SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
Commission File No.
0-19731
GILEAD SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3047598
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
353 Lakeside Drive, Foster City, California 94404
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 415-574-3000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes___X____ No________
Number of shares outstanding of the issuer's common stock, par value $.001
per share, as of October 10, 1996: 28,559,023.
GILEAD SCIENCES, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Condensed Consolidated Financial Statements and Notes
Condensed Consolidated Balance Sheets - September 30, 1996
and December 31, 1995...................................... 3
Condensed Consolidated Statements of Operations - for the
three months and nine months ended September 30, 1996 and
1995....................................................... 4
Condensed Consolidated Statements of Cash Flows - for the
nine months ended September 30, 1996 and 1995............. 5
Notes to Condensed Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................... 10
SIGNATURES................................................. 11
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements and Notes
GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
Current assets: (unaudited) (Note)
Cash and cash equivalents $ 156,043 $ 27,420
Short-term investments 134,260 128,239
Accounts receivable (less allowances of
$1,326 at September 30, 1996) 2,994 -
Other current assets 13,330 1,558
---------- ----------
Total current assets 306,627 157,217
Property and equipment, net 7,609 8,369
Other assets 1,209 1,073
---------- ----------
$ 315,445 $ 166,659
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,941 $ 2,412
Accrued clinical and preclinical expenses 5,549 3,923
Other accrued liabilities 4,682 2,229
Deferred contract revenues 1,000 208
Current portion of equipment financing
obligations and long-term debt 2,882 2,906
---------- ----------
Total current liabilities 16,054 11,678
Noncurrent portion of equipment financing
obligations and long-term debt 1,492 3,482
Commitments
Stockholders' equity:
Common stock, par value $.001 per share;
60,000,000 shares authorized; 28,558,823
shares and 23,769,878 shares issued and
outstanding at September 30, 1996 and
December 31, 1995, respectively 29 24
Additional paid-in capital 424,974 265,460
Unrealized gains (losses) on investments, net 11 167
Accumulated deficit (126,404) (112,754)
Deferred compensation (711) (1,398)
---------- ----------
Total stockholders' equity 297,899 151,499
---------- ----------
$ 315,445 $ 166,659
---------- ----------
---------- ----------
Note: The consolidated balance sheet at December 31, 1995 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
GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ---------------------
1996 1995 1996 1995
------- ------- --------- --------
Revenues:
Product sales, net $ 3,353 $ - $ 4,755 $ -
Contract revenues 21,301 1,067 22,884 2,932
------- ------- --------- --------
Total revenues 24,654 1,067 27,639 2,932
------- ------- --------- --------
Costs and expenses:
Cost of sales 447 - 548 -
Research and development 11,163 8,194 31,008 23,748
Selling, general and administrative 7,641 2,769 19,947 7,949
------- ------- --------- --------
Total costs and expenses 19,251 10,963 51,503 31,697
------- ------- --------- --------
Income (loss) from operations 5,403 (9,896) (23,864) (28,765)
Interest income, net 3,907 1,470 10,214 3,531
------- ------- --------- --------
Net income (loss) $ 9,310 $(8,426) $ (13,650) $(25,234)
------- ------- --------- --------
------- ------- --------- --------
Net income (loss) per share $ 0.30 $ (0.40) $ (0.50) $ (1.28)
------- ------- --------- --------
------- ------- --------- --------
Common and common equivalent
shares used in the calculation of net
income (loss) per share 30,549 21,085 27,500 19,785
------- ------- --------- --------
------- ------- --------- --------
See accompanying notes.
4
GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(unaudited)
(in thousands)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
------------- --------------
Cash flows from operating activities:
Net loss $ (13,650) $ (25,234)
Adjustments used to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 3,718 3,273
Changes in assets and liabilities:
Accounts receivable (2,994) -
Other current assets (11,772) (153)
Other assets (136) 83
Accounts payable (471) 151
Accrued clinical and preclinical expenses 1,626 1,042
Other accrued liabilities 2,453 577
Deferred contract revenues 792 (1,034)
---------- ----------
Total adjustments (6,784) 3,939
---------- ----------
Net cash used in operating activities (20,434) (21,295)
---------- ----------
Cash flows from investing activities:
Purchases of short-term investments (324,752) (125,302)
Sales of short-term investments 201,366 10,455
Maturities of short-term investments 117,209 105,062
Capital expenditures (1,565) (485)
---------- ----------
Net cash used in investing activities (7,742) (10,270)
---------- ----------
Cash flows from financing activities:
Payments of equipment financing obligations
and long-term debt (2,014) (2,085)
Proceeds from issuance of common stock 158,813 90,750
---------- ----------
Net cash provided by financing activities 156,799 88,665
---------- ----------
Net increase in cash and cash equivalents 128,623 57,100
Cash and cash equivalents at beginning of period 27,420 15,297
---------- ----------
Cash and cash equivalents at end of period $ 156,043 $ 72,397
---------- ----------
---------- ----------
See accompanying notes.
5
GILEAD SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The information at September 30, 1996, and for the three and nine month
periods ended September 30, 1996 and 1995, is unaudited but includes all
adjustments (consisting only of normal recurring adjustments) which, in the
opinion of management, are necessary to state fairly the financial information
set forth therein in accordance with generally accepted accounting principles.
The interim results are not necessarily indicative of results to be expected
for the full fiscal year. These financial statements should be read in
conjunction with the audited financial statements for the nine month period
ended December 31, 1995 included in the Company's annual report to security
holders furnished to the Securities and Exchange Commission pursuant to Rule
14a-3(b) in connection with the Company's 1996 Annual Meeting of Stockholders
and the interim financial statements included in the previously filed
quarterly reports (Form 10-Q) for the three and six months ended March 31,
1996 and June 30, 1996.
PER SHARE DATA
Net income per share is computed using the weighted average number of
common shares and dilutive common equivalent shares attributable to stock
options outstanding during the period. Net loss per share is computed using
the weighted average number of common shares outstanding during the period.
Common stock equivalents relating to stock options are excluded from the net
loss per share computation as their effect is antidilutive.
DEFERRED COMPENSATION
The Company records deferred compensation on option grants for the
difference between the grant price and the market value on the date of grant
and amortizes such amounts over the five year vesting period of the options.
2. INVESTMENTS
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. The Company's debt securities, which consist primarily of commercial
paper of major U.S. corporations, U.S. Treasury Securities and Certificates of
Deposit, are classified as available-for-sale and are carried at estimated
fair value in cash equivalents and short-term investments. Unrealized gains
and losses are reported as a separate component of stockholders' equity. The
amortized cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Realized gains and losses on
available-for-sale securities are included in interest income and expense.
The cost of securities sold is based on the specific identification method.
Interest and dividends on securities classified as available-for-sale are
included in interest income. At September 30, 1996, the contractual
maturities of the debt securities do not exceed three years.
6
3. CONTRACT REVENUE
In August 1996, Gilead and Pharmacia & Upjohn S.A. ("P&U") entered into a
collaboration to market VISTIDE-Registered Trademark- (cidofovir injection) in
all countries outside the United States. Under the terms of the agreement,
P&U paid Gilead an initial license fee of $10.0 million. If European
marketing authorization is received for VISTIDE, Gilead will receive an
additional cash milestone payment of $10.0 million, and, at Gilead's option,
P&U will purchase $40.0 million of newly issued Gilead Series B Preferred
Stock priced at 145 percent of the average closing price of Gilead's Common
Stock over a thirty-day trading period. In addition, P&U will pay Gilead
royalties on its VISTIDE sales.
In September 1996, Gilead and F. Hoffmann-La Roche Ltd and Hoffmann-La
Roche Inc. (collectively, "Roche") entered into a collaboration agreement to
develop and commercialize therapies to treat and prevent viral influenza.
Under the agreement, Roche received exclusive worldwide rights to Gilead's
proprietary influenza neuraminidase inhibitors. In October 1996, Roche made
an initial cash payment to Gilead of $10.3 million and Gilead is entitled to
additional cash payments of up to $40 million upon achievement of
developmental and regulatory milestones. In addition, Roche will fund all
research and development costs and pay Gilead royalties on the net sales of
any products developed under the collaboration.
The $10.0 million received from P&U and the $10.3 million received from
Roche were recorded as contract revenue in the third quarter.
4. ACCOUNTS RECEIVABLE
Gilead sells VISTIDE through major drug wholesalers in the U.S. In August
1996 a major wholesaler, FoxMeyer Corporation, filed for bankruptcy protection
under Chapter 11 of the U.S. Bankruptcy Code. The total receivable
outstanding as of September 30, 1996 from FoxMeyer of $629,000 has been
reserved.
5. SUBSEQUENT EVENT
In October 1996, the Company entered into an unsecured $3.0 million term
loan to finance its research and development facilities expansion and the
acquisition of related laboratory equipment. The four-year loan requires
quarterly principal payments of $187,500 plus interest. The interest rate is
fixed at 6.9% for the first year of the loan, and will be reset periodically
thereafter based on applicable LIBOR rates.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
Since its inception in June 1987, Gilead has devoted substantially all of
its resources to its research and development programs, with significant
expenses relating to commercialization beginning in 1996. The Company
achieved profitability in the quarter ended September 30, 1996 due primarily
to initial payments under collaboration agreements entered into with P&U and
Roche during the quarter. The Company, however, expects to incur losses for
the quarter and the year ended December 31, 1996 due primarily to its research
and development programs, including preclinical studies, clinical trials and
manufacturing, as well as marketing and sales efforts in support of
VISTIDE-Registered Trademark-(cidofovir injection) sales. On June 26, 1996
the U.S. Food and Drug Administration (FDA) granted marketing clearance of
VISTIDE for the treatment of cytomegalovirus retinitis (CMV) in patients with
AIDS. The Company is independently marketing VISTIDE in the United States
with an antiviral specialty sales force. The Company
7
expects to incur losses in the future that will fluctuate from quarter to
quarter. Such fluctuations may be substantial. There can be no assurance
that the Company will successfully develop, commercialize, manufacture and
market additional products or sustain profitability. As of September 30,
1996, the Company's accumulated deficit was approximately $126.4 million.
The successful development and commercialization of the Company's products
will require substantial and ongoing efforts at the forefront of the life
sciences industry. The Company is pursuing preclinical or clinical
development of a number of additional product candidates. Even if these
product candidates appear promising during various stages of development, they
may not reach the market for a number of reasons. Such reasons include the
possibilities that the potential products will be found ineffective or unduly
toxic during preclinical or clinical trials, fail to receive necessary
regulatory approvals, be difficult to manufacture on a large scale, be
uneconomical to market or be precluded from commercialization by proprietary
rights of others.
As a company in an industry undergoing rapid change, the Company faces
significant challenges and risks, including the risks inherent in its research
and development programs, uncertainties in obtaining and enforcing patents,
the lengthy and expensive regulatory approval process, intense competition
from pharmaceutical and biotechnology companies, increasing pressure on
pharmaceutical pricing from payors, patients and government agencies,
limitations on the availability of capital and uncertainties associated with
the eventual market acceptance of VISTIDE or any of the Company's products in
development. These risks are discussed in greater detail in the Company's
Annual Report on Form 10-K for the nine month period ended December 31, 1995.
Stockholders and potential investors in the Company should carefully consider
these risks in evaluating the Company and should be aware that the realization
of any of these risks could have a dramatic and negative impact on the
Company's stock price.
This Report contains forward-looking statements relating to future expense
levels and financial results. These statements involve inherent risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, the risks described in this
Overview and discussed in the Company's Annual Report on Form 10-K for the
nine month period ended December 31, 1995.
RESULTS OF OPERATIONS
REVENUES
The Company had total revenues of $24.7 million and $1.1 million for the
quarters ended September 30, 1996 and 1995, respectively. Total revenues for
the nine month periods ended September 30, 1996 and 1995 were $27.6 million
and $2.9 million, respectively. Revenues increased during the three and nine
month periods ended September 30, 1996, primarily due to contract revenue
resulting from the Company's collaborative agreements with both P&U and Roche.
Gilead received $20.3 million related to these agreements for the quarter
ended September 30, 1996. The Company's total revenues also included net
product sales from the sale of VISTIDE of $3.4 million and $4.8 million for
the three and nine month periods ended September 30, 1996, respectively.
COSTS AND EXPENSES
The Company's cost of sales was $0.4 million for the quarter ended
September 30, 1996, and $0.5 for the nine month period ended September 30,
1996. The Company has no cost of sales for the three and nine month periods
ended September 30, 1995. Cost of sales resulted from the Company's sale of
VISTIDE which was launched in June 1996.
8
For the quarter ended September 30, 1996, the Company's research and
development expenses increased 36% to $11.2 million from $8.2 million for the
same period in 1995. The Company's research and development expenses
increased 31% to $31.0 million for the nine month period ended September 30,
1996 from $23.7 million for the same period in 1995. This increase was due
primarily to increases in expenses associated with the Company's ongoing
clinical trials for VISTIDE and for several product candidates, as well as
increases in research and development staffing and preclinical expenses. The
Company expects its research and development expenses in the remainder of 1996
to increase reflecting anticipated increased expenses related to clinical
trials and manufacturing.
Selling, general and administrative expenses were $7.6 million and $2.8
million for the quarters ended September 30, 1996 and 1995, respectively,
representing an increase of 176%. For the nine month periods ended September
30, 1996 and 1995, such expenses were $19.9 million and $7.9 million,
respectively, an increase of 151%. This increase is attributable primarily to
the establishment of marketing and sales capabilities in connection with the
launch of VISTIDE, as well as activities in support of the Company's expanded
research and development efforts. The Company expects its selling, general
and administrative expenses to increase during the remainder of 1996 in
connection with ongoing marketing and sales activities.
NET INTEREST INCOME
The Company had net interest income of $3.9 million and $1.5 million for
the quarters ended September 30, 1996 and 1995, respectively, representing an
increase of 166%. Net interest income for the nine month periods ended
September 30, 1996 and 1995 was $10.2 million and $3.5 million, respectively,
an increase of 189%. Net interest income has significantly increased due to
the Company's higher average cash and cash equivalents and short-term
investment balances which resulted from the Company's two public offerings of
common stock completed in February 1996 and August 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments were $290.3 million
at September 30, 1996 compared to $155.7 million at December 31, 1995. This
increase is primarily the result of the Company's public offering of common
stock in February 1996 which generated $155.6 million in net proceeds, and the
$10.0 million license fee paid by P&U in August 1996. The Company expects to
incur construction and equipment costs of approximately $3.0 million related
to the build-out of a 37,000 square foot facility leased in August 1996. The
costs will be incurred during the fourth quarter of 1996 and the Company
expects to occupy this space by December 1996. For the full year 1996, the
Company expects to incur substantial research and development and selling,
general and administrative expenses.
Net cash used in operations was $20.8 million and $21.3 million for the
nine month periods ended September 30, 1996 and 1995, respectively. The
Company expects its cash requirements to grow in future periods due to higher
expenses. However, the Company believes that its existing capital resources,
including net product revenues and contract revenues, will be adequate to
satisfy its capital needs for the foreseeable future. The Company's future
capital requirements will depend on many factors, including the progress of
the Company's research and development, the scope and results of preclinical
studies and clinical trials, the cost, timing and outcomes of regulatory
reviews, the rate of technological advances, determinations as to the
commercial potential of the Company's products under development, the
commercial performance of VISTIDE and any of the Company's products in
development that receive marketing approval, administrative and legal
expenses, the status of competitive products, the establishment of
manufacturing capacity or third-party manufacturing arrangements, the
establishment of sales and marketing capabilities and the establishment of
collaborative relationships with other companies.
9
The Company may in the future require additional funding, which could be
in the form of proceeds from equity or debt financings or additional
collaborative agreements with corporate partners. If such funding is
required, there can be no assurance that it will be available on favorable
terms, if at all.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.40 License and Supply Agreement between Registrant and Pharmacia &
Upjohn S.A. dated August 7, 1996 (Registrant is applying for
confidential treatment with respect to portions of this Exhibit).
10.41 Series B Preferred Stock Purchase Agreement between Registrant
and Pharmacia & Upjohn S.A. dated August 7, 1996.
10.42 Development and License Agreement between Registrant and F.
Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc dated September 27,
1996 (Registrant is applying for confidential treatment with
respect to portions of this Exhibit).
10.43 Copromotion Agreement between Registrant and Roche Laboratories
Inc. dated September 27, 1996 (Registrant is applying for
confidential treatment with respect to portions of this Exhibit).
11.1 Computation of per share earnings
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended September
30, 1996.
10
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.
GILEAD SCIENCES, INC.
----------------------------------
(Registrant)
Date: October 25, 1996 /S/ JOHN C. MARTIN
----------------------------------
John C. Martin
President and Chief Executive Officer
Date: October 25, 1996 /S/ MARK L. PERRY
----------------------------------
Mark L. Perry
Vice President, Chief Financial Officer
and General Counsel
11