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) <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- --------------------- 1997 1996 1997 1996 ----------------------- --------------------- <S> <C> <C> <C> <C> 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 -------- -------- -------- -------- -------- -------- -------- -------- </TABLE> See accompanying notes. 4
GILEAD SCIENCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (decrease) in cash and cash equivalents (unaudited) (in thousands) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1997 1996 --------------- -------------- <S> <C> <C> 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 ---------- ---------- ---------- ---------- </TABLE> 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