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 March 31, 1998
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 April 30, 1998: 30,204,790.
GILEAD SCIENCES, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
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Item 1. Consolidated Financial Statements and Notes
Consolidated Balance Sheets--March 31, 1998
and December 31, 1997 3
Consolidated Statements of Operations--for the three
months ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows -- for the
three months ended March 31, 1998 and 1997 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 11
SIGNATURES 12
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)
March 31, December 31,
1998 1997
---- ----
ASSETS (unaudited) (Note)
Current assets:
Cash and cash equivalents $ 34,313 $ 31,990
Short-term investments 281,114 290,308
Other current assets 21,979 17,960
------------------------
Total current assets 337,406 340,258
Property and equipment, net 10,506 10,313
Other assets 1,509 1,498
------------------------
$ 349,421 $ 352,069
------------------------
------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,547 $ 3,303
Accrued clinical and preclinical expenses 12,183 12,989
Other accrued liabilities 7,125 5,705
Deferred revenues 12,628 9,541
Current portion of equipment financing obligations and
long-term debt 1,394 1,853
------------------------
Total current liabilities 36,877 33,391
Non-current portion of equipment financing obligations and
long-term debt 1,129 1,331
Commitments
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 March 31, 1998 and December 31, 1997 (liquidation preference
of $40,000) 1 1
Common stock, par value $.001 per share; 60,000,000 shares
authorized; 30,183,776 shares and 30,041,584 shares issued
and outstanding at March 31, 1998 and December 31, 1997,
respectively 30 30
Additional paid-in capital 481,282 479,737
Accumulated other comprehensive income 216 344
Deferred compensation (251) (286)
Accumulated deficit (169,863) (162,479)
------------------------
Total stockholders' equity 311,415 317,347
------------------------
$ 349,421 $ 352,069
------------------------
------------------------
Note: The consolidated balance sheet at December 31, 1997 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
MARCH 31,
-------------------
1998 1997
---- ----
Revenues:
Product sales, net $ 1,795 $ 3,034
Contract revenues 11,407 2,330
Royalty revenues 358 102
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Total revenues 13,560 5,466
Costs and expenses:
Cost of product sales 230 487
Research and development 18,930 10,826
Selling, general and administrative 6,742 6,147
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Total costs and expenses 25,902 17,460
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Loss from operations (12,342) (11,994)
Interest income, net 4,958 4,046
-------- --------
Net loss $ (7,384) $ (7,948)
-------- --------
-------- --------
Basic and diluted loss per common share $ (0.25) $ (0.27)
-------- --------
-------- --------
Common shares used to calculate basic
and diluted loss per common share 30,103 28,930
-------- --------
-------- --------
See accompanying notes
4
GILEAD SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(unaudited)
(in thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
--------- ---------
Cash flows from operating activities:
Net loss $ (7,384) $ (7,948)
Adjustments used to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 689 753
Changes in assets and liabilities:
Other current assets (4,019) 950
Other assets (11) (117)
Accounts payable 244 1,013
Accrued clinical and preclinical expenses (806) 542
Other accrued liabilities 1,420 1,121
Deferred revenues 3,087 6,220
--------- ---------
Total adjustments 604 10,482
--------- ---------
Net cash provided by (used in)
operating activities (6,780) 2,534
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments (124,331) (113,446)
Sales of short-term investments 96,960 78,391
Maturities of short-term investments 36,438 5,785
Capital expenditures (848) (1,786)
--------- ---------
Net cash provided by (used in)
investing activities 8,219 (31,056)
--------- ---------
Cash flows from financing activities:
Payments of equipment financing obligations
and long-term debt (660) (823)
Proceeds from issuance of common stock 1,544 2,103
--------- ---------
Net cash provided by financing activities 884 1,280
--------- ---------
Net increase (decrease) in cash and cash equivalents 2,323 (27,242)
Cash and cash equivalents at beginning of period 31,990 131,984
--------- ---------
Cash and cash equivalents at end of period $ 34,313 $ 104,742
--------- ---------
--------- ---------
See accompanying notes
5
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The information at March 31, 1998, and for the three month periods ended
March 31, 1998 and 1997, 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
March 31, 1998 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, 1997 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 1998 Annual Meeting of Stockholders.
NEW ACCOUNTING STANDARD
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME, which establishes
new requirements for reporting and displaying comprehensive income and its
components. The adoption of SFAS No. 130 has no impact on the Company's net
income or stockholders' equity. This new accounting standard requires net
unrealized gains or losses on the Company's available-for-sale securities to
be reported as accumulated other comprehensive income on the balance sheet.
Such amounts were previously identified separately in stockholder's equity.
Prior year financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
During the first quarter of 1998 and 1997, the Company's total comprehensive
loss was $7.5 million and $8.5 million, respectively. These amounts
represent the Company's net loss of $7.4 million and $7.9 million in the
first quarter of 1998 and 1997, respectively, plus net unrealized losses on
available-for-sale securities arising during each such quarter.
6
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 second quarter of 1997 and the third quarter of 1996, when the Company
recognized significant revenue related to collaborations, the Company has
incurred losses in every quarter since its inception. Gilead expects to
incur losses at least in 1998 and 1999, 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 (CMV) retinitis in patients with AIDS.
Pharmacia & Upjohn (P&U) has the exclusive right to market VISTIDE outside of
the United States and has launched the product in several European countries,
since VISTIDE was approved for marketing in Europe by the European
Commission, during the second quarter of 1997.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
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 not limited to, the risks summarized
below and described in more detail in the Company's Annual Report on Form
10-K for the year ended December 31, 1997, particularly those relating to the
development, regulatory approval and marketing of pharmaceutical products.
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 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 acceptance of and size
of the market for VISTIDE or any of the Company's products in development.
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
7
develop, commercialize, manufacture and market additional products or achieve
sustained profitability. As of March 31, 1998, the Company's accumulated
deficit was approximately $169.9 million.
These risks are discussed in greater detail in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997. 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.
RESULTS OF OPERATIONS
REVENUES
The Company had total revenues of $13.6 million and $5.5 million for the
quarters ended March 31, 1998 and 1997, respectively. In the 1998 period,
total revenues include net product sales and royalties of $1.8 million and
$0.4 million, respectively. In the 1997 period, total revenues include net
product sales and royalties of $3.0 million and $0.1 million, respectively.
These net product sales and royalties result primarily from sales of VISTIDE.
The overall decline in VISTIDE-related revenues reflects a decline in the
incidence of CMV retinitis as a result of more effective human
immunodeficiency virus (HIV) therapies. In future periods, VISTIDE product
sales revenues and royalties are expected to continue to be modest.
Also included in total revenues are contract revenues of $11.4 and $2.3
million for the quarters ended March 31, 1998 and 1997, respectively. Of the
1998 amount, $10.7 million was received from F. Hoffmann-La Roche Ltd.
(Roche) as reimbursement for expenses associated with the research and
development of GS 4104, an oral compound in Phase II/III development for the
treatment and prevention of influenza infection. This revenue included $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. Contract revenues for the three months ended March 31, 1997,
include $1.6 million recognized under this agreement with Roche. In both the
1998 and 1997 periods, contract revenues included approximately $0.8 million
recognized under the Company's collaborative research and development
agreement with Glaxo Wellcome Inc. related to the Company's code blocker
program.
OPERATING COSTS AND EXPENSES
The Company's cost of product sales relates to VISTIDE and was $0.2 million
and $0.5 million for the quarters ended March 31, 1998 and 1997,
respectively. The Company's cost of sales increased as a percentage of
product sales in the first quarter of 1998 because of reserves for potential
inventory obsolescence.
Research and development (R&D) expenses for the first quarter of 1998 were
$18.9 million compared to $10.8 million for the same period in 1997. This
74.9 percent increase in R&D expenses is primarily due to expenses associated
with the advancement of four therapeutic drug candidates into later stages of
clinical development. The Company expects its R&D expenses to continue to
increase significantly throughout 1998 over 1997 amounts, reflecting
anticipated increased expenses related to clinical trials for several product
candidates as well as related increases in staffing and manufacturing.
8
Selling, general and administrative (SG&A) expenses were $6.7 million and
$6.1 million for the quarters ended March 31, 1998 and 1997, respectively,
representing an increase of 9.7 percent. The increase in SG&A expenses in
1998 compared to the same quarter in 1997 relates to expenses incurred to
support an increasing level of R&D activities. The Company expects its SG&A
expenses will continue to increase significantly over 1997 expense levels,
primarily to support the increased level of R&D activities, as well as to
support the expansion of sales and marketing capacity in anticipation of the
potential launch of PREVEON-TM-, an investigational reverse transcriptase
inhibitor currently being studied to treat HIV.
NET INTEREST INCOME
The Company had net interest income of $5.0 million and $4.0 million for the
quarters ended March 31, 1998 and 1997, respectively, representing an
increase of 22.5 percent. This increase is due to several factors, including
a modest increase in the Company's portfolio of cash, cash equivalents and
short-term investments between the respective periods, a slightly higher
level of investment returns in the 1998 period and a decrease in interest
expense between the 1997 and 1998 periods, which corresponds to the Company's
lower level of debt in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments totaled $315.4 million
at March 31, 1998, compared to $322.3 million at December 31, 1997. The
decrease is primarily due to the net use of cash to fund operations, and the
uses of cash to purchase property and equipment items and repay debt
obligations. Such uses of cash were offset in part by cash received from
exercises of employee stock options. During the remainder of 1998, the
Company expects to incur R&D and SG&A expenses significantly in excess of
amounts incurred in prior periods.
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. 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
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 believes that with upgrades of existing software and conversions
to new software, both of which are readily available in the market, the Year
2000 issue will not pose significant operational problems for its internal
computer systems. All required modifications and conversions of computer
9
systems that are critical to the Company's business operations are expected
to be completed not later than December 31, 1998, which is prior to the
estimated occurrence of any Year 2000 issues. The Company has initiated
formal communications with its significant suppliers, service providers and
large customers to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to remediate their own
Year 2000 issues. There is no guarantee that the systems of other companies
on which the Company's systems rely will be timely converted and would not
have an adverse impact on the Company's systems. The Company estimates that
the cost of required upgrades and conversions will not have a significant
impact on its results of operations.
10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
No. 27--Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended March 31,
1998.
11
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: May 11, 1998 /s/ John C. Martin
-----------------------------
John C. Martin
President and Chief Executive Officer
Date: May 11, 1998 /s/ Mark L. Perry
-----------------------------
Mark L. Perry
Senior Vice President, Chief
Financial Officer and General Counsel
(Principal Financial and Accounting Officer)
12