<PAGE>
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UNITED STATES
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 ENDED SEPTEMBER 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
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 incorporation (I.R.S. Employer
or organization) Identification No.)
333 LAKESIDE DRIVE, FOSTER CITY, CALIFORNIA 94404
(Address of principal executive offices) (Zip Code)
</TABLE>
650-574-3000
Registrant's telephone number, including area code:
------------------------
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 October 31, 2000: 47,039,625
--------------------------------------------------------------------------------
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<PAGE>
GILEAD SCIENCES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets--September 30, 2000
and December 31, 1999....................................... 3
Condensed Consolidated Statements of Operations--For the
three and nine months ended September 30, 2000 and 1999..... 4
Condensed Consolidated Statements of Cash Flows--For the
nine months ended September 30, 2000 and 1999............... 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 10
Item 3. Quantitative and Qualitative Disclosures about Market
Risk................................................................. 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 16
SIGNATURES.................................................................... 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 43,374 $ 47,011
Marketable securities..................................... 249,825 247,383
Accounts receivable....................................... 46,084 45,599
Inventories............................................... 19,227 20,959
Prepaid expenses and other................................ 11,330 11,029
--------- ---------
Total current assets.................................... 369,840 371,981
Property, plant and equipment, net.......................... 54,093 51,398
Other noncurrent assets..................................... 11,982 13,429
--------- ---------
$ 435,915 $ 436,808
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,704 $ 9,481
Accrued clinical and preclinical expenses................. 6,994 5,467
Accrued compensation and employee benefits................ 11,455 9,901
Other accrued liabilities................................. 15,130 15,004
Deferred revenue.......................................... 7,473 4,833
Long-term obligations due within one year................. 2,876 3,191
--------- ---------
Total current liabilities............................... 50,632 47,877
Accrued litigation settlement expenses...................... 6,049 6,853
Long-term obligations due after one year.................... 3,134 5,253
Convertible subordinated debentures......................... -- 79,533
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.001 per share; 100,000,000
shares authorized; shares issued and outstanding:
47,008,516 shares at September 30, 2000 and 44,092,779
shares at December 31, 1999............................. 47 44
Additional paid-in capital................................ 854,472 749,081
Accumulated other comprehensive loss...................... (1,672) (2,527)
Deferred compensation..................................... (4) (74)
Accumulated deficit....................................... (476,743) (449,232)
--------- ---------
Total stockholders' equity.................................. 376,100 297,292
--------- ---------
$ 435,915 $ 436,808
========= =========
</TABLE>
Note: The condensed consolidated balance sheet at December 31, 1999 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.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product sales, net................................. $ 37,403 $ 34,598 $111,737 $100,628
Royalty revenues, net.............................. 3,609 2,545 19,331 7,426
Contract revenues.................................. 4,077 1,247 9,222 12,149
-------- -------- -------- --------
Total revenues....................................... 45,089 38,390 140,290 120,203
Costs and expenses:
Cost of products sold.............................. 9,383 7,258 26,014 21,745
Research and development........................... 35,132 27,730 88,440 79,872
Selling, general and administrative................ 21,515 34,620 59,503 78,719
-------- -------- -------- --------
Total costs and expenses............................. 66,030 69,608 173,957 180,336
-------- -------- -------- --------
Loss from operations................................. (20,941) (31,218) (33,667) (60,133)
Interest income...................................... 4,441 3,866 12,746 12,537
Interest expense..................................... (604) (1,623) (3,659) (4,939)
-------- -------- -------- --------
Loss before provision for income taxes and equity in
loss of unconsolidated affiliate................... (17,104) (28,975) (24,580) (52,535)
Provision for income taxes........................... 214 220 1,046 726
Equity in loss of unconsolidated affiliate........... 246 1,170 1,885 4,271
-------- -------- -------- --------
Net loss............................................. $(17,564) $(30,365) $(27,511) $(57,532)
======== ======== ======== ========
Basic and diluted net loss per common share.......... $ (0.38) $ (0.70) $ (0.61) $ (1.36)
======== ======== ======== ========
Common shares used to calculate basic and diluted net
loss per common share.............................. 46,089 43,467 45,007 42,446
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $(27,511) $(57,532)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 8,687 9,472
Equity in loss of unconsolidated affiliate.............. 1,885 4,271
Net unrealized loss on foreign currency transactions.... 1,066 2,137
Other non-cash transactions............................. 1,663 1,171
Changes in assets and liabilities:
Accounts receivable................................... (4,384) (6,108)
Inventories........................................... 1,732 (3,664)
Prepaid expenses and other assets..................... (556) (2,798)
Accounts payable...................................... (2,692) 3,049
Accrued liabilities................................... 2,759 (6,170)
Deferred revenue...................................... 2,557 2,416
-------- --------
Net cash used in operating activities....................... (14,794) (53,756)
INVESTING ACTIVITIES:
Purchases of marketable securities........................ (130,409) (156,767)
Sales of marketable securities............................ 19,950 94,075
Maturities of marketable securities....................... 109,153 72,314
Capital expenditures...................................... (11,575) (7,373)
Investment in unconsolidated affiliate.................... (2,450) --
-------- --------
Net cash provided by (used in) investing activities......... (15,331) 2,249
FINANCING ACTIVITIES:
Proceeds from issuances of common stock................... 26,567 25,314
Repayments of long-term debt.............................. (2,462) (4,250)
-------- --------
Net cash provided by financing activities................... 24,105 21,064
Effect of exchange rate changes on cash..................... 2,383 100
-------- --------
Net decrease in cash and cash equivalents................... (3,637) (30,343)
Cash and cash equivalents at beginning of period............ 47,011 101,136
-------- --------
Cash and cash equivalents at end of period.................. $ 43,374 $ 70,793
======== ========
NON-CASH ACTIVITIES:
Common stock issued upon the conversion of convertible
subordinated debentures................................... $ 79,508 $ 442
======== ========
Reclassification of deferred debt issuance costs to
additional paid-in capital
upon conversion of subordinated debentures................ $ 1,585 $ --
======== ========
</TABLE>
See accompanying notes.
5
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. The financial statements include all adjustments
(consisting only of normal recurring adjustments) that the management of Gilead
Sciences, Inc. ("Gilead" or the "Company") believes necessary for fair
presentation of the balances and results for the periods presented. These
interim financial results are not necessarily indicative of results to be
expected for the full fiscal year.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Examples include provisions for sales returns and bad debts and
accrued clinical and preclinical expenses. Actual results may differ from these
estimates. The accompanying consolidated financial statements include the
accounts of the Company and its wholly and majority-owned subsidiaries.
Significant intercompany transactions have been eliminated. Certain prior period
amounts have been reclassified to conform to the current presentation. The
accompanying financial information should be read in conjunction with the
audited financial statements for the fiscal year ended December 31, 1999
included in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
On July 29, 1999, Gilead acquired all of the outstanding shares of NeXstar
Pharmaceuticals, Inc. ("NeXstar") in a business combination accounted for as a
pooling of interests. Accordingly, the financial information for all periods
prior to the business combination has been restated to represent the combined
financial results of Gilead and NeXstar. Costs of the merger were charged to
operations in 1999 and are included in selling, general and administrative
expenses.
BASIC AND DILUTED NET LOSS PER COMMON SHARE
For all periods presented, both basic and diluted net loss per common share
are computed by dividing the net loss by the number of weighted average common
shares outstanding during the period. Stock options and warrants could
potentially dilute basic earnings per share in the future, but were excluded
from the computation of diluted net loss per common share as their effect is
antidilutive for the periods presented.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation--an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25 with respect to stock-related
compensation. The adoption of FIN 44 on July 1, 2000 did not have a material
effect on the financial position or results of operations of Gilead.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." Among other things, SAB No. 101 describes the SEC Staff's position
on the recognition of certain nonrefundable up-front fees received in connection
with research collaborations. The Company has recognized nonrefundable
technology access
6
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
fees received in connection with collaboration agreements as revenue when
received, when the technology has been transferred and when all contractual
obligations of the Company relating to the fees are fulfilled. The Company is
evaluating the applicability of SAB No. 101 to its existing collaborative
agreements. Required adjustments, if any, to the reporting of revenues under
these collaborative agreements would be recognized as a cumulative effect of a
change in accounting principle in the fourth quarter of 2000.
In June 1998, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which establishes accounting and financial reporting standards for
derivative instruments, including forward foreign exchange contracts, and
hedging activities. In June 2000, the FASB issued SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities", which addresses
implementation issues related to SFAS No. 133. SFAS No. 133, as amended, and
SFAS No. 138 are effective for fiscal years beginning after June 15, 2000.
Gilead will adopt the accounting standards effective January 1, 2001, and is in
the process of analyzing the accounting and financial reporting impact of the
standards. At this time management does not expect that the adoption of SFAS
No. 133 and SFAS No. 138 will have a material impact on Gilead's financial
position or results of operations. The actual transition impact, however, will
depend on Gilead's hedge position on the transition date as well as fluctuations
in foreign currency rates through that date.
2. COMPREHENSIVE LOSS
Following are the components of comprehensive loss (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss............................. $(17,564) $(30,365) $(27,511) $(57,532)
Net foreign currency translation gain
(loss)............................. 85 (139) (281) (855)
Net unrealized gain (loss) on
available-for-sale securities...... 1,205 115 1,136 (1,390)
-------- -------- -------- --------
Comprehensive loss................. $(16,274) $(30,389) $(26,656) $(59,777)
======== ======== ======== ========
</TABLE>
7
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
3. INVENTORIES
Inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Raw materials............................... $10,168 $10,703
Work in process............................. 5,135 6,793
Finished goods.............................. 3,924 3,463
------- -------
Total inventories......................... $19,227 $20,959
======= =======
</TABLE>
4. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company has determined that it has only one reportable segment because
management has organized the business around its functional lines.
Product sales consisted of the following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
AmBisome.............................. $35,047 $31,938 $105,484 $ 92,841
DaunoXome............................. 1,094 1,233 3,225 3,454
VISTIDE............................... 1,262 1,427 3,028 4,333
------- ------- -------- --------
Consolidated total.................. $37,403 $34,598 $111,737 $100,628
======= ======= ======== ========
</TABLE>
The following table summarizes total revenues from external customers and
collaborative partners by geographic region. Revenues are attributed to
countries based on the location of Gilead's customer or collaborative partner
(in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
United States......................... $ 8,866 $ 7,052 $ 25,273 $ 20,045
United Kingdom........................ 5,761 4,780 18,130 13,087
Germany............................... 5,725 5,476 16,259 15,446
Switzerland........................... 2,629 844 14,592 10,566
Italy................................. 3,428 3,747 12,760 12,215
Spain................................. 3,985 3,652 11,236 11,101
Other European countries.............. 10,914 9,547 30,457 27,649
Other................................. 3,781 3,292 11,583 10,094
------- ------- -------- --------
Consolidated total.................. $45,089 $38,390 $140,290 $120,203
======= ======= ======== ========
</TABLE>
Product sales to one distributor accounted for approximately 13% of total
revenues in the first nine months of 2000, and approximately 11% for the same
period in 1999. Total revenues from Fujisawa Healthcare, Inc., which included
product sales and royalties, also were approximately 13% of total revenues in
the first nine months of 2000 and approximately 11% in the comparable period of
8
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
4. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
(CONTINUED)
1999. Revenues from Hoffmann-La Roche, including royalties, milestone payments
and reimbursement of research and development expenses, accounted for
approximately 10% of total revenues in the first nine months of 2000, and were
less than 10% of revenues in the first nine months of 1999.
5. COLLABORATIVE ARRANGEMENTS AND CONTRACTS
In April 2000, Gilead entered into an agreement with EyeTech
Pharmaceuticals, Inc. relating to Gilead's proprietary aptamer NX 1838.
Currently in early clinical trials, NX 1838 is an inhibitor of vascular
endothelial growth factor, or VEGF, which is known to play a role in the
development of certain ophthalmic diseases. Under the terms of the agreement,
EyeTech received worldwide rights to all therapeutic uses of NX 1838, and, if
the product is successfully commercialized, will pay Gilead royalties on
worldwide sales of the product. EyeTech also will be responsible for all
research and development costs. Gilead will provide clinical supplies of the
product to EyeTech for an initial one-year period. Gilead received a
$7.0 million up-front licensing fee from EyeTech in April 2000, which will be
recognized as revenue ratably over the one-year supply agreement period.
Accordingly, $1.7 million of the license fee was recorded as contract revenue
under the agreement in the third quarter of 2000, and $3.5 million was recorded
in the nine months ended September 30, 2000. The remainder of the license fee
will be recognized as revenue over the next two fiscal quarters. Gilead is also
entitled to additional cash payments from EyeTech of up to $25.0 million if and
when EyeTech reaches certain NX 1838 development milestones. Additionally,
Gilead received a warrant to purchase 833,333 shares of EyeTech series B
convertible preferred stock, exercisable at a price of $6.00 per share, the
price at which the stock was issued to other investors.
6. CONVERSION OF SUBORDINATED DEBENTURES TO COMMON STOCK
In August 2000, Gilead redeemed its 6.25% convertible subordinated
debentures at a cash price of $1,030 per $1,000 principal amount of debentures
outstanding, plus accrued interest. The entire $79.5 million in principal amount
of the debentures was converted into 1,783,789 newly issued shares of Gilead
common stock by August 15, 2000. Deferred debt issuance costs of $1.6 million
related to the debentures were charged to additional paid in capital in
connection with the conversion of the debentures into common stock.
7. SUBSEQUENT EVENT
On November 8, 2000 Gilead's Board of Directors approved an increase in the
number of authorized shares of common stock from 100,000,000 to 500,000,000.
Gilead plans to hold a special meeting of the stockholders in February 2001 to
vote on this increase. The primary purpose of the increase is to enable the
Board to implement a stock split, to be effected in the form of a stock
dividend. The Board intends to approve the stock split in January 2001, several
weeks prior to the stockholder vote. Based on the current trading range of
Gilead's common stock, the Board anticipates approving a two-for-one split, but
the final decision will be based on market conditions at the time of approval.
The proposed increase would also provide Gilead with flexibility to implement
future stock splits and conduct transactions involving the issuance of the
Company's common stock, where appropriate.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Gilead Sciences, Inc. ("Gilead", or "we") was incorporated in Delaware on
June 22, 1987, and is an independent biopharmaceutical company that seeks to
provide accelerated solutions for patients and the people who care for them. We
discover, develop, manufacture and commercialize proprietary therapeutics for
challenging infectious diseases (viral, fungal and bacterial diseases) and
cancer. Currently, we market AmBisome-Registered Trademark- ((amphotericin
B) liposome for injection), an antifungal agent; DaunoXome-Registered Trademark-
(daunorubicin citrate liposome injection), a drug approved for the treatment of
Kaposi's Sarcoma; and VISTIDE -Registered Trademark- (cidofovir injection) for
the treatment of cytomegalovirus ("CMV") retinitis. Hoffmann-La Roche Inc.
("Roche") markets Tamiflu-TM-(oseltamivir phosphate) for the treatment of
influenza, under a collaborative agreement. In addition, Gilead is developing
products to treat diseases caused by human immunodeficiency virus ("HIV"),
hepatitis B virus ("HBV"), bacterial infections and cancer.
On July 29, 1999, Gilead entered into a business combination with NeXstar
Pharmaceuticals, Inc. ("NeXstar"). The business combination has been accounted
for as a pooling of interests and Gilead's historical consolidated financial
statements for all periods prior to the business combination have been restated
to include the financial position, results of operations and cash flows of
NeXstar. Certain prior period amounts have been reclassified to conform to the
current presentation.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The following discussion of Gilead's financial condition and results of
operations contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act that
involve risks and uncertainties. Our actual financial and operating results
could differ materially from our expectations. Some of the factors that could
cause or contribute to these differences are listed below. You should also read
the "Risk Factors" included in our Annual Report on Form 10-K for the year ended
December 31, 1999 for more detailed information regarding these and other risks
and uncertainties that can affect our actual financial and operating results.
REGULATORY PROCESS. The FDA and foreign agencies could reject or limit the
commercialization of our products for a number of reasons including: if they
disagree with the results or designs of our clinical trials; if they believe our
products have unacceptable efficacy, toxicity or tolerability; or if they
believe our products can not be safely and efficiently manufactured on a
commercial basis. If these agencies reject or limit the commercialization of our
products, our financial results would be adversely affected. The clinical trials
required for regulatory approval of our products are extremely expensive, and it
is difficult for us to accurately predict or control the amount or timing of
these expenses from quarter to quarter. In addition, regulatory agencies could
require us to conduct additional unanticipated clinical trials on our products,
the cost of which could be substantial.
AMBISOME SALES. We rely on sales of AmBisome for a significant portion of
our operating income. There are lower priced products that compete with AmBisome
and there are products being developed that could compete with AmBisome in the
future. If these lower priced products achieve further market acceptance, or
should these products in development become commercially available, revenues
from sales of AmBisome would likely decrease, resulting in a reduction of
operating income.
MARKET ACCEPTANCE OF PRODUCTS. The ability of our products to achieve and
sustain market acceptance will depend on a number of factors, including: the
receipt and scope of regulatory approvals; the availability of public and
private insurance and reimbursement for our products; safety, efficacy,
tolerability and cost of our products; and how our products compare to
competitive products. If our products do not achieve and sustain market
acceptance, our results of operations will suffer. Tamiflu is in a new class of
drugs that represent a new approach to treating the flu. In order for
10
<PAGE>
Tamiflu to achieve market acceptance, our marketing partner, Roche, must change
attitudes toward flu treatment.
COLLABORATIONS. We depend on collaborations for the development and
commercialization of certain products and for revenue, including the
collaboration with Roche for sales of Tamiflu worldwide and the collaboration
with Fujisawa Healthcare, Inc. ("Fujisawa") for sales of AmBisome in the United
States and Canada. These collaborations could fail for a number of reasons,
including if our partners do not devote sufficient resources to the development,
commercialization or marketing of our products, or if disputes arise with our
partners. We will also seek additional collaborations. If our collaborations
fail or if we are unable to establish additional collaborations, our financial
results would be adversely affected.
FOREIGN CURRENCY FLUCTUATIONS. A significant majority of our product sales
is denominated in foreign currencies. Increases in the value of the U.S. Dollar
against these foreign currencies in the past have reduced, and in the future may
reduce, our U.S. Dollar return on these sales and negatively impact our
financial condition. We do not hedge our exposure to the impact of fluctuating
foreign exchange rates on forecasted sales. We do hedge accounts receivable
balances denominated in foreign currencies, which minimizes our exposure to
currency fluctuations between the date a sale is recorded and the date that cash
is collected.
UNCERTAIN FINANCIAL RESULTS. We expect that our financial results will
continue to fluctuate from quarter to quarter and that such fluctuations may be
substantial. The fluctuations can be caused by many factors that are beyond our
control, including the risk factors listed above. We have never been profitable
on a full-year basis and we may never achieve or sustain profitability. As of
September 30, 2000, our accumulated deficit was $476.7 million.
RESULTS OF OPERATIONS
REVENUES
Total revenues were $45.1 million for the quarter ended September 30, 2000
compared with $38.4 million for the quarter ended September 30, 1999. Total
revenues were $140.3 million for the first nine months of 2000, and
$120.2 million for the first nine months of 1999. Total revenues include
revenues from net product sales, net royalties and contracts (including research
and development collaborations).
Net product sales were $37.4 million for the third quarter of 2000 compared
with $34.6 million for the third quarter of 1999. Sales of AmBisome accounted
for 94% of revenues from product sales in the third quarter of 2000, and 92% in
the third quarter of 1999. Reported sales of AmBisome for the third quarter of
2000 increased 10% over the third quarter of 1999. Excluding the negative effect
of changes in currency rates that we experienced in 2000, sales of AmBisome
would have increased 23% in the third quarter of 2000 over the comparable period
in 1999. A significant majority of Gilead's product sales is denominated in
foreign currencies. We do not hedge our exposure to the impact of fluctuating
foreign exchange rates on forecasted sales. We do hedge accounts receivable
balances denominated in foreign currencies, which minimizes our exposure to
currency fluctuations between the date a sale is recorded and the date that cash
is collected. For the first nine months of 2000, net product sales were
$111.7 million, with AmBisome sales accounting for approximately 94% of the
total. In the first nine months of 1999, net product sales were $100.6 million,
and AmBisome comprised 92% of the total. Reported AmBisome sales increased 14%
in the first nine months of 2000 over the same period in 1999. Excluding the
negative impact of foreign exchange rates in 2000, AmBisome sales would have
increased 25% for the year to date period. Gilead also recognized product sales
revenues from DaunoXome and VISTIDE totalling $2.4 million in the third quarter
of 2000, and $6.3 million in the first nine months of 2000. These amounts are
down from DaunoXome and VISTIDE sales in 1999, and
11
<PAGE>
we expect the combined sales of VISTIDE and DaunoXome in future periods will
remain lower than 1999 levels.
Net royalty revenues were $3.6 million for the third quarter of 2000 and
$2.5 million for the comparable quarter in 1999. Royalties in the third quarter
of 2000 included $3.1 million from Fujisawa for sales of AmBisome in the United
States, $0.2 million from Roche for sales for Tamiflu and $0.3 million for
VISTIDE sales by Pharmacia & Upjohn S.A. outside the United States. Third
quarter 1999 royalties included $2.0 million from Fujisawa for AmBisome and
$0.4 million for VISTIDE. For the first nine months of the year, net royalty
revenues were $19.3 million in 2000 compared with $7.4 million in 1999.
Royalties for the first nine months of 2000 included $8.8 million from Fujisawa
for AmBisome, $9.3 million from Roche for sales for Tamiflu and $1.2 million for
VISTIDE sales by Pharmacia & Upjohn. Royalty revenue in the first nine months of
1999 included $5.7 million from Fujisawa and $1.6 million for VISTIDE. In
October 1999, the U.S. Food and Drug Administration approved Tamiflu for the
treatment of influenza in adults. Gilead co-developed Tamiflu with Roche, which
owns the commercial rights to the product and is required to pay us a royalty on
its net sales. Roche's sales of Tamiflu generally are expected to strengthen
during the flu season in the Northern Hemisphere, which falls during the last
and first quarters of the calendar year. We record royalties from Roche in the
quarter following the quarter in which the related Tamiflu sales occur.
Accordingly, Tamiflu royalties were insignificant in the third quarter of 2000,
and are expected to remain immaterial in the fourth quarter of the year. In
May 2000, Roche announced that it had withdrawn its European application for
Tamiflu in order to submit further clinical data. We expect the application to
be resubmitted in the future. In August 2000, Roche filed an application in
Japan for Tamiflu for the treatment and prevention of influenza. We do not
expect Tamiflu to be marketed in Europe or Japan during the 2000-2001 flu
season. No Tamiflu royalties were recognized in the first nine months of 1999.
Contract revenues were $4.1 million for the quarter ended September 30, 2000
and $1.2 million for the comparable quarter in 1999. In the first nine months of
2000, contract revenues totaled $9.2 million compared with $12.1 million for the
first nine months of 1999. Contract revenues for the third quarter of 2000
included $2.0 million from Roche related to Roche's August 2000 Tamiflu
application filed in Japan; $1.7 million of the $7.0 million up-front licensing
fee received from EyeTech in April 2000 (see Note 5 in Item 1 Notes to Condensed
Consolidated Financial Statements); and $0.2 million for reimbursements from
Roche of costs we incurred related to the continued development of our
proprietary influenza neuraminidase inhibitors. Contract revenues for the nine
months ended September 30, 2000 included milestone payments from Roche totaling
$4.0 million; $3.5 million of the Eyetech license fee; and $0.7 million for
development cost reimbursements from Roche. In 1999, third quarter contract
revenues included $0.7 million for development cost reimbursements from Roche.
Contract revenues for the first nine months of 1999 included $6.0 million for
milestone payments from Roche resulting from regulatory applications filed for
Tamiflu in the United States and Europe; $2.0 million from Roche for the
commencement of pivotal Tamiflu trials in Japan; $2.0 million in development
cost reimbursements from Roche; and a performance-based milestone of
$1.0 million from SKW Americas, Inc. ("SKW"). SKW is the 51% owner of Proligo
L.L.C. ("Proligo"), an entity in which Gilead holds the remaining 49% ownership
interest.
COST OF PRODUCT SALES
Cost of product sales was $9.4 million, or 25% of net product sales, for the
quarter ended September 30, 2000, and $7.3 million, or 21% of net product sales,
for the quarter ended September 30, 1999. For the first nine months of the year,
cost of product sales was $26.0 million or 23% of product sales in 2000, and
$21.7 million or 22% of product sales in 1999. In connection with most of our
European product sales, we price our products in the currency of the country
into which the products are sold ("Payment Currencies"). A significant majority
of our manufacturing cost is in U.S. Dollars. A decline in the value of the
Payment Currencies relative to the U.S. Dollar will
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negatively impact gross margins since our manufacturing costs will remain
approximately the same while our revenues, which are reported in U.S. Dollars,
will decline. In the third quarter of 2000, the gross margin was negatively
impacted by these factors, as discussed in the product sales section under the
caption "Revenues" above. Excluding the impact of foreign exchange rates on
reported sales revenue, cost of sales as a percentage of sales has remained
relatively flat in 2000 compared with 1999. Except for the potential impact of
unpredictable and uncontrollable changes in Payment Currencies relative to the
U.S. Dollar, we expect the relationship between cost of sales and sales revenues
for the fourth quarter 2000 to be materially consistent with the nine month year
to date amounts. In future years, changes in the nature or mix of our product
sales could impact this relationship.
OPERATING EXPENSES
Research and development ("R&D") expenses were $35.1 million for the third
quarter of 2000, up 27% from $27.7 million for the third quarter of 1999. R&D
expenses were $88.4 million in the first nine months of 2000 and $79.9 million
in the first nine months of 1999. Major development projects in 2000 include
tenofovir disoproxil fumarate for HIV and adefovir dipivoxil for hepatitis B
virus (HBV), both of which are in Phase III clinical trials. Higher spending for
these programs more than offset significantly lower expenses in 2000 for the
development of adefovir dipivoxil for HIV, a program we discontinued in the
fourth quarter of 1999. On a year to date basis, we also had lower costs related
to reduced research activities at our Boulder, Colorado facility. We expect R&D
expenses in the fourth quarter of 2000 to continue to be higher than 1999
levels, as the increased spending on the continued late-stage development of
tenofovir for HIV and adefovir for HBV more than offsets costs savings from
other programs. In August 2000, we discontinued our development program for
MiKasome (liposomal amikacin), in Phase II development for treatment of severe
bacterial infections, after determining that the clinical data did not support
continued development of MiKasome as a product candidate.
Selling, general and administrative ("SG&A") expenses were $21.5 million for
the three months ended September 30, 2000, down from $34.6 million for the third
quarter of 1999. SG&A was $59.5 million for the nine months ended September 30,
2000, compared with $78.7 million for the first nine months of 1999. The major
factor contributing to the decrease from 1999 levels was the inclusion in SG&A
of $15.1 million of merger-related expenses in the third quarter of 1999, and
$18.2 million in the first nine months of 1999. Excluding merger expenses, SG&A
in the third quarter of 2000 increased $2.0 million or 10% compared with the
third quarter of 1999. The increase was due to higher employee compensation
costs, implementation of new or upgraded information technologies, and legal
expenses for various corporate projects. Excluding merger expenses, SG&A
expenses for the year to date period decreased slightly in 2000 compared with
1999. SG&A expenses in the first nine months of 1999 included costs to expand
our marketing and operational capacity in anticipation of the then-planned
commercial launch of adefovir dipivoxil for HIV, which was discontinued in the
fourth quarter of 1999. Additionally, the first nine months of 2000 reflect the
impact of cost savings from the elimination of duplicate SG&A positions and
functions within the combined Gilead and NeXstar organization. These cost
savings more than offset the higher employee compensation, information
technology and legal expenses on a year to date basis. We expect SG&A expenses
in the last quarter of 2000 to remain at approximately third quarter 2000
levels.
INTEREST INCOME AND INTEREST EXPENSE
We reported interest income of $4.4 million for the quarter ended
September 30, 2000, up from $3.9 million for the quarter ended September 30,
1999. The increase is due to higher average yields on our investment portfolio
in 2000, which more than offset the impact of the decrease in our cash and
investment balances since September 1999. Interest income was $12.7 million for
the first nine months of 2000, relatively flat with the $12.5 million reported
for the first nine months of 1999, as the effect of higher interest rates in
2000 offset the impact of declining balances of cash, cash equivalents and
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marketable securities. At September 30, 2000, we had cash, cash equivalents and
marketable securities of $293.2 million, down from $307.4 million at
September 30, 1999.
Interest expense was $0.6 million for the quarter ended September 30, 2000,
compared with $1.6 million for the quarter ended September 30, 1999. The
decrease occurred primarily because we incurred interest expense on our
convertible subordinated debentures only through August 1, 2000. The entire
$79.5 million balance of the debentures was converted to common stock in
August 2000. Interest expense on the debentures has been the largest component
of our total interest expense in prior periods. For the first nine months of the
year, interest expense was $3.7 million in 2000 and $4.9 million in 1999.
Interest expense should decrease further in the fourth quarter of 2000 to a
minimal level.
EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATE
For the three months ended September 30, 2000, we recorded $0.2 million as
our equity in the loss of Proligo, representing our 49% share of Proligo's
losses for its third fiscal quarter ended August 31, 2000. For the first nine
months of 2000, our recorded portion of the loss was $1.9 million. We expect our
fourth quarter 2000 Proligo equity loss to be higher than the third quarter
loss. In 1999, we recorded equity losses of Proligo of $1.2 million for the
third quarter, and $4.3 million for the first nine months of the year. Our
investment in Proligo is reported in other noncurrent assets on the balance
sheet, and was $7.7 million at September 30, 2000. In January 2000, Gilead
funded Proligo with an additional $2.5 million in cash to maintain our
percentage ownership interest in Proligo. We have no commitments to provide
additional funding to Proligo.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities totaled $293.2 million at
September 30, 2000, down slightly from $294.4 million at December 31, 1999.
Proceeds from issuances of stock under employee stock plans were used to fund
operating activities, capital expenditures and our additional $2.5 million
investment in Proligo.
Accounts receivable at September 30, 2000 increased $4.4 million compared to
the balance at December 31, 1999, excluding the effect of changes in foreign
currency rates. The growth in receivables is primarily due to higher sales of
AmBisome in the six months ended September 30, 2000 compared with the six months
ended December 31, 1999, as well as proportionately higher sales of our products
in countries in which payments tend to be relatively slow. In certain cases,
these slow payment practices reflect the pace at which governmental entities
reimburse our customers. Sales to customers in countries that tend to be
relatively slow paying have in the past increased, and in the future may further
increase, the average length of time that accounts receivable are outstanding.
This, in turn, may increase the financial risk related to certain of our
customers. In certain countries in which payments have been slow, particularly
Greece, Spain and Italy, our accounts receivable are significant. At
September 30, 2000, our past due accounts receivable for Greece, Spain and Italy
totaled approximately $18.5 million, of which approximately $6.8 million was
more than 120 days past due. At December 31, 1999, our past due receivables for
these three countries totaled approximately $15.8 million, of which
approximately $5.0 million was over 120 days past due. To date, we have
experienced only modest losses with respect to the collection of accounts
receivable and we believe that the past due accounts receivable for Greece,
Spain and Italy are collectible. We continually seek to improve our collection
processes to ensure that we collect as much as possible from product sales and
that collections are timely.
Other significant changes in working capital during the nine months ended
September 30, 2000 included a $2.6 million increase in deferred revenue. This
change is primarily due to the $3.5 million
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deferred portion of the $7.0 license fee received from EyeTech in the second
quarter of 2000, partially offset by lower deferred royalty revenues.
Gilead maintains with a major financial institution a $10.0 million
unsecured line of credit that bears interest at a floating rate. Under the terms
of the line of credit, we are required to maintain certain financial ratios and
there are limitations on our ability to incur additional debt or to engage in
certain significant transactions. The line of credit, which includes a foreign
exchange facility, expires on April 16, 2001. As of September 30, 2000, we had
no outstanding borrowings under the line.
In August 2000, Gilead redeemed its 6.25% convertible subordinated
debentures at a cash price of $1,030 per $1,000 principal amount of debentures
outstanding, plus accrued interest. The entire $79.5 million in principal amount
of the debentures was converted into 1,783,789 newly issued shares of Gilead
common stock by August 15, 2000. Deferred debt issuance costs of $1.6 million
related to the debentures were charged to additional paid in capital in
connection with the conversion of the debentures into common stock. Because
interest on the debentures has been the largest component of our total interest
expense in prior periods, our interest expense should decrease further in the
fourth quarter of 2000 to a minimal level.
We believe that our existing capital resources, supplemented by net product
sales and contract and royalty revenues, will be adequate to satisfy our capital
needs for the foreseeable future. As of September 30, 2000, we were entitled to
additional cash payments of up to $17.2 million from Roche and up to
$25.0 million from EyeTech upon those parties achieving specific additional
developmental or regulatory milestones, although there can be no assurance that
any of the milestones will be met. Our future capital requirements will depend
on many factors, including:
- The progress of our 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 our products under
development
- The commercial performance of AmBisome and any of our products in
development that receive marketing approval
- Administrative 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.
We 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of August 15, 2000, the entire balance of our $79.5 million 6.25%
convertible subordinated debentures had been converted into Gilead common stock
and is therefore no longer outstanding. There have been no other significant
changes in market risk compared to the disclosures in Item 7A of our Annual
Report on Form 10-K for the year ended December 31, 1999.
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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
None.
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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: November 9, 2000 /s/ JOHN C. MARTIN
------------------------------------------------
John C. Martin
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: November 9, 2000 /s/ SHARON A. SURREY-BARBARI
------------------------------------------------
Sharon A. Surrey-Barbari
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
</TABLE>
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