<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE PERIOD ENDING JUNE 30, 1999
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</TABLE>
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 Identification
incorporation or organization) No.)
333 LAKESIDE DRIVE, FOSTER CITY, CALIFORNIA 94404
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 650-574-3000
------------------------
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 / /
Number of shares outstanding of the issuer's common stock, par value $.001 per
share, as of July 28, 1999: 31,159,325.
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<PAGE>
GILEAD SCIENCES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
-------------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements and Notes
Consolidated Balance Sheets--June 30, 1999 and December 31, 1998........................... 3
Consolidated Statements of Operations--for the three and six months ended June 30, 1999 and
1998..................................................................................... 4
Consolidated Statements of Cash Flows--for the six months ended June 30, 1999 and 1998..... 5
Notes to Consolidated Financial Statements................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................................... 12
SIGNATURES............................................................................................. 13
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
GILEAD SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 45,339 $ 32,475
Short-term investments.............................................................. 195,195 247,464
Other current assets................................................................ 14,915 8,371
----------- ------------
Total current assets.............................................................. 255,449 288,310
Property and equipment, net........................................................... 12,460 10,182
Other assets.......................................................................... 4,211 4,368
----------- ------------
$ 272,120 $ 302,860
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 3,558 $ 3,422
Accrued clinical and preclinical expenses........................................... 9,336 11,925
Other accrued liabilities........................................................... 9,535 12,358
Deferred revenues................................................................... 3,813 3,275
Current portion of equipment financing obligations and long-term debt............... 776 770
----------- ------------
Total current liabilities......................................................... 27,018 31,750
Non-current portion of equipment financing obligations and long-term debt............. 207 563
Commitments
Stockholders' equity:
Preferred stock, par value $.001 per share, issuable in series; 5,000,000 shares
authorized; 1,133,786 shares of Series B convertible preferred issued and
outstanding at June 30, 1999 and December 31, 1998 (liquidation preference of
$40,000).......................................................................... 1 1
Common stock, par value $.001 per share; 60,000,000 shares authorized; 31,115,015
shares and 30,710,435 shares issued and outstanding at June 30, 1999 and December
31, 1998, respectively............................................................ 31 31
Additional paid-in capital.......................................................... 495,798 489,183
Accumulated other comprehensive income (loss)....................................... (1,462) 43
Deferred compensation............................................................... (97) (157)
Accumulated deficit................................................................. (249,376) (218,554)
----------- ------------
Total stockholders' equity............................................................ 244,895 270,547
----------- ------------
$ 272,120 $ 302,860
----------- ------------
----------- ------------
</TABLE>
- ------------------------------
Note: The consolidated balance sheet at December 31, 1998 has been derived from
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes
3
<PAGE>
GILEAD SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED JUNE
JUNE 30, 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Product sales, net.............................................. $ 1,461 $ 1,598 $ 2,906 $ 3,393
Contract revenue................................................ 6,573 4,682 9,514 16,089
Royalty revenue, net............................................ 646 756 1,197 1,114
---------- ---------- ---------- ----------
Total revenues.................................................... 8,680 7,036 13,617 20,596
Costs and expenses:
Cost of product sales........................................... 53 114 187 344
Research and development........................................ 18,240 18,330 34,026 37,260
Selling, general and administrative............................. 7,946 8,443 15,724 15,186
Merger related expenses......................................... 738 -- 1,327 --
---------- ---------- ---------- ----------
Total costs and expenses.......................................... 26,977 26,887 51,264 52,790
---------- ---------- ---------- ----------
Loss from operations.............................................. (18,297) (19,851) (37,647) (32,194)
Interest income, net.............................................. 3,262 5,007 6,825 9,965
---------- ---------- ---------- ----------
Net loss.......................................................... $ (15,035) $ (14,844) $ (30,822) $ (22,229)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic and diluted net loss per common share....................... $ (0.48) $ (0.49) $ (1.00) $ (0.74)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Common shares used to calculate basic and diluted net loss per
common share.................................................... 31,051 30,295 30,958 30,199
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes
4
<PAGE>
GILEAD SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
-----------------------
1999 1998
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................................... $ (30,822) $ (22,229)
Adjustments used to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................................ 1,653 1,382
Changes in assets and liabilities:
Other current assets............................................................... (6,544) 8,809
Other assets....................................................................... 157 37
Accounts payable................................................................... 136 427
Accrued clinical and preclinical expenses.......................................... (2,589) (2,037)
Other accrued liabilities.......................................................... (2,823) 1,530
Deferred revenues.................................................................. 538 (412)
---------- -----------
Total adjustments................................................................ (9,472) 9,736
---------- -----------
Net cash used in operating activities............................................ (40,294) (12,493)
---------- -----------
Cash flows from investing activities:
Purchases of short-term investments.................................................... (61,522) (262,154)
Sales of short-term investments........................................................ 54,674 215,847
Maturities of short-term investments................................................... 57,612 60,832
Capital expenditures................................................................... (3,871) (1,054)
---------- -----------
Net cash provided by investing activities........................................ 46,893 13,471
---------- -----------
Cash flows from financing activities:
Payments of equipment financing obligations and long-term debt......................... (350) (1,378)
Proceeds from issuances of common stock................................................ 6,615 5,431
---------- -----------
Net cash provided by financing activities........................................ 6,265 4,053
---------- -----------
Net increase in cash and cash equivalents................................................ 12,864 5,031
Cash and cash equivalents at beginning of period......................................... 32,475 31,990
---------- -----------
Cash and cash equivalents at end of period............................................... $ 45,339 $ 37,021
---------- -----------
---------- -----------
</TABLE>
See accompanying notes
5
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The information at June 30, 1999, and for the three- and six-month periods
ended June 30, 1999 and 1998, is unaudited but includes all adjustments
(consisting only of normal recurring adjustments) which, in the opinion of
management, are necessary to state fairly the financial information set forth
therein in accordance with generally accepted accounting principles. Such
interim results are not necessarily indicative of results to be expected for the
full fiscal year. These financial statements should be read in conjunction with
the audited financial statements for the fiscal year ended December 31, 1998
included in the Company's Annual Report on Form 10-K/A furnished to the
Securities and Exchange Commission.
COMPREHENSIVE INCOME
Following are the components of comprehensive income (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss.......................................................... $ (15,035) $ (14,844) $ (30,822) $ (22,229)
Net unrealized losses on available-for-sale securities............ (979) (35) (1,505) (163)
---------- ---------- ---------- ----------
Comprehensive income (loss)....................................... $ (16,014) $ (14,879) $ (32,327) $ (22,392)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
BASIC AND DILUTED NET LOSS PER COMMON SHARE
For each period presented, basic and diluted net loss per common share are
computed based on the weighted average number of common shares outstanding
during the period. Convertible preferred stock and stock options could
potentially dilute basic earnings per share in the future, but were excluded
from the computation of diluted net loss per share as their effect is
antidilutive for the periods presented.
2. MERGER WITH NEXSTAR PHARMACEUTICALS, INC.
On July 29, 1999, the Company acquired all of the outstanding stock of
NeXstar Pharmaceuticals, Inc., a Delaware corporation ("NeXstar"), pursuant to
an Agreement and Plan of Merger, dated as of February 28, 1999 ("Merger
Agreement"), among Gilead, NeXstar, and a merger subsidiary wholly owned by
Gilead. Pursuant to the Merger Agreement, NeXstar was merged with the wholly
owned subsidiary of Gilead, with NeXstar as the surviving corporation. As a
result, NeXstar became a wholly owed subsidiary of Gilead. In connection with
the merger, Gilead issued a total of approximately 11,212,730 shares of Gilead
common stock, or 0.3786 of a share of Gilead common stock for each share of
NeXstar common stock, to the existing stockholders of NeXstar as consideration
for all shares of common stock of NeXstar. In addition, holders of options and
warrants outstanding at the time of the merger to purchase an aggregate of
approximately 2,236,413 shares of NeXstar common stock will receive, upon
exercise of such options and warrants, the same fraction of a share of Gilead's
common stock, and holders of $80,000,000 principal amount of 6.25% Convertible
Subordinated Debentures of NeXstar (the "Debentures") will now have the right to
convert the Debentures into an indeterminate number of shares of Gilead common
stock.
6
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
2. MERGER WITH NEXSTAR PHARMACEUTICALS, INC. (CONTINUED)
The merger is intended to qualify as a tax-free reorganization and to be
accounted for as a pooling of interests.
3. CONVERSION OF PREFERRED STOCK
In June 1997, the Company issued 1,133,786 shares of Series B Convertible
Preferred Stock ("Preferred Stock") to Pharmacia & Upjohn S.A. ("Pharmacia &
Upjohn") for approximately $40.0 million, or $35.28 per share. The Preferred
Stock is automatically convertible into the Company's common stock if the
average of the closing prices of such common stock over any 30 consecutive
trading days exceeds $49.39 or 140% of the original issue price of the Preferred
Stock of $35.28 per share. On July 15, 1999, the average of the closing price of
the Company's common stock for the 30 days then ended was $49.79, which
triggered the automatic conversion of the Preferred Stock. Accordingly, the
Preferred Stock converted into 1,133,786 shares of common stock at the original
issue price of $35.28 per share on July 16, 1999.
7
<PAGE>
ITEM 2. 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. In June 1996, the
U.S. Food and Drug Administration ("FDA") granted marketing clearance of
VISTIDE-Registered Trademark- (cidofovir injection) for the treatment of
cytomegalovirus ("CMV") retinitis in patients with AIDS. Since that time, the
Company has independently marketed VISTIDE in the United States with an
antiviral specialty sales force and has entered into a collaboration agreement
with Pharmacia & Upjohn to market VISTIDE in all countries outside the United
States.
The Company began to incur significant expenses relating to
commercialization of VISTIDE and other potential product candidates in 1996.
With the exception of the second quarter of 1997 and the third quarter of 1996,
when the Company earned significant one-time fees related to collaborations, the
Company has incurred losses since its inception. Gilead expects to continue to
incur losses for at least an additional year, 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 and
other potential products.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This report contains forward-looking statements relating to clinical and
regulatory developments, marketing and sales matters, future expense levels,
financial results and Year 2000 matters. These statements involve inherent risks
and uncertainties. The Company's actual financial and operating results may
differ significantly from those discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to, the
risks summarized below and described in more detail in the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1998. In particular,
factors that could result in a material difference include, but are not limited
to, those relating to the ongoing development and commercialization of the
Company's potential pharmaceutical products and, in the case of Year 2000
matters, the ability to identify and correct all relevant computer code and the
success of remedial efforts implemented by third-party suppliers and business
partners.
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 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 either proprietary rights or competing products 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, expensive and uncertain 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 market acceptance of and size of the market
for VISTIDE or any of the Company's products in development.
The Company expects that its financial results will continue to 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, nor can there be assurance that the
Company will either achieve or sustain profitability. As of June 30, 1999, the
Company's accumulated deficit was approximately $249.4 million.
8
<PAGE>
As a result of the acquisition of NeXstar on July 29, 1999, Gilead's
business will be subject to additional risks related to NeXstar's business.
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
business, operating results, financial condition and stock price. In addition,
the forward-looking statements included in this Report relate to Gilead as a
stand-alone business, and do not take into account the impact of the merger with
NeXstar, which was consummated on July 29, 1999.
RESULTS OF OPERATIONS
REVENUES
The Company had total revenues of $8.7 million and $7.0 million for the
quarters ended June 30, 1999 and 1998, respectively. For the six-month periods
ended June 30, 1999 and 1998, total revenues were $13.6 million and $20.6
million, respectively. Total revenues include revenues from net product sales,
contracts, including research and development ("R&D") collaborations, and net
royalties.
Aggregate net product sales and net royalty revenues were $2.1 million and
$2.4 million for the quarters ended June 30, 1999 and 1998, respectively. In the
six-month periods, aggregate net product sales and royalties were $4.1 million
in 1999 and $4.5 million in 1998. All of the Company's product sales and royalty
revenue relate to VISTIDE, which the Company began to sell in mid-1996. As
expected, VISTIDE sales have continued to decline in 1999, primarily due to a
decline in the incidence of CMV retinitis as a result of more effective human
immunodeficiency virus ("HIV") therapies. In each period, net royalty revenue is
primarily comprised of royalties from Pharmacia & Upjohn on sales of VISTIDE
outside the United States. The Company anticipates that VISTIDE product sales
and royalty revenues will be comparable to 1998 levels or will decline further
in 1999 and later years as HIV therapies continue to improve.
Also included in total revenues are contract revenues of $6.6 million and
$4.7 million for the quarters ended June 30, 1999 and 1998, respectively. In the
six-month periods, total revenues include contract revenues of $9.5 million in
1999 and $16.1 million in 1998. Substantially all of the contract revenue
recognized during 1999 relates to the Company's agreement with F. Hoffmann-La
Roche Ltd. and Hoffmann-La Roche, Inc. (collectively, "Roche") for the
development of Tamiflu-TM- (oseltamivir phosphate), formerly known as GS 4104,
for the potential prevention and treatment of influenza. During the second
quarter of 1999, Gilead recorded two milestone payments totaling $6.0 million
from Roche associated with submissions for marketing clearance of Tamiflu for
the treatment of influenza in the United States and European Union. In the first
quarter of 1999, the Company also recognized a $2.0 milestone payment from Roche
based upon the commencement of pivotal clinical trials of Tamiflu in Japan.
Contract revenue for the three- and six-month periods ended June 30, 1999
also includes $0.6 million and $1.3 million, respectively, received from Roche
as reimbursement of expenses related to the development of Tamiflu. Similarly,
contract revenue for the three- and six-month periods ended June 30, 1998
include $3.9 million and $14.6 million, respectively, of such
development-related expenses. The $14.6 million received from Roche during the
six months ended June 30, 1998 includes $5.2 million attributable to research
and development expenses incurred in the fourth quarter of 1997, which were
subject to Roche's approval as of December 31, 1997. Such expenses were approved
for reimbursement in the first quarter of 1998.
For the three- and six-month periods ended June 30, 1998, contract revenue
includes $0.8 million and $1.5 million, respectively, recognized under the
Company's collaborative research and development agreement with Glaxo Wellcome
Inc. related to the Company's code blocker program. This agreement was
terminated in June 1998.
9
<PAGE>
OPERATING COSTS AND EXPENSES
The Company's cost of product sales relates to VISTIDE and was $0.1 million
for each of the quarters ended June 30, 1999 and 1998. Cost of product sales for
the six-month periods ended June 30, 1999 and 1998 was $0.2 million and $0.3
million, respectively. Presently, cost of product sales is not a significant
operating cost of the Company.
R&D expenses for the second quarter of 1999 were $18.2 million, compared to
$18.3 million for the same period in 1998. R&D expenses for the six-month
periods ended June 30, 1999 and 1998 were $34.0 million and $37.3 million,
respectively. These expenses decreased slightly in the 1999 periods relative to
1998 because of Gilead's reduced level of involvement in the development of
Tamiflu, offset in part by greater levels of expense in 1999 for the development
programs for adefovir dipivoxil for hepatitis B and tenofovir disoproxil
fumarate (PMPA oral prodrug) for HIV. The Company expects its R&D expenses to
increase during the remaining quarters of 1999 relative to 1998, reflecting
increased expenses related to clinical trials for several product candidates as
well as related increases in staffing and manufacturing process development.
Selling, general and administrative ("SG&A") expenses were $7.9 million and
$8.4 million for the quarters ended June 30, 1999 and 1998, respectively. For
the six-month periods ended June 30, 1999 and 1998, SG&A expenses were $15.7
million and $15.2 million, respectively. The Company expects its SG&A expenses
will increase during the remainder of 1999 over 1998 expense levels, primarily
to support the increased level of R&D activities and, to a lesser extent, to
support the expansion of sales and marketing capacity in anticipation of the
potential launch of adefovir dipivoxil, an investigational reverse transcriptase
inhibitor currently being studied to treat HIV.
Merger related expenses attributable to the Company's merger with NeXstar
were $0.7 million for the quarter ended June 30, 1999 and $1.3 million for the
six months then ended. Merger-related expenses incurred to date are primarily
for professional services and other merger-related fees. The Company will
recognize significant one-time merger-related expenses related to the closing of
the NeXstar merger in the third quarter of 1999.
NET INTEREST INCOME
The Company had net interest income of $3.3 million and $5.0 million for the
quarters ended June 30, 1999 and 1998, respectively. Net interest income earned
during the six-month periods ended June 30, 1999 and 1998 was $6.8 million and
$10.0 million, respectively. As expected, the Company's net interest income is
decreasing in each 1999 period as compared to the corresponding 1998 period,
primarily due to the decline in cash, cash equivalents and short-term
investments.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments totaled $240.5 million at
June 30, 1999, compared to $279.9 million at December 31, 1998. The decrease is
primarily due to the net use of cash to fund operations of $40.3 million and the
use of cash to purchase property and equipment items of $3.9 million. Aggregate
cash receipts from exercises of employee stock options and shares issued under
the employee stock purchase plan of $6.6 million offset such uses of cash.
Significant changes in working capital during 1999 include a $6.5 million
increase in the balance of other current assets. This use of cash is primarily
attributable to a receivable from Roche of $5.6 million and prepayments of
clinical trial costs. At December 31, 1998, other accrued liabilities includes a
$5.0 million accrued liability to Roche, which represents Roche's 1998 R&D
funding in excess of the Company's related R&D spending. During 1999, the
Company has achieved three milestones under its R&D agreement with Roche and
recognized $8.0 million of contract revenue as a result. Roche funded a portion
of these milestone payments, as well as the $0.7 million of R&D reimbursement
revenue for the first quarter of 1999, by permitting Gilead to offset its
liability to Roche. Accordingly, the $5.0 million
10
<PAGE>
reported as an accrued liability at December 31, 1998 is reported as contract
revenue during 1999. Offsetting in part this $5.0 million decrease in other
accrued liabilities at June 30, 1999 as compared to December 31, 1998, are
increases in several other accrued operating account balances.
The Company believes that its existing capital resources, supplemented by
net product revenues and contract and royalty revenues, will be adequate to
satisfy its capital needs for the foreseeable future. As of June 30, 1999,
Gilead was entitled to additional cash payments of up to $26.0 million from
Roche upon achieving specific developmental and regulatory milestones, although
there can be no assurance that the milestones will be met. The Company's future
capital requirements will depend on many factors, including its merger with
NeXstar, the progress of the Company's research and development efforts, 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, possible geographic expansion and the
establishment of additional 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.
IMPACT OF YEAR 2000
The Company is implementing a Year 2000 project to address the issue of
computer software and hardware correctly processing dates through and beyond the
Year 2000. The goal of this project is to ensure that all computer software and
hardware that the Company uses or relies upon is retired, replaced or made Year
2000 compliant before December 31, 1999.
There are three primary aspects to the Company's Year 2000 project:
computers and other equipment, information systems software and third-party
suppliers and business partners. Gilead is addressing each of these areas on a
phased basis, as follows: 1) educating the internal user community at Gilead; 2)
conducting an inventory of all software and hardware; 3) evaluating all software
and hardware for Year 2000 compliance; 4) implementing modifications, retirement
or replacement of software or hardware, prioritized based on an analysis of
importance to Gilead's business; 5) testing and validating all modified or
replaced software and hardware; and 6) designing and implementing contingency
and business continuation plans for critical systems.
To date, Gilead has completed the education, inventory and evaluation phases
of the project. Implementation of modifications or replacements and testing and
validation are on schedule, and the Company anticipates that, for
business-critical systems, all of these activities will be complete by the end
of 1999.
The Company has prioritized the implementation phase to first address
software or hardware that affects product manufacturing, quality control and
safety, employee safety, revenues or cash reserves. Two systems that have been
identified as critical to Gilead's operations are software programs from JD
Edwards, Inc. ("JDE") and Beckman-Coulter, Inc. ("Beckman"). The JDE system is
an enterprise-wide program that tracks financial information, processes sales
orders and monitors purchasing and manufacturing activities. During 1998, the
Company upgraded the JDE system to a Year 2000 compliant version, which is now
operational. The Beckman system monitors and records laboratory data. The
Beckman system upgrades were successfully completed during the second quarter of
1999.
To date, the Company has initiated evaluations of all its critical
third-party suppliers and business partners. Responses to Gilead's inquiries
regarding Year 2000 compliance in many cases have been general and nonbinding.
To date, substantially all respondents indicate that their Year 2000 compliance
efforts are
11
<PAGE>
progressing on schedule, and that their computer systems either are or will be
Year 2000-compliant at the appropriate time. A significant majority of these
respondents are presently in the final testing phase of their Year 2000
compliance projects, and many of them indicate that they are concurrently
developing contingency plans.
Among the most critical third parties the Company relies on are the
financial institutions that manage Gilead's cash and investments of
approximately $240.5 million at June 30, 1999, the Company's stock transfer
agent, contract manufacturers, contract research and laboratory organizations
and the FDA. The Company intends to continue monitoring and evaluating these
third parties to the extent practical through the end of 1999.
Gilead anticipates that the total cost of its Year 2000 compliance efforts
will not be material to its financial condition or results of operations. The
current estimate for external costs of total compliance efforts is approximately
$2.1 million, of which $2.0 million has been incurred to date. Of the amount
incurred to date, $1.3 million has been expensed and the remainder has been
capitalized. The $0.1 million of remaining costs are primarily consulting fees
and will be charged to expense. These amounts do not include any costs to Gilead
that may result from the failure of any third-party supplier or business partner
to achieve Year 2000 compliance.
The Company is also developing a series of contingency plans for certain
critical applications. These plans involve, among other actions, manual
solutions, increased inventories and modified staffing strategies. These
contingency plans are expected to be finalized and ready for implementation, if
necessary, before the end of 1999.
The Company's Year 2000 project is designed to significantly reduce
uncertainty and risk arising from the Year 2000 problem. The Company believes
that the implementation actions described above reduce the potential for
disruption of operations or significant financial impact. Due to the uncertainty
inherent in the Year 2000 problem, however, there can be no assurance that Year
2000 failures will not occur. Should such a Year 2000 failure occur with any of
Gilead's business critical operating systems, appropriate contingency plans have
been established which the Company believes would result in only a temporary
disruption in its ability to sell and distribute products. The Company does not
believe that any such disruption would have a material impact on its financial
condition or results of operations.
The Company cannot predict with any certainty whether its critical
third-party suppliers and business partners will achieve Year 2000 compliance,
or whether the failure of any such third party to do so would have a material
effect on the Company's business. However, the Company is establishing
contingency plans for maintaining operations with all its critical third-party
suppliers and business partners to minimize any disruption in its day-to-day
business operations.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
No. 27--Financial Data Schedule
(b) Reports on Form 8-K
On August 6, 1999, the Registrant filed a Current Report on Form 8-K
regarding its merger with NeXstar Pharmaceuticals, Inc.
12
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
<TABLE>
<S> <C>
GILEAD SCIENCES, INC.
-------------------------------------------
(Registrant)
Date: August 13, 1999 /s/ JOHN C. MARTIN
-------------------------------------------
John C. Martin
President and Chief Executive Officer
Date: August 13, 1999 /s/ MARK L. PERRY
-------------------------------------------
Mark L. Perry
Senior Vice President, Chief Financial
Officer
and General Counsel
(Principal Financial and Accounting Officer)
</TABLE>
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S 10Q FOR THE PERIOD ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 45,339
<SECURITIES> 195,195
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 255,449<F1>
<PP&E> 12,460<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 272,120
<CURRENT-LIABILITIES> 27,018
<BONDS> 207
0
1
<COMMON> 31
<OTHER-SE> 244,863
<TOTAL-LIABILITY-AND-EQUITY> 272,120
<SALES> 2,906
<TOTAL-REVENUES> 13,617
<CGS> 187
<TOTAL-COSTS> 51,264
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (30,822)
<INCOME-TAX> 0
<INCOME-CONTINUING> (30,822)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,822)
<EPS-BASIC> (1.00)
<EPS-DILUTED> (1.00)
<FN>
<F1>Current assets include receivables, allowances, inventory
and other current assets.
<F2>PP&E is net of accumulated depreciation.
</FN>
</TABLE>
