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 JUNE 30, 1996 --------------------------------------- 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.) 353 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 July 19, 1996: 28,486,798.
GILEAD SCIENCES, INC. INDEX PART I. FINANCIAL INFORMATION PAGE NO. -------- Item 1. Condensed Consolidated Financial Statements and Notes Condensed Consolidated Balance Sheets - June 30, 1996 and December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . . 3 Condensed Consolidated Statements of Operations - for the three months and six months ended June 30, 1996 and 1995 . . . . . . . . 4 Condensed Consolidated Statements of Cash Flows - for the six months ended June 30, 1996 and 1995. . . . . . . . . . . . . . . . 5 Notes to Condensed 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 Securities Holders . . . . . . 9 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . .10 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 2
PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements and Notes GILEAD SCIENCES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) ASSETS <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1996 1995 ----------- ------------ Current assets: (unaudited) (Note) <S> <C> <C> Cash and cash equivalents $ 182,918 $ 27,420 Short-term investments 107,481 128,239 Accounts receivable (less allowances of $220 at June 30, 1996) 1,537 - Prepaid expenses and other current assets 3,235 1,558 ---------- ---------- Total current assets 295,171 157,217 Property and equipment, net 7,774 8,369 Other assets 1,015 1,073 ---------- ---------- $ 303,960 $ 166,659 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,142 $ 2,412 Accrued clinical and preclinical expenses 5,276 3,923 Other accrued liabilities 3,480 2,229 Deferred contract revenues 1,750 208 Current portion of equipment financing obligations and long-term debt 2,943 2,906 ---------- ---------- Total current liabilities 14,591 11,678 Noncurrent portion of equipment financing obligations and long-term debt 2,090 3,482 Commitments Stockholders' equity: Common stock, par value $.001 per share; 60,000,000 shares authorized; 28,341,999 shares and 23,769,878 shares issued and outstanding at June 30, 1996 and December 31, 1995, respectively 28 24 Additional paid-in capital 424,559 265,460 Unrealized gains (losses) on investments, net (654) 167 Accumulated deficit (135,714) (112,754) Deferred compensation (940) (1,398) ---------- ---------- Total stockholders' equity 287,279 151,499 ---------- ---------- $ 303,960 $ 166,659 ---------- ---------- ---------- ---------- </TABLE> Note: The consolidated balance sheet at December 31, 1995 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. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (in thousands, except per share amounts) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ --------------------- 1996 1995 1996 1995 ---------- ----------- --------- --------- <S> <C> <C> <C> <C> Revenues: Product sales, net $ 1,403 $ - $ 1,403 $ - Contract sales 803 935 1,582 1,865 --------- -------- -------- --------- Total revenues 2,206 935 2,985 1,865 --------- -------- -------- --------- Costs and expenses: Cost of sales 101 - 101 - Research and development 10,563 7,500 19,846 15,554 Selling, general and administrative 7,440 2,415 12,305 5,180 --------- -------- -------- --------- Total costs and expenses 18,104 9,915 32,252 20,734 --------- -------- -------- --------- Loss from operations (15,898) (8,980) (29,267) (18,869) Interest income, net 3,740 1,045 6,307 2,061 --------- -------- -------- --------- Net loss $(12,158) $(7,935) $(22,960) $(16,808) --------- -------- -------- --------- --------- -------- -------- --------- Net loss per share $ (0.43) $ (0.41) $ (0.85) $ (0.88) --------- -------- -------- --------- --------- -------- -------- --------- Common shares used in the calculation of net loss per share 28,330 19,165 26,999 19,135 --------- -------- -------- --------- --------- -------- -------- --------- </TABLE> See accompanying notes. 4
GILEAD SCIENCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (decrease) in cash and cash equivalents (unaudited) (in thousands) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, ------------------------- 1996 1995 ---------- --------- <S> <C> <C> Cash flows from operating activities: Net loss $ (22,960) $(16,808) Adjustments used to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,883 2,188 Changes in assets and liabilities: Accounts receivable (1,537) - Prepaid expenses and other current assets (1,677) (275) Other assets 58 153 Accounts payable (1,270) (31) Accrued clinical and preclinical expenses 1,353 563 Other accrued liabilities 1,251 281 Deferred contract revenues 1,542 (1,600) --------- -------- Total adjustments 2,603 1,279 --------- -------- Net cash used in operating activities (20,357) (15,529) --------- -------- Cash flows from investing activities: Purchases of short-term investments (225,523) (70,799) Sales of short-term investments 128,250 10,455 Maturities of short-term investments 117,210 69,556 Capital expenditures (1,124) (255) --------- -------- Net cash provided by investing activities 18,813 8,957 --------- -------- Cash flows from financing activities: Payments of equipment financing obligations and long-term debt (1,355) (1,394) Proceeds from issuance of common stock 158,397 1,201 --------- -------- Net cash provided by (used in) financing activities 157,042 (193) --------- -------- Net increase (decrease) in cash and cash equivalents 155,498 (6,765) Cash and cash equivalents at beginning of period 27,420 15,296 --------- -------- Cash and cash equivalents at end of period $182,918 $ 8,531 --------- -------- --------- -------- </TABLE> See accompanying notes. 5
GILEAD SCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1996 (unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The information at June 30, 1996, and for the three and six month periods ended June 30, 1996 and 1995, 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 nine month period ended December 31, 1995 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 1996 Annual Meeting of Stockholders and the interim financial statements included in the previously filed quarterly report (Form 10-Q) for the three months ended March 31, 1996. NET LOSS PER SHARE Net loss per share is computed using the weighted average number of common shares outstanding during the period. Common stock equivalents relating to stock options are excluded from the computation as their effect is antidilutive. DEFERRED COMPENSATION The Company records deferred compensation on option grants for the difference between the grant price and the market value on the date of grant and amortizes such amounts over the five year vesting period of the options. 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 commercial paper of major U.S. corporations, U.S. Treasury Securities and Certificates of Deposit, 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. Interest and dividends on securities classified as available-for-sale are included in interest income. At June 30, 1996, the contractual maturities of the debt securities do not exceed three years. 6
3. AUTHORIZED COMMON STOCK On May 14, 1996, the stockholders approved an amendment to the Company's certificate of incorporation, increasing the number of shares of common stock the Company is authorized to issue from 35,000,000 to 60,000,000. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW Since its inception in June 1987, Gilead has devoted substantially all of its resources to its research and development programs. The Company has been unprofitable since its inception and expects to incur substantial losses for the next several years, due primarily to its research and development programs, including preclinical studies, clinical trials and manufacturing, as well as increasing marketing and sales efforts in support of VISTIDE-Registered Trademark- (cidofovir injection) sales. On June 26, 1996 the U. S. Food and Drug Administration (FDA) granted marketing clearance of VISTIDE for the treatment of cytomegalovirus retinitis (CMV) in patients with AIDS. The Company is independently marketing VISTIDE in the United States with an antiviral specialty sales force. The Company expects that losses will 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 ever achieve or sustain profitability. As of June 30, 1996, the Company's accumulated deficit was approximately $135.7 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, limitations on the availability of capital and uncertainties associated with the eventual market acceptance of VISTIDE or any of the Company's products in development. These risks are discussed in greater detail in the Company's Annual Report on Form 10-K for the nine month period ended December 31, 1995. 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. This Report contains forward-looking statements that involve 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 discussed in the Company's Annual Report on Form 10-K for the nine month period ended December 31, 1995. 7
RESULTS OF OPERATIONS REVENUES The Company had total revenues of $2.2 million and $0.9 million for the quarters ended June 30, 1996 and 1995, respectively. Total revenues for the six month periods ended June 30, 1996 and 1995 were $3.0 million and $1.9 million, respectively. Revenues increased during the three and six month periods ended June 30, 1996, primarily due to net product sales of $1.4 million derived from the launch of VISTIDE in June 1996. Other revenue resulted primarily from the Company's collaborative research and development agreement with Glaxo. In March 1996, the Company and Glaxo entered into a new collaborative research agreement, extending for five years the existing collaboration between the parties. COSTS AND EXPENSES For the quarter ended June 30, 1996, the Company's research and development expenses increased 41% to $10.6 million from $7.5 million for the same period in 1995. The Company's research and development expenses increased 27% to $19.8 million for the six month period ended June 30, 1996 from $15.6 million for the same period in 1995. This increase was due primarily to increases in expenses associated with the Company's ongoing clinical trials for several product candidates, as well as increases in research and development staffing and preclinical expenses. The Company expects its research and development expenses in the remainder of 1996 will grow significantly reflecting anticipated increased expenses related to clinical trials and manufacturing. Selling, general and administrative expenses were $7.4 million and $2.4 million for the quarters ended June 30, 1996 and 1995, respectively, representing an increase of 208%. For the six month periods ended June 30, 1996 and 1995, such expenses were $12.3 million and $5.2 million, respectively, an increase of 136%. This increase is attributable primarily to the establishment of marketing and sales capabilities in connection with the launch of VISTIDE, as well as activities in support of the Company's expanded research and development efforts. The Company expects its selling, general and administrative expenses to significantly increase during the remainder of 1996 in connection with on- going marketing and sales activities, as well as increased corporate development activities. NET INTEREST INCOME The Company had net interest income of $3.7 million and $1.0 million for the quarters ended June 30, 1996 and 1995, respectively, representing an increase of 270%. Net interest income for the six month periods ended June 30, 1996 and 1995 was $6.3 million and $2.1 million, respectively. Net interest income has significantly increased due to the Company's higher average cash and cash equivalents and short-term investment balances which resulted from the Company's two public offerings of common stock completed in February 1996 and August 1995. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents and short-term investments were $290.4 million at June 30, 1996 compared to $155.7 million at December 31, 1995. This increase is the result of the Company's public offering of common stock in February 1996 which generated $155.6 million in net proceeds. The Company expects to incur construction and equipment costs of approximately $3.0 million related to the build-out of a 37,000 square foot facility leased in August 1996. The costs will be incurred during the third and fourth quarter of 1996 and the Company expects to occupy this space by October 1996. During 1996, the Company expects to incur substantial and 8
increasing research and development and selling, general and administrative expenses. The Company is actively seeking additional collaborative agreements with corporate partners. There can be no assurance, however, that any such agreements will be entered into or that they will reduce the Company's funding requirements. The Company expects that additional equity or debt financings may be required to fund its operations. There can be no assurance that such funds will be available on favorable terms, if at all. Net cash used in operations was $20.4 million and $15.5 million for each of the six month periods ended June 30, 1996 and 1995, respectively. The Company expects its cash requirements to grow in future periods due to higher expenses. However, the Company believes that its existing capital resources, including net product 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 establishment of sales and marketing capabilities and the establishment of collaborative relationships with other companies. 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 14, 1996, the stockholders elected six directors to serve until the next annual meeting. They also approved the amendments to the Company's 1991 Stock Option Plan ("Option Plan"), approved the adoption of the Company's 1995 Non-Employee Directors' Stock Option Plan ("Directors' Plan"), ratified an amendment to the Company's Restated Certificate of Incorporation increasing the Company's authorized shares of common stock ("Certificate of Incorporation"), and ratified the selection of Ernst & Young LLP as independent auditors of the Company for its fiscal year ending December 31, 1996 ("Selection of Auditors"). Of the 28,288,416 shares of Common Stock of the Company outstanding as of the March 25, 1996 record date for the Annual Meeting (the "Outstanding Shares"), the votes regarding the election of directors were as follows: Votes Votes Against or Broker For Withheld Abstentions Non-votes ---------- ---------- ----------- --------- Etienne F. Davignon 24,072,775 248,983 N/A N/A James M. Denny, Sr. 24,072,675 249,083 N/A N/A Gordon E. Moore 24,072,674 249,084 N/A N/A Michael L. Riordan 24,072,763 248,995 N/A N/A Donald H. Rumsfeld 24,072,575 249,183 N/A N/A George P. Shultz 24,072,575 249,183 N/A N/A Of the Outstanding Shares, 13,345,091 shares were voted for the ratification of the amendments to the Option Plan, increasing the aggregate number of shares of Common Stock authorized for issuance under such plan by 2,250,000 shares and adding provisions with respect to Section 162(m) of the Internal Revenue Code of 1986, as amended; 6,299,367 shares were 9
voted against or were withheld; 22,775 shares abstained; and no shares were broker non-votes. Of the Outstanding Shares, 16,577,948 shares were voted for the ratification of the Directors' Plan; 46,874 shares abstained; and no shares were broker non-votes. Of the Outstanding Shares, 23,865,650 shares were voted for the ratification of the amendment to the Certificate of Incorporation; 315,903 shares were voted against or were withheld; 21,935 shares abstained; and no shares were broker non-votes. Of the Outstanding Shares, 24,272,401 shares were voted for the ratification of the Selection of Auditors; 15,564 shares were voted against or were withheld; 33,493 shares abstained; and no shares were broker non-votes. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10.35 Agreement among Registrant and Michael F. Bigham. 10.36 Vintage Park Research and Development Lease by and between Registrant and WCB Sixteen Limited Partnership dated June 24, 1996 for premises located at 333 Lakeside Drive, Foster City, California. 10.37 Amendment No. 1 to Vintage Park Research and Development Lease by and between Registrant and WCB Seventeen Limited Partnership dated June 24, 1996 for premises located at 335 Lakeside Drive, Foster City, California. 10.38 Amendment No. 2 to Vintage Park Research and Development Lease by and between Registrant and WCB Seventeen Limited Partnership dated June 24, 1996 for premises located at 344B, 346 and 353 Lakeside Drive, Foster City, California. 10.39 Amendment No. 2 to Vintage Park Research and Development Lease by and between Registrant and WCB Sixteen Limited Partnership dated June 24, 1996 for premises located at 342A and 368 Lakeside Drive, Foster City, California. (b) Reports on Form 8-K There were no reports on Form 8-K filed for the Quarter ended June 30, 1996. 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: July 26, 1996 /s/ John C. Martin --------------------------------------- John C. Martin President and Chief Executive Officer Date: July 26, 1996 /s/ Mark L. Perry --------------------------------------- Mark L. Perry Vice President, Chief Financial Officer and General Counsel 11