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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 JUNE 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 (I.R.S. Employer Identification No.)
incorporation or organization)
333 LAKESIDE DRIVE, FOSTER CITY, 94404
CALIFORNIA
(Address of principal executive (Zip Code)
offices)
</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 August 11, 2000: 46,719,306
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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--June 30, 2000 and
December 31, 1999......................................... 3
Condensed Consolidated Statements of Operations--For the
three and six months ended June 30, 2000 and 1999......... 4
Condensed Consolidated Statements of Cash Flows--For the six
months ended June 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...................................................... 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......... 17
Item 6. Exhibits and Reports on Form 8-K............................ 17
SIGNATURES...................................................................... 18
</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>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 42,740 $ 47,011
Marketable securities..................................... 252,807 247,383
Accounts receivable....................................... 46,644 45,599
Inventories............................................... 20,292 20,959
Prepaid expenses and other................................ 8,964 11,029
--------- ---------
Total current assets.................................... 371,447 371,981
Property, plant and equipment, net.......................... 51,771 51,398
Other noncurrent assets..................................... 13,319 13,429
--------- ---------
$ 436,537 $ 436,808
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,658 $ 9,481
Accrued clinical and preclinical expenses................. 1,718 5,467
Accrued compensation and employee benefits................ 8,615 9,901
Other accrued liabilities................................. 16,448 15,004
Deferred revenue.......................................... 10,302 4,833
Long-term obligations due within one year................. 2,889 3,191
--------- ---------
Total current liabilities............................... 44,630 47,877
Accrued litigation settlement expenses...................... 6,322 6,853
Long-term obligations due after one year.................... 3,870 5,253
Convertible subordinated debentures......................... 79,508 79,533
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.001 per share; 100,000,000
shares authorized; shares issued and outstanding:
44,722,452 shares at June 30, 2000, and 44,092,779
shares at December 31, 1999............................. 45 44
Additional paid-in capital................................ 764,319 749,081
Accumulated other comprehensive loss...................... (2,962) (2,527)
Deferred compensation..................................... (16) (74)
Accumulated deficit....................................... (459,179) (449,232)
--------- ---------
Total stockholders' equity.................................. 302,207 297,292
--------- ---------
$ 436,537 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
2000 1999 2000 1999
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product sales, net................................. $37,994 $ 33,982 $ 74,334 $ 66,030
Royalty revenues, net.............................. 7,680 2,793 15,722 4,881
Contract revenues.................................. 4,305 6,762 5,145 10,902
------- --------- -------- --------
Total revenues....................................... 49,979 43,537 95,201 81,813
Costs and expenses:
Cost of products sold.............................. 8,684 7,088 16,631 14,487
Research and development........................... 27,251 27,253 53,308 52,142
Selling, general and administrative................ 19,829 21,559 37,988 44,099
------- --------- -------- --------
Total costs and expenses............................. 55,764 55,900 107,927 110,728
------- --------- -------- --------
Loss from operations................................. (5,785) (12,363) (12,726) (28,915)
Interest income...................................... 4,360 4,230 8,305 8,671
Interest expense..................................... (1,518) (1,646) (3,055) (3,316)
------- --------- -------- --------
Loss before provision for income taxes and equity in
loss of unconsolidated affiliate................... (2,943) (9,779) (7,476) (23,560)
Provision for income taxes........................... 525 424 832 506
Equity in loss of unconsolidated affiliate........... 718 1,488 1,639 3,101
------- --------- -------- --------
Net loss............................................. $(4,186) $ (11,691) $ (9,947) $(27,167)
======= ========= ======== ========
Basic and diluted net loss per common share.......... $ (0.09) $ (0.28) $ (0.22) $ (0.65)
======= ========= ======== ========
Common shares used to calculate basic and diluted net
loss per common share.............................. 44,591 42,115 44,466 41,936
======= ========= ======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
2000 1999
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $ (9,947) $(27,167)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 5,977 6,047
Equity in loss of unconsolidated affiliate.............. 1,639 3,101
Net unrealized loss on foreign currency transactions.... 165 2,730
Other non-cash transactions............................. 399 486
Changes in assets and liabilities:
Accounts receivable................................... (2,182) (3,208)
Inventories........................................... 667 (1,423)
Prepaid expenses and other assets..................... 2,377 (3,947)
Accounts payable...................................... (4,992) (441)
Accrued liabilities................................... (4,605) (8,664)
Deferred revenue...................................... 5,469 726
--------- --------
Net cash used in operating activities....................... (5,033) (31,760)
INVESTING ACTIVITIES:
Purchases of marketable securities........................ (109,384) (72,261)
Sales of marketable securities............................ 8,993 54,674
Maturities of marketable securities....................... 94,898 57,612
Capital expenditures...................................... (5,973) (5,736)
Investment in unconsolidated affiliate.................... (2,450) --
--------- --------
Net cash provided by (used in) investing activities......... (13,916) 34,289
FINANCING ACTIVITIES:
Proceeds from issuances of common stock................... 15,105 14,785
Repayments of long-term debt.............................. (1,724) (2,292)
--------- --------
Net cash provided by financing activities................... 13,381 12,493
Effect of exchange rate changes on cash..................... 1,297 (210)
--------- --------
Net increase (decrease) in cash and cash equivalents........ (4,271) 14,812
Cash and cash equivalents at beginning of period............ 47,011 101,136
--------- --------
Cash and cash equivalents at end of period.................. $ 42,740 $115,948
========= ========
NON-CASH FINANCING ACTIVITIES:
Common stock issued upon the conversion of convertible
subordinated debentures................................... $ 25 $ --
========= ========
</TABLE>
See accompanying notes.
5
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 the three- and
six-month periods ended June 30, 1999 has been restated to represent the
combined financial results of Gilead and NeXstar.
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. Convertible debentures, 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. In August 2000, the total
reported number of common shares outstanding has increased by approximately 1.8
million shares as a result of the conversion of outstanding convertible
subordinated debentures into Gilead common stock prior to the redemption date of
the debentures on August 15, 2000 (see Note 6), exclusive of additional shares
that may be issued as a result of stock option exercises.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and 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. Management has not yet
determined the impact of SFAS No. 133 and SFAS No. 138 on Gilead's financial
position or results of operations.
6
<PAGE>
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 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 no later than the fourth
quarter of 2000.
In March 2000, the 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. FIN 44 is effective July 1, 2000.
Management does not expect the adoption of FIN 44 to have a material effect on
the financial position or results of operations of Gilead.
2. COMPREHENSIVE LOSS
Following are the components of comprehensive loss (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss.............................................. $(4,186) $(11,691) $ (9,947) $(27,167)
Net foreign currency translation loss................. (170) (735) (366) (716)
Net unrealized gain (loss) on available-for-sale
securities.......................................... 207 (979) (69) (1,505)
------- -------- -------- --------
Comprehensive loss.................................. $(4,149) $(13,405) $(10,382) $(29,388)
======= ======== ======== ========
</TABLE>
3. INVENTORIES
Inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
-------------- ------------------
<S> <C> <C>
Raw materials............................................... $10,113 $10,703
Work in process............................................. 5,016 6,793
Finished goods.............................................. 5,163 3,463
------- -------
Total inventories......................................... $20,292 $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.
7
<PAGE>
Product sales consisted of the following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
AmBisome................................................ $35,851 $31,567 $70,437 $60,903
DaunoXome............................................... 1,080 954 2,131 2,221
VISTIDE................................................. 1,063 1,461 1,766 2,906
------- ------- ------- -------
Consolidated total.................................... $37,994 $33,982 $74,334 $66,030
======= ======= ======= =======
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
United States........................................... $ 9,841 $ 6,184 $16,407 $12,915
United Kingdom.......................................... 6,526 5,062 12,369 8,307
Switzerland............................................. 5,987 6,989 11,963 9,802
Germany................................................. 5,141 4,751 10,534 9,971
Italy................................................... 4,984 4,183 9,332 8,468
Spain................................................... 3,674 3,524 7,251 7,449
Other European countries................................ 9,515 9,324 19,543 18,103
Other non-U.S. countries................................ 4,311 3,520 7,802 6,798
------- ------- ------- -------
Consolidated total.................................... $49,979 $43,537 $95,201 $81,813
======= ======= ======= =======
</TABLE>
Revenues from Hoffmann-La Roche, including royalties, milestone payments and
reimbursement of research and development expenses, accounted for approximately
12% of total revenues in the first half of 2000, and approximately 11% of
revenues in the first half of 1999. Revenues from Fujisawa Healthcare, Inc.,
which included product sales and royalties, were approximately 13% of total
revenues in the first half of 2000 and approximately 10% in the comparable
period of 1999. Sales to one distributor accounted for approximately 13% of
total revenues in the first half of 2000, and approximately 10% in the same
period in 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 second quarter of 2000, and the remainder will be
recognized as revenue over the next three quarters. Gilead is also entitled to
additional cash payments from EyeTech of up to $25.0 million upon EyeTech
reaching certain development milestones. Additionally, Gilead received a warrant
to purchase 833,333 shares of
8
<PAGE>
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. SUBSEQUENT EVENTS
In July 2000, Gilead called for the redemption of its 6.25% convertible
subordinated debentures on August 15, 2000 at a cash price of $1,030 per $1,000
principal amount of debentures outstanding, plus accrued interest. Holders of
the debentures had the option, through August 11, 2000, of converting their
debentures into Gilead common stock at a rate of 22.4366 shares of stock per
$1,000 principal amount of notes held, an effective price of approximately
$44.57 per share. As of August 14, 2000 Gilead had been informed that the entire
$79.5 million in principal amount of the debentures had been converted into
approximately 1.78 million newly issued shares of Gilead common stock.
Gilead recently completed its evaluation of pre-clinical and clinical data
for MiKasome (liposomal amikacin), a liposomal formulation of the antibiotic
amikacin. MiKasome is in Phase II development of the potential treatment of
severe bacterial infections. Gilead has determined that the emerging data for
MiKasome do not support continued development of this product candidate and
therefore this clinical development program has been discontinued.
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 the three- and six-month periods ended June 30, 1999, have been
restated in the accompanying condensed consolidated financial statements 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.
SUBSEQUENT EVENTS
In July 2000, Gilead called for the redemption of its 6.25% convertible
subordinated debentures on August 15, 2000 at a cash price of $1,030 per $1,000
principal amount of debentures outstanding, plus accrued interest. Holders of
the debentures had the option, through August 11, 2000, of converting their
debentures into Gilead common stock at a rate of 22.4366 shares of stock per
$1,000 principal amount of notes held, an effective price of approximately
$44.57 per share. As of August 14, 2000 Gilead had been informed that the entire
$79.5 million in principal amount of the debentures had been converted into
approximately 1.78 million newly issued shares of Gilead common stock.
Gilead recently completed its evaluation of pre-clinical and clinical data
for MiKasome (liposomal amikacin), a liposomal formulation of the antibiotic
amikacin. MiKasome is in Phase II development of the potential treatment of
severe bacterial infections. Gilead has determined that the emerging data for
MiKasome do not support continued development of this product candidate and
therefore this clinical development program has been discontinued.
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
10
<PAGE>
agencies reject or limit the commercialization of our products, our financial
results would be adversely affected. In addition, these 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 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 portion of our 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. The hedging techniques we use can reduce but not eliminate
the effects of foreign currency fluctuations.
UNCERTAIN FINANCIAL RESULTS. We expect that our financial results will
continue to fluctuate from quarter to quarter and that such fluctuations may be
substantial. We have never been profitable on a full-year basis and we may never
achieve or sustain profitability. As of June 30, 2000, our accumulated deficit
was $459.2 million.
COLLABORATIVE ARRANGEMENTS AND CONTRACTS
In April 2000, we entered into an agreement with EyeTech
Pharmaceuticals, Inc. relating to our 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 second quarter of
2000, and the remainder will be recognized as revenue over the next three
quarters. Gilead is also entitled to additional cash payments from EyeTech of up
to $25.0 million upon EyeTech reaching
11
<PAGE>
certain 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.
In May 2000, Roche, Gilead's collaborative partner for the development and
commercialization of Tamiflu, announced that Roche withdrew its European
application for Tamiflu for the treatment of influenza. The application was
withdrawn in order to provide Roche with more time to submit further clinical
data. We expect the application to be resubmitted in the future, although we do
not expect Tamiflu to be marketed in Europe during the 2000-2001 flu season. In
early August 2000, Roche filed an application in Japan for Tamiflu for the
treatment and prevention of influenza.
RESULTS OF OPERATIONS
REVENUES
Total revenues were $50.0 million for the quarter ended June 30, 2000
compared with $43.5 million for the quarter ended June 30, 1999. Total revenues
were $95.2 million for the first half of 2000, and $81.8 million for the first
half of 1999. Total revenues include revenues from net product sales, net
royalties and contracts (including research and development collaborations).
Net product sales were $38.0 million for the second quarter of 2000 compared
with $34.0 million for the second quarter of 1999. Sales of AmBisome accounted
for 94% of revenues from product sales in the second quarter of 2000, and 93% in
the second quarter of 1999. Unit sales of AmBisome in the second quarter of 2000
increased 22% over the second quarter of 1999, however AmBisome sales as
reported in U.S. dollars increased only 14%, constrained by a decrease in
average selling prices in certain non-U.S. countries, as well as the negative
impact of changes in currency exchange rates. For the first half of 2000, net
product sales were $74.3 million, with AmBisome sales accounting for
approximately 95% of the total. In the first half of 1999, net product sales
were $66.0 million, and AmBisome comprised 92% of the total. Gilead also
recognized product sales revenues from the sale of DaunoXome and VISTIDE
totalling $2.1 million in the second quarter of 2000, and $3.9 million in the
first six months of 2000. These amounts are down slightly from DaunoXome and
VISTIDE sales in 1999, and we expect the combined sales of VISTIDE and DaunoXome
in future periods to remain lower than 1999 levels. A significant majority of
Gilead's product sales are denominated in foreign currencies.
Net royalty revenues were $7.7 million for the second quarter of 2000 and
$2.8 million for the comparable quarter in 1999. For the first half of the year,
net royalty revenues were $15.7 million in 2000 compared with $4.9 million in
1999. 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 net sales. Royalties from Tamiflu were $3.7 million in the second
quarter of 2000, and $9.1 million in the first half of the year. There were no
Tamiflu royalties recognized in 1999. We also recognized net royalty revenue
from sales of AmBisome in the United States by Fujisawa of $3.5 million during
the second quarter of 2000 and $2.1 million during the second quarter of 1999.
For the first half of the year, AmBisome royalties were $5.7 million in 2000
compared with $3.7 million in 1999. Net royalty revenues in each of these
periods also includes amounts recognized from sales of VISTIDE by Pharmacia &
Upjohn S.A. outside the United States.
Contract revenues were $4.3 million for the quarter ended June 30, 2000 and
$6.8 million for the comparable quarter in 1999. In the first half of 2000,
contract revenues totaled $5.1 million compared with $10.9 million in the first
half of 1999. Contract revenues for the second quarter of 2000 included a $2.0
million milestone payment from Roche for the regulatory application filed in the
United States for Tamiflu for prevention of influenza. Also included in second
quarter 2000 contract revenues was $1.7 million of the $7.0 million up-front
licensing fee received from EyeTech in April 2000. Contract
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revenues in 2000 also included reimbursements from Roche of costs we incurred
related to the continued development of our proprietary influenza neuraminidase
inhibitors. These reimbursements amounted to $0.1 million in the second quarter
of 2000, and $0.4 million in the first quarter of 2000. In the second quarter of
1999, contract revenues included $6.0 million for two milestone payments from
Roche resulting from regulatory application filings for Tamiflu in the United
States and Europe, and $0.6 million in expense reimbursements from Roche. In the
first quarter of 1999, we recognized a $2.0 million milestone payment from Roche
based upon the commencement of pivotal clinical trials of Tamiflu in Japan. Also
in the first quarter of 1999, we recorded 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. Additionally, first quarter 1999 contract revenues included $0.7
million of Roche expense reimbursements.
COST OF PRODUCT SALES
Cost of product sales was $8.7 million, or 23% of net product sales, for the
quarter ended June 30, 2000, and $7.1 million, or 21% of net product sales, for
the quarter ended June 30, 1999. For the first half of the year, cost of product
sales was $16.6 million in 2000, and $14.5 million in 1999. As a percentage of
net product sales, cost of sales was 22% for both the first half of 2000 and the
first half of 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. It is likely that any decline in the value of the Payment
Currencies relative to the U.S. Dollar would negatively impact gross margins
since our manufacturing costs would remain approximately the same while our
revenues, which are reported in U.S. Dollars, would decline. In the second
quarter of 2000, the gross margin was negatively impacted by the factors
identified in the product sales section under the caption "Revenue" above.
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 product sales and net product sales revenues for the remainder
of the year to be materially consistent with the second quarter of 2000. 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 for both the second quarter of
2000 and the second quarter of 1999 were $27.3 million. R&D expenses were $53.3
million in the first half of 2000 and $52.1 million in the first half of 1999.
Major development projects in 2000 included tenofovir disoproxil fumarate for
HIV and adefovir dipivoxil for HBV. Higher spending for these programs was
offset by significantly lower expenses in 2000 for the development of adefovir
dipivoxil for HIV, a program we discontinued in the fourth quarter of 1999, and
by reduced research activities at our Boulder, Colorado facility. We expect R&D
expenses in the second half of 2000 to remain relatively flat or slightly higher
than 1999 levels, as these costs savings will be offset by the increased
spending related to the continued late-stage development of tenofovir disoproxil
fumarate for HIV and adefovir dipivoxil for HBV.
Selling, general and administrative ("SG&A") expenses were $19.8 million for
the three months ended June 30, 2000, down from $21.6 million for the second
quarter of 1999. SG&A was $38.0 million for the six months ended June 30, 2000,
compared with $44.1 million in the first six months of 1999. One factor
contributing to the decrease from 1999 levels was the inclusion in SG&A of $1.6
million of merger-related expenses in the second quarter of 1999, and $3.1
million in the first half of 1999. In addition, the first half of 1999 included
costs incurred to expand our marketing and operational capacity in anticipation
of the then-planned commercial launch of adefovir dipivoxil for HIV. Finally,
the first half of 2000 reflects the impact of cost savings resulting from the
elimination of duplicate SG&A positions and functions within the combined Gilead
and NeXstar organization. Partially offsetting these cost savings were increased
administrative costs in the second quarter of 2000 related to our implementation
of new or upgraded information technologies. We expect SG&A expenses to
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increase in the second half of 2000 relative to the first half of the year as we
incur costs related to ongoing marketing and sales programs and administrative
costs to support our R&D activities.
INTEREST INCOME AND INTEREST EXPENSE
We reported interest income of $4.4 million for the quarter ended June 30,
2000, up slightly from $4.2 million for the quarter ended June 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 June 1999. Interest income was $8.3 million for the first half of
2000, compared with $8.7 million for the first half of 1999. The decrease for
the six-month period was due to the declining balances of cash, cash equivalents
and marketable securities more than offsetting the effect of higher interest
rates in 2000. At June 30, 2000, we had cash, cash equivalents and marketable
securities of $295.5 million, down from $322.1 million at June 30, 1999.
Interest expense was $1.5 million for the quarter ended June 30, 2000, and
$1.6 million for the quarter ended June 30, 1999. For the first six months of
the year, interest expense was $3.1 million in 2000 and $3.3 million in 1999.
Interest expense continues to decline as we repay our outstanding debt
obligations. Interest expense should decrease significantly after the third
quarter of 2000 due to the conversion to common stock of our $79.5 million
convertible subordinated debentures before the August 15, 2000 redemption date.
Interest expense on the debentures is currently the largest component of our
total interest expense.
EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATE
For the three months ended June 30, 2000, we recorded $0.7 million as our
equity in the loss of Proligo, representing our 49% share of Proligo's losses
for its second fiscal quarter ended May 31, 2000. For the first half of 2000,
our recorded portion of the loss was $1.6 million. In 1999, we recorded equity
losses of Proligo of $1.5 million for the second quarter, and $3.1 million for
the first half of the year. Our investment in Proligo is reported in other
noncurrent assets on the balance sheet, and was $8.1 million at June 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 $295.5 million at
June 30, 2000, up 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 June 30, 2000 was $46.6 million compared with $45.6
million at December 31, 1999. The growth in receivables is primarily due to
higher sales of AmBisome in the six months ended June 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 of certain of
our customers. In certain countries in which payments have been slow,
particularly Greece, Spain and Italy, our accounts receivable are significant.
At June 30, 2000, our past due accounts receivable for Greece, Spain and Italy
totaled approximately $17.3 million, of which approximately $7.7 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
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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 six months ended
June 30, 2000 included a $5.5 million increase in deferred revenue, primarily
consisting of the deferred portion of the $7.0 million license fee received from
EyeTech in the second quarter. We also reported significant decreases in
accounts payable and accrued clinical and preclinical expenses between December
31, 1999 and June 30, 2000. These balances can fluctuate significantly based on
the timing of payments. All of the changes in working capital described here are
based on local currency amounts that do not take into account the effect of
exchange rate changes on cash.
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 June 30, 2000, we had no
outstanding borrowings under the line.
In July 2000, we called for the redemption of our 6.25% convertible
subordinated debentures on August 15, 2000 at a cash price of $1,030 per $1,000
principal amount of debentures outstanding, plus accrued interest. Holders of
the debentures had the option, through August 11, 2000, of converting their
debentures into Gilead common stock at a rate of 22.4366 shares of stock per
$1,000 principal amount of notes held, an effective price of approximately
$44.57 per share. As of August 14, 2000 we had been informed that the entire
$79.5 million in principal amount of the debentures had been converted into
approximately 1.78 million newly issued shares of Gilead common stock.
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 June 30, 2000, we were entitled to
additional cash payments of up to $19.2 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2000, our $79.5 million 6.25% convertible subordinated
debentures had a fair value of $129.4 million. See Note 6 "Subsequent
Event--Redemption of Convertible Subordinated Debentures" in Item 1 regarding
the conversion of the debentures in the third quarter of 2000. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 24, 2000 in Redwood City,
California. Of the 44,547,212 shares of Gilead Common Stock entitled to vote at
the meeting, 35,932,973 shares were represented at the meeting in person or by
proxy, constituting a quorum. The voting results are presented below.
The stockholders elected seven directors to serve for the ensuing year and
until their successors are elected. The votes regarding the election of
directors were as follows:
<TABLE>
<CAPTION>
NAME SHARES VOTED FOR VOTES WITHHELD
---- ---------------- --------------
<S> <C> <C>
Paul Berg....................................... 35,831,696 101,277
Etienne F. Davignon............................. 32,998,825 2,934,148
James M. Denny.................................. 35,831,707 101,266
John C. Martin.................................. 35,831,870 101,103
Gordon E. Moore................................. 35,831,180 101,793
Donald H. Rumsfeld.............................. 35,832,627 100,346
George P. Shultz................................ 29,788,308 6,144,665
</TABLE>
The stockholders approved the amendment and restatement of the 1991 Stock
Option Plan and the reservation of additional shares under the plan. There were
19,709,236 votes cast for the proposal, 4,854,105 votes cast against, 67,988
abstentions, and 11,301,644 broker non-votes.
The stockholders approved the ratification of Ernst & Young LLP as Gilead's
independent auditors for the year ending December 31, 2000. There were
35,878,773 votes cast for the proposal, 6,856 votes cast against, 47,344
abstentions, and no broker non-votes.
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: August 14, 2000 /s/ JOHN C. MARTIN
------------------------------------------------
John C. Martin
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: August 14, 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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