antiviral therapeutics, cardiovascular
therapeutics and genetic code blockers. Each of these programs is directed
toward the development of nucleotide analogues or other compounds that, through
different mechanisms of action, inhibit the production or activity of
disease-causing proteins.
- ANTIVIRAL THERAPEUTICS. Gilead has an extensive library of proprietary
nucleotide compounds, including cidofovir, the active ingredient in
VISTIDE. The Company is developing small molecule nucleotide analogues in
preclinical studies and clinical trials for the potential treatment of a
variety of viral infections. The Company has multiple small molecule
product candidates in clinical trials for viral diseases, including human
immunodeficiency virus ("HIV"), hepatitis B virus ("HBV"), herpes simplex
virus ("HSV"), human papillomavirus ("HPV") and influenza virus. Gilead's
most advanced product candidates are FORVADE-TM- (cidofovir gel) and GS
840 (adefovir dipivoxil).
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FORVADE is the subject of a new drug application ("NDA") filed in January
1997 for the treatment of refractory HSV infection in patients with AIDS.
GS 840 is in Phase II/III trials for the treatment of HIV and AIDS and
Phase II trials for the treatment of HBV infection.
- CARDIOVASCULAR THERAPEUTICS. Gilead's cardiovascular program includes a
thrombin inhibitor, GS 522, and two new classes of product candidates,
Protein C Activator and Adenosine Receptor Regulators, which have the
potential to address a variety of cardiovascular conditions.
- GENETIC CODE BLOCKERS. The Company is conducting research in collaboration
with Glaxo Wellcome on oligonucleotide analogues that are designed to act
inside the cell to block or regulate the production of disease-causing
proteins.
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The following table summarizes Gilead's products and product candidates.
This table is qualified in its entirety by reference to the more detailed
descriptions elsewhere in this Report.
<TABLE>
<CAPTION>
PRODUCT CANDIDATE TARGET INDICATIONS DEVELOPMENT STATUS(1) WORLDWIDE RIGHTS
- ---------------------------------------- ---------------------------- ---------------------------- ----------------
<S> <C> <C> <C>
ANTIVIRAL THERAPEUTICS
VISTIDE-Registered Trademark- (cidofovir CMV Retinitis Launched in U.S. (6/96) Gilead
injection)
Launch Pending in E.U. Pharmacia &
Upjohn
FORVADE-TM- (cidofovir gel) HSV-Acyclovir-Resistant NDA; Expanded Access Gilead
Herpes
HSV-Recurrent Genital Herpes Phase I/II Gilead
HPV-Genital Warts Phase I/II Gilead
GS 840 Oral (adefovir dipivoxil) HIV-AIDS Phase II/III Gilead
Hepatitis B Virus Phase II Gilead
PMPA IV HIV-AIDS Phase I/II Gilead
PMPA Oral Prodrug HIV-AIDS Clinical Candidate Gilead
Cidofovir Topical Ophthalmic Viral Keratoconjunctivitis Phase II AHP/Storz
Cidofovir Intraocular CMV Retinitis Phase I/II Gilead
GS 930 IV/Oral Herpesviruses Phase I Gilead
GS 4104 Oral Influenza Phase I Hoffmann-
La Roche
GS 3333 Analogues Oral HIV-AIDS (protease Preclinical Gilead
inhibitor)
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CARDIOVASCULAR THERAPEUTICS
GS 522 and Derivatives Anticoagulation for Bypass, Preclinical Gilead
Thrombolytic Adjunct
Protein C Activator Angioplasty, Thrombolysis Preclinical Gilead
Adenosine Receptor Regulators Stroke Preclinical Gilead/NIH
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GENETIC CODE BLOCKERS
Antisense and Triple Helix Compounds Cell Cycle Genes / Cancer, Research Gilead & Glaxo
Viral Infections, Wellcome
Cardiovascular Disease
</TABLE>
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(1) "NDA" indicates that a new drug application has been filed with the FDA for
clearance to market a product for the target indication.
"Phase II/III" clinical trials indicates that the compound is being tested
in human clinical trials for safety and efficacy in an expanded patient
population at geographically dispersed clinical study sites.
"Phase I/II" clinical trials indicates that the compound is being tested in
humans for safety and preliminary indications of biological activity in a
limited patient population.
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"Phase I" clinical trials indicates that the compound is being tested in
humans for preliminary safety and pharmacologic profile in a limited patient
population.
"Clinical Candidate" indicates that Gilead is completing pre-IND animal
model studies of a lead compound and is compiling the data necessary for the
submission of an IND with the FDA.
"Preclinical" indicates that Gilead is conducting efficacy, pharmacology
and/or toxicology testing of a lead compound in animal models or biochemical
or cell culture assays.
"Research" includes the development of assay systems, discovery of prototype
compounds and evaluation and refinement of prototype compounds in in vitro
testing.
See "Government Regulation" for a more complete description of the phases of
clinical testing and the regulatory approval process.
ANTIVIRAL THERAPEUTICS
Gilead is developing small molecule nucleotide analogues that are intended
to treat viral infections by selectively interfering with proteins essential for
viral replication. Numerous disease processes, particularly viral infections,
require precise interactions between cellular or viral proteins and nucleotides
or oligonucleotides. For example, many viruses depend upon certain proteins
known as enzymes to synthesize their own DNA. This dependence of the virus upon
specific interactions between proteins and nucleic acids provides opportunities
for the development of therapeutic products that disrupt these crucial
interactions. Preclinical and clinical studies have demonstrated that small
molecule nucleotide analogues can selectively interrupt these interactions.
The Company believes that small molecule nucleotide analogues offer several
potential advantages as therapeutics. First, these molecules may have a long
duration of action, permitting less frequent and therefore more convenient
dosing. Second, because certain nucleotides can be active in both infected and
uninfected cells, these molecules may provide prophylactic protection of
uninfected cells. Third, when compared to existing antiviral drugs, viruses may
be less likely to develop resistance to these analogues. In addition, these
analogues may be active against viral strains that have developed resistance to
existing antiviral drugs. Finally, the low molecular weight of these analogues,
or prodrug derivatives of them, may permit their development into drugs suitable
for oral administration.
CIDOFOVIR
Cidofovir is a mononucleotide analogue that has demonstrated activity in
preclinical studies and clinical trials against several viruses in the
herpesvirus family. Cidofovir is the active ingredient in the Company's
commercial product VISTIDE (cidofovir injection). See "VISTIDE." Gilead is
currently conducting clinical trials of cidofovir in different formulations for
the potential treatment of infections caused by HSV, HPV and CMV. Gilead is also
evaluating cidofovir, in intravenous and topical formulations, as a potential
treatment for diseases caused by several other viruses in people with AIDS. In
addition, a collaborative partner of Gilead, American Home Products, is
conducting Phase II clinical trials of topical ophthalmic cidofovir, an eyedrop
formulation, for the potential treatment of certain viruses that can cause
external infections of the eye.
The side effect profiles of the drugs under development based on cidofovir
have not yet been fully characterized. Renal toxicity is the primary
dose-limiting side effect of VISTIDE administration. In addition, in certain
animal studies, cidofovir was carcinogenic. There can be no assurance that the
Company will be successful in developing or commercializing any therapeutic
products, other than VISTIDE, based on cidofovir.
HERPES SIMPLEX VIRUS. The Company is developing FORVADE-TM- (cidofovir gel)
for the potential treatment of lesions caused by HSV. This product candidate has
the same active ingredient as VISTIDE,
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but in a gel formulation for direct topical application. In 1996, the Company
completed a Phase I/II clinical trial of FORVADE in 30 patients with AIDS,
evaluating the treatment of HSV lesions that are clinically unresponsive to
treatment with acyclovir, the standard therapy for this disease. In this trial,
FORVADE demonstrated a statistically significant treatment effect in healing
these lesions. Based on these data, the Company filed an NDA with the FDA
seeking marketing clearance of FORVADE for this indication. The FDA accepted the
NDA for review in January 1997. The Company's NDA for FORVADE was filed on the
basis of a single trial, with substantially less patient data than is generally
required by the FDA for approval. There can be no assurance as to the timing or
ultimate approval of the Company's NDA for FORVADE.
Herpes lesions that are unresponsive to current therapies can be
debilitating and represent a small but important medical need. While the NDA is
under review, Gilead is making FORVADE available to eligible patients through an
expanded access program in the United States. The Company is also evaluating
alternatives for pursuing regulatory approval and/or making FORVADE available on
an expanded access basis in certain European countries.
The Company is also evaluating FORVADE as a potential treatment for HSV
lesions in immunocompetent patients. Genital herpes simplex virus infection is a
common sexually transmitted disease. Once a person is infected, the virus may
remain in the body indefinitely, evading attempts by the immune system to
destroy it. In 1996, Gilead completed a Phase I/II placebo-controlled clinical
trial of FORVADE in a group of 96 patients with normal immune systems at
multiple clinical centers in Canada. Data from this study indicated that a
single application of FORVADE significantly decreased the time to viral culture
negativity in the lesion at all strengths relative to placebo, and treatment was
associated with a trend toward more rapid healing of lesions. The application of
FORVADE was generally well tolerated with no evidence of systemic side effects.
Further development of FORVADE for the treatment of HSV lesions in
immunocompetent patients would require Phase II/III trials involving a
significant number of patients, as well as additional animal testing, including
long-term carcinogenicity studies. There are significant competitive products in
this market, including acyclovir, which will become a generic product in the
United States in 1997, as well as two more recently approved products,
famciclovir and valacyclovir. The Company is evaluating the commercial
feasibility of developing FORVADE for this indication, either independently or
with a collaborative partner.
HUMAN PAPILLOMAVIRUS. The Company is also developing FORVADE for the
potential treatment of HPV, a cause of genital warts in humans. FORVADE has
demonstrated activity against HPV in preclinical and clinical studies. Based on
this activity, Gilead is evaluating FORVADE in the treatment of HPV-associated
genital warts in both HIV-infected and immunocompetent patients. In a recently
completed Phase I/II multicenter trial that enrolled 69 patients with AIDS, 64%
of the patients treated experienced complete or partial clearance of the warts.
Reversible, mild to moderate reactions at the application site were observed in
some patients, with no systemic side-effects. A Phase I/II study designed to
enroll 60 immunocompetent patients with HPV-associated genital warts is ongoing
at multiple centers in Europe.
HPV is also associated with increased rates of cervical and anogenital
cancers. Some HPV types are found in 85% to 90% of cervical cancers, and
laboratory experiments have demonstrated that if specific HPV genes in the
infected cells are inhibited, the cancer does not progress. Clinical researchers
in Europe are independently conducting a study of FORVADE for the potential
treatment of HPV-associated cervical intraepithelial neoplasia, a precancerous
condition. Gilead is also evaluating other potential anti-cancer applications of
FORVADE in preclinical research.
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CYTOMEGALOVIRUS. Gilead is evaluating an intraocular formulation of
cidofovir for local administration by direct injection into the eye, a method
that may prove useful as an adjunct to systemic therapy with VISTIDE or other
systemic agents. Gilead is conducting a Phase I/II clinical trial of intraocular
cidofovir at multiple centers in the United States. This randomized clinical
trial is designed to determine the safety, tolerance and efficacy of various
dose levels. Pharmacia & Upjohn has the rights to any commercial applications of
intraocular cidofovir outside of the United States. See "Collaborative
Relationships-- Pharmacia & Upjohn."
OTHER VIRUSES. Gilead has entered into a license agreement with American
Home Products ("AHP"), whose ophthalmologic subsidiary, Storz Instrument
Company, is developing an eyedrop formulation of cidofovir for the potential
treatment of certain viruses that cause external eye infections, including
adenovirus, which is the leading cause of viral conjunctivitis, or "pink eye."
The license to AHP is limited to topical ophthalmic use for external viral eye
disease, and excludes any treatment requiring injection and any treatment for
other eye diseases such as CMV retinitis. AHP commenced clinical testing of
topical ophthalmic cidofovir in December 1995 and is currently conducting Phase
II trials. See "Collaborative Relationships--American Home Products."
Preclinical studies have demonstrated that cidofovir is active against a
variety of viruses that cause disease in people with AIDS, including molluscum
contagiosum, which causes disfiguring skin lesions, Kaposi's sarcoma ("KS"), an
AIDS-related malignancy, and progressive multifocal leukoencephalopathy ("PML"),
a rapidly progressive, often fatal brain disease. Gilead anticipates commencing
human studies for the potential treatment of certain of these indications in
1997, with a topical or intravenous formulation of cidofovir.
GS 930, a derivative of cidofovir, has been evaluated in preclinical testing
and exhibited comparable activity to cidofovir and was tolerated at higher
doses. GS 930 has the potential to be a broad-spectrum antiviral, with activity
against a number of herpesviruses. Gilead completed Phase I clinical trials in
1996, and determined that GS 930 was not adequately bioavailable to support
further development as an oral therapeutic. Gilead is evaluating derivatives and
prodrugs of GS 930 for potential development.
The Company has an exclusive, worldwide license to patent rights and related
technology for cidofovir from the Institute of Organic Chemistry and
Biochemistry of the Academy of Sciences of the Czech Republic and the REGA
Stichting Research Institute in Belgium (collectively, "IOCB/REGA"), and is
obligated to pay a royalty to IOCB/REGA on the net sales of VISTIDE and any
other products containing cidofovir. See "Collaborative
Relationships--IOCB/REGA."
GS 840
GS 840 (adefovir dipivoxil) is a mononucleotide analogue developed as an
oral prodrug of GS 393 (also known as PMEA), the Company's first HIV clinical
candidate. A prodrug is a modified version of a parent compound designed to
enhance delivery characteristics. GS 840 has demonstrated preclinical and
clinical activity against HIV and HBV. GS 840 has been generally well tolerated
in clinical trials. Observed adverse events have included mild gastrointestinal
intolerance and laboratory abnormalities, including hepatic enzyme elevations
and reversible increases in creatinine in some patients. The Company is
developing GS 840 in Phase II/III clinical trials as a potential oral treatment
for HIV, and in Phase II clinical trials as a potential oral treatment for HBV.
HUMAN IMMUNODEFICIENCY VIRUS. HIV is the causative agent of AIDS. HIV
infects an estimated 23 million people worldwide. There were an estimated
225,000 people with AIDS in the United States in 1996.
A number of products with different mechanisms of action have been approved
for the treatment of HIV. The first generation of approved HIV drugs are reverse
transcriptase inhibitors, generally nucleoside compounds. Several protease
inhibitors have recently been approved for marketing, and others are in
9
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clinical development. Combination therapy with reverse transcriptase inhibitors
and protease inhibitors is proving to be effective for many people with AIDS, in
some cases lowering the patient's viral load (level of virus in the blood) to
undetectable levels for prolonged periods of time. The Company believes,
however, that there is still substantial room for improvement in AIDS drug
therapy. Many patients are developing resistance to combination therapy, and
require new combinations for therapy to be effective. In addition, patients
would benefit from AIDS drugs that are better tolerated, more convenient to dose
and less prone to develop significant resistance.
In Phase I/II trials conducted by Gilead, GS 840 was associated with
statistically significant anti-HIV activity as measured by the surrogate markers
of HIV viral load and CD4 cell counts. In June 1996, Gilead initiated a
placebo-controlled Phase II/III trial of GS 840 at multiple centers in the
United States, designed to enroll up to 400 patients. Patients in this trial
will receive either GS 840 (one tablet per day) or placebo, in addition to
continuing their current antiretroviral therapy (including combination therapy)
for six months, followed by a six-month open label period of therapy with GS
840. Enrollment in this trial is expected to be completed by mid-1997. If the
results from the trial adequately demonstrate GS 840's safety and efficacy, the
Company expects to file an NDA for approval of GS 840 in 1998. This NDA filing
would require additional safety and efficacy data from other trials of GS 840
underway or scheduled to commence in 1997. There can be no assurance that the
Company will file an NDA for GS 840 on this schedule or at all, or that GS 840
will be approved for marketing if the NDA is filed.
GS 840 is also being evaluated in a Phase III trial initiated in January
1997 by the Community Programs for Clinical Research on AIDS ("CPCRA"), a
clinical trial group sponsored by the National Institutes of Health ("NIH"). The
CPCRA trial is designed to enroll up to 2,000 patients, and will evaluate the
safety and efficacy of GS 840 in prolonging survival among patients with
advanced AIDS and in preventing the development of CMV end-organ disease in
patients co-infected with HIV and CMV. The Company anticipates that a trial
similar in size and scope to the CPCRA trial will be initiated in Europe and
Australia in 1997. The Company is also intending to initiate several smaller
trials, designed to provide guidance to physicians and patients on appropriate
use of GS 840 in combination with other drugs in AIDS therapy. The Company is
also intending to evaluate lower doses of GS 840 in several trials in an effort
to expand the therapeutic index of the drug. Recent improvements in AIDS drug
therapy may make any of these trials more difficult to enroll.
HEPATITIS B VIRUS. Gilead is also developing GS 840 for the potential
treatment of HBV. Approximately 300 million people worldwide are chronically
infected with HBV, primarily in Asian countries. HBV can lead to cirrhosis and
cancer of the liver. A vaccine is available that can prevent the transmission of
HBV in some patients; however, it has no activity in those already infected with
the virus. Alpha interferon is approved for the treatment of HBV, is
administered by injection and is not always successful in controlling the
disease.
In 1996, Gilead completed a Phase I/II placebo-controlled trial of GS 840
for the treatment of hepatitis B infection at multiple centers in the United
Kingdom, enrolling 20 patients. Data from this trial indicate that GS 840 was
well tolerated and resulted in a statistically significant decline in HBV DNA
levels in treated patients compared to placebo. Gilead intends to initiate
multinational Phase II trials of GS 840 for the treatment of HBV infection in
1997, designed to enroll up to 120 patients, in order to evaluate the drug at
three dose levels and in two different patient populations.
The Company has an exclusive, worldwide license to patent rights and related
technology for GS 840 and GS 393, which is the parent compound of GS 840, from
IOCB/REGA, and would be obligated to pay a royalty to IOCB/REGA on any net sales
of GS 840. See "Collaborative Relationships--IOCB/REGA."
PMPA
The Company is also evaluating PMPA, a nucleotide analogue with structural
similarities to GS 840, as a potential therapeutic for HIV and AIDS. PMPA has
shown significant activity against simian
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immunodeficiency virus ("SIV") in a variety of preclinical treatment and
prevention models. SIV causes an AIDS-like syndrome in primates. In these
experiments, primates treated with injections of PMPA either before or after
exposure to SIV were completely protected from infection. In a small primate
study, a topical gel form of PMPA also provided protection against SIV
transmission when applied intravaginally.
Gilead initiated a placebo-controlled Phase I/II human clinical trial of
intravenous PMPA in October 1996, designed to enroll up to 40 patients. An oral
prodrug of PMPA has been identified by Gilead researchers, and Gilead
anticipates beginning human studies of the oral prodrug in mid-1997. There can
be no assurance that human studies of the PMPA oral prodrug will begin on this
schedule, or will begin at all. A topical version of PMPA, with possible
application in the prevention of sexual transmission of HIV, is in preclinical
evaluation.
The Company has exclusive, worldwide license to patent rights and related
technology for PMPA from IOCB/REGA, and would be obligated to pay a royalty to
IOCB/REGA from any net sales of PMPA. See "Collaborative
Relationships--IOCB/REGA."
GS 4104
In September 1996, Gilead researchers announced the discovery of GS 4104, an
orally active neuraminidase inhibitor that inhibits the replication of influenza
virus in a variety of animal models. In these experiments, the parent compound
of GS 4104 was well tolerated and demonstrated antiviral activity against
multiple strains of influenza A and B.
Based on these data, Gilead and F. Hoffmann-La Roche ("Roche") entered into
an exclusive, worldwide development and commercialization collaboration covering
Gilead's neuraminidase inhibitors. Gilead and Roche will jointly conduct
research and development of neuraminidase inhibitors for the prevention and
treatment of influenza, with Roche funding the efforts of both parties. Roche
has exclusive commercial rights to any products developed under the
collaboration. Roche is obligated to pay Gilead cash payments upon achievement
of development milestones and royalties on net sales of any products developed
under the collaboration. See "Collaborative Relationships--Hoffmann-La Roche."
In March 1997, Roche commenced Phase I human clinical trials of GS 4104 in
the United Kingdom. Gilead anticipates commencing clinical trials of GS 4104 in
the United States in mid-1997. Glaxo Wellcome, in collaboration with Biota
Holdings Limited, is also pursuing development of a neuraminidase inhibitor to
treat influenza. This compound is in advanced clinical trials and represents
significant potential competition for GS 4104. See "Competition."
OTHER ANTIVIRALS
The Company has an extensive library of proprietary nucleotide compounds
and, using structure-based drug design techniques, has synthesized other small
molecule lead compounds having antiviral activity. Gilead has in preclinical
assessment a number of these compounds that have the potential to address
several viral targets, including protease inhibitors for the potential treatment
of HIV and hepatitis C infection.
CARDIOVASCULAR THERAPEUTICS
Cardiovascular diseases, including stroke, are the number one cause of
morbidity and mortality in the United States. Gilead's cardiovascular
therapeutics program is focused on the development of novel therapeutics based
on a detailed understanding of the mediators of cardiovascular disease. Gilead's
technological approaches to cardiovascular therapeutics include combinatorial
chemistry, recombinant protein mutagenesis, structural chemistry and medicinal
chemistry.
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GS 522 AND DERIVATIVES
The Company discovered GS 522 through a combinatorial approach designed to
identify highly specific inhibitors of thrombin. Thrombin is a naturally
occurring protein in the bloodstream that plays a central role in coagulation
and thrombosis. Because thrombin generates the fibrin mesh of blood clots and
activates platelet aggregation, the Company believes that it is an attractive
target for anticoagulant and antithrombotic therapy. Coagulation and thrombosis
are complex processes that can lead to occlusion of blood vessels and serious
related diseases and disorders. The Company believes that the process of
coagulation and thrombosis can be controlled in certain settings through the
administration of a nucleotide-based drug, which could selectively bind to
thrombin in the bloodstream and inhibit its activity.
Gilead is evaluating derivatives of GS 522 in preclinical testing for
potential use as anticoagulants in cardiopulmonary bypass surgery. Preclinical
studies performed by the Company have demonstrated that GS 522 is an effective
anticoagulant during cardiopulmonary bypass procedures in animals. Continuous
infusions of GS 522 during surgery in animals have demonstrated rapid onset,
reproducible dose-related anticoagulant activity, and rapid return to normal
clotting times after discontinuation of infusion. However, animal models do not
necessarily predict effectiveness in humans.
Derivatives of GS 522 are being developed which may also have benefit in the
treatment of arterial restenosis, including use in combination with angioplasty
procedures or thrombolytic therapy, and in the treatment of arterial and venous
thrombosis.
PROTEIN C ACTIVATOR
Thrombin has both procoagulant and anticoagulant activities through the
activation of naturally-occurring Protein C. Activation of plasma Protein C is
an important natural anti-thrombotic and anti-inflammatory pathway. Activated
Protein C inhibits certain clotting factors which are key regulatory factors in
the clotting cascade. Activated Protein C also inhibits plasminogen activator,
which enhances endogenous thrombolysis by increasing tissue plasminogen
activator activity.
In order to exploit the potent antithrombotic activity of Protein C, the
Company developed a modified version of thrombin which does not stimulate
thrombosis, but retains the ability to activate Protein C and thereby inhibit
thrombosis. Gilead has named this novel recombinant protein Protein C Activator
("PCA").
Gilead has performed animal studies which demonstrate that PCA causes
potent, dose-dependent anticoagulation without increased bleeding time. These
findings suggest that administration of PCA may result in effective inhibition
of thrombosis, while not increasing the risk of intracerebral hemorrhage or
stroke. However, animal models do not necessarily predict effectiveness in
humans.
ADENOSINE RECEPTOR REGULATORS
Gilead is working with the National Institute of Diabetes, Digestive and
Kidney Diseases at the NIH to study adenosine receptor agonists and antagonists
in the treatment and prevention of stroke. Adenosine receptor studies have
recently identified three classes of receptors which may play a central role in
the regulation of cardiovascular disease. The NIH has synthesized a series of
novel small molecule adenosine agonist and antagonist compounds. NIH researchers
have identified several compounds with A3 receptor agonist and antagonist
activity which exhibit protective effects in an animal model of stroke, and
which have anti-inflammatory and antiallergic properties. In collaboration with
the NIH, Gilead is currently evaluating several compounds with A3 receptor
antagonist or agonist activity in animal models of stroke, and also intends to
evaluate the anti-inflammatory and antiallergic properties of these compounds.
GENETIC CODE BLOCKERS
The Company is conducting research on oligonucleotide analogues that are
designed to act inside the cell to block or regulate the production of
disease-causing proteins. The Company is developing two types
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of code blocker compounds: antisense compounds that interfere with the function
of RNA and triple helix compounds that inhibit gene expression by binding to the
DNA double helix. The Company's therapeutic targets in its code blocker program
include cancer (particularly the cell cycle genes implicated in cancer), viral
infections and cardiovascular diseases. The Company believes that its code
blocker technology will also have utility as a drug discovery tool. The
Company's ability to selectively inhibit the activity of specific genes within
cells provides a rapid method of determining the function of a gene that has a
known sequence.
The Company's collaborative relationship with Glaxo Wellcome covers the
research and development of code blocker compounds for all potential diagnostic
and therapeutic applications, and has been the exclusive funding source for the
code blocker program since 1990. In March 1996, Glaxo Wellcome and Gilead
extended the existing collaboration for a period of five years. See
"Collaborative Relationships-- Glaxo Wellcome."
The successful development of therapeutics using code blocker technology
will require significant technical improvements, notably in the ability of
oligonucleotides to enter cells efficiently to enable them to reach their
molecular targets: DNA in the nucleus, and RNA in the nucleus or the cytoplasm.
The inability of a code blocker to enter the cell in sufficient quantity could
limit the effectiveness of the compound, require higher doses (potentially
resulting in unacceptable toxicity), and significantly increase the cost of
treatment. Although the size and chemical properties of code blocker
oligonucleotides limit their ability to enter the cell, the Company believes
that chemical modification or proprietary permeation enhancers developed by the
Company may overcome this problem. The Company is focusing a significant part of
its code blocker research program on synthesizing novel oligonucleotide
analogues that are able to penetrate cells efficiently.
Other technical challenges that the Company's research is addressing include
enhancing the intracellular stability of oligonucleotide analogues, minimizing
interference with normal cellular function, inhibiting the target gene with
sufficient potency, and achieving adequate pharmacokinetics. There can be no
assurance that the Company will be successful in overcoming any of these
technical challenges or in developing effective or commercially viable code
blocker technology or products.
COLLABORATIVE RELATIONSHIPS
As part of its business strategy, Gilead establishes collaborations with
pharmaceutical companies to assist in the clinical development and/or
commercialization of certain of its products and product candidates, and to
provide support for research programs. The Company is also evaluating
opportunities for in-licensing products and technologies complementary to its
business, although no negotiations regarding any such opportunities are
currently in progress. The Company's existing collaborative relationships are as
follows:
PHARMACIA & UPJOHN
In August 1996, Gilead and Pharmacia & Upjohn entered into an agreement
providing Pharmacia & Upjohn with exclusive rights to market and sell VISTIDE
and cidofovir intraocular in all countries outside of the United States. Under
the terms of the agreement, Pharmacia & Upjohn paid Gilead an initial license
fee of $10.0 million. If the EMEA grants final approval of VISTIDE for marketing
in the European Union, Gilead is entitled to an additional cash milestone
payment of $10.0 million. In addition, at Gilead's option, within 60 days of
such approval, Pharmacia & Upjohn will purchase $40.0 million of newly issued
shares of Series B Preferred Stock at a per share purchase price equal to 145%
of the average closing price of Gilead's Common Stock over the 30 trading days
prior to public announcement of the EMEA approval. If issued, the Series B
Preferred Stock will not be publicly registered, will vote together with
Gilead's Common Stock and will be convertible at any time into an equal number
of shares of Common Stock at Pharmacia & Upjohn's option. Pharmacia & Upjohn
will be restricted in its ability to sell the Series B Preferred Stock (or
underlying Common Stock), or purchase any additional stock of the Company, for a
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period of five years from the original purchase. Gilead is entitled to royalty
payments on a quarterly basis on the net sales of VISTIDE by Pharmacia & Upjohn.
Pharmacia & Upjohn has the right to terminate the agreement at any time
beginning in August 1998, upon six months notice. See "VISTIDE."
HOFFMANN-LA ROCHE
In September 1996, Gilead and Roche entered into a collaboration agreement
to develop and commercialize therapies to treat and prevent viral influenza.
Under the agreement, Roche received exclusive worldwide rights to Gilead's
proprietary influenza neuraminidase inhibitors, including GS 4104. In October
1996, Roche made an initial license fee payment to Gilead of $10.3 million and
Gilead is entitled to additional cash milestone payments of up to $40.0 million
upon achievement of development milestones. Roche will fund all research and
development costs and pay Gilead royalties on the net sales on any products
developed under the collaboration. Roche has the right to terminate the
agreement at any time upon 12 months notice. See "Gilead's Product Development
Programs--GS 4104."
In September 1996, Gilead and Roche entered into an agreement to co-promote
Roche's Roferon-Registered Trademark--A (Interferon alfa-2a, recombinant) for
the treatment of chronic hepatitis C infection in the United States. The
agreement continues until December 31, 1999, unless earlier terminated by either
party as of December 31, 1998. Under the agreement, Gilead's antiviral specialty
sales force is obligated to make a fixed number of calls to promote Roferon-A in
each year. Roche paid Gilead a $150,000 one-time fee in 1996. Roche will pay
Gilead a royalty based on the net product sales beginning in 1997. See
"Marketing and Sales."
GLAXOWELLCOME
In July 1990, Gilead entered into a research and development agreement with
Glaxo Wellcome. Concurrent with the signing of the agreement Glaxo Wellcome made
an $8.0 million equity investment in Gilead, and currently holds approximately
3.1% of the Company's outstanding Common Stock. The collaboration with Glaxo
Wellcome has been modified and extended on several occasions since 1990, most
recently in March 1996. At that time, Gilead and Glaxo entered into a new
collaborative research agreement, extending for five years the existing
collaboration between the parties. Under the terms of the 1996 agreement, Glaxo
will fund Gilead's ongoing research in the code blocker field for five years.
Each party has a worldwide license to the other party's patent rights to
research, develop, manufacture and sell products based on code blocker
technology for all applications. Glaxo will have the primary right to develop
any products identified during the collaboration. Gilead is entitled to payments
for achievement of development milestones, as well as royalties on any product
sales. Glaxo has a right to terminate the collaborative research and funding at
any time after two years (beginning in 1998), in which case Gilead could develop
code blocker technology independently or with a third party.
AMERICAN HOME PRODUCTS
In August 1994, the Company entered into a license and supply agreement with
American Cyanamid Company, now a part of American Home Products, pursuant to
which the Storz Instrument Company subsidiary of AHP will develop and have the
right to market an eyedrop formulation of cidofovir for the potential treatment
of topical ophthalmic viruses. The field of the exclusive, worldwide license to
AHP is limited to topical ophthalmic use for external viral eye disease, and
specifically excludes any treatment requiring injection, and any treatment for
other eye diseases such as CMV retinitis. In December 1995, AHP commenced human
clinical trials of topical ophthalmic cidofovir and is currently conducting a
Phase II trial. Gilead is entitled to receive a fee each year until AHP files an
NDA under the agreement. In addition, AHP is obligated to make a series of
payments based on the achievement of development milestones in different
countries during the term of the agreement. Gilead is responsible for supplying
bulk cidofovir to AHP, and AHP is obligated to make royalty payments to Gilead
based on net sales of any products developed under the agreement. AHP may
terminate this agreement at any time on three months notice.
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IOCB/REGA
In 1991 and 1992, the Company entered into agreements with IOCB/REGA
regarding a class of nucleotide compounds, including cidofovir, GS 393 (the
parent compound of GS 840) and PMPA. Under these agreements and later
amendments, Gilead received from IOCB/REGA an exclusive license to manufacture,
use and sell the compounds covered by issued United States patents and patent
applications plus foreign counterparts throughout the world, subject to an
obligation to pay royalties on product sales to IOCB/REGA. IOCB/REGA may
terminate the licenses under these agreements with respect to any particular
product, in specified countries, if the Company does not make any sales of such
product in such countries within 12 months after regulatory approval. Under one
of these agreements, the Company has an option to receive an exclusive license
to any new developments by IOCB/REGA during the term of this agreement. Such
agreement may be terminated by either party on six months notice.
ACADEMIC AND CONSULTING RELATIONSHIPS
To supplement its research and development efforts, the Company collaborates
with and has licensed certain patents and patent applications from a number of
universities and medical research institutions.
MANUFACTURING
The Company generally relies on third parties for the manufacture of bulk
drug substance and final drug product for clinical and commercial purposes,
including for VISTIDE, FORVADE and GS 840. Pursuant to such manufacturing
relationships, the Company depends on such third parties to perform their
obligations effectively and on a timely basis. There can be no assurance that
such parties will perform and any failures by third parties may delay clinical
trials or the submission of products for regulatory approval, impair the
Company's ability to deliver commercial products on a timely basis, or otherwise
impair the Company's competitive position, which could have a material adverse
effect on the Company.
The Company has qualified a sole source supplier with the FDA for the bulk
drug substance used in VISTIDE and another sole source supplier for the final
drug product. Gilead has established a second source of bulk drug substance
supply for VISTIDE (and for FORVADE), but has not yet qualified this source with
the FDA. The use of this second source or other alternative suppliers will
require FDA approval, which will be time consuming. Consequently, in the event
that supplies from either of these sole source suppliers were interrupted for
any reason, the Company's ability to ship VISTIDE or FORVADE could be impaired,
which would have a material adverse effect on the Company.
Gilead has developed in-house capabilities to synthesize and purify
nucleotides and oligonucleotides, and believes that it has a base of proprietary
technologies, including patent applications and trade secrets, for the
manufacture of these compounds. Gilead has established a pilot-scale, bulk
chemical facility, which operates in compliance with the FDA's current Good
Manufacturing Practices ("cGMP"), to meet its current preclinical and limited
early-stage clinical requirements. The Company believes that it has or will be
able to develop, acquire or contract for sufficient supply capacity to meet its
additional clinical and commercial manufacturing requirements, although there
can be no assurance that it will be able to do so. Gilead currently has no
commercial-scale cGMP manufacturing facilities for either the production of bulk
drug substance or final drug product, and no current plans to establish such
capacity.
The manufacture of sufficient quantities of new drugs can be an expensive,
time-consuming and complex process and may require the use of materials with
limited availability or require dependence on sole source suppliers. If the
Company is unable to develop manufacturing capabilities internally or contract
for large scale manufacturing with third parties on acceptable terms, the
Company's ability to conduct preclinical studies and clinical trials, and/or
meet demand for commercial products, will be adversely affected. This could
prevent or delay commercial shipment, submission of products for regulatory
approval and initiation of new development programs, which would have a material
adverse effect on the Company.
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The production of the Company's compounds is based in part on technology
that the Company believes to be proprietary. Gilead has licensed this technology
to contract manufacturers to enable them to manufacture compounds for the
Company. There can be no assurance that such manufacturers will abide by any use
limitations or confidentiality restrictions in licenses with the Company. In
addition, any such manufacturer may develop process technology related to its
work for Gilead, which could increase the Company's reliance on such
manufacturer or require the Company to obtain a license from such manufacturer
in order to have its products manufactured elsewhere. There can be no assurance
that such license, if required, would be available on terms acceptable to the
Company, if at all.
For certain of its potential products, including GS 4104 for the potential
treatment and prevention of influenza, the Company will need to develop further
its production technologies for use on a larger scale in order to conduct
clinical trials and produce such products for commercial sale at an acceptable
cost. There can be no assurance that the Company or its partners will be able to
implement any of these developments successfully.
MARKETING AND SALES
In connection with the launch of VISTIDE in 1996, Gilead established a sales
force of antiviral specialists in the United States. This group currently
consists of 26 sales representatives and three regional directors who call
directly on physicians, hospitals, clinics, pharmacies and other healthcare
providers involved in the treatment of patients with CMV retinitis. VISTIDE is
sold by Gilead to wholesalers and specialty distributors, who in turn sell the
product to hospitals, home healthcare companies, pharmacies and other healthcare
providers. Gilead's sales force also promotes Roferon-Registered Trademark--A
(Interferon alfa-2a, recombinant), Roche's product for the treatment of
hepatitis C in the United States, pursuant to a co-promotion agreement with
Roche entered into in September 1996. See "Collaborative Relationships--
Hoffmann-La Roche." Gilead's sales force is supplemented by a marketing and
sales staff of approximately 15 people based at the Company's headquarters in
Foster City, California.
The Company anticipates that its existing sales force will promote FORVADE
in the United States, if that product receives marketing clearance from the FDA.
Gilead does not anticipate that a substantial increase in its sales force or
marketing resources will be required to market and sell FORVADE. If any of the
Company's other products in development for specialty markets receive marketing
clearance in the United States, or if the Company obtains marketing rights to
such a product from a third party, Gilead's current intention would be to market
and sell such a product directly, supplementing its existing marketing and sales
staff as appropriate. Gilead has not established a marketing and sales capacity
in Europe or any other country outside of the United States. Pharmacia & Upjohn
has exclusive commercial rights to VISTIDE and intraocular cidofovir outside the
United States, and Roche has exclusive commercial rights to GS 4104 on a
worldwide basis. Gilead intends to evaluate the establishment of a direct
European marketing and sales capacity in connection with the potential launch of
GS 840 in Europe for the treatment of HIV and AIDS, if that product receives
marketing approval. The Company does not currently intend to directly market and
sell any product outside of the United States and Europe.
The revenues received by Gilead for its products subject to commercial
collaborations, including VISTIDE outside of the United States, and GS 4104 on a
worldwide basis, are dependent to a large degree on the efforts of third
parties. There can be no assurance that such efforts will be successful, that
the interests of the Company and its partners will not be in conflict or that
any of the Company's partners will not terminate their relationship with the
Company. See "Collaborative Relationships."
PATENTS AND PROPRIETARY RIGHTS
Gilead has a proprietary portfolio of patent rights and exclusive licenses
to patents and patent applications in the field of nucleotide-based
therapeutics. The Company has filed patent applications directed to the
compositions of matter, methods of preparation and uses of novel compounds on
the
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commercial market, under research or in development. Patent applications have
been filed which encompass compounds that are relevant to many of the targets
the Company is currently researching, as well as other targets that may be of
interest to Gilead in the future. Gilead intends to file additional patent
applications, when appropriate, relative to improvements in its technology and
to specific products that it develops.
Several patents relating to cidofovir (the active ingredient in VISTIDE and
FORVADE) and GS 393 (the parent compound of GS 840), including composition of
matter claims, have been issued in the United States, Western Europe and several
other jurisdictions. The Company has exclusive licenses from third parties
covering these patents and other patent applications. See "Collaborative
Relationships--IOCB/ REGA." The Company does not have patent filings covering GS
840 in China or in other certain other Asian countries, although it does have an
application pending in Japan. Asia is a major market for hepatitis B therapies,
one of the potential indications for GS 840. In addition, patents on certain of
the Company's compounds may issue many years before marketing approval is
obtained, limiting the ultimate commercial value of the product.
The Company is the holder of, or is a licensee with respect to, patents and
patent applications in the United States and abroad relating to certain basic
aspects of code blocker technology, and is the holder of patent applications
relating to neuraminidase inhibitors and their use in the treatment and
prevention of influenza. The Company is aware that others have patents or
pending applications that relate to its own in these fields. The Company cannot
predict whether its patent or license rights or those of third parties will
result in a significant position in these fields, whether its patents or those
of third parties will be issued, whether its patents or those of third parties
will provide significant proprietary protection, or whether they will be
circumvented or invalidated.
The commercial success of the Company will also depend in part on not
infringing patents or proprietary rights of others and not breaching the
licenses granted to the Company. There can be no assurance that the Company will
be able to obtain a license to any third-party technology that it may require to
conduct its business or that, if obtainable, such technology can be licensed at
a reasonable cost. Failure by the Company to obtain a license to any technology
that it may require to commercialize its technologies or products may have a
material adverse effect on the Company.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
firms, including Gilead, are generally uncertain and involve complex legal and
factual questions. Consequently, even though Gilead is currently prosecuting its
patent applications with the United States and foreign patent offices, the
Company does not know whether any of its pending applications will result in the
issuance of any patents or, if any patents are issued, whether they will provide
significant proprietary protection. Since patent applications in the United
States are maintained in secrecy until patents are issued, and since publication
of discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months, Gilead cannot be certain that it has rights as
the first inventor of technologies covered by pending patent applications or
that it was the first to file patent applications for such inventions.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position which it seeks to protect, in part, by
confidentiality agreements with its corporate partners, collaborators,
employees, consultants and vendors. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known or be independently discovered by competitors.
Gilead's practice is to require its corporate partners, collaborators,
employees, consultants and vendors to execute a confidentiality agreement upon
the commencement of a relationship with the Company. The agreements provide that
all confidential information developed or made known to an individual during the
course of the relationship shall be kept confidential and not disclosed to third
parties except in specified circumstances. In the case of employees, the
agreements provide that all inventions
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conceived by the individual while employed by the Company shall be the exclusive
property of the Company. There can be no assurance, however, that these
agreements will provide meaningful protection for the Company's trade secrets in
the event of unauthorized use or disclosure of such information.
COMPETITION
The Company's products and development programs target a number of diseases
and conditions, including viral infections, cardiovascular disease and cancer.
Even if the Company is successful in developing additional products to treat any
of these diseases or conditions, there can be no assurance that VISTIDE or any
other products that receive marketing clearance will achieve significant
commercial acceptance. There are many commercially available products for these
diseases, and a large number of companies and institutions are conducting
well-funded research and development activities directed at developing
additional treatments for these diseases.
Ganciclovir, marketed in intravenous and oral formulations by Roche
Laboratories and as an ocular implant by Chiron Corporation, and foscarnet,
marketed by Astra U.S., are commercially available for the treatment of CMV
retinitis. These products are directly competitive with VISTIDE. Several other
potential CMV retinitis therapeutics are being developed by other companies. A
number of therapeutics are currently marketed or are in advanced stages of
clinical development for the treatment of AIDS and herpes simplex virus. Glaxo
Wellcome, in collaboration with Biota Holdings Limited, is pursuing development
of a neuraminidase inhibitor to treat influenza. This compound is in advanced
clinical trials and represents significant potential competition for GS 4104.
The Company believes that its products and product candidates have competitive
advantages over these products, particularly with regard to dosing convenience
and duration of action. However, there can be no assurance that VISTIDE or any
of the Company's products in development will compete successfully with other
available products.
Nucleotide-based drugs would compete for market share, in many of their
applications, with existing therapies. The indications being pursued by the
Company's cardiovascular therapeutics program are addressed to varying degrees
by existing products, and are the subject of extensive, well-funded programs
sponsored by a number of large pharmaceutical companies. In addition, a number
of companies are pursuing the development of technologies competitive with the
Company's code blocker program. These competing companies include specialized
pharmaceutical firms and large pharmaceutical companies acting either
independently or together with biopharmaceutical companies. Furthermore,
academic institutions, government agencies and other public and private
organizations conducting research may seek patent protection and may establish
collaborative arrangements for product and clinical development.
Gilead anticipates that it will face increased competition in the future as
new products enter the market and advanced technologies become available. There
can be no assurance that existing products or new products developed by the
Company's competitors will not be more effective, or more effectively marketed
and sold, than any that may be developed by the Company. Competitive products
may render Gilead's technology and products obsolete or noncompetitive prior to
the Company's recovering research, development or commercialization expenses
incurred with respect to any such products.
Many of the Company's existing or potential competitors, particularly large
pharmaceutical companies, have substantially greater financial, technical and
human resources than the Company. In addition, many of these competitors have
significantly greater experience than the Company in undertaking research,
preclinical studies and clinical trials of new pharmaceutical products,
obtaining FDA and other regulatory approvals, and manufacturing, marketing and
selling such products. Accordingly, the Company's competitors may succeed in
commercializing the products more rapidly or more effectively than the Company,
which would have a material adverse effect on the Company.
The Company's competition will be determined in part by the potential
indications for which the Company's compounds are developed and ultimately
approved by regulatory authorities. For certain of the Company's potential
products, an important competitive factor may be the timing of market
introduction
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of its products or competitive products. Accordingly, the relative speed with
which Gilead can develop products, complete the clinical trials and approval
processes, and supply commercial quantities of the products to the market are
expected to be important competitive factors. The Company expects that
competition among products approved for sale will be based, among other things,
on product efficacy, safety, dosing convenience, availability, price and patent
position.
The Company's competitive position also depends upon its ability to attract
and retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes, and secure sufficient capital resources for
the often substantial period between technological conception and commercial
sales.
GOVERNMENT REGULATION
The production and marketing of the Company's products and its research and
development activities are subject to regulation for safety, efficacy and
quality by numerous government authorities in the United States and other
countries. In the United States, drugs are subject to rigorous FDA regulation.
The Federal Food, Drug and Cosmetic Act, as amended ("FFDCA") and the
regulations promulgated thereunder, and other federal and state statutes and
regulations, govern, among other things the testing, manufacture, safety,
efficacy, labeling, storage, record keeping, approval, advertising and promotion
of the Company's products. Product development and approval within this
regulatory framework takes a number of years and involves the expenditure of
substantial resources.
The steps required before a pharmaceutical agent may be marketed in the
United States include (i) preclinical laboratory tests, IN VIVO preclinical
studies and formulation studies, (ii) the submission to the FDA of an
investigational new drug application ("IND"), which must become effective before
clinical trials commence, (iii) adequate and well-controlled clinical trials to
establish the safety and efficacy of the drug, (iv) the submission of a new drug
application ("NDA") to the FDA and (v) the FDA approval of the NDA, prior to any
commercial sale or shipment of the drug. In addition to obtaining FDA approval
for each product, each drug manufacturing establishment must be registered with,
and approved by, the FDA. Domestic manufacturing establishments, including third
party contract manufacturers producing a drug sponsor's products, are subject to
periodic inspections by the FDA and must comply with cGMP. To supply products
for use in the United States, foreign manufacturing establishments must comply
with cGMP and are subject to periodic inspection by the FDA or by regulatory
authorities in certain of such countries under reciprocal agreements with the
FDA. Drug product and drug substance manufacturing establishments located in
California also must be licensed by the State of California in compliance with
local regulatory requirements.
The FDA has implemented accelerated approval procedures for pharmaceutical
agents that treat serious or life-threatening diseases and conditions,
especially where no satisfactory alternative therapy exists. Drug sponsors are
generally required to conduct post-marketing clinical trials of drugs that have
been approved under the FDA's accelerated approval procedures, in order to
further characterize the drug's safety and efficacy profile. The Company
believes that GS 840 and certain of its other products in development may
qualify for accelerated approval. The Company cannot predict the ultimate
impact, however, of the FDA's accelerated approval procedures on the timing or
likelihood of approval of any of its potential products or those of any
competitor.
Preclinical tests include laboratory evaluation of product chemistry and
formulation, as well as animal studies to assess the potential safety and
efficacy of the product. Compounds must be formulated according to cGMP and
preclinical safety tests must be conducted by laboratories that comply with FDA
regulations regarding current Good Laboratory Practices ("GLP"). The results of
the preclinical tests are submitted to the FDA as part of an IND and are
reviewed by the FDA prior to the commencement of clinical trials. Additional
pharmacology and toxicology studies are generally conducted concurrently with
clinical trials.
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Clinical trials involve the administration of the investigational new drug
to healthy volunteers or to patients, under the supervision of qualified
principal investigators. Clinical trials are conducted in accordance with Good
Clinical Practices under protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the IND.
Further, each clinical trial must be conducted under the auspices of an
independent Institutional Review Board ("IRB") at the institution at which the
study will be conducted. The IRB will consider, among other things, ethical
factors, the safety of human subjects and the possible liability of the
institution.
Clinical trials are typically conducted in three sequential phases, but the
phases often overlap. In Phase I, the initial introduction of the drug into
healthy human subjects, the drug is tested for safety (adverse effects), dosage
tolerance, metabolism, distribution, excretion and pharmacodynamics (clinical
pharmacokinetics and pharmacology). Phase II involves studies in a limited
patient population to (i) determine the efficacy of the drug for specific,
targeted indications, (ii) determine dosage tolerance and optimal dosage and
(iii) identify possible adverse effects and safety risks. When a compound
appears to be effective and to have an acceptable safety profile in Phase II
clinical trials, Phase III clinical trials are undertaken to further evaluate
and confirm clinical efficacy and to further test for safety within an expanded
patient population at geographically dispersed clinical study sites. There can
be no assurance that Phase I, Phase II or Phase III clinical trials will be
completed successfully within any specified time period, if at all, with respect
to any of the Company's products subject to such testing. Furthermore, the
Company or the FDA may delay or suspend clinical trials at any time if it is
felt that the subjects or patients are being exposed to an unacceptable health
risk.
The results of the preclinical studies and clinical trials are submitted to
the FDA in the form of an NDA for approval of the marketing and commercial
shipment of the drug. The testing and approval process is likely to require
substantial time and effort and there can be no assurance that any approval will
be granted on a timely basis, if at all. The FDA may deny an NDA if applicable
regulatory criteria are not satisfied, require additional testing or
information, require significant improvements to manufacturing facilities or
require extensive post-marketing testing and surveillance to monitor the safety
or efficacy of the Company's products if they do not view the NDA as containing
adequate evidence of the safety and efficacy of the drug. Notwithstanding the
submission of such data, the FDA may ultimately decide that the application does
not satisfy its regulatory criteria for approval. Moreover, if regulatory
approval of a drug is granted, such approval may entail limitations on the
indicated uses for which it may be marketed. Finally, product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing.
Among the conditions for NDA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to cGMP, which must be followed at all times. In complying with standards set
forth in these regulations, manufacturers (including a drug sponsor's third-
party contract manufacturers) must continue to expend time, money and effort in
the area of production and quality control to ensure full technical compliance.
In addition to regulations enforced by the FDA, the Company also is subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and potential future federal, state or local
regulations. The Company's research and development involves the controlled use
of hazardous materials, chemicals, viruses and various radioactive compounds.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the standards prescribed by state and
federal regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, the
Company could be held liable for significant damages or fines.
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In the European Community, human pharmaceutical products are also subject to
extensive regulation. The European Community Pharmaceutical Directives govern,
among other things, the testing, manufacture, safety, efficacy, labeling,
storage, record keeping, advertising and promotion of human pharmaceutical
products. Effective in January 1995, the European Community enacted new
regulations providing for a centralized licensing procedure, which is mandatory
for certain kinds of products, and a decentralized (country by country)
procedure for all other products. A license granted under the centralized
procedure authorizes marketing of the product in all of the member states of the
European Community. Under the decentralized procedure, a license granted in one
member state can be extended to additional member states pursuant to a
simplified application process. In the centralized procedure, the EMEA
coordinates a scientific review by one or more rapporteurs chosen from among the
membership of the Committee for Proprietary Medical Products ("CPMP"), which
represent the medicine authorities of the member states. The final approval is
granted by a decision of the Commission or Council of the European Community,
based on the opinion of the CPMP.
PRICING AND REIMBURSEMENT
The business and financial condition of pharmaceutical and biotechnology
companies will continue to be affected by the efforts of government and
third-party payors to contain or reduce the cost of health care through various
means. For example, in certain foreign markets pricing or profitability of
prescription pharmaceuticals is subject to government control. In particular,
individual pricing negotiations are often required in each country of the
European Community, even if approval to market the drug under the EMEA's
centralized procedure is obtained. In the United States, there have been, and
the Company expects that there will continue to be, a number of federal and
state proposals to implement similar government control. In addition, an
increasing emphasis on managed care in the United States has and will continue
to increase the pressure on pharmaceutical pricing. While the Company cannot
predict whether any such legislative or regulatory proposals will be adopted or
the effect such proposals or managed care efforts may have on its business, the
announcement of such proposals or efforts could have a material adverse effect
on the trading price of the Company's Common Stock, and the adoption of such
proposals or efforts could have a material adverse effect on the Company.
Further, to the extent that such proposals or efforts have a material adverse
effect on other pharmaceutical companies that are prospective corporate partners
for the Company, the Company's ability to establish a strategic alliance may be
adversely affected. In addition, in both the United States and elsewhere, sales
of prescription pharmaceuticals are dependent in part on the availability of
reimbursement to the consumer from third-party payors, such as government and
private insurance plans that mandate rebates or predetermined discounts from
list prices. For example, a majority of VISTIDE sales is subject to
reimbursement by government agencies, resulting in significant discounts from
list price and rebate obligations. The Company expects that several of its other
products in development, particularly for AIDS indications, will have a similar
reimbursement profile. In addition, third-party payors are increasingly
challenging the prices charged for medical products and services. If the Company
succeeds in bringing one or more additional products to the market, there can be
no assurance that these products will be considered cost effective and that
reimbursement will be available or will be sufficient to allow the Company to
sell its products on a competitive basis.
HUMAN RESOURCES
As of December 31, 1996, Gilead employed 248 people full-time, of whom 69
hold Ph.D. and/or M.D. degrees and 30 hold other advanced degrees. Approximately
149 employees are engaged in research and development activities and 99 are
employed in finance, sales and marketing, corporate development, legal and
general administrative positions. Gilead believes that it maintains good
relations with its employees.
SCIENTIFIC ADVISORY BOARD
The Company's Scientific Advisory Board is composed of individuals with
expertise in fields related to the Company's programs. This Board holds formal
meetings with scientists from the Company at least
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once a year. In some cases, individual members of this Board consult and meet
informally with the Company on a more frequent basis. Each of the members of
this Board has a consulting agreement with the Company.
The members of Gilead's Scientific Advisory Board are as follows:
DANIEL L. AZARNOFF, M.D., has been a member of Gilead's Scientific Advisory
Board since January 1990. He headed G.D. Searle & Co.'s research and development
from 1979 through 1985, and previously was Professor of Medicine and
Pharmacology at the University of Kansas. Dr. Azarnoff is a member of the
Institute of Medicine of the National Academy of Sciences.
JACQUELINE K. BARTON, PH.D., has been a member of Gilead's Scientific
Advisory Board since January 1989. She is a Professor of Chemistry at the
California Institute of Technology ("Cal Tech"), a member of the American
Academy of Arts and Sciences and a recipient of a MacArthur Foundation
Fellowship.
PETER B. DERVAN, PH.D., has been a member of Gilead's Scientific Advisory
Board since September 1987. He is Bren Professor of Chemistry at Cal Tech and a
member of the National Academy of Sciences and the American Academy of Arts and
Sciences.
MICHAEL J. GAIT, PH.D., has been a member of Gilead's Scientific Advisory
Board since July 1989. He is a Senior Staff Scientist with the Medical Research
Council in Cambridge, England.
RALPH F. HIRSCHMANN, PH.D., has been a member of Gilead's Scientific
Advisory Board since October 1989. He is a Research Professor of Chemistry at
the University of Pennsylvania. Previously, Dr. Hirschmann was employed by Merck
& Co., most recently as Senior Vice President of Basic Research and Chemistry.
Dr. Hirschmann is a member of the American Academy of Arts and Sciences.
LAWRENCE L.-K. LEUNG, M.D., has been a member of Gilead's Scientific
Advisory Board since September 1994. He is Chief of the Division of Hematology
at the Stanford University Medical School. Dr. Leung was previously Director of
Cardiovascular Biology and Medicine at Gilead.
BUSINESS ADVISORY BOARD
The members of Gilead's Business Advisory Board are as follows:
JOSEPH A. CALIFANO, JR. has been a member of Gilead's Business Advisory
Board since September 1988. He is the Chairman and President of the Center on
Addiction and Substance Abuse. Formerly, he was the managing partner of the law
firm of Dewey, Ballantine, Bushby, Palmer & Wood. Mr. Califano served as
Secretary of Health, Education and Welfare from 1977 to 1979.
THOMAS D. KILEY has been a member of Gilead's Business Advisory Board since
January 1990. He is an attorney and independent consultant specializing in
intellectual property and corporate strategy in the biotechnology industry. Mr.
Kiley formerly served as Vice President and General Counsel and as Vice
President for Corporate Development at Genentech, Inc.
JOHN E. ROBSON has been a member of Gilead's Business Advisory Board since
November 1993. He is a Senior Advisor with Robertson, Stephens & Company, LLC.
Formerly, he was Deputy Secretary of the United States Treasury, and President
and Chief Executive Officer of G. D. Searle & Co. Mr. Robson has also served as
Chairman of the Civil Aeronautics Board, Undersecretary of the United States
Department of Transportation and Dean of the Emory University School of Business
Administration.
GAIL R. WILENSKY has been a member of Gilead's Business Advisory Board since
February 1996. She is the John M. Olin Senior Fellow at Project HOPE, and Chair
of the Physician Payment Review Commission, responsible for advising the U.S.
Congress on Medicare and Medicaid matters. Dr. Wilensky was previously Deputy
Assistant to the President for Policy Development, and Administrator of the
Health Care Financing Administration of the U.S. Department of Health and Human
Services.
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RISK FACTORS
IN THIS SECTION, THE COMPANY SUMMARIZES CERTAIN RISKS THAT SHOULD BE
CONSIDERED BY STOCKHOLDERS AND PROSPECTIVE INVESTORS IN THE COMPANY. THESE RISKS
ARE DISCUSSED IN DETAIL BELOW, AND ARE DISCUSSED IN CONTEXT IN OTHER SECTIONS OF
THIS REPORT.
RAPIDLY CHANGING ENVIRONMENT FOR AIDS THERAPEUTICS
Several of the Company's products and products in development address AIDS
or AIDS-related conditions, including VISTIDE for CMV retinitis, FORVADE for
refractory HSV infection, GS 840 for HIV and AIDS and PMPA for HIV and AIDS. The
medical, regulatory and commercial environment for AIDS therapies is changing at
a rapid pace, often in unpredictable ways. For example, medical opinion on
appropriate treatment regimens for people with AIDS is evolving and is often in
conflict. This evolution can have a dramatic impact on the regulatory
requirements for the approval of AIDS therapies as well as the commercial
prospects of individual therapies. In addition, improvements in AIDS therapy
reduce the potential commercial market for therapies to treat AIDS-related
conditions such as CMV retinitis, and make clinical trials for new AIDS
therapies more difficult to enroll. As a participant in the development and
marketing of AIDS therapies, Gilead is subject to dramatic changes in the
regulatory and commercial environment in which it operates, which could have a
material adverse impact on the Company. See "VISTIDE" and "Gilead's Product
Development Programs."
NO ASSURANCE OF REGULATORY APPROVAL; GOVERNMENT REGULATION
The Company's preclinical studies and clinical trials, as well as the
manufacturing and marketing of its potential products, are subject to extensive
regulation by numerous federal, state and local government authorities in the
United States. Similar regulatory requirements exist in Europe and in other
countries where the Company intends to test and market its potential products.
The Company's NDA for FORVADE is currently under review by the FDA, and the
Company anticipates filing for marketing approval of additional products over
the next several years. There can be no assurance that FORVADE or any of the
Company's other products in development will receive marketing approval in any
country on a timely basis, or at all.
The regulatory process, which includes preclinical studies and clinical
trials of each compound to establish its safety and efficacy, takes many years
and requires the expenditure of substantial resources. Moreover, if regulatory
approval of a drug is granted, such approval may entail limitations on the
indicated uses for which it may be marketed. Failure to comply with applicable
regulatory requirements can, among other things, result in fines, suspension of
regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecutions. Further, FDA policy may change and
additional government regulations may be established that could prevent or delay
regulatory approval of the Company's potential products. In addition, a marketed
drug and its manufacturer are subject to continual review, and later discovery
of previously unknown problems with a product or manufacturer may result in
restrictions on such product or manufacturer, including withdrawal of the
product from the market. See "Government Regulation."
UNCERTAINTIES RELATED TO CLINICAL TRIALS
Before obtaining regulatory approvals for the commercial sale of any of its
products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and efficacious for use in
each target indication. The results from preclinical studies and early clinical
trials may not be predictive of results that will be obtained in large-scale
testing, and there can be no assurance that the Company's clinical trials will
demonstrate the safety and efficacy of any products or will result in marketable
products. A number of companies in the biotechnology industry have suffered
significant setbacks in advanced clinical trials, despite promising results in
earlier trials.
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The rate of completion of the Company's clinical trials is dependent upon
the rate of patient accrual. Patient accrual is a function of many factors,
including the size of the patient population, the nature of the protocol, the
proximity of patients to clinical sites and the eligibility criteria for the
study. In addition, recent improvements in AIDS drug therapy may make clinical
trials for new AIDS therapies more difficult to enroll. Delays in planned
patient enrollment can result in increased costs and delays. In addition, if the
Company is unable to successfully complete its clinical trials, its business
could be materially adversely affected. See "Gilead's Product Development
Programs."
DEPENDENCE ON COLLABORATIVE RELATIONSHIPS
The Company has established a number of significant collaborative
relationships with major pharmaceutical companies, including Pharmacia & Upjohn,
Hoffmann-La Roche, Glaxo Wellcome and American Home Products. The Company is
dependent to a large degree on its collaborative partners with respect to
research funding, clinical development and/or sales and marketing performance.
There can be no assurance that the efforts of the Company's collaborative
partners will be successful, that the interests of the Company and its partners
will not be in conflict or that any of the Company's partners will not terminate
their relationship with the Company. In addition, a significant portion of the
Company's revenues have historically come from collaborative relationships, and
the Company expects this to be the case in future periods. Although the Company
has established contractual relationships with each of its collaborative
partners, there can be no assurance that these contracts will provide
significant protection or can be effectively enforced if one of these partners
fails to perform. The Company cannot control whether its corporate partners will
devote sufficient resources to the Company's programs or products. The Company
anticipates seeking collaborative relationships for certain of its programs in
the future, and there can be no assurance that such relationships will be
available on acceptable terms, if at all. See "Collaborative Relationships."
LOSS HISTORY AND ACCUMULATED DEFICIT; QUARTERLY FLUCTUATIONS; UNCERTAINTY OF
FUTURE PROFITABILITY
Gilead has incurred net losses since its inception. At December 31, 1996,
the Company's accumulated deficit was approximately $134.5 million. Such losses
have resulted principally from expenses incurred in the Company's research and
development programs and, to a lesser extent, from sales, general and
administrative expenses. The Company's revenues to date have been generated
primarily from collaborative arrangements rather than product revenues. The
Company's current product revenues are derived solely from sales of VISTIDE and
from the co-promotion of Roche's Roferon-A for hepatitis C. Both of these
products were recently launched and have limited sales potential relative to
many pharmaceutical products. Gilead expects to incur substantial losses for at
least the next several years, due primarily to the expansion of its research and
development programs, including preclinical studies, clinical trials and
manufacturing, as well as increasing commercialization expenses. The Company
expects that losses will fluctuate from quarter to quarter and that such
fluctuations may be substantial. There can be no assurance that the Company will
successfully develop, receive regulatory approval for, commercialize,
manufacture, market and sell any additional products, or achieve or sustain or
profitability.
TECHNOLOGICAL UNCERTAINTY
The development of new pharmaceutical products is highly uncertain and is
subject to a number of significant risks. Potential products that appear to be
promising at various stages of development may not reach the market for a number
of reasons. Such reasons include the possibilities that the potential products
will be found ineffective or cause harmful side effects during preclinical
studies or clinical trials, fail to receive necessary regulatory approvals, be
difficult or uneconomical to manufacture on a commercial scale, fail to achieve
market acceptance or be precluded from commercialization by proprietary rights
of third parties.
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There are a number of technological challenges the Company must address to
successfully develop commercial products in each of its development programs.
Certain of the Company's potential products will require significant additional
research and development efforts, including process development and significant
additional clinical testing, prior to any commercial use. There can be no
assurance that the Company will successfully address any of these technological
challenges, or others that may arise in the course of development. See "Gilead's
Product Development Programs."
NO ASSURANCE OF MARKET ACCEPTANCE
There can be no assurance that VISTIDE or any of the Company's products in
development, if approved for marketing, will achieve market acceptance. The
degree of market acceptance depends upon a number of factors, including the
receipt and scope of regulatory approvals, the establishment and demonstration
in the medical and patient advocacy community of the clinical efficacy and
safety of the Company's product candidates and their potential advantages over
competitive products, and reimbursement policies of government and third-party
payors. There can be no assurance that physicians, patients, patient advocates,
payors or the medical community in general will accept and utilize any products
that may be developed by the Company. See "VISTIDE," "Gilead's Product
Development Programs" and "Competition."
INTENSE COMPETITION
The Company's products and development programs target a number of diseases
and conditions, including viral infections, cardiovascular disease and cancer.
Even if the Company is successful in developing additional products to treat any
of these diseases or conditions, there can be no assurance that VISTIDE or any
other products that receive marketing clearance will achieve significant
commercial acceptance. There are many commercially available products for these
diseases, and a large number of companies and institutions are conducting
well-funded research and development activities directed at developing
treatments for these diseases.
Gilead anticipates it will face increased competition in the future as new
products enter the market and advanced technologies become available. There can
be no assurance that existing products or new products developed by the
Company's competitors will not be more effective, or be more effectively
marketed and sold, than any that may be developed by the Company. Competitive
products may render Gilead's technology and products obsolete or noncompetitive
prior to the Company's recovery of research, development or commercialization
expenses incurred with respect to any such products.
Many of the Company's existing or potential competitors, particularly large
pharmaceutical companies, have substantially greater financial, technical and
human resources than the Company. In addition, many of these competitors have
significantly greater experience than the Company in undertaking research,
preclinical studies and clinical trials of new pharmaceutical products,
obtaining FDA and other regulatory approvals, and manufacturing, marketing and
selling such products. Accordingly, the Company's competitors may succeed in
commercializing products more rapidly or effectively than the Company, which
would have a material adverse effect on the Company. See "Competition."
UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT
The business and financial condition of pharmaceutical and biotechnology
companies will continue to be affected by the efforts of government and
third-party payors to contain or reduce the cost of health care through various
means. For example, in certain foreign markets, pricing or profitability of
prescription pharmaceuticals is subject to government control. In particular,
individual pricing negotiations are often required in each country of the
European Community, even if approval to market the drug under the EMEA's
centralized procedure is obtained. In the United States, there have been, and
the Company expects that there will continue to be, a number of federal and
state proposals to implement similar
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government control. In addition, an increasing emphasis on managed care in the
United States has and will continue to increase the pressure on pharmaceutical
pricing. While the Company cannot predict whether any such legislative or
regulatory proposals will be adopted or the effect such proposals or managed
care efforts may have on its business, the announcement of such proposals or
efforts could have a material adverse effect on the trading price of the
Company's Common Stock, and the adoption of such proposals or efforts could have
a material adverse effect on the Company. Further, to the extent that such
proposals or efforts have a material adverse effect on other pharmaceutical
companies that are prospective corporate partners for the Company, the Company's
ability to establish corporate collaborations may be adversely affected. In
addition, in both the United States and elsewhere, sales of prescription
pharmaceuticals are dependent in part on the availability of reimbursement to
the consumer from third-party payors, such as government and private insurance
plans that mandate rebates or predetermined discounts from list prices. For
example, a majority of VISTIDE sales is subject to reimbursement by government
agencies, resulting in significant discounts from list price and rebate
obligations. The Company expects that several of its other products in
development, particularly for AIDS indications, will have a similar
reimbursement profile. In addition, third-party payors are increasingly
challenging the prices charged for medical products and services. If the Company
succeeds in bringing one or more additional products to the market, there can be
no assurance that these products will be considered cost effective and that
reimbursement will be available or will be sufficient to allow the Company to
sell its products on a competitive basis. See "Pricing and Reimbursement."
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain and
enforce patent protection for its products both in the United States and other
countries. No assurance can be given that patents will issue from any pending
applications or that, if patents do issue, the claims allowed will be
sufficiently broad to protect the Company's technology. In addition, no
assurance can be given that any patents issued to or licensed by the Company
will not be challenged, invalidated, infringed or circumvented, or that the
rights granted thereunder will provide competitive advantages to the Company.
The Company does not have patent filings covering GS 840 in China or in certain
other Asian countries, although it does have an application pending in Japan.
Asia is a major market for hepatitis B therapies, one of the potential
indications for GS 840. In addition, patents on certain of the Company's
compounds may issue many years before marketing approval is obtained, limiting
the commercial value of the product.
The commercial success of the Company will also depend in part on not
infringing patents or proprietary rights of others and not breaching the
licenses granted to the Company. There can be no assurance that the Company will
be able to obtain a license to any third-party technology that it may require to
conduct its business or that, if obtainable, such technology can be licensed at
a reasonable cost. Failure by the Company to obtain a license to any technology
that it may require to commercialize its technologies or products may have a
material adverse effect on the Company.
Litigation, which could result in substantial cost to the Company, may also
be necessary to enforce any patents issued to the Company or to determine the
scope and validity of other parties' proprietary rights. If the outcome of any
such litigation is adverse to the Company, the Company's business could be
adversely affected. To determine the priority of inventions, the Company may
have to participate in interference proceedings declared by the United States
Patent and Trademark Office, which could result in substantial cost to the
Company.
The Company also relies on unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its corporate partners, collaborators,
employees, consultants and vendors. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets will not
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otherwise become known or be independently discovered by competitors. See
"Patents and Proprietary Rights."
RELIANCE ON THIRD PARTY MANUFACTURERS
The Company generally relies on third parties for the manufacture of bulk
drug substance and final drug product for clinical and commercial purposes,
including for VISTIDE, FORVADE and GS 840. Pursuant to such manufacturing
relationships, the Company depends on such third parties to perform their
obligations effectively and on a timely basis. There can be no assurance that
such parties will perform and any failures by third parties may delay clinical
trials or the submission of products for regulatory approval, impair the
Company's ability to deliver commercial products on a timely basis, or otherwise
impair the Company's competitive position, which could have a material adverse
effect on the Company.
The Company has qualified a sole source supplier with the FDA for the bulk
drug substance used in VISTIDE and another sole source supplier for the final
drug product. Gilead has established a second source of bulk drug substance
supply for VISTIDE (and for FORVADE), but has not yet qualified this source with
the FDA. The use of this second source or other alternative suppliers will
require further FDA approval, which will be time consuming. Consequently, in the
event that supplies from either of these sole source suppliers were interrupted
for any reason, the Company's ability to ship VISTIDE or FORVADE could be
impaired, which would have a material adverse effect on the Company.
For certain of its potential products, including GS 4104 for the potential
treatment and prevention of influenza, the Company will need to develop further
its production technologies for use on a larger scale in order to conduct
clinical trials and produce such products for commercial sale at an acceptable
cost. There can be no assurance that the Company or its partners will be able to
implement any of these developments successfully. See "Manufacturing."
PRODUCT LIABILITY EXPOSURE AND INSURANCE
The commercial use of VISTIDE or any other product approved for marketing,
and use of any of the Company's potential products in clinical trials, exposes
the Company to product liability claims. These claims might be made directly by
consumers, health care providers or by pharmaceutical companies or others
selling such products. Gilead has obtained product liability insurance coverage
for its commercial products and clinical trials. There can be no assurance that
such coverage will be adequate for any liability arising from the use of
commercial or clinical products of the Company. Moreover, insurance coverage is
becoming increasingly expensive, and no assurance can be given that the Company
will be able to maintain insurance coverage at a reasonable cost or in
sufficient amounts to protect the Company against losses due to liability. There
can also be no assurance that the Company will be able to obtain commercially
reasonable product liability insurance for any future clinical trials or
products approved for marketing. A successful product liability claim or series
of claims could have a material adverse effect on the Company.
HAZARDOUS MATERIALS
The Company's research and development involves the controlled use of
hazardous materials, chemicals, viruses and various radioactive compounds.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the standards prescribed by state and
federal regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, the
Company could be held liable for significant damages or fines.
VOLATILITY OF STOCK PRICE
The market prices for securities of biopharmaceutical companies, including
Gilead, have historically been highly volatile, and the market has from time to
time experienced significant price and volume
27
<PAGE>
fluctuations that are unrelated to the operating performance of particular
companies. Factors such as fluctuations in the Company's operating results,
announcements of technological innovations or new therapeutic products by the
Company or its competitors, clinical trial results, government actions or
regulation, developments in patent or other proprietary rights, public concern
as to the safety of drugs developed by the Company or others and general market
conditions can have an adverse effect on the market price of the Common Stock.
In particular, the realization of any of the risks described in these "Risk
Factors" could have a dramatic and adverse impact on such market price.
ANTITAKEOVER PROVISIONS
The Company has adopted a number of provisions that could have antitakeover
effects. In November 1994, the Company's Board of Directors adopted a Preferred
Share Purchase Rights Plan, commonly referred to as a "poison pill." The
Company's Restated Certificate of Incorporation (the "Restated Certificate")
does not permit cumulative voting. The Board of Directors has the authority,
without further action by the stockholders, to fix the rights and preferences
of, and issue shares of, preferred stock. These provisions and other provisions
of the Restated Certificate and Delaware corporate law may have the effect of
deterring hostile takeovers or delaying or preventing changes in control or
management of the Company, including transactions in which stockholders might
otherwise receive a premium for their shares over then current market prices.
ITEM 2. PROPERTIES
Gilead's administrative offices and research laboratories are located in
Foster City, California. The Company leases approximately 145,800 square feet of
space in six adjacent buildings. The leases on this space expire March 31, 2006,
and the Company has an option to renew the leases for two additional five year
periods. The Company believes that it will need to expand its facilities in the
future to support any significant growth in its operations. Gilead anticipates
it will be able to expand its facilities in nearby locations. There can be no
assurance, however, that such space will be available on favorable terms, if at
all.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to page
39 of the Registrant's annual report to security holders furnished to the
Commission pursuant to Rule 14a-3(b) in connection with the 1997 Annual Meeting
attached hereto as Exhibit 13.1 (the "Annual Report").
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to page
23 of the Annual Report attached hereto as Exhibit 13.1.
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The information required by this Item is incorporated by reference to pages
24 through 25 of the Annual Report attached hereto as Exhibit 13.1.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company and the
related report of independent auditors are incorporated herein by reference to
pages 26 through 38 of the Annual Report attached here as to Exhibit 13.1:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING FINANCIAL DISCLOSURE
Not applicable.
29
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The information required by this Item concerning the Company's directors and
executive officers is incorporated by reference to pages 2 through 4 of
Registrant's Definitive Proxy Statement filed with the Commission pursuant to
Regulation 14A in connection with the 1997 Annual Meeting (the "Proxy
Statement") under the headings "Nominees" and "Executive Officers."
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this Item is incorporated by reference to page 6
of the Proxy Statement under the heading "Compliance with Section 16(a) of the
Securities Exchange Act of 1934."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to pages
7 through 10 of the Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by reference to pages
5 through 6 of the Proxy Statement under the heading "Security Ownership of
Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to page
14 through 15 of the Proxy Statement under the heading "Certain Transactions"
and by reference to pages 7 through 10 of the Proxy Statement under the heading
"Executive Compensation."
30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
(1) Index to Consolidated Financial Statements. The following Consolidated
Financial Statements of Gilead Sciences, Inc. are filed as part of this Form
10-K and are included in the Annual Report attached hereto as Exhibit 13.1 and
incorporated herein by reference.
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for the year ended December 31,
1996, the nine months ended December 31, 1995 and 1994 and for the year
ended March 31, 1995
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 1996, the nine months ended December 31, 1995 and for the year
ended March 31, 1995
Consolidated Statements of Cash Flows for the year ended December 31,
1996, the nine months ended December 31, 1995 and 1994 and for the year
ended March 31, 1995
Notes to Consolidated Financial Statements
All schedules are omitted because they are not required or the required
information is included in the financial statements or notes thereto.
(2) Exhibits
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
- --------- ----------- ----------------------------------------------------------------------------------------------
<S> <C> <C>
(1) 3.1 Amended and Restated Certificate of Incorporation of the Registrant.
(2) 3.2 Amended and Restated By-laws of the Registrant.
(9) 3.3 Certificate of Amendment of Restated Certificate of Incorporation.
4.1 Reference is made to Exhibits 3.1, 3.2, and 3.3.
(8) 4.2 Rights Agreement, dated as of November 21, 1994, between Registrant and First Interstate Bank,
with exhibits.
(8) 4.3 Form of letter sent to Gilead Sciences, Inc. stockholders, dated December 14, 1994.
(9)+ 10.1 Form of Indemnity Agreement entered into between the Registrant and its directors and
executive officers.
(3) 10.3 Form of Employee Proprietary Information and Invention Agreement entered into between
Registrant and certain of its officers and key employees.
(2)+ 10.4 Registrant's 1987 Incentive Stock Option Plan and related agreements.
(2) 10.5 Registrant's 1987 Supplemental Stock Option Plan and related agreements.
(4) 10.7 Registrant's 1991 Employee Stock Purchase Plan.
(9) 10.8 Registrant's 1991 Stock Option Plan, as amended October 17, 1995.
(2) 10.11 Series C Preferred Stock Purchase Agreement, dated as of July 26, 1990, by and between
Registrant and Glaxo Inc.
(2) 10.13 Registration Rights Agreement, dated as of June 28, 1991, by and among Registrant and the
investors identified on Schedule 1 attached thereto.
(2)+ 10.15 Form of Non-Qualified Stock Option issued to certain executive officers and directors in 1991.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
- --------- ----------- ----------------------------------------------------------------------------------------------
<S> <C> <C>
(2) 10.16 Relocation Loan Agreement, dated as of November 1, 1990 among Registrant, John C. Martin and
Rosemary Martin.
(2) 10.17 Vintage Park Research and Development Net Lease by and between Registrant and Vintage Park
Associates dated March 27, 1992 for premises located at 344B, 346 and 353 Lakeside Drive,
Foster City, California with related addendum, exhibits and amendments.
(2) 10.21 Letter Agreement, dated as of September 23, 1991 between Registrant and IOCB/ REGA, with
exhibits with certain confidential information deleted.
(5) 10.23 Vintage Park Research and Development Net Lease by and between Registrant and Vintage Park
Associates dated September 16, 1993 for premises located at 335 Lakeside Drive, Foster City,
California with related exhibits.
(6) 10.26 Amendment Agreement, dated October 25, 1993 between Registrant and IOCB/ REGA, and related
license agreements and exhibits with certain confidential information deleted.
(6) 10.28 Loan Agreement among Registrant and The Daiwa Bank, Limited dated May 17, 1994 with certain
confidential information deleted.
(7) 10.29 License and Supply agreement between Registrant and American Cyanamid Company dated August 1,
1994 with certain confidential information deleted.
(8) 10.30 Loan Agreement, dated as of October 1, 1994 among Registrant and Mark L. Perry and Melanie P.
Pena.
(9) 10.33 Registrant's 1995 Non-Employee Directors' Stock Option Plan and related form of stock option
grant.
(10) 10.34 Collaborative Research Agreement, dated as of March 25, 1996, by and between Registrant and
Glaxo Wellcome Inc. with certain confidential information deleted.
(11) 10.35 Agreement among Registrant and Michael F. Bigham.
(11) 10.36 Vintage Park Research and Development Lease by and between Registrant and WCB Sixteen Limited
Partnership dated June 24, 1996 for premises located at 333 Lakeside Drive, Foster City,
California.
(11) 10.37 Amendment No. 1 to Vintage Park Research and Development Lease by and between Registrant and
WCB Seventeen Limited Partnership dated June 24, 1996 for premises located at 335 Lakeside
Drive, Foster City, California.
(11) 10.38 Amendment No. 2 to Vintage Park Research and Development Lease by and between Registrant and
WCB Seventeen Limited Partnership dated June 24, 1996 for premises located at 344B, 346 and
353 Lakeside Drive, Foster City, California.
(11) 10.39 Amendment No. 2 to Vintage Park Research and Development Lease by and between Registrant and
WCB Sixteen Limited Partnership dated June 24, 1996 for premises located at 342A and 368
Lakeside Drive, Foster City, California.
(12) 10.40 License and Supply Agreement between Registrant and Pharmacia & Upjohn S.A. dated August 7,
1996 with certain confidential information deleted.
(12) 10.41 Series B Preferred Stock Purchase Agreement between Registrant and Pharmacia & Upjohn S.A.
dated August 7, 1996.
(12) 10.42 Development and License Agreement between Registrant and F. Hoffmann-La Roche Ltd and
Hoffmann-La Roche Inc dated September 27, 1996 with certain confidential information deleted.
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
- --------- ----------- ----------------------------------------------------------------------------------------------
<S> <C> <C>
(12) 10.43 Copromotion Agreement between Registrant and Roche Laboratories, Inc. dated September 27, 1996
with certain confidential information deleted.
10.44 Agreement among Registrant and Michael L. Riordan, M.D.
13.1 Registrant's Annual Report to Stockholders for the year ended December 31, 1996.
23.1 Consent of Ernst & Young LLP, Independent Auditors. Reference is made to page 36.
24.1 Power of Attorney. Reference is made to page 34.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Filed as an exhibit to Registrant's Registration Statement on Form S-8 (No.
33-46058) and incorporated herein by reference.
(2) Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No.
33-44534) or amendments thereto and incorporated herein by reference.
(3) Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No.
33-55680) or amendments thereto and incorporated herein by reference.
(4) Filed as an exhibit to Registrant's Registration Statement on Form S-8 (No.
33-62060) and incorporated herein by reference.
(5) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993 and incorporated herein by reference.
(6) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1994 and incorporated herein by reference.
(7) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994 and incorporated herein by reference.
(8) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1994 and incorporated herein by reference.
(9) Filed as an exhibit to Registrant's Registration Statement on Form S-3 (No.
333-868) or amendments thereto and incorporated herein by reference.
(10) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the nine
month period ended December 31, 1996.
(11) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 and incorporated herein by reference.
(12) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein by reference.
+ Indicates management contracts or compensatory plans or arrangements filed
pursuant to Item 601(b)(10) of Regulation S-K.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the fourth
quarter of the fiscal year ended December 31, 1996.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GILEAD SCIENCES, INC.
By: /s/ JOHN C. MARTIN
-----------------------------------------
John C. Martin
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 20, 1997
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John C. Martin and Mark L. Perry, and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments to this Report, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming that all said attorneys-in-fact
and agents, or any of them or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------ --------------------
<C> <S> <C>
/s/ JOHN C. MARTIN President and Chief Executive
- ---------------------------------------- Officer, Director (Principal March 20, 1997
(John C. Martin) Executive Officer)
Vice President, Chief
/s/ MARK L. PERRY Financial Officer and
- ---------------------------------------- General Counsel (Principal March 20, 1997
(Mark L. Perry) Financial and Accounting
Officer)
/s/ DONALD H. RUMSFELD
- ---------------------------------------- Chairman of the Board of March 20, 1997
(Donald H. Rumsfeld) Directors
/s/ ETIENNE F. DAVIGNON
- ---------------------------------------- Director March 20, 1997
(Etienne F. Davignon)
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------ --------------------
<C> <S> <C>
/s/ JAMES M. DENNY, SR.
- ---------------------------------------- Director March 20, 1997
(James M. Denny, Sr.)
/s/ GORDON E. MOORE
- ---------------------------------------- Director March 20, 1997
(Gordon E. Moore)
/s/ MICHAEL L. RIORDAN
- ---------------------------------------- Director March 20, 1997
(Michael L. Riordan)
/s/ GEORGE P. SHULTZ
- ---------------------------------------- Director March 20, 1997
(George P. Shultz)
</TABLE>
35
<PAGE>
[GILEAD SCIENCES LETTERHEAD]
October 1, 1996
Michael L. Riordan, M.D.
360 Forest Avenue, No. 604
Palo Alto, California 94301
Dear Dr. Riordan:
This letter agreement sets forth the terms upon which you will continue as
an employee of Gilead Sciences, Inc. (the "Company") during the period from
October 1, 1996 through December 31, 1998.
I. OCTOBER 1, 1996 THROUGH DECEMBER 31, 1996. You will become a part-time
employee on October 1, 1996 and continue in such capacity through December
31, 1996, as provided below:
A. TERMS OF EMPLOYMENT.
1. TITLE AND DUTIES: Your title and duties will remain the same. You
will reduce your time commitment to approximately fifty percent (50%)
of full-time employment.
2. SALARY: You will receive fifty percent (50%) of your current base
salary.
3. BONUS: You will be eligible for a bonus for the calendar year ending
December, 1996 in the full amount for the second and third quarters
of the year and one-half ( 1/2) for the fourth quarter (I.E.,
five-eighths ( 5/8) of the full annual bonus), as determined by the
Board of Directors at its July 1997 meeting in accordance with
current policies.
4. HEALTH AND LIFE INSURANCE; FACILITIES: You will receive all life and
disability insurance, hospitalization and major medical, dental and
other employee benefit plans offered by the Company to its full-time
employees, at levels maintained for you prior to October 1, 1996. You
will be provided with part-time secretarial and office support.
5. DEATH OR DISABILITY: In the event of your death or disability, your
options will vest as provided therein.
6. OPTIONS: Your existing options will continue to vest during this
period.
II. 1997-1998. During the period commencing on January 1, 1997 through December
31, 1998, your employment will continue as follows:
A. TERMS OF EMPLOYMENT.
1. DUTIES: You will continue as a part-time employee, serving at the
Chief Executive Officer's request and direction at times and for
periods mutually agreed to by you and the Chief Executive Officer.
2. SALARY: You will be paid $5,000 per month.
3. BONUS: You will not be eligible for a bonus for calendar years 1997
or 1998.
4. HEALTH AND LIFE INSURANCE; FACILITIES: You will receive life and
disability insurance, hospitalization and major medical, dental and
other employee benefit plans offered by the Company to its full-time
employees, at levels maintained for you prior to October 1, 1996. You
will be provided with part-time secretarial and office support.
5. NONCOMPETITION AGREEMENT: You agree not to compete with the Company
during a two year period commencing on January 1, 1997 and ending on
December 31, 1998, as provided below:
A. SCOPE OF NON-COMPETITION COVENANT: You shall not, directly or
indirectly, without the prior written consent of the Company,
own, manage, operate, join, control, finance or
<PAGE>
Michael L. Riordan, M.D.
October 1, 1996
Page 2
participate in the ownership, management, operation, control or
financing of, or be connected as an officer, director, employee,
partner, principal, agent, representative, consultant, licensor,
licensee or otherwise with, any business or enterprise in the
world which is engaged in the biotechnology or pharmaceutical
business.
B. EXCEPTION: You shall be permitted to (i) invest in any business
solely as a passive investor, up to five percent (5%) of the
publicly traded equity securities of such business, or (ii) be
employed by a business or enterprise that is engaged primarily in
a business other than the biotechnology or pharmaceutical
business if you do not apply your expertise at such business or
enterprise to that part of such business or enterprise that is or
could be competitive with the biotechnology or pharmaceutical
business.
6. OPTIONS: Your existing options will continue to vest during this
period. At the end of the two year period, the Board would consider
whether the exercise period for vested but unexercised options should
be extended in light of the contributions made by Dr. Riordan to the
Company.
7. TERMINATION: In the event of your violation of the noncompetition
provisions contained in Section (II)(A)(5) above, the vesting of your
options will cease and the Company could terminate your employment or
compensation or seek injunctive relief.
III. BOARD SERVICE. From October 1, 1996 through December 31, 1998, you will
continue serving on the Board of Directors, subject to termination at the
discretion of the Board of Directors. Your sole compensation for serving on
the Board of Directors during the two year period will be the salary and
benefits described in Sections (I)(A)(1-5) and (II)(A)(1-4) above. If
elected thereafter, you will be entitled to standard, independent director
compensation.
A. The benefits described in Sections I and II will continue even if you
are not serving on the Board of Directors, so long as you do not violate
the non-competition provisions contained in Section (II)(A)(5) above and
remain available to assist the Chief Executive Officer as provided in
Section (II)(A)(1).
IV. GOVERNING LAW. This Letter Agreement shall be construed in accordance with,
and governed in all respects by, the laws of the State of California
(without giving effect to principles of conflicts of law).
Please evidence your acceptance of the terms of this Letter Agreement by
executing this Letter Agreement below and returning the executed Letter
Agreement to the undersigned.
Very truly yours,
GILEAD SCIENCES, INC.
By: /s/ JOHN C. MARTIN
------------------------------------------
John C. Martin
PRESIDENT AND CHIEF EXECUTIVE OFFICER
I hereby accept, and agree to
be bound by, the terms of this
Letter Agreement:
/s/ MICHAEL L. RIORDAN
- ------------------------------
Michael L. Riordan, M.D.
<PAGE>
1996
FINANCIALS
GILEAD SCIENCES
[LOGO]
<PAGE>
SELECTED CONSOLIDATED
FINANCIAL DATA
CONSOLIDATED STATEMENT OF OPERATIONS DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months
YEAR ENDED Ended
DECEMBER 31, December 31, Years Ended March 31,
1996 1995(1) 1995 1994 1993
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales, net $ 8,477 $ -- $ -- $ -- $ --
Contract revenues 24,943 2,699 4,922 4,085 4,177
-----------------------------------------------------------------------
Total revenues 33,420 2,699 4,922 4,085 4,177
-----------------------------------------------------------------------
Operating costs and expenses:
Cost of sales 910 -- -- -- --
Research and development 41,881 25,670 30,360 26,046 17,987
Selling, general and administrative 26,692 9,036 9,669 7,639 4,377
-----------------------------------------------------------------------
Total operating costs and expenses 69,483 34,706 40,029 33,685 22,364
-----------------------------------------------------------------------
Loss from operations (36,063) (32,007) (35,107) (29,600) (18,187)
Interest income, net 14,331 4,592 3,833 3,888 4,105
-----------------------------------------------------------------------
Net loss $ (21,732) $ (27,415) $ (31,274) $ (25,712) $ (14,082)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Net loss per share $ (0.78) $ (1.29) $ (1.65) $ (1.37) $ (0.88)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Common shares used in the calculation
of net loss per share 27,786 21,274 18,971 18,779 16,065
-----------------------------------------------------------------------
-----------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA
(in thousands)
DECEMBER 31, December 31, March 31,
1996 1995(1) 1995 1994 1993
-----------------------------------------------------------------------
Cash, cash equivalents and
short-term investments $ 295,963 $ 155,659 $ 89,146 $ 114,968 $ 139,353
Working capital 284,154 145,539 80,190 108,071 133,901
Total assets 310,673 166,659 102,395 126,602 146,809
Non-current portion of equipment
financing obligations and
long-term debt 2,914 3,482 5,454 2,479 1,156
Accumulated deficit (134,486) (112,754) (85,339) (54,065) (28,353)
Total stockholders' equity (2) 291,660 151,499 86,056 115,280 139,402
</TABLE>
(1) In October 1995, the Company changed its fiscal year end from March 31 to
December 31, effective with the nine months ended December 31, 1995.
(2) No dividends have been declared or paid on the common stock.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
Since its inception in June 1987, Gilead has devoted the substantial
portion of its resources to its research and development programs, with
significant expenses relating to commercialization beginning in 1996. With the
exception of the third quarter of 1996, when the Company entered into two
collaborations with significant initial license fees, the Company has incurred
losses since its inception. Gilead expects to incur losses for the next several
years, due primarily to its research and development programs, including
preclinical studies, clinical trials and manufacturing, as well as marketing and
sales efforts in support of VISTIDE-Registered Trademark- (cidofovir injection)
and other potential products. On June 26, 1996, the U.S. Food and Drug
Administration (FDA) granted marketing clearance of VISTIDE for the treatment of
cytomegalovirus retinitis (CMV) in patients with AIDS. The Company is
independently marketing VISTIDE in the United States with an antiviral specialty
sales force and has entered into a collaboration agreement with Pharmacia &
Upjohn S.A. ("P&U") to market VISTIDE in all countries outside the United
States. The Company expects that its financial results will fluctuate from
quarter to quarter and that such fluctuations may be substantial. There can be
no assurance that the Company will successfully develop, commercialize,
manufacture and market additional products or sustain profitability. As of
December 31, 1996, the Company's accumulated deficit was approximately $134.5
million.
The successful development and commercialization of the Company's products
will require substantial and ongoing efforts at the forefront of the life
sciences industry. The Company is pursuing preclinical or clinical development
of a number of additional product candidates. Even if these product candidates
appear promising during various stages of development, they may not reach the
market for a number of reasons. Such reasons include the possibilities that the
potential products will be found ineffective or unduly toxic during preclinical
or clinical trials, fail to receive necessary regulatory approvals, be difficult
to manufacture on a large scale, be uneconomical to market or be precluded from
commercialization by proprietary rights of others.
As a company in an industry undergoing rapid change, the Company faces
significant challenges and risks, including the risks inherent in its research
and development programs, uncertainties in obtaining and enforcing patents, the
lengthy and expensive regulatory approval process, intense competition from
pharmaceutical and biotechnology companies, increasing pressure on
pharmaceutical pricing from payors, patients and government agencies and
uncertainties associated with the eventual market acceptance of VISTIDE or any
of the Company's products in development. These risks are discussed in greater
detail in the Company's Annual Report on Form 10-K for the year ended December
31, 1996. Stockholders and potential investors in the Company should carefully
consider these risks in evaluating the Company and should be aware that the
realization of any of these risks could have a dramatic and negative impact on
the Company's stock price.
This report contains forward-looking statements relating to clinical and
regulatory developments, marketing and sales matters, future expense levels and
financial results. These statements involve inherent risks and uncertainties.
The Company's actual results may differ significantly from the results discussed
in the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, the risks discussed in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, particularly those
relating to the development and marketing of pharmaceutical products.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
REVENUES The Company had total revenues of $33.4 million, $2.7 million, and
$4.9 million for the year ended December 31, 1996, the nine months ended
December 31, 1995, and the year ended March 31, 1995, respectively. Revenues
increased during 1996, primarily due to contract revenues resulting from the
Company's collaborative agreements with P&U and F. Hoffmann-La Roche Ltd.
("Roche"). Gilead recognized revenues of $21.6 million related to these
agreements for the year ended December 31, 1996. The Company's 1996 total
revenues also included net product sales from the sale of VISTIDE of $8.5
million for the year ended December 31, 1996, with no net product sales in the
previous periods. Revenues in all three periods included income from the
Company's research and development agreement with Glaxo, which was extended for
an additional five years in 1996. Revenues for the year ended March 31, 1995,
also included amounts earned under the
24
<PAGE>
Company's collaborative research and development agreement with the Advanced
Research Projects Agency ("ARPA"), which ended in October 1994.
COSTS AND EXPENSES The Company's cost of sales was $0.9 million for the year
ended December 31, 1996. The Company had no cost of sales for the nine months
ended December 31, 1995 and the year ended March 31, 1995. Cost of sales
resulted from the Company's sale of VISTIDE, which was launched in June 1996.
The Company's research and development expenses were $41.9 million for the
year ended December 31, 1996, $25.7 million for the nine months ended December
31, 1995, and $30.4 million for the year ended March 31, 1995. These expenses
increased 63% from the nine months ended December 31, 1995 to the twelve months
ended December 31, 1996 due to a shorter time period in 1995 and higher
staffing, preclinical and clinical expenses in 1996. The 15% decrease from the
year ended March 31, 1995 to the nine months ended December 31, 1995 is due to
the shorter time period, offset in part by higher research and development
expenses. The Company expects its research and development expenses in 1997 to
increase over 1996, reflecting anticipated increased expenses related to
clinical trials for several product candidates as well as related increases in
staffing and manufacturing.
Selling, general and administrative expenses were $26.7 million for the
year ended December 31, 1996, $9.0 million for the nine months ended December
31, 1995, and $9.7 million for the year ended March 31, 1995. This increase of
195% from the nine months ended December 31, 1995 to the twelve months ended
December 31, 1996 is attributable to the shorter time period in 1995 and to the
establishment of marketing and sales capabilities in connection with
the launch of VISTIDE in 1996, as well as administrative activities in support
of the Company's expanded research and development efforts. The decrease of 7%
in selling, general, and administrative expenses from the year ended March 31,
1995 to the nine months ended December 31, 1995 is due to the shorter time
period, offset in part by initial marketing and sales expenses, support of
expanded research and development activities and the expansion of other general
and administrative activities. The Company expects its selling, general and
administrative expenses to increase during 1997 in connection with ongoing
marketing and sales activities as well as continued support of expanded research
and development efforts and facilities.
NET INTEREST INCOME The Company had net interest income of $14.3 million
for the year ended December 31, 1996, $4.6 million for the nine months ended
December 31, 1995, and $3.8 million for the year ended March 31, 1995. Net
interest income has significantly increased due to the Company's higher average
cash and cash equivalents and short-term investment balances, which resulted
from the Company's two public offerings of common stock completed in February
1996 and August 1995.
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Cash and cash equivalents and short-term investments were $296.0 million at
December 31, 1996, compared to $155.7 million at December 31, 1995. This
increase is primarily the result of the Company's public offering of common
stock in February 1996, which generated $155.5 million in net proceeds, and an
aggregate of $20.3 million in license fees paid by Roche in October 1996 and by
P&U in August 1996, offset by the Company's net use of cash. In October 1996,
the Company entered into a $3.0 million term loan to finance its facilities
expansion, which began in the fourth quarter of 1996. In 1997, the Company
expects to incur construction and equipment costs of approximately $2.5 million
related to the final build-out of a 37,000 square foot facility leased in August
1996, as well as improvements to other leased facilities. In 1997, the Company
expects to incur research and development and selling, general and
administrative expenses in excess of amounts incurred in 1996.
Net cash used in operations was $16.5 million for the year ended December
31, 1996, $23.0 million for the nine months ended December 31, 1995, and $27.4
million for the year ended March 31, 1995. The Company believes that its
existing capital resources, supplemented by net product revenues and contract
revenues, will be adequate to satisfy its capital needs for the foreseeable
future. The Company's future capital requirements will depend on many factors,
including the progress of the Company's research and development, the scope and
results of preclinical studies and clinical trials, the cost, timing and
outcomes of regulatory reviews, the rate of technological advances,
determinations as to the commercial potential of the Company's products under
development, the commercial performance of VISTIDE and any of the Company's
products in development that receive marketing approval, administrative and
legal expenses, the status of competitive products, the establishment of
manufacturing capacity or third-party manufacturing arrangements, the expansion
of sales and marketing capabilities and the establishment of collaborative
relationships with other companies.
The Company may in the future require additional funding, which could be in
the form of proceeds from equity or debt financings or additional collaborative
agreements with corporate partners. If such funding is required, there can be no
assurance that it will be available on favorable terms, if at all.
25
<PAGE>
CONSOLIDATED
BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands, except share and per share amounts) DECEMBER 31, December 31,
1996 1995
-----------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 131,984 $ 27,420
Short-term investments 163,979 128,239
Other current assets 4,290 1,558
-----------------------------------
Total current assets 300,253 157,217
Property and equipment, net 9,172 8,369
Other assets 1,248 1,073
-----------------------------------
$ 310,673 $ 166,659
-----------------------------------
-----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,501 $ 2,412
Accrued clinical and preclinical expenses 5,007 3,923
Other accrued liabilities 4,433 2,229
Deferred revenues 527 208
Current portion of equipment financing obligations and long-term debt 3,631 2,906
-----------------------------------
Total current liabilities 16,099 11,678
Non-current portion of equipment financing obligations and long-term debt 2,914 3,482
Commitments
Stockholders' equity:
Preferred stock, par value $.001 per share, issuable in series;
5,000,000 shares authorized; no shares issued and outstanding
at December 31, 1996 and 1995 -- --
Common stock, par value $.001 per share; 60,000,000 shares
authorized; 28,758,165 shares and 23,769,878 shares issued and
outstanding at December 31, 1996 and 1995, respectively 29 24
Additional paid-in capital 426,577 265,460
Unrealized gains on investments, net 89 167
Accumulated deficit (134,486) (112,754)
Deferred compensation (549) (1,398)
-----------------------------------
Total stockholders' equity 291,660 151,499
-----------------------------------
$ 310,673 $ 166,659
-----------------------------------
-----------------------------------
</TABLE>
See accompanying notes
26
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) YEAR ENDED Nine Months Ended Year Ended
DECEMBER 31, December 31, March 31,
1996 1995 1994 1995
----------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
Revenues:
Product sales, net $ 8,477 $ -- $ -- $ --
Contract revenues 24,943 2,699 3,992 4,922
----------------------------------------------------------
Total revenues 33,420 2,699 3,992 4,922
----------------------------------------------------------
Costs and expenses:
Cost of sales 910 -- -- --
Research and development 41,881 25,670 22,306 30,360
Selling, general and administrative 26,692 9,036 6,904 9,669
----------------------------------------------------------
Total costs and expenses 69,483 34,706 29,210 40,029
----------------------------------------------------------
Loss from operations (36,063) (32,007) (25,218) (35,107)
Interest income 15,042 5,199 3,501 4,762
Interest expense (711) (607) (684) (929)
----------------------------------------------------------
Net loss $(21,732) $(27,415) $(22,401) $(31,274)
----------------------------------------------------------
----------------------------------------------------------
Net loss per share $ (0.78) $ (1.29) $ (1.18) $ (1.65)
----------------------------------------------------------
----------------------------------------------------------
Common shares used in the calculation
of net loss per share 27,786 21,274 18,926 18,971
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
See accompanying notes
27
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share amounts) Unrealized
Gains
Additional (Losses) on Total
Common Paid-in Investments, Accumulated Deferred Stockholders'
Stock Capital Net Deficit Compensation Equity
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1994 $ 19 $171,767 $ -- $ (54,065) $(2,441) $115,280
Issuance of 134,814 shares of common
stock upon the exercise of stock options -- 208 -- -- -- 208
Issuance of 133,002 shares of common
stock pursuant to the employee stock
purchase plan -- 923 -- -- -- 923
Deferred compensation related to grant
of certain stock options -- 49 -- -- (49) --
Amortization of deferred compensation -- -- -- -- 886 886
Unrealized gains (losses) on available-for-
sale short-term investments, net -- -- 33 -- -- 33
Net loss -- -- -- (31,274) -- (31,274)
----------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1995 19 172,947 33 (85,339) (1,604) 86,056
Issuance of 380,595 shares of common
stock upon the exercise of stock options 1 1,963 -- -- -- 1,964
Issuance of 207,165 shares of common
stock pursuant to the employee stock
purchase plan -- 1,430 -- -- -- 1,430
Issuance of 4,053,750 shares of common
stock at $23.25 per share (net of
issuance costs of $5,575,173) 4 88,670 -- -- -- 88,674
Deferred compensation related to grant
of certain stock options -- 450 -- -- (450) --
Amortization of deferred compensation -- -- -- -- 656 656
Unrealized gains (losses) on available-for-
sale short-term investments, net -- -- 134 -- -- 134
Net loss -- -- -- (27,415) -- (27,415)
----------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 24 265,460 167 (112,754) (1,398) 151,499
Issuance of 500,853 shares of common
stock upon the exercise of stock options 1 3,077 -- -- -- 3,078
Issuance of 181,590 shares of common
stock pursuant to the employee stock
purchase plan -- 1,856 -- -- -- 1,856
Issuance of 4,305,844 shares of common
stock at $37.75 per share (net of
issuance costs of $7,063,476) 4 155,478 -- -- -- 155,482
Compensation related to accelerated
vesting on stock options -- 706 -- -- -- 706
Amortization of deferred compensation -- -- -- -- 849 849
Unrealized gains (losses) on available-for-
sale short-term investments, net -- -- (78) -- -- (78)
Net loss -- -- -- (21,732) -- (21,732)
----------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 $ 29 $426,577 $ 89 $(134,486) $ (549) $291,660
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
</TABLE>
See accompanying notes
28
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED
STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents YEAR ENDED Nine Months Ended Year Ended
(in thousands) DECEMBER 31, December 31, March 31,
1996 1995 1994 1995
---------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (21,732) $ (27,415) $ (22,401) $ (31,274)
Adjustments used to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 4,479 3,247 2,803 3,908
Changes in assets and liabilities:
Other current assets (2,732) 371 396 17
Other assets (175) (148) (235) (92)
Accounts payable 89 1,365 (314) (21)
Accrued clinical and preclinical expenses 1,084 757 (885) (637)
Other accrued liabilities 2,204 (366) (45) 741
Deferred revenues 319 (859) 800 --
------------------------------------------------------------
Total adjustments 5,268 4,367 2,520 3,916
------------------------------------------------------------
Net cash used in operating activities (16,464) (23,048) (19,881) (27,358)
------------------------------------------------------------
Cash flows from investing activities:
Purchases of short-term investments (437,627) (173,971) (88,781) (111,575)
Sale of short-term investments 248,552 10,455 -- 6,338
Maturities of short-term investments 153,257 94,147 108,673 148,484
Capital expenditures (3,727) (565) (3,716) (3,885)
------------------------------------------------------------
Net cash provided by (used in) investing activities (39,545) (69,934) 16,176 39,362
------------------------------------------------------------
Cash flows from financing activities:
Payments of financing obligations and long-term debt (2,843) (2,076) (1,665) (2,366)
Proceeds from equipment loans -- -- 624 623
Proceeds from issuance of long-term debt 3,000 -- 6,000 6,000
Proceeds from issuance of common stock 160,416 92,068 1,024 1,131
------------------------------------------------------------
Net cash provided by financing activities 160,573 89,992 5,983 5,388
------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 104,564 (2,990) 2,278 17,392
Cash and cash equivalents at beginning of period 27,420 30,410 13,018 13,018
------------------------------------------------------------
Cash and cash equivalents at end of period $ 131,984 $ 27,420 $ 15,296 $ 30,410
------------------------------------------------------------
------------------------------------------------------------
Supplemental schedule of noncash investing and
financing activities:
Acquisition of equipment pursuant to equipment
loan and capital lease obligation $ -- $ -- $ 677 $ 677
------------------------------------------------------------
------------------------------------------------------------
Deferred compensation related to grant of certain
stock options $ -- $ 450 $ 49 $ 49
------------------------------------------------------------
------------------------------------------------------------
Compensation related to acceleration of vesting
on stock options $ 706 $ -- $ -- $ --
------------------------------------------------------------
------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid $ 731 $ 619 $ 613 $ 866
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
See accompanying notes
29
<PAGE>
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION Gilead Sciences, Inc. (the
"Company" or "Gilead") was incorporated in the State of Delaware on June 22,
1987. The Company is engaged in the discovery, development and marketing of a
new class of human therapeutics based on nucleotides. VISTIDE, the Company's
first commercially available product, which received marketing clearance from
the FDA in June 1996, is sold in the U.S. through drug wholesalers.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary Gilead Sciences Limited, which was formed under
the laws of the United Kingdom in November 1995. To date, the subsidiary has
been inactive and has no material assets or liabilities.
CHANGE IN YEAR END In October 1995, the Company changed its fiscal year end
from March 31 to December 31 effective with the nine months ended December 31,
1995. Financial statements for the nine months ended December 31, 1994 are
unaudited and included for comparison purposes.
CASH EQUIVALENTS The Company considers highly liquid investments with
insignificant interest rate risk purchased with a remaining maturity of three
months or less to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK Cash and cash equivalents and short-term
investments are financial instruments that potentially subject the Company to
concentrations of credit risk. The Company primarily invests in notes and bills
issued by the U.S. government, bonds and notes of domestic corporations,
certificates of deposit, commercial paper and asset-backed securities. By
policy, the Company limits the amount of credit exposure to any one financial
institution and to any one type of investment, other than securities issued by
the U.S. government.
USE OF ESTIMATES The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that effect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
REVENUE RECOGNITION The Company recognizes product revenue at the time product
is shipped. Provisions are made for estimated product returns, cash discounts
and government discounts and rebates. Revenues recognized under the Company's
collaborative research and development agreements, license and supply agreements
and government grants are recorded as earned based upon the performance
requirements of the contracts. Payments received in advance under these
agreements are recorded as deferred revenue until earned.
STOCK-BASED COMPENSATION In accordance with the provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which the Company adopted in 1996, the Company has
elected to follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issue to Employees" ("APB 25") and related interpretations in accounting
for its employee stock option plans. Under APB 25, if the exercise price of the
Company's employee stock options equals or exceeds the fair value of the
underlying stock on the date of grant as determined by the Company's Board of
Directors, no compensation expense is recognized. See Note 9 for
pro forma disclosure of stock-based compensation pursuant to SFAS 123.
SECURITIES AVAILABLE FOR SALE Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The Company's debt securities, which
consist primarily of U.S. treasury securities, corporate commercial paper, bonds
and notes of domestic corporations and asset-backed securities, are classified
as available-for-sale and are carried at estimated fair value in cash
equivalents and short-term investments. At December 31, 1996, available-for-sale
investments included
30
<PAGE>
$132,621,000 of cash equivalents ($27,356,000 at December 31, 1995) and all
short-term investments. Unrealized gains and losses are reported in a separate
component of stockholders' equity. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in interest income. Realized gains and
losses on available-for-sale securities are included in interest income and
expense. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in interest income.
FOREIGN CURRENCY INSTRUMENTS The Company enters into foreign exchange forward
contracts with financial institutions primarily to protect against currency
exchange risks associated with certain firmly committed purchase transactions.
The Company's foreign exchange risk management policy allows it to hedge a
majority of its existing material foreign exchange transaction exposures.
However, the Company may not hedge certain foreign exchange transaction
exposures that are immaterial in terms of their minimal U.S. dollar value. For
further discussion about the Company's foreign currency instruments see Note 7.
PROPERTY AND EQUIPMENT Property and equipment are stated at cost and consist
of the following (in thousands):
December 31,
1996 1995
-----------------------
Equipment subject to
financing obligations $ 5,320 $ 6,026
Laboratory equipment 1,904 766
Office equipment and
furniture and fixtures 4,081 2,386
Leasehold improvements 10,887 9,514
-----------------------
22,192 18,692
Less accumulated depreciation
and amortization (13,020) (10,323)
-----------------------
$ 9,172 $ 8,369
-----------------------
-----------------------
Laboratory equipment, office equipment and furniture and fixtures are
depreciated on a straight-line basis over their estimated useful lives of three
to five years. Leasehold improvements and equipment subject to financing
obligations are amortized on a straight-line basis over the shorter of their
estimated useful lives or the borrowing term.
See Note 5 for discussion of certain laboratory and office equipment
acquired pursuant to equipment financing obligations.
OTHER ACCRUED LIABILITIES Other accrued liabilities are summarized as follows
(in thousands):
December 31,
1996 1995
-----------------------
Accrued compensation $ 1,662 $ 1,102
Accrued Medicaid rebates 1,100 --
Other 1,671 1,127
-----------------------
$ 4,433 $ 2,229
-----------------------
-----------------------
NET LOSS PER SHARE Net loss per share is computed using the weighted average
number of common shares outstanding during the period. Common stock equivalents
relating to stock options are excluded from the computation, as their effect is
antidilutive.
- --------------------------------------------------------------------------------
2. INVESTMENTS
- --------------------------------------------------------------------------------
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
U.S. Treasury
Securities and
obligations of
U.S. government
agencies $158,734 $ 94 $(86) $158,742
Corporate
securities 27,115 24 (3) 27,136
Other debt
securities 110,662 64 (4) 110,722
---------------------------------------------------------
Total $296,511 $182 $(93) $296,600
---------------------------------------------------------
---------------------------------------------------------
DECEMBER 31, 1995
U.S. Treasury
Securities and
obligations of
U.S. government
agencies $141,621 $162 -- $141,783
Corporate
securities 13,807 5 -- 13,812
---------------------------------------------------------
Total $155,428 $167 $155,595
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
During the year ended December 31, 1996, the Company sold available-for-
sale investments with a fair value at the date of sale of $248,552,000
($10,445,000 in the nine-month period ended December 31, 1995.) The gross
realized gain on the sale of available-for-sale securities totaled approximately
$451,000 at December 31, 1996, and
31
<PAGE>
none at December 31, 1995, and the gross realized loss on the sale of available-
for-sale securities totaled approximately $65,000 at December 31, 1996. At
December 31, 1996, the contractual maturities of the debt securities do not
exceed three years.
- --------------------------------------------------------------------------------
3. COLLABORATIVE RESEARCH AGREEMENTS
- --------------------------------------------------------------------------------
PHARMACIA & UPJOHN In August 1996, Gilead and Pharmacia & Upjohn S.A. ("P&U")
entered into a collaboration to market VISTIDE-Registered Trademark- (cidofovir
injection) in all countries outside the United States. Under the terms of the
agreement, P&U paid Gilead an initial license fee of $10.0 million. If European
marketing authorization is received for VISTIDE, Gilead will receive an
additional cash milestone payment of $10.0 million, and, at Gilead's option, P&U
will purchase $40.0 million of newly issued Gilead Series B Preferred Stock
priced at 145% of the average closing price of Gilead's common stock over a
thirty-day trading period. In addition, P&U will pay Gilead royalties on its
VISTIDE sales.
Under the terms of the License and Supply Agreement with P&U dated August
1996 and related agreements relating to expanded access programs for VISTIDE
outside of the United States, the Company will supply either the bulk drug
substance used to manufacture VISTIDE or the finished product VISTIDE
("Product") to P&U. Gilead is entitled to receive a royalty based upon the sale
of Product by P&U, a portion of which is received upon the shipment of Product
(either bulk drug substance or finished product) from Gilead to P&U, with the
remainder received upon the ultimate sale of Product by P&U. Any royalties
received by Gilead prior to the P&U sale of Product to a third party are
recorded as deferred revenue until such third party sale occurs. As of December
31, 1996, the Company recorded approximately $277,000 of deferred royalty income
related to shipment of Product to P&U for expanded access programs.
HOFFMANN-LA ROCHE In September 1996, Gilead and F. Hoffmann-La Roche Ltd. and
Hoffmann-La Roche, Inc. (collectively, "Roche") entered into a collaboration
agreement to develop and commercialize therapies to treat and prevent viral
influenza. Under the agreement, Roche received exclusive worldwide rights to
Gilead's proprietary influenza neuraminidase inhibitors. In October 1996, Roche
made an initial license fee payment to Gilead of $10.3 million (recorded in the
third quarter of 1996) and Gilead is entitled to additional cash payments of up
to $40.0 million upon achievement of developmental and regulatory milestones. In
addition, Roche will fund all research and development costs and pay Gilead
royalties on the net sales of any products developed under the collaboration.
For the year ended December 31, 1996, the Company recorded $1,147,000 of
research and development revenue related to this agreement. Costs of research
and development revenues earned under this arrangement approximate such revenues
(exclusive of any milestone revenues) and are included in research and
development expenses in the accompanying financial statements.
In September 1996, Gilead and Roche entered into an agreement to co-promote
Roche's Roferon-A (Interferon alfa-2a, recombinant) for the treatment of chronic
hepatitis C infection in the U.S. Roche paid Gilead a $150,000 one-time fee in
1996. Roche will pay Gilead a royalty based on the net product sales beginning
in 1997.
GLAXO WELLCOME In July 1990, the Company entered into a collaborative research
agreement with Glaxo Wellcome, Inc. ("Glaxo"). Concurrent with the signing of
the agreement, Glaxo made an $8 million equity investment in the Company and
currently holds 3.1% of the Company's outstanding common stock. The agreement
provided for the Company to conduct research over a period of five years with a
goal of identifying code blocker compounds with potential application in the
diagnosis, prevention and treatment of cancer. The collaboration was extended to
all potential therapeutic applications in July 1992.
In March 1996, the Company and Glaxo entered into a new collaborative
research agreement extending for five years the existing collaboration between
the parties. Under the terms of the new agreement, Glaxo will fund the Company's
ongoing research in the code blocker field for five years. Each party has a
worldwide right to the other party's patent rights to research, develop,
manufacture, and sell products based on code blocker technology for all
applications. Glaxo will have the primary right to develop any products
identified during the collaboration. Gilead is entitled to payments for
achievement of regulatory milestones, as well as royalties on any product sales.
Glaxo has the right to terminate the collaborative research and funding at any
time after two years, in which case Gilead could develop code blocker technology
independently or with a third party. Under the terms of the agreement the
Company received $3.0 million in March 1996 to fund research during the first
year of the new agreement.
Costs of research and development revenues earned under this arrangement
approximate such revenues (exclusive of any milestone revenues) and are included
in
32
<PAGE>
research and development expenses in the accompanying financial statements.
ARPA In December 1991, the Company entered into a collaborative research
agreement with the Advanced Research Projects Agency ("ARPA"). The research
under this program was focused on the development of code blocker therapeutic
compounds for the treatment of dengue fever and malaria. The Company performed
"best efforts" research and development on a cost-sharing basis. ARPA funding
ended October 1994 at the conclusion of the initial three-year term of the
program. No revenues were recognized for the year ended December 31, 1996 or for
the nine months ended December 31, 1995 ($748,000 was recognized in the fiscal
year ended March 31, 1995).
AMERICAN HOME PRODUCTS In August 1994, the Company entered into a license and
supply agreement with the Storz subsidiary of American Home Products to develop
and market an eye-drop formulation of cidofovir for the potential treatment of
topical ophthalmic viruses. The Company received a $250,000 annual fee in the
year ended December 31, 1996, which was recognized as revenue (the Company
recognized as revenue a $250,000 annual fee in the nine months ended December
31, 1995, and a $500,000 license fee in the fiscal year ended March 31, 1995).
In addition, under the agreement the Company is entitled to receive annual fees,
milestone payments and future royalties on product sales.
OTHER Also included in total revenues for the year ended December 31, 1996 is
$104,000 earned under a U.S. Department of Health and Human Services Small
Business Innovation Research Awards ($327,000 and $474,000 for the nine months
ended December 31, 1995, and the year ended March 31, 1995, respectively). Costs
of research and development under these arrangements approximate revenues. The
research programs funded by these grants are focused on certain novel inhibitors
of thrombin and certain genetic code blocker compounds.
- --------------------------------------------------------------------------------
4. ACCOUNTS RECEIVABLE
- --------------------------------------------------------------------------------
Gilead sells VISTIDE through major drug wholesalers in the U.S. In August
1996, a major wholesaler FoxMeyer Corporation, filed for bankruptcy protection
under Chapter 11 of the U.S. Bankruptcy Code. The total receivable outstanding
as of December 31, 1996, from FoxMeyer of $629,000 has been reserved. At
December 31, 1996, trade receivables are included in the balance sheet in "Other
current assets."
- --------------------------------------------------------------------------------
5. EQUIPMENT FINANCING OBLIGATIONS AND LONG-TERM DEBT
- --------------------------------------------------------------------------------
Included in property and equipment at December 31, 1996 are assets with a
cost of $5,320,000 ($6,026,000 at December 31, 1995) acquired pursuant to
capital lease obligations and equipment loans. Accumulated amortization of
assets acquired pursuant to these obligations was approximately $4,360,000 and
$3,843,000 at December 31, 1996 and 1995, respectively. Assets acquired under
these arrangements secure the related obligations.
At December 31, 1996, the Company's aggregate commitment under such
arrangements, together with the net present value of the obligations, is as
follows (in thousands):
Years ending December 31:
1997 $ 1,244
1998 371
----------
1,615
Less amounts representing interest 133
Less current portion 1,131
----------
$ 351
----------
----------
In May 1994, the Company entered into an unsecured $6 million term loan to
finance its office and research and development facilities expansion and the
acquisition of related laboratory equipment. The four-year loan requires
quarterly principal payments of $375,000, plus applicable interest at a fixed
rate of 8%, commencing July 1994. In addition, the Company is required to comply
with certain financial and operating covenants. At December 31, 1996, the total
debt outstanding is $2,250,000. The current portion outstanding is $1,750,000.
In October 1996, the Company entered into an unsecured $3 million term loan
to finance its office and research and development facilities expansion. The
four-year loan requires quarterly principal payments of $187,500, plus
applicable interest, commencing October 1, 1996. The interest is fixed at 6.9%
for the first year of the loan and will be reset periodically thereafter based
on applicable LIBOR rates. In addition, the Company is required to comply with
certain financial and operating covenants. At December 31, 1996, the total debt
outstanding is $2,812,500. The current portion outstanding is $750,000.
At December 31, 1996, the long-term debt amount approximates fair value.
33
<PAGE>
- --------------------------------------------------------------------------------
6. COMMITMENTS
- --------------------------------------------------------------------------------
The Company leases its facilities pursuant to operating leases. Rent
expense under these leases totaled approximately $2,117,000 for the year ended
December 31, 1996, $1,485,000 for the nine month period ended December 31, 1995,
and $1,980,000 for the year ended March 31, 1995.
At December 31, 1996, the aggregate noncancelable future minimum payments
under the operating leases are as follows (in thousands):
Years ending December 31:
1997 $ 2,195
1998 2,284
1999 2,392
2000 2,484
2001 2,573
Thereafter 11,994
----------
$ 23,922
----------
----------
In connection with its facilities lease agreements, the Company obtained a
letter of credit agreement from a bank which secures the aggregate future
payments under one of its facilities leases. At December 31, 1996, a total of
$2,500,000 was secured under this letter of credit arrangement.
- --------------------------------------------------------------------------------
7. FOREIGN CURRENCY INSTRUMENTS
- --------------------------------------------------------------------------------
The Company has forward contracts outstanding at December 31, 1996 with
notional principal amounts totaling $1,417,000, fair value of $(28,000). No
forward contracts were outstanding at December 31, 1995. The notional principal
amounts for off-balance sheet instruments provides one measure of the
transaction volume outstanding as of year end, and does not represent the amount
of the Company's exposure to credit or market loss. The Company's exposure to
credit loss and market risk will vary over time as a function of interest rates
and currency exchange rates. The estimates of fair value are based on applicable
and commonly used pricing models using prevailing financial market information
as of December 31, 1996. The notional principal and fair value amounts of the
Company's foreign exchange instruments discussed above do not reflect the gains
or losses associated with the exposures and transactions that the foreign
exchange instruments are intended to hedge. The amounts ultimately realized upon
settlement of these financial instruments, together with the gains and losses on
the underlying exposures, will depend on actual market conditions during the
remaining life of the instruments. Unrealized gains and losses on foreign
exchange forward contracts that are designated and effective as hedges are
deferred and recognized in expense in the same period as the hedged
transactions. All foreign exchange forward contracts expire within one year.
- --------------------------------------------------------------------------------
8. STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
PREFERRED STOCK The Company has 5,000,000 shares of authorized preferred stock
issuable in series, none of which are issued or outstanding. The Company's board
of directors is authorized to determine the designation, powers, preferences and
rights of any such series. The Company has reserved 400,000 shares of preferred
stock for potential issuance under the Preferred Share Purchase Rights Plan.
COMMON STOCK The Company has 60,000,000 shares of authorized common stock at
December 31, 1996. In January 1996 the Board of Directors approved an amendment
to the Company's Certificate of Incorporation, increasing the number of shares
of common stock authorized from 35,000,000 to 60,000,000 shares. The amendment
was approved by the Company's stockholders and filed with the Delaware Secretary
of State in May 1996.
EMPLOYEE STOCK PURCHASE PLAN The Company has adopted an Employee Stock Purchase
Plan under which employees can purchase shares of the Company's common stock
based on a percentage of their compensation. The purchase price per share must
equal at least the lower of 85% of the market value on the date offered or on
the date purchased. A total of 750,000 shares of common stock are reserved for
issuance under the plan. As of December 31, 1996, 601,289 shares had been issued
under the Plan (419,699 shares as of December 31, 1995).
STOCK OPTION PLANS In December 1987, the Company adopted the 1987 Incentive
Stock Option Plan and the Supplemental Stock Option Plan for issuance of common
stock to employees, consultants and scientific advisors. Options granted under
the plans are at prices not less than the fair market value on the date of the
grant. Options vest over five years pursuant to a formula determined by the
Company's board of directors and expire after ten years. At December 31, 1996,
options on 545,108 shares are outstanding under the plans at exercise prices
ranging from $0.09 to $17.50 per share (781,718 options outstanding at December
31, 1995 with exercise prices ranging from
34
<PAGE>
$0.09 to $17.50 per share). For the year ended December 31, 1996, options to
purchase 220,947 shares were exercised at $0.09 to $17.50 per share (options to
purchase 182,029 shares were exercised at prices ranging from $0.09 to $17.50
per share for the nine months ended December 31, 1995). At December 31, 1996,
options on 522,308 shares were exercisable (options on 605,125 shares were
exercisable at December 31, 1995). No shares were available for grant of future
options.
In April 1991, the Company's board of directors approved the granting of
nonqualified stock options that are not granted pursuant to the 1987
Supplemental Stock Option Plan but contain such other terms and conditions
of the Company's Supplemental Stock Options. The options vest pursuant to a
formula determined by the Company's board of directors and expire no more than
ten years after the date of grant or earlier if employment terminates. At
December 31, 1996, options on 197,064 shares are outstanding at exercise prices
ranging from $1.20 to $1.50 per share (286,230 options outstanding at December
31, 1995 with exercise price ranging from $1.20 to $1.50 per share). For the
year ended December 31, 1996, options to purchase 89,166 shares were exercised
at $1.20 per share (options to purchase 49,966 shares were exercised at $1.20
per share for the nine month period ended December 31, 1995). At December 31,
1996, options on 103,741 shares were exercisable (options on 111,314 shares were
exercisable at December 31, 1995). No shares were available for grant of future
options.
In November 1991, the Company adopted the 1991 Stock Option Plan for
issuance of common stock to employees and consultants. Options issued under the
plan shall, at the discretion of the Company's board of directors, be either
incentive stock options or nonstatutory stock options. The exercise price of
incentive stock options must equal at least the fair market value of the common
stock on the date of grant. Options vest over five years pursuant to a formula
determined by the Company's board of directors and expire after ten years. At
December 31, 1996, options to purchase 3,745,630 shares are outstanding under
the plan at exercise prices ranging from $4.38 to $38.00 per share (3,076,020
options outstanding at December 31, 1995 with exercise prices ranging from $4.38
to $22.50 per share). For the year ended December 31, 1996, options to purchase
190,740 shares were exercised at prices ranging from $6.50 to $19.00 per share
(options to purchase 145,330 shares were exercised for the nine month period
ended December 31, 1995 at prices ranging from $6.13 to $16.50 per share). At
December 31, 1996, options on 1,375,050 shares were exercisable (options on
954,342 shares were exercisable at December 31, 1995) and 1,599,550 were
available for grant of future options.
In November 1995, the Company adopted the 1995 Non-Employee Directors'
Stock Option Plan for issuance of common stock to non-employee directors.
Options granted under the plan are at prices not less than the fair market value
on the date of grant. Options vest over five years from the time of grant in
quarterly 5% installments and expire after ten years. At December 31, 1996,
options on 163,000 shares are outstanding at exercise prices ranging from $32.00
to $38.00 per share (none at December 31, 1995). For the year ended December 31,
1996, no options were exercised. At December 31, 1996, options on 24,300 shares
were exercisable (no options were exercisable at December 31, 1995) and 187,000
shares were available for grant of future options.
The Company records deferred compensation for the difference between the
grant price and the market value related to certain options granted. No deferred
compensation was recorded during the year ended December 31, 1996 ($450,000 and
$49,000 in the nine month period ended December 31, 1995 and the year ended
March 31, 1995, respectively). Deferred compensation is being amortized to
expense over the five-year vesting period of the options. Amortization expense
for the year ending December 31, 1996 totaled approximately $849,000 ($656,000
and $886,000 the nine month period ended December 31, 1995 and the year ended
March 31, 1995, respectively).
PREFERRED SHARE PURCHASE RIGHTS PLAN In November 1994, the Company adopted a
Preferred Share Purchase Rights Plan (the "Plan"). The Plan provides for the
distribution of a preferred stock purchase right (a "Right") as a dividend for
each share of Gilead common stock held of record at the close of business on
December 14, 1994. The Rights are not currently exercisable. Under certain
conditions involving an acquisition or proposed acquisition by any person or
group of 15% or more of the common stock, the Rights permit the holders (other
than the 15% holder) to purchase Gilead common stock at a 50% discount from the
market price at that time, upon payment of an exercise price of $60 per Right.
In addition, in the event of certain business combinations, the Rights permit
the purchase of the common stock of an acquirer at a 50% discount from the
market price at that time. Under certain conditions, the Rights may be redeemed
by the Company's board of directors in whole, but not in part, at a price of
$.01 per Right. The Rights have no voting privileges and are attached to and
automatically trade with Gilead common stock. The Rights expire on November 21,
2004.
35
<PAGE>
- --------------------------------------------------------------------------------
9. STOCK OPTION ACCOUNTING
- --------------------------------------------------------------------------------
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options and employee stock purchase plan
shares because, as discussed below, the alternative fair value accounting
provided for under SFAS 123 requires use of option valuation models that were
not developed for use in valuing employee stock options and employee stock
purchase plan shares. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of the grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 and has been determined as if the Company had accounted for
its employee stock options granted subsequent to March 31, 1995, under the fair
value method of that Statement. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model for the multiple
option approach with the following weighted-average assumptions for 1995 and
1996: risk-free interest rate of 6.0%; volatility factor of the expected market
price of the Company's common stock of 69%; and a weighted-average expected life
of the option of 1.54 years from the vesting date. No dividend payments are
expected.
The pro forma information required by SFAS 123 includes compensation
expense related to the Company's employee stock purchase plan purchases made
subsequent to March 31, 1995. The compensation expense has also been calculated
based on the fair-value method using a Black-Scholes option pricing model with
the weighted-average assumptions discussed above.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options and employee stock
purchase plan shares have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
the Company's employee stock options and employee stock purchase plan shares.
For purposes of pro forma disclosures, the estimated fair value of the
options and shares are amortized to pro forma/net loss over the options' vesting
period and the shares' plan period. The Company's pro forma information follows
(in thousands, except for earnings per share information):
Nine Months
YEAR ENDED Ended
DECEMBER 31, December 31,
1996 1995
--------------------------------
Pro forma net loss $(29,586) $(29,162)
Pro forma loss per
share $ (1.06) $ (1.37)
Because SFAS 123 is applicable only to options granted or shares issued
subsequent to March 31, 1995, its pro forma effect will not be fully reflected
until 1999.
A summary of the Company's stock option activity and related information
for the periods ended December 31 follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED Nine Months Ended
DECEMBER 31, 1996 December 31, 1995
OPTIONS WEIGHTED-AVERAGE Options Weighted-average
(000's) EXERCISE PRICE (000's) Exercise Price
----------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding -- beginning of period 4,144 $10.55 4,069 $ 8.96
Granted (Price equals FMV) 1,240 $25.89 532 $18.04
Granted (Price less than FMV) -- -- 75 $19.00
Exercised (501) $ 6.15 (377) $ 5.20
Forfeited (232) $13.70 (155) $11.60
----------------------------------------------------------
Outstanding -- end of period 4,651 $14.96 4,144 $10.55
----------------------------------------------------------
Exercisable at end of period 2,025 1,671
----------------------------------------------------------
----------------------------------------------------------
Weighted-average fair value per share of
options granted during the period 15.17 11.26
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
The shares granted at less than fair market value in the nine months ended
December 31, 1995 have a weighted-average fair value per share of $19.00.
36
<PAGE>
The options outstanding at December 31, 1996 have been segregated into
three ranges for additional disclosure as follows (options amounts are recorded
in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------------
Options
Options Weighted-average Weighted- Currently Weighted-
Outstanding Remaining Average Exercisable average
Range of Exercise Prices at Dec. 31, 1996 Contractual Life Exercise Price at Dec. 31, 1996 Exercise Price
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.09-$12.25 2,005 5.88 $ 7.48 1,315 $ 7.12
$12.50-$19.00 1,739 7.59 $16.13 647 $15.03
$19.38-$38.00 907 9.15 $29.24 63 $25.67
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
10. INCOME TAXES
- --------------------------------------------------------------------------------
As of December 31, 1996, the Company had a federal net operating loss
carryforward of approximately $127,000,000. The net operating loss carryforwards
will expire at various dates beginning in 2001 through 2011, if not utilized.
Significant components of the Company's deferred tax assets for federal and
state income taxes are as follows (in thousands):
December 31, December 31,
1996 1995
-----------------------------
Deferred tax assets:
Net operating loss
carryforwards $ 43,000 $ 35,100
Research credits
(expire 2001-2011) 5,400 5,700
Capitalized R&D for
California 4,100 3,000
Other 2,800 3,300
-----------------------------
Total deferred tax assets 55,300 47,100
Valuation allowance for
deferred tax assets (55,300) (47,100)
-----------------------------
Net deferred tax assets $ -- $ --
-----------------------------
-----------------------------
The net valuation allowance increased by $8,200,000 during the year ended
December 31, 1996 $10,500,000 for the nine months ended December 31, 1995 and
$12,600,000 during the year ended March 31, 1995.
Utilization of the net operating losses and credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986.
Approximately $2,000,000 of the valuation allowance at December 31, 1996
relates to the tax benefits of stock option deductions which will be credited to
additional paid-in capital when realized.
37
<PAGE>
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND STOCKHOLDERS
GILEAD SCIENCES, INC.
We have audited the accompanying consolidated balance sheets of Gilead
Sciences, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 1996, the nine-month period ended December 31, 1995, and the year
ended March 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Gilead Sciences, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for the year ended December 31,
1996, the nine-month period ended December 31, 1995, and the year ended March
31, 1995, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
PALO ALTO, CALIFORNIA
JANUARY 24, 1997
38
<PAGE>
CORPORATE
INFORMATION
- --------------------------------------------------------------------------------
TRANSFER AGENT AND REGISTRAR
- --------------------------------------------------------------------------------
Communications concerning stock transfer requirements, lost certificates and
changes of address should be directed to the Transfer Agent:
ChaseMellon Shareholder Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
http://www.cmssonline.com
1-800-522-6645
- --------------------------------------------------------------------------------
STOCKHOLDER INQUIRIES
- --------------------------------------------------------------------------------
Inquiries from our stockholders and potential investors regarding our company
are always welcome and will receive a prompt response. Please direct your
requests for information to:
Investor Relations
Gilead Sciences, Inc.
333 Lakeside Drive
Foster City, California 94404
415-574-3000 or 1-800-GILEAD-5
Information regarding Gilead is available via the Internet on our web site at:
http://www.gilead.com
- --------------------------------------------------------------------------------
STOCK LISTING
- --------------------------------------------------------------------------------
Gilead common stock is traded on The Nasdaq Stock Market under the symbol GILD.
- --------------------------------------------------------------------------------
PRICE RANGE OF COMMON STOCK
- --------------------------------------------------------------------------------
As of February 28, 1997, there were approximately 585 stockholders of record of
the Company's common stock and 28,996,918 shares of common stock outstanding. No
dividends have been paid on the common stock since the Company's inception, and
the Company does not anticipate paying any dividends in the foreseeable future.
1995 High Low
- --------------------------------------------------------------------------------
First Quarter $15 1/4 $ 9 1/4
Second Quarter $19 3/4 $12 1/2
Third Quarter $25 1/2 $16 3/4
Fourth Quarter $34 1/4 $18
1996 High Low
- --------------------------------------------------------------------------------
First Quarter $41 7/8 $26 3/4
Second Quarter $39 $21 3/4
Third Quarter $29 3/4 $17 1/4
Fourth Quarter $28 3/4 $21 1/2
- --------------------------------------------------------------------------------
ANNUAL MEETING
- --------------------------------------------------------------------------------
The annual meeting of stockholders will be held at 10:00 a.m. on Tuesday, May
13, 1997, at Hotel Sofitel, 223 Twin Dolphin Drive, Redwood City, California.
VISTIDE-Registered Trademark- is a registered trademark and
FORVADE-TM- is a trademark of Gilead Sciences, Inc.
Roferon-Registered Trademark- is a registered trademark of Hoffmann-La Roche.
- -C- 1997 Gilead Sciences, Inc.
39
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Gilead Sciences, Inc. of our report dated January 24, 1997, included in
the 1996 Annual Report to Stockholders of Gilead Sciences, Inc. for the year
ended December 31, 1996.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-46058) pertaining to the Gilead Sciences, Inc. 1987
Incentive Stock Option Plan, 1987 Supplemental Stock Option Plan, 1991 Stock
Option Plan, Employee Stock Purchase Plan, Officer, Director and Key Employee
Nonqualified Stock Options, the Registration Statement (Form S-8 No. 33-62060)
pertaining to Gilead Sciences, Inc. 1991 Stock Option Plan, and the Registration
Statement (Form S-8 No. 33-81670) pertaining to Gilead Sciences, Inc. Employee
Stock Purchase Plan, of our report dated January 24, 1997, with respect to the
consolidated financial statements incorporated by reference in the Annual Report
(Form 10-K) of Gilead Sciences, Inc. for the year ended December 31, 1996.
ERNST & YOUNG LLP
Palo Alto, California
March 20, 1997
36
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATION FOUND ON
PAGES 26 AND 27 OF THE COMPANY ANNUAL REPORT TO STOCKHOLDERS AT 12/31/96 AND FOR
THE YEAR ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 131,984
<SECURITIES> 163,979
<RECEIVABLES> 4,290<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 300,253
<PP&E> 22,192
<DEPRECIATION> 13,020
<TOTAL-ASSETS> 310,673
<CURRENT-LIABILITIES> 16,099
<BONDS> 2,914
0
0
<COMMON> 29
<OTHER-SE> 291,631
<TOTAL-LIABILITY-AND-EQUITY> 310,673
<SALES> 8,477
<TOTAL-REVENUES> 33,420
<CGS> 910
<TOTAL-COSTS> 910
<OTHER-EXPENSES> 41,881
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 711
<INCOME-PRETAX> (21,732)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,732)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,732)
<EPS-PRIMARY> (0.78)
<EPS-DILUTED> 0
<FN>
<F1>Includes all other current assets.
</FN>
</TABLE>
