On October 26, 2017 Gilead Sciences, Inc. (Nasdaq: GILD) reported its results of operations for the third quarter ended September 30, 2017 (Press release, Gilead Sciences, OCT 26, 2017, View Source [SID1234521213]).

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The financial results that follow represent a year-over-year comparison of the third quarter 2017 to the third quarter 2016. Total revenues were $6.5 billion in 2017 compared to $7.5 billion in 2016. Net income was $2.7 billion or $2.06 per diluted share in 2017 compared to $3.3 billion or $2.49 per diluted share in 2016. Non-GAAP net income, which excludes amounts related to acquisition-related, up-front collaboration, stock-based compensation and other expenses, was $3.0 billion or $2.27 per diluted share in 2017 compared to $3.7 billion or $2.75 per diluted share in 2016.

Three Months Ended Nine Months Ended
September 30, September 30,
(In millions, except per share amounts) 2017 2016 2017 2016
Product sales $ 6,402 $ 7,405 $ 19,825 $ 22,737
Royalty, contract and other revenues 110 95 333 333
Total revenues $ 6,512 $ 7,500 $ 20,158 $ 23,070

Net income attributable to Gilead $ 2,718 $ 3,330 $ 8,493 $ 10,393
Non-GAAP net income* $ 2,990 $ 3,677 $ 9,311 $ 12,128

Diluted earnings per share $ 2.06 $ 2.49 $ 6.44 $ 7.59
Non-GAAP diluted earnings per share*
$ 2.27 $ 2.75 $ 7.06 $ 8.87
* Non-GAAP net income and non-GAAP diluted earnings per share exclude acquisition-related, up-front collaboration, stock-based compensation and other expenses. A reconciliation between GAAP and non-GAAP financial information is provided in the tables on pages 7 and 8.

Product Sales

Total product sales for the third quarter of 2017 were $6.4 billion compared to $7.4 billion for the same period in 2016. Product sales for the third quarter of 2017 were $4.5 billion in the United States, $1.2 billion in Europe and $663 million in other locations. Product sales for the third quarter of 2016 were $5.1 billion in the United States, $1.4 billion in Europe and $931 million in other locations.

Antiviral Product Sales

Antiviral product sales, which include sales of our HIV, chronic hepatitis B (HBV) and chronic hepatitis C (HCV) products, were $5.8 billion for the third quarter of 2017 compared to $6.8 billion for the same period in 2016.

HIV and HBV product sales were $3.6 billion compared to $3.5 billion for the same period in 2016. The increase was primarily due to the continued uptake of our tenofovir alafenamide (TAF) based products, Genvoya (elvitegravir 150 mg/cobicistat 150 mg/emtricitabine 200 mg/tenofovir alafenamide 10 mg), Descovy (emtricitabine 200 mg/tenofovir alafenamide 25 mg) and Odefsey (emtricitabine 200 mg/rilpivirine 25 mg/tenofovir alafenamide 25 mg).
HCV product sales, which consist of Harvoni (ledipasvir 90 mg/sofosbuvir 400 mg), Sovaldi (sofosbuvir 400 mg), Epclusa (sofosbuvir 400 mg/velpatasvir 100 mg) and Vosevi (sofosbuvir 400 mg/velpatasvir 100 mg/voxilaprevir 100 mg), were $2.2 billion compared to $3.3 billion for the same period in 2016. The decline was due to lower sales of Harvoni and Sovaldi across all major markets, partially offset by sales of Epclusa, which was approved in the United States and Europe in June and July 2016, respectively, and sales of Vosevi, which was approved in the United States and Europe in July 2017.
Other Product Sales

Other product sales, which include Letairis (ambrisentan), Ranexa (ranolazine) and AmBisome (amphotericin B liposome for injection), were $559 million for the third quarter of 2017 compared to $564 million for the same period in 2016.

Operating Expenses

Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 2017 2016 2017 2016
Research and development expenses (R&D) $ 789 $ 1,141 $ 2,584 $ 3,890
Non-GAAP R&D expenses* $ 745 $ 981 $ 2,446 $ 2,790

Selling, general and administrative expenses (SG&A) $ 879 $ 831 $ 2,626 $ 2,406
Non-GAAP SG&A expenses* $ 806 $ 780 $ 2,440 $ 2,256
* Non-GAAP R&D and SG&A expenses exclude acquisition-related, up-front collaboration, stock-based compensation and other expenses. A reconciliation between GAAP and non-GAAP financial information is provided in the tables on pages 7 and 8.

During the third quarter of 2017, compared to the same period in 2016:

R&D expenses decreased primarily due to the 2016 impacts of a $200 million milestone expense associated with Nimbus Apollo, Inc. (Nimbus) and a $117 million impairment charge related to in-process R&D.
Non-GAAP R&D expenses* decreased primarily due to the 2016 impact of a $200 million milestone expense associated with Nimbus.
Cash, Cash Equivalents and Marketable Securities

As of September 30, 2017, Gilead had $41.4 billion of cash, cash equivalents and marketable securities compared to $36.6 billion as of June 30, 2017. This increase was primarily due to the issuance of $3.0 billion aggregate principal amount of senior unsecured notes in September 2017 to partially fund the purchase of Kite Pharma, Inc. (Kite). The acquisition was completed in October 2017. Cash flow from operating activities was $2.7 billion for the quarter. During the third quarter of 2017, Gilead paid cash dividends of $682 million and utilized $153 million on stock repurchases.

Revised Full Year 2017 Guidance

Gilead revises its full year 2017 guidance, initially provided on February 7, 2017 and revised on July 26, 2017:

(In millions, except percentages and per share amounts) Initially Provided
February 7, 2017
Reiterated
May 2, 2017
Updated
July 26, 2017
Updated
October 26, 2017
Net Product Sales $22,500 – $24,500 $24,000 – $25,500 $24,500 – $25,500
Non-HCV Product Sales $15,000 – $15,500 $15,500 – $16,000 $16,000 – $16,500
HCV Product Sales $7,500 – $9,000 $8,500 – $9,500 $8,500 – $9,000
Non-GAAP*
Product Gross Margin 86% – 88% 86% – 88% 86% – 87%
R&D Expenses $3,100 – $3,400 $3,200 – $3,400 $3,300 – $3,400
SG&A Expenses $3,100 – $3,400 $3,200 – $3,400 $3,300 – $3,400
Effective Tax Rate 25.0% – 28.0% 25.0% – 28.0% 25.0% – 27.0%
Diluted EPS Impact of Acquisition-related, Up-front Collaboration, Stock-based Compensation and Other Expenses $0.84 – $0.91 $0.86 – $0.93 $1.02 – $1.17

* Non-GAAP Product Gross Margin, R&D and SG&A expenses and effective tax rate exclude acquisition-related, up-front collaboration, stock-based compensation and other expenses. A reconciliation between GAAP and non-GAAP full year 2017 guidance is provided in the tables on page 9.

Corporate Highlights

In August, Gilead and Kite announced that the companies had signed a definitive agreement under which Gilead would acquire all of Kite’s outstanding shares of common stock for $180 per share in cash. The acquisition was completed in early October 2017 for approximately $11.2 billion, excluding $0.7 billion relating to the portion of stock-based compensation attributable to the post combination period.
Product and Pipeline Updates announced by Gilead during the Third Quarter of 2017 include:

Antiviral and Liver Diseases Programs

Announced that the China Food and Drug Administration has approved Sovaldi for the treatment of HCV infection. Sovaldi was approved for the treatment of adults and adolescents (aged 12 to 18 years) infected with HCV genotype 1, 2, 3, 4, 5 or 6 as a component of a combination antiviral treatment regimen. Sovaldi is the first Gilead HCV medicine approved in China.
Announced that the U.S. Food and Drug Administration (FDA) has granted priority review for Gilead’s new drug application (NDA) for an investigational, fixed-dose combination of bictegravir (50 mg) (BIC), an integrase strand transfer inhibitor, and emtricitabine/tenofovir alafenamide (200/25 mg) (FTC/TAF), a dual-NRTI backbone, for the treatment of HIV-1 infection. Gilead filed the NDA for BIC/FTC/TAF with a priority review voucher on June 12, 2017, and FDA has set a target action date under the Prescription Drug User Fee Act of February 12, 2018.
Announced that FDA has approved expanded labeling for Epclusa, the first all-oral, pan-genotypic, once-daily single-tablet regimen for the treatment of adults with HCV infection, to include use in patients co-infected with HIV.
Announced that the European Commission and FDA approved Vosevi, a once-daily single-tablet regimen for the treatment of HCV infection in adults with genotypes 1-6. Vosevi is the first and only single-tablet regimen for patients who have previously failed therapy with direct-acting antiviral (DAA) treatments and is the latest regimen in Gilead’s portfolio of sofosbuvir-based HCV DAA treatments.
Announced detailed 48-week results from two Phase 3 studies evaluating the efficacy and safety of BIC/FTC/TAF for the treatment of HIV-1 infection in treatment-naïve adults. In the ongoing studies, BIC/FTC/TAF was found to be statistically non-inferior to regimens containing dolutegravir (50 mg). The data was presented in two late-breaker sessions at the 9th International AIDS Conference in Paris. In addition, our marketing authorization application for BIC/FTC/TAF has been fully validated and is now under evaluation by the European Medicines Agency.
Non-GAAP Financial Information

The information presented in this document has been prepared by Gilead in accordance with U.S. generally accepted accounting principles (GAAP), unless otherwise noted as non-GAAP. Management believes non-GAAP information is useful for investors, when considered in conjunction with Gilead’s GAAP financial information, because management uses such information internally for its operating, budgeting and financial planning purposes. Non-GAAP information is not prepared under a comprehensive set of accounting rules and should only be used to supplement an understanding of Gilead’s operating results as reported under GAAP. Non-GAAP measures may be defined and calculated differently by other companies in the same industry. A reconciliation between GAAP and non-GAAP financial information is provided in the tables on pages 7, 8 and 9.

Conference Call

At 4:30 p.m. Eastern Time today, Gilead’s management will host a conference call and a simultaneous webcast to discuss results from its third quarter 2017 and a general business update. To access the webcast live via the internet, please connect to the company’s website at www.gilead.com/investors 15 minutes prior to the conference call to ensure adequate time for any software download that may be needed to hear the webcast. Alternatively, please call 1-877-359-9508 (U.S.) or 1-224-357-2393 (international) and dial the conference ID 89229005 to access the call.

A replay of the webcast will be archived on the company’s website for one year, and a phone replay will be available approximately two hours following the call through October 28, 2017. To access the phone replay, please call 1-855-859-2056 (U.S.) or 1-404-537-3406 (international) and dial the conference ID 89229005.