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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, 1999
---------------------------
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.)
333 Lakeside Drive, Foster City, California 94404
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 650-574-3000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Number of shares outstanding of the issuer's common stock, par value $.001
per share, as of October 29, 1999: 43,925,623
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GILEAD SCIENCES, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements and Notes
Consolidated Balance Sheets--September 30, 1999 and 3
December 31, 1998...........................................
Consolidated Statements of Operations--for the three and
nine months ended September 30, 1999 and 1998............... 4
Consolidated Statements of Cash Flows--for the nine months
ended September 30, 1999 and 1998........................... 5
Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations...................................
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............................ 18
SIGNATURES.......................................................................... 19
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
GILEAD SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 70,793 $101,136
Marketable securities..................................... 236,602 247,607
Accounts receivable....................................... 46,663 43,090
Inventories............................................... 20,077 16,550
Prepaid expenses and other................................ 13,543 8,506
-------- --------
Total current assets.................................... 387,678 416,889
Property, plant and equipment, net.......................... 49,216 51,019
Other noncurrent assets..................................... 12,298 19,856
-------- --------
$449,192 $487,764
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 10,771 $ 7,662
Accrued clinical and preclinical expenses................. 10,302 12,841
Accrued compensation and employee benefits................ 11,068 9,387
Other accrued expenses.................................... 15,377 19,327
Deferred revenue.......................................... 5,692 3,275
Long-term obligations due within one year................. 3,631 4,842
-------- --------
Total current liabilities............................... 56,841 57,334
Accrued litigation settlement expenses due after one year... 7,109 7,848
Long-term obligations due after one year.................... 5,885 8,883
Convertible subordinated debentures......................... 79,558 80,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.001 per share, issuable in
series; 5,000,000 shares authorized; 1,133,786 shares of
Series B convertible preferred issued and outstanding at
December 31, 1998 (liquidation preference of $40,000)... -- 1
Common stock, par value $.001 per share; 100,000,000
shares authorized; 43,869,092 shares and 41,562,837
shares issued and outstanding at September 30, 1999 and
December 31, 1998, respectively......................... 44 42
Additional paid-in capital................................ 742,719 716,964
Accumulated other comprehensive loss...................... (2,582) (337)
Deferred compensation..................................... (104) (225)
Accumulated deficit....................................... (440,278) (382,746)
-------- --------
Total stockholders' equity.................................. 299,799 333,699
-------- --------
$449,192 $487,764
======== ========
Note: The consolidated balance sheet at December 31, 1998 has been derived from
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes
3
GILEAD SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Product sales, net................................. $ 34,598 $ 28,458 $100,628 $ 81,898
Contract revenue................................... 1,247 1,811 12,149 22,250
Royalty revenue, net............................... 2,545 1,597 7,426 4,520
-------- -------- -------- --------
Net revenues......................................... 38,390 31,866 120,203 108,668
Costs and expenses:
Cost of products sold.............................. 7,258 5,769 21,745 16,945
Research and development........................... 28,192 28,584 81,745 92,559
Selling, general and administrative................ 19,079 19,068 58,667 56,560
Merger related expenses............................ 15,079 -- 18,179 --
-------- -------- -------- --------
Total costs and expenses............................. 69,608 53,421 180,336 166,064
-------- -------- -------- --------
Loss from operations................................. (31,218) (21,555) (60,133) (57,396)
Gain on sale of a majority interest in a
subsidiary......................................... -- 21,480 -- 21,480
Interest income...................................... 3,866 5,032 12,537 16,623
Interest expense..................................... (1,623) (1,769) (4,939) (5,483)
-------- -------- -------- --------
Income (loss) before provision for income taxes and
and equity in loss of unconsolidated affiliate..... (28,975) 3,188 (52,535) (24,776)
Provision for income taxes........................... 220 262 726 649
Equity in loss of unconsolidated affiliate........... 1,170 724 4,271 724
-------- -------- -------- --------
Net income (loss).................................... $(30,365) $ 2,202 $(57,532) $(26,149)
======== ======== ======== ========
Basic and diluted net income (loss) per common
share.............................................. $ (0.70) $ 0.05 $ (1.36) $ (0.64)
======== ======== ======== ========
Common shares used to calculate basic net income
(loss) per common share............................ 43,467 41,286 42,446 40,886
======== ======== ======== ========
Common shares used to calculate diluted net income
(loss) per common share............................ 43,467 43,280 42,446 40,886
======== ======== ======== ========
See accompanying notes
4
GILEAD SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 1998
--------- ---------
OPERATING ACTIVITIES:
Net loss.................................................. $ (57,532) $ (26,149)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 9,472 9,967
Gain on sale of a majority interest in a subsidiary..... -- (21,480)
Equity in loss of unconsolidated affiliate.............. 4,271 724
Litigation settlement charges........................... 574 626
Net additions to (reductions of) allowance for doubtful
accounts............................................... 597 (70)
Net unrealized loss (gain) on foreign currency
transactions........................................... 2,137 (1,868)
Changes in assets and liabilities:
Accounts receivable................................... (6,108) (7,365)
Inventories........................................... (3,664) 1,224
Prepaid expenses and other assets..................... (2,798) 5,459
Accounts payable...................................... 3,049 (491)
Accrued liabilities................................... (6,170) 384
Deferred revenue...................................... 2,416 17
--------- ---------
Net cash used in operating activities....................... (53,756) (39,022)
--------- ---------
INVESTING ACTIVITIES:
Purchases of marketable securities........................ (156,767) (346,076)
Sales of marketable securities............................ 94,075 285,540
Maturities of marketable securities....................... 72,314 124,557
Capital expenditures...................................... (7,373) (8,710)
Proceeds from sale of a majority interest in a
subsidiary.............................................. -- 15,000
Investment in unconsolidated affiliate.................... -- (4,900)
Payments received on note receivable...................... -- 550
--------- ---------
Net cash provided by investing activities................... 2,249 65,961
--------- ---------
FINANCING ACTIVITIES:
Proceeds from issuances of common stock................... 25,314 16,853
Payments of short-term borrowings, net.................... -- (5,039)
Proceeds from issuance of long-term debt.................. -- 4,324
Repayments of long-term debt.............................. (4,250) (5,163)
--------- ---------
Net cash provided by financing activities................... 21,064 10,975
--------- ---------
Effect of exchange rate changes on cash..................... 100 280
--------- ---------
Net increase (decrease) in cash and cash equivalents........ (30,343) 38,194
Cash and cash equivalents at beginning of period............ 101,136 71,305
--------- ---------
Cash and cash equivalents at end of period.................. $ 70,793 $ 109,499
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Common stock issued upon conversion of debentures........... $ 442 $ --
========= =========
See accompanying notes
5
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(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 information at September 30, 1999 and for the
three- and nine-month periods ended September 30, 1999 and 1998 includes 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 1999 presentation.
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 prior periods
has been restated to represent the combined financial results of Gilead and
NeXstar. For additional information, refer to Note 2.
The accompanying financial information should be read in conjunction with
the audited financial statements for the fiscal year ended December 31, 1998
included in the Company's Annual Report on Form 10-K/A, the Form 8-K filed with
the Securities and Exchange Commission ("SEC") on August 6, 1999 and the
Form 8-K filed with the SEC on September 15, 1999. Both Form 8-K filings restate
financial information for prior periods to reflect the combined results of
Gilead and NeXstar.
NEW ACCOUNTING STANDARD
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 1999, the FASB issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT
NO. 133. SFAS No. 133 is now effective for fiscal years beginning after
June 15, 2000 and, therefore, the Company will adopt this accounting standard
effective January 1, 2001. Management has not yet determined the impact of SFAS
No. 133 on its financial position or results of operations.
2. MERGER WITH NEXSTAR PHARMACEUTICALS, INC.
On July 29, 1999, the Company acquired all of the outstanding stock of
NeXstar pursuant to an Agreement and Plan of Merger dated as of February 28,
1999, among Gilead, NeXstar, and a merger subsidiary wholly owned by Gilead.
Pursuant to the Merger Agreement, NeXstar was merged with the wholly owned
subsidiary of Gilead, with NeXstar as the surviving corporation. As a result,
NeXstar
6
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
2. MERGER WITH NEXSTAR PHARMACEUTICALS, INC. (CONTINUED)
became a wholly owned subsidiary of Gilead. In connection with the merger,
Gilead issued a total of approximately 11,212,730 shares of Gilead common stock,
or 0.3786 of a share of Gilead common stock for each share of NeXstar common
stock, to the existing stockholders of NeXstar as consideration for all shares
of capital stock of NeXstar. In addition, holders of options and warrants
outstanding at the time of the merger to purchase an aggregate of approximately
2,236,413 shares of NeXstar common stock will receive, upon exercise of such
options and warrants, the same fraction of a share of Gilead's common stock, and
holders of $80,000,000 principal amount of 6.25% Convertible Subordinated
Debentures of NeXstar (the "Debentures") will now have the right to convert the
Debentures into approximately 1.8 million shares of Gilead common stock. The
merger is intended to qualify as a tax-free reorganization and has been
accounted for as a pooling of interests. Accordingly, Gilead's consolidated
financial statements have been retroactively restated for periods prior to
July 1999 to include the combined financial results of Gilead and NeXstar. The
consolidated balances and results of operations of the combined companies have
been presented in all periods and no material adjustments were necessary to
conform the accounting policies of the two companies.
The table below presents the separate results of operations for Gilead and
NeXstar for the periods prior to the merger and combined results after the
merger:
MERGER-RELATED
(IN THOUSANDS) GILEAD NEXSTAR ADJUSTMENTS TOTAL
- -------------- -------- -------- -------------- --------
Quarter ended September 30, 1999
Revenues..................................... $ 2,685 $ 35,705 $ -- $ 38,390
Net income (loss)............................ (23,398) 8,112 (15,079)(a) (30,365)
Quarter ended September 30, 1998
Revenues..................................... $ 3,038 $ 28,828 $ -- $ 31,866
Net income (loss)............................ (17,559) 19,460 301 (b) 2,202
Nine months ended September 30, 1999
Revenues..................................... $ 16,300 $103,903 $ -- $120,203
Net income (loss)............................ (52,908) 13,555 (18,179)(a) (57,532)
Nine months ended September 30, 1998
Revenues..................................... $ 23,634 $ 85,034 $ -- $108,668
Net income (loss)............................ (39,785) 13,527 109 (b) (26,149)
- ------------------------
(a) Merger-related costs
(b) Adjustment required to conform accounting policy
As a result of its merger with NeXstar, Gilead incurred merger-related costs
consisting of transaction costs (primarily professional fees, filing fees,
printing costs and other related charges), employee severance costs and the
write-down of certain NeXstar assets that will not be used in
7
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
2. MERGER WITH NEXSTAR PHARMACEUTICALS, INC. (CONTINUED)
continuing operations. The following table shows the details of the
merger-related costs and accruals at September 30, 1999:
CHARGED TO EXPENSE THROUGH SEPTEMBER 30, 1999
(IN THOUSANDS) SEPTEMBER 30, 1999 UTILIZED ACCRUAL BALANCE
- -------------- -------------------------- -------- ------------------
Merger transaction costs.................... $11,647 $11,618 $ 29
Employee severance.......................... 5,758 2,002 3,756
Write-down of NeXstar assets................ 536 N/A N/A
Other....................................... 238 238 --
------- ------- ------
Total..................................... $18,179 $13,858 $3,785
======= ======= ======
3. INVENTORIES
Inventories are summarized as follows (in thousands):
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
Finished goods.............................. $ 3,811 $ 3,672
Work in process............................. 6,362 5,962
Raw materials............................... 9,904 6,916
------- -------
Total inventories........................... $20,077 $16,550
======= =======
4. CONVERSION OF PREFERRED STOCK
In June 1997, the Company issued 1,133,786 shares of Series B Convertible
Preferred Stock ("Preferred Stock") to Pharmacia & Upjohn S.A. ("Pharmacia &
Upjohn") for approximately $40.0 million, or $35.28 per share. The Preferred
Stock was automatically convertible into the Company's common stock if the
average of the closing prices of such common stock over any 30 consecutive
trading days exceeds $49.39, or 140% of the original issue price of the
Preferred Stock of $35.28 per share. On July 15, 1999, the average of the
closing price of the Company's common stock for the thirty days then ended was
$49.79, which triggered the automatic conversion of the Preferred Stock.
Accordingly, the Preferred Stock converted into 1,133,786 shares of common stock
at the original issue price of $35.28 per share on July 16, 1999.
5. STOCKHOLDERS' EQUITY
On January 26, 1999, the Board authorized an additional 200,000 shares of
common stock as available for grant under the Directors' Plan. On March 30,
1999, the Board approved an amendment to Gilead's restated certificate of
incorporation to increase the authorized shares of common stock to 100 million
shares, approved an amendment to the 1991 Plan increasing the number of shares
reserved for issuance by 3.5 million to a total of 10.0 million shares, and
approved an amendment to the ESPP increasing the number of shares reserved for
issuance by 330,000 to a total of 1.58 million shares.
8
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
These amendments and increases were approved by the Company's stockholders at
its annual stockholders' meeting in July 1999.
6. BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE
Basic earnings per share is calculated by dividing net income by the number
of weighted average common shares outstanding during the period. Diluted
earnings per share is calculated by dividing net income by the sum of the number
of weighted average common shares outstanding for the period plus the effect of
potentially dilutive securities such as stock options, warrants and subordinated
convertible debentures. For each nine-month period presented and for the three
months ended September 30, 1999, such potentially dilutive securities were not
included in the computation of diluted earnings per share because their effect
is antidilutive in each of those periods. For the quarter ended September 30,
1998, the following is a reconciliation of the number of shares used in the
basic and diluted earnings per share calculation (in thousands):
Weighted average common shares outstanding.................. 41,286
Effect of dilutive securities outstanding:
Series B Convertible Preferred Stock...................... 1,133
Employee stock options.................................... 851
Warrants.................................................. 10
------
Weighted average shares and assumed conversions............. 43,280
======
7. COMPREHENSIVE INCOME
Following are the components of comprehensive income (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net income (loss)...................................... $(30,365) $2,202 $(57,532) $(26,149)
Net foreign currency translation loss.................. (139) (97) (855) (131)
Net unrealized gain (loss) on available-for-sale
securities........................................... 115 965 (1,390) 802
-------- ------ -------- --------
Comprehensive income (loss)............................ $(30,389) $3,070 $(59,777) $(25,478)
======== ====== ======== ========
8. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company has determined that it has only one reportable operating segment
because management has organized the business around its functional lines.
9
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
8. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
(CONTINUED)
Net product sales revenues consisted of the following (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
AmBisome............................................... $31,938 $25,763 $ 92,841 $73,522
DaunoXome.............................................. 1,233 1,251 3,454 3,539
VISTIDE................................................ 1,427 1,444 4,333 4,837
------- ------- -------- -------
$34,598 $28,458 $100,628 $81,898
======= ======= ======== =======
The following is a summary of total revenues from external customers and
collaborative partners by geographic areas (in thousands):
REVENUES FROM EXTERNAL CUSTOMERS AND COLLABORATIVE PARTNERS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
United States......................................... $ 7,052 $ 4,638 $ 20,045 $ 15,584
Germany............................................... 5,476 5,516 15,446 16,010
United Kingdom........................................ 4,780 4,063 13,087 11,973
Italy................................................. 3,747 3,464 12,215 9,947
Spain................................................. 3,652 2,535 11,101 8,430
Switzerland........................................... 844 1,101 10,566 15,889
Sweden................................................ 446 376 1,565 1,147
Other European countries.............................. 9,101 7,418 26,084 21,386
Other foreign countries............................... 3,292 2,755 10,094 8,302
------- ------- -------- --------
Consolidated total.................................... $38,390 $31,866 $120,203 $108,668
======= ======= ======== ========
- ------------------------
Revenues are attributed to countries based on the location of the customer or
collaborative partner.
MAJOR CUSTOMERS
For the three months ended September 30, 1999 and 1998, revenues from one
customer accounted for approximately 12.5% and 12.0% of total revenues,
respectively. For the nine months ended September 30, 1999, revenues from one
customer accounted for approximately 10.9% of total revenues. For the nine
months ended September 30, 1998, no single customer accounted for more than 10%
of total revenues.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Gilead Sciences, Inc. (the "Company" or "Gilead") 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. The Company discovers, develops, manufactures and commercializes
proprietary therapeutics to treat life threatening and other serious infectious,
oncological and hematological diseases. Currently, the Company markets AmBisome,
an antifungal agent, DaunoXome, a drug approved for the treatment of Kaposi's
Sarcoma, and VISTIDE -Registered Trademark- (cidofovir injection) for the
treatment of cytomegalovirus ("CMV") retinitis. Hoffmann-LaRoche Inc. ("Roche")
markets TAMIFLU-TM- (oseltamivir phosphate) for the treatment of influenza,
under a collaborative agreement with the Company. In addition, the Company 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 the historical consolidated financial
statements of Gilead for all years prior to the business combination have been
restated in the accompanying consolidated financial statements to include the
financial position, results of operations and cash flows of NeXstar.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
In addition to the historical information contained in this report, this
report 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. Factors that could cause or contribute to
these differences are listed below. You should also read the "Risk Factors" that
are contained in our prospectus that we filed with the SEC on October 29, 1999
and our Annual Report on Form 10K/A for the year end December 31, 1998, for more
detailed information regarding these and other risks and uncertainties that can
affect our actual financial and operating results.
MERGER INTEGRATION. We continue to integrate Gilead and NeXstar and
unforeseen costs could require us to expend substantially more financial
resources than we have anticipated.
REGULATORY PROCESS. The FDA and foreign agencies could reject or limit the
commercialization of our products for a number of reasons including:
disagreement with the results or designs of our clinical trials; the belief that
our products have unacceptable efficacy, toxicity or tolerability; or the belief
that 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. In addition, these agencies
could require us to conduct additional unanticipated clinical trials on our
products the cost of which could be substantial. On November 1, 1999, an FDA
Advisory Committee recommended against approval of adefovir dipivoxil, one of
our product candidates for the treatment of AIDS. Although the FDA is not
obligated to follow the recommendations of Advisory Committees, it generally
does. If the FDA ultimately does not approve adefovir dipivoxil, this could
delay the Company's ability to become profitable in the future.
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.
11
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.
COLLABORATIONS. We depend on collaborations for the development and
commercialization of certain products and for revenues. 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. If our collaborations fail,
the development and commercialization of our products could be delayed or
revenue from our products could decline. We will also seek additional
collaborations, including a collaboration for adefovir dipivoxil for the
treatment of Hepatitis B virus infection. If we fail to establish additional
collaborations, we will be required to develop and commercialize our proposed
products at our own expense.
FOREIGN CURRENCY FLUCTUATIONS. A significant portion of our sales are
denominated in European currencies. Increases in the value of the U.S. dollar
against foreign currencies may reduce our U.S. dollar return on these sales. The
hedging techniques we use can reduce but not eliminate the effects of foreign
currency fluctuations.
YEAR 2000. We and our third party suppliers and partners may not
successfully identify and correct all relevant Year 2000 computer problems.
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 September 30, 1999, our accumulated
deficit was $440.3 million.
RESULTS OF OPERATIONS
REVENUES
The Company had total revenues of $38.4 million and $31.9 million for the
quarters ended September 30, 1999 and 1998, respectively. For the nine-month
periods ended September 30, 1999 and 1998, total revenues were $120.2 million
and $108.7 million, respectively. Total revenues include revenues from net
product sales, contracts (including research and development ("R&D")
collaborations) and net royalties.
Net product sales revenues were $34.6 million and $28.5 million for the
quarters ended September 30, 1999 and 1998, respectively. Comparable amounts in
the nine-month periods were $100.6 million in 1999 and $81.9 million in 1998.
Net product sales revenues are primarily derived from sales of
AmBisome-Registered Trademark- ((amphotericin B) liposome for injection),
accounting for at least 89 percent of such revenues in each period presented.
AmBisome sales for the third quarter of 1999 were $31.9 million, a 24 percent
increase in sales from the same period of 1998. Gilead also recognized product
revenues of $1.4 million and $1.2 million from the sale of
VISTIDE-Registered Trademark- (cidofovir injection) and
DaunoXome-Registered Trademark- (daunorubicin citrate liposome injection),
respectively, during the third quarter of 1999. In future periods, the combined
levels of sales of VISTIDE and DaunoXome are expected to be relatively flat as
compared to 1999 amounts. A significant majority of the Company's product sales
are denominated in European currencies.
During the three- and nine-month periods ended September 30, 1999, the
Company recorded net royalty revenues of $2.5 million and $7.4 million,
respectively. This compares to $1.6 million and $4.5 million for the three- and
nine-month periods ended September 30, 1998. In each period, the majority of
this royalty revenue was derived from sales of AmBisome in the United States by
Fujisawa
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Healthcare, Inc. ("Fujisawa"). 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. In future periods, royalties from sales of
VISTIDE are expected to be relatively flat. In October 1999, the U.S. Food and
Drug Administration approved TAMIFLU for the treatment of influenza in adults.
The Company co-developed TAMIFLU with Roche, which owns the commercial rights to
the product and is required to pay Gilead a royalty on net sales. Beginning in
2000, the Company expects that royalties from sales of TAMIFLU will comprise the
majority of its net royalty revenue.
Also included in total revenues are contract revenues of $1.2 million and
$1.8 million for the quarters ended September 30, 1999 and 1998, respectively.
In the nine-month periods, total revenues include contract revenues of
$12.1 million in 1999 and $22.3 million in 1998. In each period presented, the
majority of the contract revenue recognized relates to the Company's agreement
with Roche for the development of TAMIFLU. During the second quarter of 1999,
Gilead recorded two milestone payments totaling $6.0 million from Roche
associated with submissions for marketing clearance of TAMIFLU for the treatment
of influenza in the United States and European Union. In the first quarter of
1999, the Company also recognized a $2.0 milestone payment from Roche based upon
the commencement of pivotal clinical trials of TAMIFLU in Japan.
Contract revenue for the three- and nine-month periods ended September 30,
1999 also includes $0.7 million and $2.0 million, respectively, received from
Roche as reimbursement of expenses related to the development of TAMIFLU.
Similarly, contract revenue for the three- and nine-month periods ended
September 30, 1998 include $0.9 million and $15.5 million, respectively, of such
development-related expenses. The $15.5 million received from Roche during the
nine months ended September 30, 1998 also includes $5.2 million attributable to
research and development expenses incurred in the fourth quarter of 1997, which
were subject to Roche's approval as of December 31, 1997. Such expenses were
approved for reimbursement in the first quarter of 1998. Further, in the first
quarter of 1998, the Company recorded as contract revenue a $3.0 million
milestone payment from Sumitomo Pharmaceuticals Co., Ltd., related to a license
of AmBisome rights in Japan.
COST OF PRODUCTS SOLD
Cost of products sold was $7.3 million and $21.7 million, or approximately
21% and 22%, respectively, of net product sales revenue for the three and nine
months ended September 30, 1999, compared to $5.8 million and $16.9 million, or
approximately 20% and 21%, respectively, of net product sales revenue for the
corresponding 1998 periods. The Company expects this relationship between cost
of products sold and net product sales to be consistent for the foreseeable
future, provided there are no significant changes in the nature or mix of
product sales.
OPERATING EXPENSES
R&D expenses for the third quarter of 1999 were $28.2 million, compared to
$28.6 million for the same period in 1998. R&D expenses for the nine-month
periods ended September 30, 1999 and 1998 were $81.7 million and $92.6 million,
respectively. For the nine-month comparisons, these expenses decreased in the
1999 period relative to 1998 because of Gilead's reduced research activities at
its Boulder, Colorado facility and its reduced level of involvement in the
development of TAMIFLU. Such decreases were offset in part by greater levels of
expense in 1999 for the development programs for adefovir dipivoxil for
hepatitis B, tenofovir disoproxil fumarate (PMPA oral prodrug) for HIV,
MiKasome-Registered Trademark- (liposomal amikacin) for severe bacterial
infection and NX 211 (liposomal lurtotecan) for cancer. The Company expects its
R&D expenses to increase during the remainder of 1999 and 2000 relative to the
first nine months of 1999, primarily reflecting increased expenses related to
the continued development of adefovir dipivoxil for hepatitis B and tenofovir
disoproxil fumarate for HIV.
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Selling, general and administrative ("SG&A") expenses were $19.1 million for
each of the quarters ended September 30, 1999 and 1998. For the nine-month
periods ended September 30, 1999 and 1998, SG&A expenses were $58.7 million and
$56.6 million, respectively. The Company expects its SG&A expenses to increase
in 2000 to support increased R&D activities.
Merger related expenses attributable to the Company's merger with NeXstar
were $15.1 million for the quarter ended September 30, 1999 and $18.2 million
for the nine months then ended. Merger-related expenses primarily consist of
transaction costs, including professional fees, filing fees and printing costs,
employee severance costs and the write-down of certain NeXstar assets that will
not be used in future operations. The Company does not expect to recognize
significant expenses related to the NeXstar merger in future periods.
INTEREST INCOME AND INTEREST EXPENSE
The Company had interest income of $3.9 million and $5.0 million for the
quarters ended September 30, 1999 and 1998, respectively. Interest income earned
during the nine-month periods ended September 30, 1999 and 1998 was
$12.5 million and $16.6 million, respectively. As expected, the Company's
interest income has decreased in each 1999 period as compared to the
corresponding 1998 period, primarily due to the decline in cash, cash
equivalents and marketable securities.
The Company incurred interest expense of $1.6 million and $1.8 million,
respectively, for the quarters ended September 30, 1999 and 1998. During the
nine-month periods, interest expense was $4.9 million and $5.5 million
respectively. The decline in interest expense is primarily due to the repayment
of debt obligations.
EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATE
For the three months ended September 30, 1999, the Company recorded
$1.2 million as its equity in the loss of Proligo L.L.C. ("Proligo"),
representing its 49% share of losses for the three months ended August 31, 1999,
the Proligo fiscal third quarter. The loss reported by Proligo for the nine
months ended August 31, 1999 included eleven months of operating losses
(October 1, 1998 through August 31, 1999) for Proligo's Hamburg, Germany
subsidiary (the "Hamburg Company"). The additional two months of losses from the
Hamburg Company were recorded in Proligo's operating results because the Hamburg
Company changed from a September 30 fiscal year end to a November 30 fiscal year
end in 1999 to conform to Proligo's November 30 fiscal year end. As a result,
the Hamburg Company will report 14 months of operating results in its 1999
fiscal year operating results (October 1, 1998 through November 30, 1999) and
these 14 months of operating results will be included in the Proligo fiscal 1999
operating results. The Proligo operating loss for September 1999 is
approximately $0.3 million of which the Company will recognize its 49% share
(approximately $0.1 million) in the three months ending December 31, 1999. The
Company expects to record additional losses from its equity investment in
Proligo in future periods.
The Company's investment in Proligo is reported in other noncurrent assets
on the balance sheet. The carrying amount of this investment is $5.4 million and
$10.3 million at September 30, 1999 and December 31, 1998, respectively. In
October 1999, the Company funded Proligo with an additional $2.5 million in cash
to maintain its 49% ownership interest in Proligo. In the event Proligo needs
additional capital in 2000 of up to $5.0 million, the Company has agreed to
contribute its proportionate share of such additional capital.
14
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities totaled $307.4 million at
September 30, 1999, compared to $348.7 million at December 31, 1998. This
decrease of $41.3 million is primarily due to the uses of cash to fund operating
activities, repay long-term debt obligations and purchase captial items,
partially offset by proceeds from issuances of stock under employee stock plans.
Significant changes in working capital during 1999 include a $3.5 million
increase in the balance of inventories. This use of cash reflects a build-up of
the Company's inventory of adefovir dipivoxil. Prepaid assets and other also
increased by $5.0 million. This increase includes receivables from two of the
Company's collaborative partners, Roche and Pharmacia & Upjohn, totaling
$3.1 million and the reclassification of a note receivable of $1.6 million from
long-term to short-term. At December 31, 1998, other accrued liabilities
includes a $5.0 million accrued liability to Roche, which represents Roche's
1998 R&D funding in excess of the Company's related R&D spending. During 1999,
the Company has achieved three milestones under its R&D agreement with Roche and
recognized $8.0 million of contract revenue as a result. Roche funded a portion
of these milestone payments, as well as the $0.7 million of R&D reimbursement
revenue for the first quarter of 1999, by permitting Gilead to offset its
liability to Roche. Accordingly, the $5.0 million reported as an accrued
liability at December 31, 1998 is reported as contract revenue during 1999.
The Company believes that its existing capital resources, supplemented by
net product revenues and contract and royalty revenues, will be adequate to
satisfy its capital needs for the foreseeable future. As of September 30, 1999,
Gilead was entitled to additional cash payments of up to $26.0 million from
Roche upon achieving specific developmental and regulatory milestones, although
there can be no assurance that any of the milestones will be met. The Company's
future capital requirements will depend on many factors, including its
integration with NeXstar, the progress of the Company's research and development
efforts, the scope and results of preclinical studies and clinical trials, the
cost, timing and outcomes of regulatory reviews, the rate of technological
advances, determinations as to the commercial potential of the Company's
products under development, the commercial performance of AmBisome and any of
the Company's products in development that receive marketing approval,
administrative and legal expenses, the status of competitive products, the
establishment of manufacturing capacity or third-party manufacturing
arrangements, the expansion of sales and marketing capabilities, possible
geographic expansion and the establishment of additional collaborative
relationships with other companies.
The Company may in the future require additional funding, which could be in
the form of proceeds from equity or debt financings or additional collaborative
agreements with corporate partners. If such funding is required, there can be no
assurance that it will be available on favorable terms, if at all.
IMPACT OF YEAR 2000
The Company is implementing a Year 2000 project to address the issue of
computer software and hardware correctly processing dates through and beyond the
Year 2000. The goal of this project is to ensure that all computer software and
hardware that the Company uses or relies upon is retired, replaced or made Year
2000 compliant before December 31, 1999.
There are three primary aspects to the Company's Year 2000 project:
computers and other equipment, information systems software and third-party
suppliers and business partners. Gilead is addressing each of these areas on a
phased basis, as follows: 1) educating the internal user community at Gilead;
2) conducting an inventory of all software and hardware; 3) evaluating all
software and hardware for Year 2000 compliance; 4) implementing modifications,
retirement or replacement of software or hardware, prioritized based on an
analysis of importance to Gilead's business; 5) testing
15
and validating all modified or replaced software and hardware; and 6) designing
and implementing contingency and business continuation plans for critical
systems.
To date, Gilead has substantially completed the first five phases of the
project and is in the process of designing and implementing contingency and
business continuation plans for critical systems. These plans involve, among
other actions, manual solutions, increased inventories and modified staffing
strategies. These contingency plans are expected to be finalized and ready for
implementation, if necessary, before the end of 1999. Overall, the Company
anticipates that, for business-critical systems, all of its Year 2000 project
activities will be complete by the end of 1999.
The Company prioritized the implementation phase of this project to first
address software or hardware that affects product manufacturing, quality control
and safety, employee safety, revenues or cash reserves. Two systems that have
been identified as critical to Gilead's operations are software programs from JD
Edwards, Inc. ("JDE") and Beckman-Coulter, Inc. ("Beckman"). The JDE system is
an enterprise-wide program that tracks financial information, processes sales
orders and monitors purchasing and manufacturing activities. During 1998, the
Company upgraded the JDE system to a Year 2000 compliant version, which is now
operational. The Beckman system monitors and records laboratory data. The
Beckman system upgrades to a Year 2000-compliant version were successfully
completed during the second quarter of 1999.
The Company has performed evaluations of all its critical third-party
suppliers and business partners. Responses to Gilead's inquiries regarding Year
2000 compliance in many cases have been general and nonbinding. However,
substantially all respondents indicate that their Year 2000 compliance efforts
are progressing on schedule, and that their computer systems either are or will
be Year 2000-compliant at the appropriate time. A significant majority of these
respondents are presently in the final testing phase of their Year 2000
compliance projects, and many of them indicate that they are concurrently
developing contingency plans.
Among the most critical third parties the Company relies on are the
financial institutions that manage Gilead's cash and marketable securities of
approximately $307.4 million at September 30, 1999, the Company's stock transfer
agent, contract manufacturers, contract research and laboratory organizations
and the FDA. The Company intends to continue monitoring and evaluating these
third parties to the extent practical through the end of 1999.
Gilead anticipates that the total cost of its Year 2000 compliance efforts
will not be material to its financial condition or results of operations. The
current estimate for external costs of total compliance efforts is approximately
$2.2 million, of which $2.1 million has been incurred to date. Of the amount
incurred to date, $1.3 million has been expensed and the remainder has been
capitalized. The $0.1 million of remaining costs are primarily consulting fees
that will be charged to expense. These amounts do not include any costs to
Gilead that result from the failure of any third-party supplier or business
partner to achieve Year 2000 compliance.
The Company's Year 2000 project is designed to significantly reduce
uncertainty and risk arising from the Year 2000 problem. The Company believes
that the implementation actions described above reduce the potential for
disruption of operations or significant financial impact. Due to the uncertainty
inherent in the Year 2000 problem, however, there can be no assurance that Year
2000 failures will not occur. Should such a Year 2000 failure occur with any of
Gilead's business critical operating systems, appropriate contingency plans have
been established which the Company believes would result in only a temporary
disruption in its ability to sell and distribute products. The Company does not
believe that any such disruption would have a material impact on its financial
condition or results of operations.
The Company cannot predict with any certainty whether its critical
third-party suppliers and business partners will achieve Year 2000 compliance,
or whether the failure of any such third party to do so would have a material
effect on the Company's business. However, the Company has established
16
contingency plans for maintaining operations with all its critical third-party
suppliers and business partners to minimize any disruption in its day-to-day
business operations.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders on July 29, 1999, the
stockholders elected seven directors to serve for the ensuing year and until
their successors are elected, approved the issuance of shares in connection with
the NeXstar merger, approved the Company's 1991 Stock Option Plan, as amended
(Stock Option Plan), approved the Company's Employee Stock Purchase Plan, as
amended (ESPP), approved the Non-Employee Director's Stock Option Plan, as
amended, approved an amendment to the Certificate of Incorporation, and ratified
the selection of Ernst & Young LLP as independent auditor of the Company for its
fiscal year ending December 31, 1999 (Selection of Auditors).
Of the 32,190,870 shares of Common Stock and Series B Preferred Stock of the
Company, voting together and outstanding as of the June 11, 1999 record date for
the Annual Meeting (the "Outstanding Shares"), the holders of 28,514,180 were
present at the meeting in person or by proxy, constituting a quorum of the
Outstanding Shares. The votes regarding the election of directors were as
follows:
VOTES FOR VOTES WITHHELD
---------- --------------
Paul Berg.......................................... 28,392,378 121,802
Etienne F. Davignon................................ 28,399,915 114,265
James M. Denny, Sr................................. 28,400,382 113,798
John C. Martin..................................... 28,396,291 117,889
Gordon E. Moore.................................... 28,394,582 119,598
Donald H. Rumsfeld................................. 28,392,460 121,720
George P. Schultz.................................. 28,392,087 122,093
Of the Outstanding Shares, 23,169,214 shares were voted to approve the
issuance of shares in connection with the NeXstar merger; 44,443 shares were
voted against; 8,109 shares abstained; and 5,292,414 shares were broker
non-votes.
Of the Outstanding Shares, 17,035,202 shares were voted to approve the Stock
Option Plan; 6,169,850 shares were voted against; 16,714 shares abstained; and
5,292,414 shares were broker non-votes.
Of the Outstanding Shares, 22,504,254 shares were voted to approve the ESPP;
699,386 shares were voted against; 18,126 shares abstained; and 5,292,414 shares
were broker non-votes.
Of the Outstanding Shares, 20,408,104 shares were voted to approve the
Non-Employee Director's Stock Option Plan; 2,786,577 shares were voted against;
28,430 shares abstained; and 5,291,069 shares were broker non-votes.
Of the Outstanding Shares, 26,113,987 shares were voted to approve the
amendment to the Certificate of Incorporation; 2,386,459 shares were voted
against; 13,734 shares abstained; no shares were broker non-votes.
Of the Outstanding Shares, 28,347,107 shares were voted for the ratification
of the Selection of Auditors; 27,841 shares were voted against; 136,337 shares
abstained; and 2,495 shares were broker non-votes.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
No. 27--Financial Data Schedule
(b) Reports on Form 8-K
On August 6, 1999, the Registrant filed a Current Report on Form 8-K
regarding its merger with NeXstar.
On September 15, 1999 the Registrant filed an additional Current Report on
Form 8-K regarding its merger with NeXstar, which included audited
supplemental consolidated balance sheets of Gilead as of December 31, 1998
and 1997 and the related supplemental consolidated statements of
operations, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998 together with the related
supplemental financial statement schedule of Gilead, representing Gilead's
and NeXstar's combined operations for these periods.
18
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: November 12, 1999 /s/ JOHN C. MARTIN
-------------------------------------------
John C. Martin
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: November 12, 1999 /s/ MARK L. PERRY
-------------------------------------------
Mark L. Perry
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND GENERAL COUNSEL
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
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