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, 1997
--------------------------------------
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: 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 20, 1997: 29,733,935.
1
GILEAD SCIENCES, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Consolidated Financial Statements and Notes
Consolidated Balance Sheets -- September 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations -- for
the three months and nine months ended
September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows -- for
the nine months ended September 30, 1997
and 1996 5
Notes to 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. Consolidated Financial Statements and Notes
GILEAD SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(unaudited) (Note)
Current assets:
Cash and cash equivalents $ 45,670 $ 131,984
Short-term investments 286,494 163,979
Other current assets 4,346 4,290
--------- ---------
Total current assets 336,510 300,253
Property and equipment, net 10,225 9,172
Other assets 1,419 1,248
--------- ---------
$ 348,154 $ 310,673
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,592 $ 2,501
Accrued clinical and preclinical expenses 7,650 5,007
Other accrued liabilities 5,785 4,433
Deferred revenues 3,304 527
Current portion of equipment financing
obligations and long-term debt 2,449 3,631
--------- --------
Total current liabilities 20,780 16,099
Noncurrent portion of equipment financing
obligations and long-term debt 1,570 2,914
Commitments
Stockholders' equity:
Preferred stock, par value $.001 per share;
5,000,000 shares authorized; 1,133,786
shares of Series B issued and outstanding
at September 30, 1997; none at
December 31, 1996 (liquidation
preference of $40.0 million) 1 -
Common stock, par value $.001 per share;
60,000,000 shares authorized; 29,719,035
shares and 28,758,165 shares issued and
outstanding at September 30, 1997 and
December 31, 1996, respectively 30 29
Additional paid-in capital 475,796 426,577
Unrealized gains (losses) on investments,
net 362 89
Accumulated deficit (150,055) (134,486)
Deferred compensation (330) (549)
--------- ---------
Total stockholders' equity 325,804 291,660
--------- ---------
$ 348,154 $ 310,673
--------- ---------
--------- --------
Note: The consolidated balance sheet at December 31, 1996 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,
----------------------- ---------------------
1997 1996 1997 1996
----------------------- ---------------------
Revenues:
Product sales, net $ 2,326 $ 3,353 $ 9,316 $ 4,755
Contract revenues 2,347 21,301 20,438 22,884
Royalty revenues 264 - 374 -
-------- -------- -------- --------
Total revenues 4,937 24,654 30,128 27,639
Costs and expenses:
Cost of sales 180 447 995 548
Research and development 13,604 11,163 39,126 31,008
Selling, general and administrative 6,233 7,641 18,525 19,947
-------- -------- -------- --------
Total costs and expenses 20,017 19,251 58,646 51,503
-------- -------- -------- --------
Income (loss) from operations (15,080) 5,403 (28,518) (23,864)
Interest income, net 4,749 3,907 12,949 10,214
-------- -------- -------- --------
Net income (loss) $(10,331) $ 9,310 $(15,569) $(13,650)
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share $(0.35) $ 0.30 $ (0.53) $ (0.50)
-------- -------- -------- --------
-------- -------- -------- --------
Common and common equivalent
shares used in the calculation of net
income (loss) per share 29,406 30,549 29,147 27,500
-------- -------- -------- --------
-------- -------- -------- --------
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,
-------------------------------
1997 1996
--------------- --------------
Cash flows from operating activities:
Net loss $ (15,569) $ (13,650)
Adjustments used to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 2,277 3,718
Changes in assets and liabilities:
Other current assets (56) (14,766)
Other assets (171) (136)
Accounts payable (909) (471)
Accrued clinical and preclinical expenses 2,643 1,626
Other accrued liabilities 1,352 2,453
Deferred revenues 2,777 792
---------- ----------
Total adjustments 7,913 (6,784)
---------- ----------
Net cash used in operating activities (7,656) (20,434)
---------- ----------
Cash flows from investing activities:
Purchases of short-term investments (333,197) (324,752)
Sales of short-term investments 163,491 201,366
Maturities of short-term investments 47,464 117,209
Capital expenditures (3,111) (1,565)
---------- ----------
Net cash used in investing activities (125,353) (7,742)
---------- ----------
Cash flows from financing activities:
Payments of equipment financing obligations
and long-term debt (2,526) (2,014)
Proceeds from issuance of common stock 9,221 158,813
Proceeds from issuance of preferred stock 40,000 -
---------- ----------
Net cash provided by financing activities 46,695 156,799
---------- ----------
Net increase (decrease) in cash and cash equivalents (86,314) 128,623
Cash and cash equivalents at beginning of period 131,984 27,420
---------- ----------
Cash and cash equivalents at end of period $ 45,670 $ 156,043
---------- ----------
---------- ----------
See accompanying notes.
5
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The information at September 30, 1997, and for the three and nine month
periods ended September 30, 1997 and 1996, 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
fiscal year ended December 31, 1996 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 1997 Annual
Meeting of Stockholders and the interim financial statements included in the
previously filed quarterly report (Form 10-Q) for the three and six months
ended March 31, 1997 and June 30, 1997.
PER SHARE DATA
Net income per share is computed using the weighted average number of
common shares and dilutive common equivalent shares attributable to
convertible preferred stock and 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
convertible preferred stock and stock options are excluded from the
computation of net loss per share as their effect is antidilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share" (EPS). The Statement is effective
for both interim and annual financial statements for periods ending after
December 15, 1997. Under the Statement, primary EPS computed in accordance
with Accounting Principle Board Opinion No. 15 will be replaced with a new
simpler calculation called "basic EPS" and Gilead will be required to restate
comparative EPS amounts for all prior periods. Under the new requirements,
basic EPS for the three and nine month periods ended September 30, 1997 and
the nine month period ended September 30, 1996 will be unchanged from primary
EPS as disclosed. Basis EPS for the three month period ended September 30,
1996 is $0.33 per share as compared to $0.30 per share under the primary EPS
method. Fully diluted EPS will not change significantly but has been renamed
"diluted EPS". Gilead plans to implement the Statement in the fourth quarter
of 1997.
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 U.S.
Treasury Securities, corporate commercial paper, bonds and notes of domestic
corporations and asset-backed securities, 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.
6
Interest and dividends on securities classified as available-for-sale are
included in interest income. At September 30, 1997, the contractual
maturities of the debt securities do not exceed three years.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
Since its inception in June 1987, Gilead has devoted the substantial
portion of its resources to its research and development programs, with
significant expenses relating to commercialization beginning in 1996. With
the exception of the third quarter of 1996 and the second quarter of 1997,
when the Company recognized significant license fees and milestone payments
related to two collaboration agreements, the Company has incurred losses in
every quarter since its inception. Gilead expects to incur losses for the
next several years 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) and other potential products.
Gilead is independently marketing VISTIDE in the United States for the
treatment of cytomegalovirus retinitis in patients with AIDS. P&U has the
exclusive right to market VISTIDE outside of the United States, and recently
launched the product in several European countries after receipt of marketing
authorization from the European Commission. The financial contribution from
VISTIDE sales and royalties has been modest to date, and the Company does not
anticipate achieving sustained profitability without significant revenue
contribution from other products in development, supplemented by contract
revenue. The Company expects that its financial results will continue to
fluctuate from quarter to quarter and that such fluctuations may be
substantial. There can be no assurance that the Company will successfully
develop, commercialize, manufacture and market additional products or achieve
sustained profitability. As of September 30, 1997, the Company's accumulated
deficit was approximately $150.1 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, and uncertainties associated with the market performance of VISTIDE
and the market acceptance of any of the Company's products in development
that reach the market. These risks are discussed in greater detail in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
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.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements relating to clinical and
regulatory developments, marketing and sales matters, 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
7
not limited to, the risks discussed in the Company's Annual Report on Form
10-K for the year ended December 31, 1996, particularly those relating to the
development, regulatory approval and marketing of pharmaceutical products.
RESULTS OF OPERATIONS
REVENUES
The Company had total revenues of $4.9 million and $24.7 million for the
quarters ended September 30, 1997 and 1996, respectively. Total revenues
included net product sales of $2.3 million and $3.4 million from the sale of
VISTIDE for the quarters ended September 30, 1997 and 1996, respectively.
This decrease in product sales reflects an overall decrease in the demand for
drugs which treat cytomegalovirus retinitis in patients with AIDS that has
resulted from the increasing general availability of more effective therapies
for AIDS.
Total revenues for the nine month periods ended September 30, 1997 and
1996 were $30.1 million and $27.6 million, respectively, which included net
product sales of $9.3 million and $4.8 million for the same periods. Revenues
of approximately $13.0 million for the nine month period ended September 30,
1997 resulted from milestone payments under the Company's collaborative
agreements with P&U and F. Hoffmann-La Roche Ltd. ("Roche"). Revenues
totaling $20.3 million were recognized in the nine month period ended
September 30, 1996 related to two initial license fees under the Company's
agreements with these two partners. In addition, revenues in the first nine
months of 1997 included $4.9 million of contract revenue from Roche related
to the collaboration agreement to develop and commercialize therapies for the
treatment and prevention of viral influenza. Revenues of approximately $2.3
million in each of the nine month periods ended September 30, 1997 and 1996
resulted from the Company's collaborative research and development agreement
with Glaxo Wellcome.
OPERATING COSTS AND EXPENSES
The Company's cost of sales was $0.2 million and $0.4 million for the
quarters ended September 30, 1997 and 1996, respectively. Cost of sales
resulted from the Company's sale of VISTIDE, which was launched in June 1996.
Cost of sales for the nine month periods ended September 30, 1997 and 1996
was $1.0 million and $0.5 million, respectively. The Company's cost of sales
has decreased as a percentage of product sales because of reserves for
inventory obsolescence in 1996 which were not required in 1997.
For the quarter ended September 30, 1997, the Company's research and
development expenses increased 21.9% to $13.6 million from $11.2 million for
the same period in 1996. Research and development expenses for the nine
month periods ended September 30, 1997 and 1996 were $39.1 million and $31.0
million, respectively. These increases were due primarily to expansion in
the scope and number of clinical trials for several product candidates and a
related increase in research and development staffing and manufacturing. The
Company expects its research and development expenses will increase in the
fourth quarter and increase significantly throughout 1998, reflecting
anticipated increased expenses related to clinical trials for several product
candidates as well as related increases in staffing, preclinical studies and
manufacturing.
Selling, general and administrative expenses were $6.2 million and $7.6
million for the quarters ended September 30, 1997 and 1996, respectively,
representing a decrease of 18.4%. Selling, general and administrative
expenses were $18.5 million and $19.9 million in the nine month periods
ending September 30, 1997 and 1996, respectively. This decrease for the three
and nine month periods resulted from VISTIDE product launch-related expenses
incurred in 1996 which were not incurred in 1997. The Company expects its
selling, general and administrative expenses to increase during the remainder
of 1997 and to increase significantly in 1998 in connection with the ongoing
sales and marketing activities related to the sale of VISTIDE and other
potential products as well as continued support of expanded
8
research an development activities. In particular, the Company anticipates
expanding its sales and marketing capacity during 1998 in anticipation of a
possible launch of PREVEON-TM- (adefovir dipivoxil) for the treatment of HIV
and AIDS, although no assurance can be given that such product will receive
regulatory approval or be successfully launched.
NET INTEREST INCOME
The Company had net interest income of $4.7 million and $3.9 million for
the quarters ended September 30, 1997 and 1996, respectively, representing an
increase of 21.6%. Net interest income was $12.9 million and $10.2 million
for the nine month periods ended September 30, 1997 and 1996, respectively.
Net interest income increased in the third quarter of 1997 primarily due to
the Company's higher average cash and cash equivalents and short-term
investment balances.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments totalled $332.2
million at September 30, 1997 compared to $296.0 million at December 31,
1996. The increase is due to cash proceeds from stock issuances and milestone
payments during 1997 offset by cash used in operations and to fund capital
acquisitions. During the remainder of 1997 and for 1998, the Company expects
to incur research and development and selling, general and administrative
expenses significantly in excess of amounts incurred in prior periods.
Net cash used in operations was $7.7 million and $20.4 million for the
nine month periods ended September 30, 1997 and 1996, respectively. Cash
used in operations during the 1996 period included an outstanding receivable
related to the Company's collaborative agreements. No such receivable was
outstanding at September 30, 1997. The Company believes that its existing
capital resources, supplemented by 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, however, 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 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.
9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.45 Amended and Restated Copromotion Agreement between Registrant and
Roche Laboratories, Inc. dated September 12, 1997 with
certain confidential information deleted.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the Quarter ended September
30, 1997.
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 30, 1997 /s/ JOHN C. MARTIN
-----------------------------
John C. Martin
President and Chief Executive Officer
Date: October 30, 1997 /s/ MARK L. PERRY
-----------------------------
Mark L. Perry
Vice President, Chief Financial Officer
and General Counsel
(Principal Financial and Accounting Officer)
11