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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 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
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GILEAD SCIENCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3047598
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
333 LAKESIDE DRIVE, FOSTER CITY, 94404
CALIFORNIA (Zip Code)
(Address of principal executive
offices)
(650) 574-3000
(Registrant's telephone number, including area code)
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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 July 31, 1998: 30,479,495.
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GILEAD SCIENCES, INC.
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements and Notes
Consolidated Balance Sheets--June 30, 1998 and December 31, 1997............................ 3
Consolidated Statements of Operations--for the three months
and six months ended June 30, 1998 and 1997................................................. 4
Consolidated Statements of Cash Flows--for the
six months ended June 30, 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 4. Submission of Matters to a Vote of Security Holders......................................... 10
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)
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 37,021 $ 31,990
Short-term investments.............................................................. 275,620 290,308
Other current assets................................................................ 9,151 17,960
----------- ------------
Total current assets.............................................................. 321,792 340,258
Property and equipment, net........................................................... 10,052 10,313
Other assets.......................................................................... 1,461 1,498
----------- ------------
$ 333,305 $ 352,069
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 3,730 $ 3,303
Accrued clinical and preclinical expenses........................................... 10,952 12,989
Other accrued liabilities........................................................... 7,235 5,705
Deferred revenues................................................................... 9,129 9,541
Current portion of equipment financing obligations and long-term debt............... 871 1,853
----------- ------------
Total current liabilities......................................................... 31,917 33,391
Non-current portion of equipment financing obligations and long-term debt............. 935 1,331
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 June 30, 1998 and December 31, 1997(liquidation preference of
$40,000).......................................................................... 1 1
Common stock, par value $.001 per share; 60,000,000 shares authorized; 30,458,765
shares and 30,041,584 shares issued and outstanding at June 30, 1998 and December
31, 1997, respectively............................................................ 30 30
Additional paid-in capital.......................................................... 485,166 479,737
Accumulated other comprehensive income.............................................. 181 344
Deferred compensation............................................................... (219) (286)
Accumulated deficit................................................................. (184,706) (162,479)
----------- ------------
Total stockholders' equity............................................................ 300,453 317,347
----------- ------------
$ 333,305 $ 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 SIX MONTHS ENDED JUNE
JUNE 30, 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- --------- ---------- ---------
Revenues:
Product sales, net................................................ $ 1,598 $ 3,956 $ 3,393 $ 6,990
Contract revenues................................................. 4,682 15,761 16,089 18,091
Royalty revenues.................................................. 756 9 1,114 110
---------- --------- ---------- ---------
Total revenues...................................................... 7,036 19,726 20,596 25,191
Costs and expenses:
Cost of product sales............................................. 114 328 344 815
Research and development.......................................... 18,330 14,696 37,260 25,522
Selling, general and administrative............................... 8,443 6,146 15,186 12,292
---------- --------- ---------- ---------
Total costs and expenses............................................ 26,887 21,170 52,790 38,629
---------- --------- ---------- ---------
Loss from operations................................................ (19,851) (1,444) (32,194) (13,438)
Interest income, net................................................ 5,007 4,155 9,965 8,201
---------- --------- ---------- ---------
Net income (loss)................................................... $ (14,844) $ 2,711 $ (22,229) $ (5,237)
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Basic and diluted net income (loss) per common share................ $ (0.49) $ 0.09 $ (0.74) $ (0.18)
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Common shares used to calculate basic net income (loss) per common
share............................................................. 30,295 29,107 30,199 29,018
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Common shares used to calculate diluted net income (loss) per common
share............................................................. 30,295 31,057 30,199 29,018
---------- --------- ---------- ---------
---------- --------- ---------- ---------
See accompanying notes
4
GILEAD SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED JUNE
30,
------------------------
1998 1997
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Cash flows from operating activities:
Net loss.............................................................................. $ (22,229) $ (5,237)
Adjustments used to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization....................................................... 1,382 1,539
Changes in assets and liabilities:
Other current assets.............................................................. 8,809 (394)
Other assets...................................................................... 37 (216)
Accounts payable.................................................................. 427 (213)
Accrued clinical and preclinical expenses......................................... (2,037) 1,071
Other accrued liabilities......................................................... 1,530 1,413
Deferred revenues................................................................. (412) 3,733
----------- -----------
Total adjustments............................................................... 9,736 6,933
----------- -----------
Net cash provided by (used in) operating activities............................. (12,493) 1,696
----------- -----------
Cash flows from investing activities:
Purchases of short-term investments................................................... (262,154) (164,242)
Sales of short-term investments....................................................... 215,847 105,715
Maturities of short-term investments.................................................. 60,832 24,003
Capital expenditures.................................................................. (1,054) (2,665)
----------- -----------
Net cash provided by (used in) investing activities............................. 13,471 (37,189)
----------- -----------
Cash flows from financing activities:
Payments of equipment financing obligations and long-term debt........................ (1,378) (1,663)
Proceeds from issuance of common stock................................................ 5,431 4,133
Proceeds from issuance of preferred stock............................................. -- 40,000
----------- -----------
Net cash provided by financing activities....................................... 4,053 42,470
----------- -----------
Net increase in cash and cash equivalents............................................... 5,031 6,977
Cash and cash equivalents at beginning of period........................................ 31,990 131,984
----------- -----------
Cash and cash equivalents at end of period.............................................. $ 37,021 $ 138,961
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See accompanying notes
5
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The information at June 30, 1998, and for the three- and six-month periods
ended June 30, 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. Such
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.
EARNINGS (LOSS) PER COMMON SHARE
At December 31, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, EARNINGS PER SHARE, which requires the Company to
report basic and diluted net income (loss) per share in its financial
statements. For all periods presented, the financial statements have been
restated to conform to the requirements of SFAS No. 128. Except for the
three-month period ended June 30, 1997, both basic and diluted net loss per
common share are computed solely based on the weighted average number of common
shares outstanding during the period. For the three-month period ended June 30,
1997, diluted weighted-average shares outstanding include the following (shares
in 000's):
Weighted-average common shares outstanding.......................... 29,107
Weighted-average convertible preferred shares outstanding........... 62
Dilutive stock options outstanding.................................. 1,888
---------
Diluted weighted-average shares outstanding....................... 31,057
---------
---------
NEW ACCOUNTING STANDARD
On January 1, 1998, the Company adopted 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 stockholders' equity. Prior year financial statements have been reclassified
to conform to the requirements of SFAS No. 130.
Following are the components of comprehensive income (in 000's):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE
JUNE 30, 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- --------- ---------- ---------
Net income (loss)................................. $ (14,844) $ 2,711 $ (22,229) $ (5,237)
Net unrealized gains (losses) on
available-for-sale securities................... (35) 487 (163) (110)
---------- --------- ---------- ---------
Comprehensive income (loss)....................... $ (14,879) $ 3,198 $ (22,392) $ (5,347)
---------- --------- ---------- ---------
---------- --------- ---------- ---------
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 either proprietary rights or competing products 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 develop, commercialize,
manufacture and market additional products or achieve sustained profitability.
As of June 30, 1998, the Company's accumulated deficit was approximately $184.7
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.
7
RESULTS OF OPERATIONS
REVENUES
The Company had total revenues of $7.0 million and $19.7 million for the
quarters ended June 30, 1998 and 1997, respectively. For the six-month periods
ended June 30, 1998 and 1997, total revenues were $20.6 million and $25.2
million, respectively. For both of these comparisons, the decline in total
revenues is primarily due to one-time milestone payments in the 1997 periods,
and decreased net product sales in the 1998 periods.
For the quarters ended June 30, 1998 and 1997, total revenues include
aggregate net product sales and royalties of $2.4 million and $3.9 million,
respectively. In the six-month periods, total revenues include aggregate net
products sales and royalties of $4.5 million in 1998 and $7.1 million in 1997.
These net product sales and royalties result primarily from sales of VISTIDE in
the United States and Europe. The decline in VISTIDE-related revenues reflects a
continuing 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 $4.7 million and
$15.8 million for the quarters ended June 30, 1998 and 1997, respectively. In
the six-month periods, total revenues include contract revenues of $16.1 million
in 1998 and $18.1 million in 1997. Contract revenues for the second quarter of
1997 include a $10 million milestone payment from Pharmacia and Upjohn following
the marketing authorization for VISTIDE in the European Union, as well as a $3
million milestone payment from F. Hoffmann-La Roche Ltd. (Roche) associated with
the development of GS 4104 for the treatment and prevention of viral influenza.
Contract revenues for the six-month and three-month periods ended June 30, 1998
include $14.6 million and $3.9 million, respectively, received from Roche as
reimbursement of expenses related to the development of GS 4104. The $14.6
million received from Roche during the six months ended June 30, 1998 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.
In each of the six-month periods, contract revenues include $1.5 million
recognized under the Company's collaborative research and development agreement
with Glaxo Wellcome Inc. related to the Company's code blocker program. This
agreement was terminated in June 1998.
OPERATING COSTS AND EXPENSES
The Company's cost of product sales relates to VISTIDE and was $0.1 million
and $0.3 million for the quarters ended June 30, 1998 and 1997, respectively.
Cost of product sales for the six-month periods ended June 30, 1998 and 1997 was
$0.3 million and $0.8 million, respectively. The Company's declining cost of
sales corresponds to the overall decrease in net product sales.
Research and development (R&D) expenses for the second quarter of 1998 were
$18.3 million compared to $14.7 million for the same period in 1997, which
represents a 24.5% increase. For the six-month periods ended June 30, 1998 and
1997, R&D expenses were $37.3 million and $25.5 million, respectively, or an
increase of 46.3%. Such increases in R&D expenses are 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.
Selling, general and administrative (SG&A) expenses were $8.4 million and
$6.1 million for the quarters ended June 30, 1998 and 1997, respectively,
representing an increase of 37.7%. For the six-month periods ended June 30, 1998
and 1997, SG&A expenses were $15.2 million and $12.3 million, respectively,
8
or a 23.6% increase. The increases in SG&A expenses in the 1998 periods as
compared to the corresponding 1997 periods relate 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 and, to a lesser
extent, 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 $4.2 million for the
quarters ended June 30, 1998 and 1997, respectively, representing an increase of
19.0%. Net interest income earned during the six-month periods ended June 30,
1998 and 1997 was $10.0 million and $8.2 million, or an increase of 22.0%. Such
increases are primarily due to a higher level of investment returns in the 1998
periods.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments totaled $312.6 million
at June 30, 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 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 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.
9
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders on May 27, 1998, the
stockholders elected six directors to serve for the ensuing year and until their
successors are elected, approved the Company's 1991 Stock Option Plan, as
amended (Stock Option Plan), approved the Company's Employee Stock Purchase
Plan, as amended (ESPP), and ratified the selection of Ernst & Young LLP as
independent auditors of the Company for its fiscal year ending December 31, 1998
(Selection of Auditors).
Of the 31,330,911 shares of Common Stock and Series B Preferred Stock of the
Company, voting together and outstanding as of the April 15, 1998 record date
for the Annual Meeting (the "Outstanding Shares"), the holders of 28,518,067
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
------------ --------------
Etienne F. Davignon............................................. 25,885,801 1,498,480
James M. Denny, Sr.............................................. 27,185,636 198,645
John C. Martin.................................................. 27,190,560 193,721
Gordon E. Moore................................................. 27,189,686 194,595
Donald H. Rumsfeld.............................................. 27,188,126 196,155
George P. Schultz............................................... 27,182,976 201,305
Of the Outstanding Shares, 24,962,259 shares were voted to approve the Stock
Option Plan; 2,155,791 shares were voted against; 266,901 shares abstained; and
3,939,973 shares were broker non-votes.
Of the Outstanding Shares, 27,054,155 shares were voted to approve the ESPP;
288,096 shares were voted against; 42,530 shares abstained; and 3,939,973 shares
were broker non-votes.
Of the Outstanding Shares, 27,183,216 shares were voted for the ratification
of the Selection of Auditors; 168,916 shares were voted against; 32,649 shares
abstained; and 3,939,973 shares were broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
No. 27--Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended June 30,
1998.
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: August 7, 1998
/s/ JOHN C. MARTIN
--------------------------------------
John C. Martin
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: August 7, 1998
/s/ MARK L. PERRY
--------------------------------------
Mark L. Perry
SENIOR VICE PRESIDENT, CHIEF FINANCIAL
OFFICER AND GENERAL COUNSEL
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
11