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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
AMENDMENT NO. 1
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-19731
------------------------
GILEAD SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Registrant's telephone number, including area code: 650-574-3000
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK $.001 PAR VALUE
(Title of Class)
------------------------
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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based upon the closing price of the Common Stock on the Nasdaq Stock
Market on February 26, 1999 was $762,213,210*.
The number of shares outstanding of the Registrant's Common Stock was
30,884,298 as of February 26, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Certain Exhibits filed with the Registrant's Registration Statements on Form
S-1 (Registration Nos. 33-44534 and 33-55680), as amended, the Registrant's
Registration Statement on Form S-3 (No. 333-868), as amended, the Registrant's
Registration Statement on Form S-8 (Registration No. 33-46058), the Registrant's
Annual Reports on Form 10-K for the fiscal periods ended March 31, 1994,
December 31, 1995 and December 31, 1997, the Registrant's Quarterly Reports on
Form 10-Q for the fiscal quarters ended September 30, 1993, September 30, 1994,
December 31, 1994, June 30, 1996, September 30, 1996 and September 30, 1997 and
the Registrant's Current Report on Form 8-K filed March 9, 1999 are incorporated
herein by reference into Part IV of this Report.
------------------------
* Based on a closing price of $41.25 per share. Excludes 12,406,402 shares of
the Registrant's Common Stock held by executive officers, directors and
stockholders whose ownership exceeds 5% of the Common Stock outstanding at
February 26, 1999. Exclusion of such shares should not be construed to
indicate that any such person possesses the power, direct or indirect, to
direct or cause the direction of the management or policies of the Registrant
or that such person is controlled by or under common control with the
Registrant.
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
THIS REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO
CLINICAL AND REGULATORY DEVELOPMENTS (INCLUDING ANTICIPATED CLINICAL TRIAL
COMMENCEMENT AND FDA FILING AND APPROVAL DATES), MARKETING AND SALES MATTERS,
FUTURE EXPENSE LEVELS, FINANCIAL RESULTS AND YEAR 2000 MATTERS. THESE STATEMENTS
INVOLVE INHERENT RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL FINANCIAL AND
OPERATING 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, THOSE DISCUSSED IN "RISK FACTORS," PARTICULARLY THOSE
RELATING TO THE ONGOING DEVELOPMENT AND COMMERCIALIZATION OF THE COMPANY'S
POTENTIAL PHARMACEUTICAL PRODUCTS AND, IN THE CASE OF YEAR 2000 MATTERS, THE
ABILITY TO IDENTIFY AND CORRECT ALL RELEVANT COMPUTER CODE AND THE SUCCESS OF
REMEDIAL EFFORTS IMPLEMENTED BY THIRD-PARTY SUPPLIERS AND BUSINESS PARTNERS.
GENERAL
Gilead Sciences, Inc. ("Gilead" or the "Company") is an independent
biopharmaceutical company that seeks to provide accelerated solutions for
patients and the people who care for them. The Company discovers, develops and
commercializes proprietary therapeutics for important viral diseases, including
the currently marketed product VISTIDE-Registered Trademark- (cidofovir
injection) for the treatment of cytomegalovirus ("CMV") retinitis, a
sight-threatening viral infection in patients with acquired immune deficiency
syndrome ("AIDS"). In addition, the Company is developing products to treat
diseases caused by human immunodeficiency virus ("HIV"), hepatitis B virus
("HBV") and influenza virus.
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 cause harmful side effects
during preclinical or clinical trials, fail to receive necessary regulatory
approvals, be difficult or uneconomical to manufacture on a commercial scale, be
uneconomical to market or be precluded from commercialization by either
proprietary rights or competing products of others.
The Company faces significant challenges and risks in an industry undergoing
rapid change, including the risks inherent in its research and development
programs, uncertainties in obtaining and enforcing patents, the lengthy,
expensive and uncertain regulatory approval process, reliance on third party
manufacturers, intense competition from pharmaceutical and biotechnology
companies, dependence on collaborative relationships, 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 any of the Company's products or 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, nor can there be assurance that the
Company will either achieve or sustain profitability.
On March 1, 1999, Gilead and NeXstar Pharmaceuticals, Inc. ("NeXstar")
announced a definitive merger agreement (the "Merger") providing for the
acquisition by Gilead of all the outstanding common stock of NeXstar. The Merger
is structured as a tax-free, stock-for-stock transaction. The Company intends to
account for the Merger under the pooling-of-interests method. NeXstar,
headquartered in Boulder, Colorado, is engaged in the discovery, development,
manufacture and commercialization of products to treat serious and
life-threatening illnesses. In addition to its Boulder headquarters, NeXstar
maintains research, development and manufacturing facilities in San Dimas,
California, and marketing subsidiaries
1
outside of the United States. Under the terms of the Merger agreement, NeXstar
stockholders will receive between 0.3786 and 0.5000 of a share of Gilead common
stock for each share of NeXstar common stock. The exact exchange ratio will be
determined based on the trading range of Gilead common stock prior to completion
of the Merger. The Merger is subject to certain conditions, including approval
by the stockholders of Gilead and NeXstar. The Merger is expected to be
completed in mid-1999. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation--Proposed Merger Agreement."
The Company was incorporated in Delaware in 1987. The Company's principal
executive offices are located at 333 Lakeside Drive, Foster City, California
94404 and its telephone number is (650) 574-3000, or (800) GILEAD5
(800-445-3235).
FOR A MORE DETAILED DISCUSSION OF THE RISK FACTORS RELATING TO THE COMPANY
SUMMARIZED ABOVE, SEE "RISK FACTORS" AT THE END OF THIS ITEM 1 (PAGES 20 THROUGH
25 OF THIS REPORT). STOCKHOLDERS AND PROSPECTIVE INVESTORS IN THE COMPANY SHOULD
CAREFULLY CONSIDER THESE RISK FACTORS.
OVERVIEW OF NUCLEOTIDES
Nucleotides exist in every human cell and are the building blocks of the
nucleic acids DNA and RNA. A single nucleotide is called a mononucleotide, and
several nucleotides linked together are called an oligonucleotide. Nucleotides
are involved in the metabolism and regulation of certain activities of cells and
microorganisms. Oligonucleotides are the material containing genetic
information.
Natural oligonucleotides are coupled to one another in a specific manner to
form DNA or RNA strands. The specific sequences of nucleotides that compose each
strand of DNA contain the genetic codes for the different proteins produced by
the cell. Proteins perform most of the normal physiologic functions of humans,
viruses and other organisms. However, when the production or activity of
proteins becomes aberrant, numerous diseases, such as vascular disease,
inflammatory disease or cancer, can result. Diseases may also result from a
foreign organism, such as a virus, which directs a cell to produce proteins
necessary for viral replication.
Natural nucleotides are a versatile class of compounds that can be
chemically modified to inhibit the production or activity of disease-causing
proteins. Natural nucleotides have three molecular components: a sugar, a
phosphate group and a base. Every nucleotide in DNA has the same sugar and
phosphate group but a different base. Nucleotide analogues designed to be
therapeutic compounds can work by a number of different mechanisms.
Mononucleotides can be designed to interfere with the metabolism of cells or
with the replication of viruses. Oligonucleotides can be designed to interfere
with transcription or translation by binding to DNA or RNA.
The Company believes that the precise interaction of nucleotides in binding
to DNA, RNA and proteins provides the chemical basis for the development of
therapeutic products with high specificity and potency and long duration of
action. Many of the Company's products or products in development are nucleotide
analogues, including VISTIDE, PREVEON-Registered Trademark- (adefovir
dipivoxil), adefovir dipivoxil for hepatitis B and PMPA.
2
PRODUCT PIPELINE
The following table summarizes Gilead's products and product candidates.
This table is qualified in its entirety by reference to the more detailed
descriptions elsewhere in this Report.
------------------------
(1) See "Government Regulation" for a description of the phases of clinical
testing and the regulatory approval process.
VISTIDE
In June 1996, Gilead received United States Food and Drug Administration
("FDA") clearance to market its first product, VISTIDE for the treatment of CMV
retinitis in patients with AIDS. The active ingredient in VISTIDE is cidofovir,
a mononucleotide analogue that has demonstrated activity in preclinical studies
and clinical trials against several viruses in the herpesvirus family. In
addition to VISTIDE, cidofovir is under evaluation for other indications. See
"Clinical Development Programs--Cidofovir."
Cytomegalovirus is an opportunistic infection in patients with AIDS. CMV is
a systemic viral infection that may infect several sites in the body, including
the retina, gastrointestinal tract, lungs, liver and central nervous system.
Retinitis is the most frequent manifestation of CMV infection in patients with
AIDS. The incidence of CMV retinitis in AIDS patients declined by more than 75%
since 1996 as a result of more effective therapeutics for AIDS, as well as the
use of oral ganciclovir for CMV prophylaxis. The Company anticipates that this
decline may continue as these therapies effectively control HIV infection.
VISTIDE was cleared for marketing based on clinical trials demonstrating
that the drug has a statistically significant effect in delaying the progression
of CMV retinitis lesions in newly diagnosed patients, and in previously treated
patients who had failed other therapies. In addition, VISTIDE has a more
convenient dosing regimen than the other intravenous CMV treatments. VISTIDE is
administered by intravenous infusion once per week for the first two weeks as
induction therapy, and then once every other week as maintenance therapy until
progression of the disease or intolerance to the therapy. Other intravenous
treatments must be administered once or multiple times per day and often require
the surgical implantation of a chronic catheter in the patient's chest for the
daily infusions.
3
Renal toxicity is the primary dose-limiting side effect of VISTIDE
administration. Prior to each administration, patients must be monitored for
urinary protein and serum creatinine (laboratory markers of renal toxicity). In
addition, patients receive intravenous saline hydration and oral probenecid on
each treatment day to mitigate the potential for toxicity. VISTIDE is
contraindicated in patients receiving other agents with nephrotoxic potential,
and patients are required to undergo a "wash out" period of seven days after
completing therapy with such agents and before receiving VISTIDE. In certain
animal studies, cidofovir, the active ingredient in VISTIDE, was carcinogenic.
VISTIDE is marketed and sold in the United States by Gilead's sales force of
antiviral specialists. This group currently consists of 26 sales representatives
and three regional directors who detail physicians, hospitals, clinics,
pharmacies and other healthcare providers involved in the treatment of patients
with CMV retinitis. Gilead sells VISTIDE to wholesalers and specialty
distributors who, in turn, sell the product to hospitals, home healthcare
companies, pharmacies and other healthcare providers. See "Marketing and Sales."
In August 1996, Gilead licensed commercial rights to Pharmacia & Upjohn S.A.
("Pharmacia & Upjohn") to market and sell VISTIDE in all territories outside of
the United States. In April 1997, the European Commission granted marketing
approval for VISTIDE for all the member countries in the European Union under
the centralized procedure of the European Medicines Evaluation Agency ("EMEA").
Subsequently, VISTIDE was approved for marketing in Switzerland, Australia and
Hong Kong, and applications for approval are pending in several other countries.
By the end of 1998, Pharmacia & Upjohn had launched the product in twelve
European countries and two other countries. VISTIDE product launches by
Pharmacia & Upjohn in additional countries are expected as approvals are
obtained. Pharmacia & Upjohn pays Gilead a royalty on its net sales of VISTIDE
on a trailing, quarterly basis. See "Collaborative Relationships--Pharmacia &
Upjohn."
There are several approved therapies that compete with VISTIDE in the CMV
retinitis market. Ganciclovir, marketed by Roche Laboratories, is the most
widely used treatment for CMV retinitis. Ganciclovir is available in intravenous
and oral formulations, and the oral formulation is approved for both prophylaxis
and maintenance treatment of CMV retinitis. A ganciclovir ocular implant,
marketed by Bausch & Lomb Incorporated ("Bausch & Lomb"), provides local therapy
to an affected eye and is implanted through a surgical procedure. In addition,
Astra U.S.A. markets foscarnet, another approved intravenous therapy for CMV
retinitis, and CibaVision markets formivirsen, an antisense drug injected
directly into the eye. There are also potentially competing products in clinical
development for the treatment of CMV retinitis. Although the Company believes
that VISTIDE has competitive advantages over these products, particularly with
regard to dosing convenience and efficacy, there can be no assurance that the
Company will be successful in maintaining or increasing VISTIDE's share of the
declining CMV retinitis treatment market. See "Competition."
CLINICAL DEVELOPMENT PROGRAMS
Gilead is developing small molecule nucleotide analogues that are intended
to treat viral infections by selectively interfering with proteins essential for
viral replication. Numerous disease processes, particularly viral infections,
require precise interactions between cellular or viral proteins and nucleotides
or oligonucleotides. For example, many viruses depend upon certain proteins
known as enzymes to synthesize their own DNA. This dependence of the virus upon
specific interactions between proteins and nucleic acids provides opportunities
for the development of therapeutic products that disrupt these crucial
interactions. Preclinical and clinical studies have demonstrated that small
molecule nucleotide analogues can selectively interrupt these interactions.
The Company believes that small molecule nucleotide analogues offer several
potential advantages as therapeutics. First, these molecules may have a long
duration of action, permitting less frequent and therefore more convenient
dosing. Second, because certain nucleotides can be active in both infected and
4
uninfected cells, these molecules may provide prophylactic protection of
uninfected cells. Third, when compared to existing antiviral drugs, viruses may
be less likely to develop resistance to these analogues. In addition, these
analogues may be active against viral strains that have developed resistance to
existing antiviral drugs. Finally, the low molecular weight of these analogues,
or prodrug derivatives of them, may permit their development into drugs suitable
for oral administration.
A major portion of the Company's operating expenses to date has been related
to the research and development of products. During the years ended December 31,
1998, 1997 and 1996, the Company's research and development expenses were $75.3
million, $59.2 million, $41.9 million, respectively.
PREVEON
PREVEON is a mononucleotide analogue developed as an oral prodrug of
adefovir, the Company's first HIV clinical candidate. A prodrug is a modified
version of a parent compound designed to enhance delivery characteristics.
PREVEON has demonstrated preclinical and clinical activity against HIV,
hepatitis B virus and herpesviruses. See "Adefovir Dipivoxil for HBV." PREVEON
has been generally well tolerated in clinical trials. The most common adverse
events have been dose-related gastrointestinal effects, including nausea and
loss of appetite. Nephrotoxicity, including changes in serum creatinine and
phosphate, is the most significant toxicity observed. Nephrotoxicity has been
observed in approximately one-third of patients dosed for six months to one year
at the 120 mg daily dose level. In clinical trials, observed nephrotoxicity has
generally been gradual in onset, asymptomatic, detectable by routine monitoring
and resolvable upon dose reduction or withdrawal. Some patients have also
experienced elevations in liver transaminases. In clinical trials, PREVEON is
administered as a single oral tablet once per day, along with a single oral
capsule of L-carnitine, a nutritional supplement. L-carnitine is administered to
counteract the decrease of natural serum carnitine that can be caused by PREVEON
administration.
A number of products with different mechanisms of action have been approved
for the treatment of HIV. The first generation of approved HIV drugs are reverse
transcriptase inhibitors, including nucleoside and non-nucleoside compounds.
Several protease inhibitors were approved for marketing beginning in 1996, and
others are in clinical development. Combination therapy with reverse
transcriptase inhibitors and protease inhibitors is proving to be effective for
many people with AIDS, in some cases lowering the patient's viral load (level of
virus in the blood) to undetectable levels for prolonged periods of time. The
Company believes, however, that there is still substantial room for improvement
in AIDS drug therapy. Many patients are developing resistance or becoming
intolerant to combination therapy, and require new combinations for therapy to
be effective. Patients would benefit from AIDS drugs that are better-tolerated,
more convenient to dose, less prone to develop significant resistance and active
against resistant strains of HIV.
PREVEON is a reverse transcriptase inhibitor that is being evaluated in a
series of clinical studies sponsored by Gilead, as well as by government
organizations, in the United States and abroad. These studies were designed to
test the safety and efficacy of PREVEON in a variety of drug combinations and
patient populations, including studies of patients not previously treated with
anti-HIV therapies, patients not previously treated with a protease inhibitor
and patients who had failed treatment with triple combination or protease
containing regimens. PREVEON is also available in the United States under an
expanded access program for patients with limited treatment options, and more
than 7,000 patients have enrolled in the program as of March 1999. In both the
clinical studies and the expanded access program, PREVEON has been administered
at one of two dose levels (120 mg or 60 mg, once per day).
Based on the data obtained from the clinical studies and expanded access
program, as well as ongoing feedback from the FDA, Gilead plans to submit a new
drug application ("NDA") for the 60 mg dose of PREVEON during mid-1999. In
November 1998, the FDA granted "fast track" designation to PREVEON for the
treatment of HIV-infected patients with clinical, immunologic and/or virologic
progression despite prior reverse transcriptase inhibitor therapy. In January
1999, Gilead initiated a rolling submission by filing
5
the Chemistry, Manufacturing and Controls section of the NDA. In addition to
ongoing Phase III clinical trials for PREVEON, additional Phase IV studies will
be initiated during 1999 to confirm the safety and efficacy of PREVEON at the 60
mg dose level. There can be no assurance as to when or whether Gilead will file
an NDA for approval of PREVEON. Moreover, even if the NDA is filed, there can be
no assurance as to the nature, timing or ultimate approval of the NDA by the
FDA.
HIV is the causative agent of AIDS. HIV infects an estimated 33 million
people worldwide. There were an estimated 260,000 people with AIDS in the United
States in 1998. A number of therapeutics are currently marketed or are in
advanced stages of clinical development for the treatment of HIV infection and
AIDS, including 13 products currently marketed in the United States. See
"Competition."
The Company has an exclusive, worldwide license to patent rights and related
technology for adefovir, which is the parent compound of adefovir dipivoxil,
from the Institute of Organic Chemistry and Biochemistry of the Academy of
Sciences of the Czech Republic and the REGA Stichting Research Institute in
Belgium (collectively, "IOCB/REGA"), and would be obligated to pay a royalty to
IOCB/ REGA on any net sales of adefovir dipivoxil. See "Collaborative
Relationships--IOCB/REGA."
GS 4104
In September 1996, Gilead announced the discovery of GS 4104 (oseltamivir),
an oral prodrug of the active neuraminidase inhibitor GS 4071, which inhibits
the replication of influenza virus in a variety of animal models. GS 4104 is a
potent and specific inhibitor of influenza A and B virus neuraminidase activity
and has shown potent antiviral activity when tested against laboratory strains
of influenza A and B viruses IN VITRO.
Based on these data, Gilead and F. Hoffmann-La Roche Ltd. and Hoffmann-La
Roche, Inc. (collectively, "Roche") entered into an exclusive, worldwide
development and commercialization collaboration covering all of Gilead's
neuraminidase inhibitors. Gilead and Roche are jointly conducting research and
development of neuraminidase inhibitors for the prevention and treatment of
influenza, with Roche funding 100% of this program. GS 4104 is a systemic
treatment for influenza, administered as an oral capsule and designed to reach
all sites of infection. GS 4104 targets one of the two major surface structures
of the influenza virus, the neuraminidase protein. The neuraminidase site is
highly conserved in all common strains of influenza. If neuraminidase is
inhibited, the virus is not able to infect new cells.
During 1998, Roche and Gilead completed and announced the results of several
Phase III clinical studies of GS 4104. In two treatment studies, one conducted
in the United States and another in Europe, Canada and Hong Kong and each
involving over 600 patients, GS 4104 significantly decreased the duration and
severity of acute influenza in adults. In addition, GS 4104 reduced secondary
flu complications, such as bronchitis and sinusitis, in previously healthy
adults. In both of these treatment studies, the drug was generally well
tolerated. Transient nausea was reported more often in the active drug arm of
each study than in the placebo group. In a third study, which involved testing
GS 4104 as a preventative therapy, the drug reduced the incidence of influenza
infection relative to placebo and was well tolerated by the over 1,000
participants who were on a six-week regimen of the active drug.
Roche has exclusive commercial rights to GS 4104 and to any other products
developed under the collaboration. Roche is obligated to pay Gilead cash
payments upon achievement of development milestones and royalties on net sales
of any products developed under the collaboration. See "Collaborative
Relationships--Hoffmann-La Roche." In the second quarter of 1999, Roche
submitted an NDA to the FDA, and a Marketing Authorisation Application ("MAA")
to the European Commission under the centralized procedure of the EMEA, in each
case seeking marketing approval for the treatment indication for GS 4104. There
can be no assurance as to the timing or ultimate approval of these marketing
applications for GS 4104.
6
Glaxo Wellcome, in collaboration with Biota Holdings Limited, is also
pursuing development of zanamavir, a neuraminidase inhibitor to treat influenza.
This compound, delivered with a dry powder inhaler, has been approved in some
countries and is under review for approval in the United States by the FDA.
Zanamavir represents significant potential competition for GS 4104. See
"Competition."
ADEFOVIR DIPIVOXIL FOR HBV
Gilead is also developing adefovir dipivoxil for the potential treatment of
HBV. More than 350 million people worldwide are chronically infected with HBV,
primarily in Asian countries. Complications of chronic HBV include cirrhosis,
cancer of the liver and liver failure. A vaccine is available that can prevent
the transmission of HBV; however, it has no activity in those already infected
with the virus. Alpha interferon is approved for the treatment of HBV, is
administered by injection and is not always successful in controlling the
disease.
In 1998, Gilead completed two Phase II randomized, double-blind,
placebo-controlled clinical studies of adefovir dipivoxil for the treatment of
hepatitis B infection. Data from both studies indicate that twelve weeks of
dosing with adefovir dipivoxil at 5 mg, 30 mg or 60 mg once per day was well
tolerated and resulted in a statistically significant decline in HBV DNA levels
in treated patients compared to placebo. The decline in HBV DNA was greater than
4 logs (99.99%) at the higher doses tested. Treatment with adefovir dipivoxil
was also associated with seroconversion in a portion of the patients in one of
the studies. In March 1999, the Company initiated the first of a series of
multinational Phase III trials in HBV infected patients.
Glaxo Wellcome, in collaboration with Biochem Pharma, is pursuing
development of lamivudine, a nucleoside analogue to treat HBV infection. This
compound was recently approved for marketing in the United States, China and
several other countries and represents significant potential competition for
adefovir dipivoxil for HBV. See "Competition."
The Company has an exclusive, worldwide license to patent rights and related
technology for adefovir, which is the parent compound of adefovir dipivoxil,
from IOCB/REGA, and would be obligated to pay a royalty to IOCB/REGA on any net
sales of adefovir dipivoxil. See "Collaborative Relationships--IOCB/ REGA."
PMPA
The Company is evaluating PMPA (tenofovir), a nucleotide analogue with
structural similarities to adefovir dipivoxil, as a potential therapeutic for
HIV and AIDS. PMPA has shown significant activity against simian
immunodeficiency virus ("SIV") in a variety of preclinical treatment and
prevention models. SIV causes an AIDS-like syndrome in primates. In these
experiments, primates treated with injections of PMPA either before or after
exposure to SIV were completely protected from infection. In another primate
study, a topical gel form of PMPA also provided protection against SIV
transmission when applied intravaginally.
Gilead has conducted placebo-controlled Phase I/II studies of PMPA in both
intravenous and oral formulations ("PMPA Prodrug"). In February 1998, the
Company presented data from a Phase I/II study of PMPA Prodrug, indicating that
the highest dose of the drug tested reduced viral load by a median of 1.22 logs
after one month of dosing. In this study, PMPA Prodrug was administered as a
single oral tablet at one of three doses (75 mg, 150 mg or 300 mg) once per day.
Based on these results, the Company initiated a long-term Phase II safety study
of PMPA Prodrug, in combination with other anti-retroviral therapies, which
completed enrollment at 190 patients in March 1999. Depending on the results
from this study, Gilead intends to initiate a program of Phase III studies of
PMPA Prodrug before the end of 1999.
The National Institutes of Health ("NIH") is evaluating possible
applications of intravenous PMPA in the prevention of maternal-fetal HIV
transmission, as well as a topical version of PMPA for the prevention of sexual
transmission of HIV.
The Company has an exclusive, worldwide license to patent rights and related
technology for PMPA from IOCB/REGA, and would be obligated to pay a royalty to
IOCB/REGA on any net sales of PMPA or PMPA Prodrug. See "Collaborative
Relationships--IOCB/REGA."
7
CIDOFOVIR
Cidofovir is a mononucleotide analogue that has demonstrated activity in
preclinical studies and clinical trials against several viruses in the
herpesvirus family. Cidofovir is the active ingredient in the Company's
commercial product VISTIDE (cidofovir injection). See "VISTIDE." Gilead is
currently evaluating cidofovir in different formulations for the potential
treatment of certain infectious diseases caused by herpesviruses and other
viruses.
Preclinical studies have demonstrated that cidofovir is active against a
variety of viruses that cause disease in people with AIDS, including molluscum
contagiosum, which causes disfiguring skin lesions, Kaposi's sarcoma, an
AIDS-related malignancy, and progressive multifocal leukoencephalopathy ("PML"),
a rapidly progressive, often fatal brain disease.
In 1994, Gilead entered into a license and supply agreement with Bausch &
Lomb (formerly Storz Instrument Company, a subsidiary of American Home Products
Corporation) to develop an eye drop formulation of cidofovir for the potential
treatment of certain viruses that cause external eye infections, including
adenovirus, which is the leading cause of viral conjunctivitis, or "pink eye."
The license to Bausch & Lomb is limited to topical ophthalmic use for external
viral eye disease, and excludes any treatment requiring injection and any
treatment for other eye diseases such as CMV retinitis. Bausch & Lomb is
conducting clinical development of topical ophthalmic cidofovir and is currently
analyzing the data from Phase II clinical studies. See "Collaborative
Relationships--Bausch & Lomb."
The side effect profiles of the drugs under development based on cidofovir
have not yet been fully characterized. Renal toxicity is the primary
dose-limiting side effect of VISTIDE administration. In addition, in certain
animal studies, cidofovir was carcinogenic. There can be no assurance that the
Company will be successful in developing or commercializing any therapeutic
products, other than VISTIDE, based on cidofovir.
The Company has an exclusive, worldwide license to patent rights and related
technology for cidofovir from IOCB/REGA, and is obligated to pay a royalty to
IOCB/REGA on the net sales of VISTIDE, as well as on any other future products
containing cidofovir. See "VISTIDE," "Collaborative Relationships-- IOCB/REGA."
RESEARCH
Gilead's research efforts are conducted by a scientific team with the
multi-disciplinary skills that the Company believes are critical for the
discovery and preclinical development of therapeutics based on nucleotides or
other small molecules. The primary therapeutic targets of the Company's research
program are infectious diseases, primarily viral diseases, as well as cancer.
NUCLEOTIDE ANALOGUES
The Company has an extensive library of proprietary nucleotide compounds
that it is evaluating for antiviral and antiproliferative activity. Among the
primary targets of this screening activity are HIV, herpesviruses, hepatitis B
virus and poxviruses. In addition, Gilead is evaluating novel nucleotide
prodrugs with the potential for enhanced pharmaceutical properties, including
better bioavailability, longer half-life and enhanced therapeutic index. Several
nucleotide analogues are also being evaluated for activity against cancer in
animal models.
HIV PROTEASE INHIBITORS
Through its structure-based drug design program, the Company has synthesized
a number of small molecule compounds with IN VITRO activity against HIV. Gilead
has evaluated several HIV protease inhibitors in animal models. The current
focus of this program is to enhance the pharmacological
8
properties and cross-resistance profile of these compounds before conducting
further preclinical development.
HEPATITIS C VIRUS
Building on its expertise in the discovery and development of antiviral
therapeutics, the Company is evaluating different approaches that could lead to
inhibitors of hepatitis C virus ("HCV"). This research includes identification
of HCV targets, establishment of assays and screening of compounds as potential
inhibitors. See "Legal Proceedings."
ANTIBACTERIAL PROGRAM
Gilead has synthesized a series of small molecule compounds with IN VITRO
activity against bacteria, including methicillin-resistant staphylococcus aureus
("MRSA"). The current focus of this program is the optimization of potency and
selectivity and evaluation of these compounds in preclinical animal models.
ADENOSINE RECEPTOR REGULATORS
Gilead is working with the National Institute of Diabetes, Digestive and
Kidney Diseases at the NIH to study adenosine receptor agonists and antagonists
in the treatment and prevention of neurodegenerative disorders, particularly
stroke. Independent research has also implicated adenosine receptors in
inflammation and allergic disorders. NIH researchers have synthesized a series
of novel small molecule adenosine agonist and antagonist compounds and have
identified several compounds with A3 receptor agonist and antagonist activity
which exhibit protective effects in an animal model of stroke. These compounds
also have potential utility in the treatment of inflammatory and allergic
conditions. In collaboration with the NIH, Gilead is currently evaluating
several compounds with A3 receptor antagonist or agonist activity in animal
models of stroke, and also intends to evaluate the anti-inflammatory and anti-
allergic properties of these compounds.
COLLABORATIVE RELATIONSHIPS
As part of its business strategy, Gilead establishes collaborations with
pharmaceutical companies to assist in the clinical development and/or
commercialization of certain of its products and product candidates, and to
provide support for research programs. The Company also evaluates opportunities
for in-licensing products and technologies complementary to its business. The
Company's existing collaborative relationships are as follows:
PHARMACIA & UPJOHN
In August 1996, Gilead and Pharmacia & Upjohn entered into a license and
supply agreement providing Pharmacia & Upjohn with exclusive rights to market
and sell VISTIDE in all countries outside of the United States. Under the terms
of the agreement, Pharmacia & Upjohn paid Gilead an initial license fee of $10.0
million. In June 1997, after VISTIDE was approved for marketing in the European
Union, Gilead received an additional cash milestone payment of $10.0 million.
Except for payments for bulk cidofovir and the royalties described below, no
additional payments are due to Gilead under the agreement with Pharmacia &
Upjohn. Pharmacia & Upjohn also purchased 1,133,786 newly issued shares of
Series B Preferred Stock at $35.28 per share, a price equal to 145% of the
average closing price of Gilead's common stock over the 30 trading days prior to
public announcement of the European approval, for a total purchase price of
$40.0 million. The Series B Preferred Stock is not publicly registered, votes
together with Gilead's common stock and is convertible at any time into an equal
number of shares of Gilead's common stock at Pharmacia & Upjohn's option.
Pharmacia & Upjohn is restricted in its ability to sell the Series B Preferred
Stock (or underlying common stock), or purchase any additional stock of the
Company until June 2002.
9
Gilead is responsible for maintaining the cidofovir patent portfolio and for
supplying bulk cidofovir to Pharmacia & Upjohn. Gilead is entitled to payments
for bulk cidofovir and royalty payments on a quarterly basis on the net sales of
VISTIDE by Pharmacia & Upjohn. Gilead is recognizing royalties on a delayed
basis, one quarter after the Pharmacia & Upjohn sales that generated the
royalties. The agreement with Pharmacia & Upjohn terminates on a
country-by-country basis as patent coverage for VISTIDE expires. Pharmacia &
Upjohn has the right to terminate the agreement prior to its expiration at any
time with six months notice. See "VISTIDE."
HOFFMANN-LA ROCHE
In September 1996, Gilead and Roche entered into a collaboration agreement
to develop and commercialize therapies to treat and prevent viral influenza.
Under the agreement, Roche received exclusive worldwide rights to all of
Gilead's proprietary influenza neuraminidase inhibitors, including GS 4104.
Gilead and Roche are jointly conducting the clinical development of GS 4104. In
October 1996, Roche made an initial license fee payment to Gilead of $10.3
million and Gilead is entitled to total additional cash milestone payments of up
to $40.0 million upon achievement of milestones relating to regulatory filings
and approvals in the United States, Europe and Japan. Through December 31, 1998,
Gilead recognized $6.0 million in milestone payments from Roche. Gilead
recognized $2.0 million in milestone payments in the first quarter of 1999 and
will recognize an additional $6.0 million in milestone payments relating to the
marketing applications filed by Roche in the United States and Europe in the
second quarter of 1999. Roche is funding 100% of its own and Gilead's research
and development costs for the program and will pay Gilead royalties on net sales
on GS 4104 and any other products developed under the collaboration. Under the
agreement, Roche is responsible for commercialization of GS 4104 on a worldwide
basis. The agreement with Roche terminates on a country-by-country basis as
patent coverage for any product developed under the agreement expires. Roche has
the right to terminate the agreement prior to expiration at any time upon 12
months notice. See "Clinical Development Programs--GS 4104."
For the years ended December 31, 1998, 1997 and 1996, the Company recorded
approximately $16.4 million, $8.2 million and $1.1 million, respectively, of
research and development reimbursement revenue related to the Roche agreement.
The $16.4 million recorded as revenue during 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 and recognized in contract revenue in
1998. Except for this $5.2 million, research and development costs related to
the Roche agreement approximate the reimbursement revenue recognized in each
year and are included in research and development expenses.
In September 1996, Gilead and Roche Laboratories Inc. ("Roche Labs") entered
into an agreement to co-promote Roche's Roferon-Registered Trademark--A
(Interferon alfa-2a, recombinant) for the treatment of chronic hepatitis C
infection in the United States. This co-promotion agreement terminated at the
end of 1998.
GLAXO WELLCOME
In July 1990, Gilead entered into a collaborative research and development
agreement with Glaxo Wellcome Inc. ("Glaxo"). Concurrent with the signing of the
agreement Glaxo made an $8.0 million equity investment in Gilead and currently
holds 889,911 shares (approximately 2.8%) of the Company's outstanding common
stock. Under the terms of the Glaxo agreement, as amended, the Company received
$1.8 million in 1998, and $3.0 million in both 1997 and 1996, to fund research,
which is reported as contract revenue in Gilead's consolidated statements of
operations. The research and development costs reimbursed by Glaxo approximate
the related revenue and are included in research and development expense. This
agreement and the related funding was terminated in June 1998.
In December 1998, Gilead sold its antisense patent estate to Isis
Pharmaceuticals, Inc. ("Isis") for $6.0 million, payable in installments over
three years. Gilead has no ongoing research or funding
10
obligations under the Isis agreement and does not expect to perform additional
research in the antisense field.
BAUSCH & LOMB
In August 1994, the Company entered into a license and supply agreement with
Bausch & Lomb (formerly Storz Instrument Company, a subsidiary of American Home
Products Corporation), pursuant to which Bausch & Lomb will develop and have the
right to market an eye drop formulation of cidofovir for the potential treatment
of topical ophthalmic viruses. The field of the exclusive, worldwide license to
Bausch & Lomb is limited to topical ophthalmic use for external viral eye
disease, and specifically excludes any treatment requiring injection, and any
treatment for other eye diseases such as CMV retinitis. Bausch & Lomb is
conducting clinical development of topical ophthalmic cidofovir and is currently
analyzing the data from Phase II clinical trials. Gilead is entitled to receive
a fee of $250,000 each year until Bausch & Lomb files an NDA under the
agreement. In addition, Bausch & Lomb is obligated to make a series of payments,
up to $3,000,000 in the aggregate, based on the achievement of milestones during
the term of the agreement. These milestones would be triggered by the
commencement of Phase III clinical trials and regulatory filings and approvals
in the United States, Europe and Japan. None of these milestones has been
achieved to date. Gilead is responsible for supplying bulk cidofovir to Bausch &
Lomb, and Bausch & Lomb is obligated to make royalty payments to Gilead based on
net sales of any products developed under the agreement. Under the agreement,
Bausch & Lomb is responsible for commercialization of topical ophthalmic
cidofovir on a worldwide basis. The agreement with Bausch & Lomb terminates on a
country-by-country basis as patent coverage for any product developed under the
agreement expires. Bausch & Lomb may terminate this agreement prior to its
expiration at any time on three months notice. See "Clinical Development
Programs--Cidofovir."
IOCB/REGA
In 1991 and 1992, the Company entered into agreements with IOCB/REGA
regarding a class of nucleotide compounds discovered at these institutions.
Under these agreements and later amendments, Gilead received from IOCB/REGA an
exclusive license to manufacture, use and sell the compounds covered by issued
United States patents and patent applications plus foreign counterparts
throughout the world, subject to an obligation to pay royalties on product sales
to IOCB/REGA. The compounds covered by the agreement with IOCB/REGA include
cidofovir, adefovir (the parent compound of adefovir dipivoxil) and PMPA. The
IOCB/REGA agreements do not cover GS 4104 or any of the Company's compounds in
clinical or preclinical development. The Company is currently paying IOCB/REGA
quarterly royalties on sales of VISTIDE and will be obligated to pay additional
royalties upon any future sales of adefovir dipivoxil or PMPA. See "VISTIDE" and
"Clinical Development Programs--PREVEON," "--Adefovir Dipivoxil for HBV" and
"--PMPA." The licenses from IOCB/REGA terminate on a country-by-country basis as
patent coverage for any product licensed under the agreements expires. IOCB/REGA
may terminate the licenses under these agreements with respect to any particular
product, in specified countries, if the Company does not make any sales of such
product in such countries within 12 months after regulatory approval. Under one
of these agreements, the Company has an option to receive an exclusive license
to any new developments by IOCB/REGA during the term of this agreement. Either
party may terminate this agreement on six months notice.
ACADEMIC AND CONSULTING RELATIONSHIPS
To supplement its research and development efforts, in the ordinary course
of business, the Company collaborates with and has licensed certain patents,
patent applications and technology from a number of universities and medical
research institutions.
11
MANUFACTURING
The Company generally relies on third parties for the manufacture of bulk
drug substance and drug product for clinical and commercial purposes, including
cidofovir (VISTIDE), adefovir dipivoxil (PREVEON) and PMPA. In the case of GS
4104, Gilead's influenza neuraminidase inhibitor in clinical development, Roche
is responsible for the manufacture of clinical and any commercial supplies of
drug substance and drug product. Pursuant to these relationships, the Company
depends on such third parties to perform their manufacturing obligations
effectively and on a timely basis. There can be no assurance that such parties
will perform and any failures by third parties may delay clinical trials or the
submission of products for regulatory approval, impair the Company's ability to
deliver commercial products on a timely basis, or otherwise impair the Company's
competitive position, which could have a material adverse effect on the Company.
The Company has readily available alternative supply sources for all key raw
materials used in all of its drug substances and drug products. Suppliers of the
Company's manufactured drug substances and drug products must be qualified as
such by the FDA. The process of obtaining the FDA's approval to use a particular
supplier of either a drug substance or a drug product is a costly and lengthy
process. Further, there is no assurance that approval of a supplier ultimately
will be obtained.
The Company has qualified a sole source supplier with the FDA for the bulk
drug substance used in VISTIDE and another sole source supplier for the final
drug product. Gilead has established a second source of bulk drug substance
supply for VISTIDE, and intends to file for approval of this supplier with the
FDA in 1999. The Company anticipates including two suppliers of bulk drug
substance and one supplier of drug product for PREVEON in the NDA it intends to
file in 1999. PMPA drug substance is manufactured at Gilead and at a contract
manufacturer, and PMPA drug product for clinical trials is manufactured at two
contract manufacturing sites. In the event that supplies from any of Gilead's
suppliers were interrupted for any reason, the Company's ability to complete its
clinical trials or ship its products could be impaired, which would have a
material adverse effect on the Company. The Company believes that alternative
suppliers for any of the Company's products or products in development are
available, but establishing a new supplier would require agreement with such
supplier and FDA approval.
Gilead has developed in-house capabilities to synthesize and purify
nucleotides and oligonucleotides, and believes that it has a base of proprietary
technologies, including patent applications and trade secrets, for the
manufacture of these compounds. Gilead has established a pilot-scale, bulk
chemical facility, which operates in compliance with the FDA's current Good
Manufacturing Practices ("cGMP"), to meet its current preclinical and limited
early-stage clinical requirements. The Company believes that it has or will be
able to develop, acquire or contract for sufficient supply capacity to meet its
additional clinical and commercial manufacturing requirements, although there
can be no assurance that it will be able to do so. Gilead currently has no
commercial-scale cGMP manufacturing facilities for either the production of bulk
drug substance or final drug product, and no current plans to establish such
capacity.
The manufacture of sufficient quantities of new drugs can be an expensive,
time-consuming and complex process and may require the use of materials with
limited availability or require dependence on sole source suppliers. If the
Company is unable to develop manufacturing capabilities internally or contract
for large scale manufacturing with third parties on acceptable terms, the
Company's ability to conduct preclinical studies and clinical trials, and/or
meet demand for commercial products, will be adversely affected. This could
prevent or delay commercial shipment, submission of products for regulatory
approval and initiation of new development programs, which would have a material
adverse effect on the Company.
The production of the Company's compounds is based in part on technology
that the Company believes to be proprietary. Gilead has licensed this technology
to contract manufacturers to enable them to manufacture compounds for the
Company. There can be no assurance that such manufacturers will abide by any use
limitations or confidentiality restrictions in licenses with the Company. In
addition, any such manufacturer may develop process technology related to its
work for Gilead, which could increase the
12
Company's reliance on such manufacturer or require the Company to obtain a
license from such manufacturer in order to have its products manufactured
elsewhere. There can be no assurance that such license, if required, would be
available on terms acceptable to the Company, if at all.
For certain of its potential products, the Company will need to develop
further its production technologies for use on a larger scale in order to
conduct clinical trials and produce such products for commercial sale at an
acceptable cost. There can be no assurance that the Company or its partners will
be able to implement any of these developments successfully.
MARKETING AND SALES
In connection with the launch of VISTIDE in 1996, Gilead established a sales
force of antiviral specialists in the United States. This group currently
consists of 26 sales representatives and three regional directors who detail
physicians, hospitals, clinics, pharmacies and other healthcare providers
involved in the treatment of AIDS patients with CMV retinitis. Gilead sells
VISTIDE to wholesalers and specialty distributors who, in turn, sell the product
to hospitals, home healthcare companies, pharmacies and other healthcare
providers. Gilead's sales force is supplemented by a marketing and sales staff
of approximately 20 people based at the Company's headquarters in Foster City,
California.
The Company's products are returnable in their original, unopened containers
up to one year beyond expiration date or if damaged when received by the
customer. Additionally, certain governmental agency customers are entitled to
discounts, and the Company is required to provide rebates under state Medicaid
programs. To date, returns, rebates and discounts have not been material.
The Company anticipates that it will expand its existing sales force in
order to promote PREVEON in the United States, if that product receives
marketing clearance from the FDA. A larger sales force and additional marketing
resources will be required to reach the broader market of healthcare
professionals treating patients infected with HIV. If any of the Company's other
products in development for specialty markets receive marketing clearance in the
United States, or if the Company obtains marketing rights to such a product from
a third party, Gilead's current intention would be to market and sell such a
product directly, supplementing its existing marketing and sales staff as
appropriate. Gilead has not established a marketing and sales capacity in Europe
or any other country outside of the United States. Pharmacia & Upjohn has
exclusive commercial rights to VISTIDE outside the United States, and Roche has
exclusive commercial rights to GS 4104 on a worldwide basis. The Company does
not currently intend to directly market and sell any product outside of the
United States and Europe.
The revenues received by Gilead for its products subject to commercial
collaborations, including VISTIDE outside of the United States and GS 4104 on a
worldwide basis, are dependent to a large degree on the efforts of third
parties. There can be no assurance that such efforts will be successful, that
the interests of the Company and its partners will not be in conflict or that
any of the Company's partners will not terminate their relationship with the
Company. See "Collaborative Relationships."
PATENTS AND PROPRIETARY RIGHTS
Gilead has a proprietary portfolio of patent rights and exclusive licenses
to patents and patent applications related to its products and technologies. The
Company has filed patent applications directed to the compositions of matter,
methods of preparation and uses of novel compounds on the commercial market,
under research or in development. Patent applications have been filed by Gilead
which encompass compounds that are relevant to many of the targets the Company
is currently researching, as well as other targets that may be of interest to
Gilead in the future. Gilead intends to file additional patent applications,
when appropriate, relative to improvements in its technologies and to specific
products that it develops.
Patents covering cidofovir (the active ingredient in VISTIDE) and adefovir
dipivoxil, including composition of matter claims, have been issued in the
United States, Western Europe and other
13
jurisdictions. The Company has exclusive licenses from third parties covering
these patents and other patent applications. See "Collaborative
Relationships--IOCB/REGA." The Company does not have patent filings covering
adefovir dipivoxil in China or in other certain other Asian countries, although
it does have an application pending in Japan and is seeking patent protection in
other Asian countries on commercial forms of adefovir dipivoxil. Asia is a major
market for hepatitis B therapies, one of the potential indications for adefovir
dipivoxil. Patents on certain of the Company's compounds may issue many years
before marketing approval is obtained, limiting the ultimate commercial value of
the product. However, patent term extensions for cidofovir have been applied for
or granted in the United States and a number of European countries, compensating
in part for delays in obtaining marketing approval. Similar patent term
extensions may be available for other products in development.
Set forth below are the actual or estimated patent expiration dates in the
United States and Europe for the compounds included in the Company's marketed
product and products in clinical development:
Expiration dates do not reflect patent term extensions or supplementary
protection certificates not yet applied for or granted. There can be no
assurance that pending patent applications will issue as patents or that issued
patents will provide significant proprietary protection.
The Company is the exclusive licensee or holder of patents and patent
applications relating to methoxyphosphonate derivatives and neuraminidase
inhibitors and their use in the treatment and prevention of viral infections.
The Company cannot predict whether its patent or license rights or those of
third parties will result in a significant position in these fields, whether its
patent applications or those of third parties will be issued, whether its
patents or those of third parties will provide significant proprietary
protection, or whether they will be dominated, circumvented or invalidated.
The commercial success of the Company will also depend in part on not
infringing patents or proprietary rights of others and not breaching the
licenses granted to the Company. There can be no assurance that the Company will
be able to obtain a license to any third-party technology that it may require to
conduct its business or that, if obtainable, such technology can be licensed at
a reasonable cost. Failure by the Company to obtain a license to any technology
that it may require to commercialize its technologies or products may have a
material adverse effect on the Company. In August 1998, the Company was served
with a patent infringement lawsuit filed by Chiron Corporation ("Chiron") in the
U.S. District Court for the Northern District of California. In the lawsuit,
Chiron alleges that Gilead is conducting scientific research that infringes
Chiron's patents covering the hepatitis C NS3 protease protein and gene
sequences and their use in screening for potential hepatitis C therapeutics. See
"Legal Proceedings."
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
firms, including Gilead, are generally uncertain and involve complex legal and
factual questions. Consequently, even though Gilead is currently prosecuting its
patent applications with the United States and foreign patent offices, the
Company does not know whether any of its or its licensors' pending applications
will result in the issuance of any patents or, if any patents are issued,
whether they will provide significant proprietary protection. Since patent
applications in the United States are maintained in secrecy until patents are
issued, and since publication of discoveries in the scientific or patent
literature tend to lag behind actual discoveries by several months, Gilead
cannot be certain that it has rights as the first inventor of technologies
covered by pending patent applications or that it was the first to file patent
applications for such inventions.
------------------------
* Estimated date for pending application, not yet issued.
14
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position which it seeks to protect, in part, by
confidentiality agreements with its corporate partners, collaborators,
employees, consultants and vendors. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known or be independently discovered by competitors.
Gilead's practice is to require its corporate partners, collaborators,
employees, consultants and vendors to execute a confidentiality agreement upon
the commencement of a relationship with the Company. The agreements provide that
all confidential information developed or made known to an individual during the
course of the relationship shall be kept confidential and not disclosed to third
parties except in specified circumstances. In the case of employees, the
agreements provide that all inventions conceived by the individual while
employed by the Company shall be the exclusive property of the Company. There
can be no assurance, however, that these agreements will provide meaningful
protection for the Company's trade secrets in the event of unauthorized use or
disclosure of such information.
COMPETITION
The Company's products and development programs target a number of diseases
and conditions, including viral infections and cancer. Even if the Company is
successful in developing products to treat any of these diseases or conditions,
there can be no assurance that any product that receives marketing clearance
will achieve significant commercial acceptance. There are many commercially
available products for these diseases, and a large number of companies and
institutions are conducting well-funded research and development activities
directed at developing additional treatments for these diseases.
Ganciclovir, marketed in intravenous and oral formulations by Roche
Laboratories and as an ocular implant by Bausch & Lomb Incorporated, foscarnet,
marketed by Astra U.S.A., and formivirsen, a local injection marketed by
CibaVision, are commercially available for the treatment of CMV retinitis. These
products are directly competitive with VISTIDE. Several other potential CMV
retinitis therapeutics are being developed by other companies. A number of
therapeutics are currently marketed or are in advanced stages of clinical
development for the treatment of HIV infection and AIDS, including 13 products
currently marketed in the United States. These products represent significant
potential competition for PREVEON and PMPA. Among the companies with significant
commercial presence in the AIDS market are Glaxo Wellcome, Bristol-Myers Squibb,
Hoffmann-La Roche, Agouron Pharmaceuticals, Merck & Co. and DuPont Pharma.
Glaxo Wellcome, in collaboration with Biota Holdings Limited, is pursuing
development of zanamavir, a neuraminidase inhibitor to treat influenza. This
compound has been approved in some countries and is under review for approval in
the United States by the FDA. If approved, zanamavir would represent significant
potential competition for GS 4104. In addition, Glaxo Wellcome, in collaboration
with Biochem Pharma, is pursuing development of lamivudine, a nucleoside
analogue to treat HBV infection. This compound was recently approved for
marketing in the United States, China and several other countries and represents
significant potential competition for adefovir dipivoxil for HBV.
The Company believes that its products and product candidates have potential
competitive advantages over many of these products, particularly with regard to
dosing convenience and the potential for resistance development. However, there
can be no assurance that any of the Company's products or products in
development will compete successfully with other available products.
A number of companies are pursuing the development of technologies
competitive with the Company's research programs. These competing companies
include specialized pharmaceutical firms and large pharmaceutical companies
acting either independently or together with biopharmaceutical companies.
Furthermore, academic institutions, government agencies and other public and
private organizations conducting research may seek patent protection and may
establish collaborative arrangements for competitive products and programs.
Gilead anticipates that it will face increased competition in the future as
new products enter the market and advanced technologies become available. There
can be no assurance that existing products or new products developed by the
Company's competitors will not be more effective, or more effectively marketed
and sold, than any that may be developed by the Company. Competitive products
may render Gilead's technology and products obsolete or noncompetitive prior to
the Company's recovering research, development or commercialization expenses
incurred with respect to any such products.
15
Many of the Company's existing or potential competitors, particularly large
pharmaceutical companies, have substantially greater financial, technical and
human resources than the Company. In addition, many of these competitors have
significantly greater experience than the Company in undertaking research,
preclinical studies and clinical trials of new pharmaceutical products,
obtaining FDA and other regulatory approvals, and manufacturing, marketing and
selling such products. Accordingly, the Company's competitors may succeed in
commercializing products more rapidly or more effectively than the Company,
which would have a material adverse effect on the Company.
The Company's competition will be determined in part by the potential
indications for which the Company's compounds are developed and ultimately
approved by regulatory authorities. For certain of the Company's potential
products, an important competitive factor may be the timing of market
introduction of its products or competitive products. Accordingly, the relative
speed with which Gilead can develop products, complete the clinical trials and
regulatory approval processes, and supply commercial quantities of the products
to the market are expected to be important competitive factors. The Company
expects that competition among products approved for sale will be based, among
other things, on product efficacy, safety, dosing convenience, availability,
price, third-party reimbursement and patent position.
The Company's competitive position also depends upon its ability to attract
and retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes, and secure sufficient capital resources for
the substantial period between technological conception and commercial sales.
GOVERNMENT REGULATION
The production and marketing of the Company's products and its research and
development activities are subject to regulation for safety, efficacy and
quality by numerous government authorities in the United States and other
countries. In the United States, drugs are subject to rigorous FDA regulation.
The Federal Food, Drug and Cosmetic Act, as amended ("FFDCA"), and the
regulations promulgated thereunder, and other federal and state statutes and
regulations, govern, among other things the testing, manufacture, safety,
efficacy, labeling, storage, record keeping, approval, advertising and promotion
of the Company's products. Product development and approval within this
regulatory framework, and under equivalent regulations in other countries, takes
a number of years and involves the expenditure of substantial resources.
The steps required before a pharmaceutical agent may be marketed in the
United States include (i) preclinical laboratory tests, IN VIVO preclinical
studies and formulation studies, (ii) the submission to the FDA of an
investigational new drug application ("IND"), which must become effective before
clinical trials commence, (iii) adequate and well-controlled clinical trials to
establish the safety and efficacy of the drug, (iv) the submission of an NDA to
the FDA, and (v) the FDA approval of the NDA, prior to any commercial sale or
shipment of the drug. In addition to obtaining FDA approval for each product,
each drug manufacturing establishment must be registered with, and approved by,
the FDA. Domestic manufacturing establishments, including third party contract
manufacturers producing a drug sponsor's products, are subject to periodic
inspections by the FDA and must comply with cGMP. To supply products for use in
the United States, foreign manufacturing establishments must comply with cGMP
and are subject to periodic inspection by the FDA or by regulatory authorities
in certain of such countries under reciprocal agreements with the FDA. Drug
product and drug substance manufacturing establishments located in California
also must be licensed by the State of California in compliance with local
regulatory requirements.
Preclinical tests include laboratory evaluation of product chemistry and
formulation, as well as animal studies to assess the potential safety and
efficacy of the product. Compounds must be formulated according to cGMP and
preclinical safety tests must be conducted by laboratories that comply with FDA
regulations regarding current Good Laboratory Practices ("GLP"). The results of
the preclinical tests are
16
submitted to the FDA as part of an IND and are reviewed by the FDA prior to the
commencement of clinical trials. Additional pharmacology and toxicology studies
are generally conducted concurrently with clinical trials.
Clinical trials involve the administration of the investigational new drug
to healthy volunteers or to patients, under the supervision of qualified
principal investigators. Clinical trials are conducted in accordance with Good
Clinical Practices under protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the IND.
Further, each clinical trial must be conducted under the auspices of an
independent Institutional Review Board ("IRB") or Ethics Committee at the
institution at which the study will be conducted. The IRB will consider, among
other things, ethical factors, the safety of human subjects and the possible
liability of the institution.
Clinical trials are typically conducted in three sequential phases, but the
phases often overlap. In Phase I, the initial introduction of the drug into
healthy human subjects, the drug is tested for safety (adverse effects), dosage
tolerance, metabolism, distribution, excretion and pharmacodynamics (clinical
pharmacokinetics and pharmacology). Phase II involves studies in a limited
patient population to (i) determine the efficacy of the drug for specific,
targeted indications, (ii) determine dosage tolerance and optimal dosage and
(iii) identify possible adverse effects and safety risks. When a compound
appears to be effective and to have an acceptable safety profile in Phase II
clinical trials, Phase III clinical trials are undertaken to further evaluate
and confirm clinical efficacy and to further test for safety within an expanded
patient population at geographically dispersed clinical study sites. There can
be no assurance that Phase I, Phase II or Phase III clinical trials will be
completed successfully within any specified time period, if at all, with respect
to any of the Company's products subject to such testing. Furthermore, the
Company or the FDA may delay or suspend clinical trials at any time if it is
felt that the subjects or patients are being exposed to an unacceptable health
risk.
The results of the preclinical studies and clinical trials are submitted to
the FDA in the form of an NDA for approval of the marketing and commercial
shipment of the drug. The testing and approval process is likely to require
substantial time and effort and there can be no assurance that any approval will
be granted on a timely basis, if at all. The FDA may deny an NDA if applicable
regulatory criteria are not satisfied, require additional testing or
information, require significant improvements to manufacturing facilities or
require extensive post-marketing testing and surveillance to monitor the safety
or efficacy of the Company's products if they do not view the NDA as containing
adequate evidence of the quality, safety and efficacy of the drug.
Notwithstanding the submission of such data, the FDA may ultimately decide that
the application does not satisfy its regulatory criteria for approval. Moreover,
if regulatory approval of a drug is granted, such approval may entail
limitations on the indicated uses for which it may be marketed. Finally, product
approvals may be withdrawn if compliance with regulatory standards is not
maintained or if problems occur following initial marketing.
Among the conditions for NDA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to cGMP, which must be followed at all times. In complying with standards set
forth in these regulations, manufacturers (including a drug sponsor's third-
party contract manufacturers) must continue to expend time, money and effort in
the area of production and quality control to ensure full technical compliance.
The FDA has implemented accelerated approval procedures for pharmaceutical
products that treat serious or life-threatening diseases and conditions, if
those products have the potential to address unmet medical needs. Under the Food
and Drug Modernization Act of 1997, effective in February 1998, such products
may be designated as "fast track" products, and may be approved on the basis of
surrogate as well as clinical endpoints. The FDA will generally review NDAs for
fast track products within six months. Drug sponsors are generally required to
conduct post-marketing clinical trials of drugs that have been approved under
the FDA's accelerated approval procedures, in order to characterize further the
drug's safety and
17
efficacy profile. The FDA has granted fast track designation to PREVEON for the
treatment of HIV-infected patients and the Company believes that certain of its
other products in development may qualify as fast track products and be eligible
for accelerated approval. The Company cannot predict the ultimate impact,
however, of the FDA's accelerated approval procedures on the timing or
likelihood of approval of any of its potential products or those of any
competitor.
In addition to regulations enforced by the FDA, the Company also is subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other federal, state or local regulations. The Company's
research and development involves the controlled use of hazardous materials,
chemicals, viruses and various radioactive compounds. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, the risk
of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for significant damages or fines.
In the European Community, human pharmaceutical products are also subject to
extensive regulation. The European Community Pharmaceutical Directives govern,
among other things, the testing, manufacture, safety, efficacy, labeling,
storage, record keeping, advertising and promotion of human pharmaceutical
products. Effective in January 1995, the European Community enacted regulations
providing for a centralized licensing procedure, which is mandatory for certain
kinds of products, as well as a decentralized (country by country) procedure. A
license granted under the centralized procedure authorizes marketing of the
product in all of the member states of the European Community. Under the
decentralized procedure, a license granted in one member state can be extended
to additional member states pursuant to a simplified application process. In the
centralized procedure, the EMEA coordinates a scientific review by one or more
rapporteurs chosen from among the membership of the Committee for Proprietary
Medical Products ("CPMP"), which represent the medicine authorities of the
member states. The final approval is granted by a decision of the Commission or
Council of the European Community, based on the opinion of the CPMP. After
approval under the centralized procedure, pricing and reimbursement approvals
are generally required in most countries. VISTIDE was approved by the European
Community under the centralized procedure. GS 4104 is being reviewed under the
centralized procedure and the Company anticipates that PREVEON will be reviewed
under the centralized procedure when a marketing authorization application for
this product is filed.
PRICING AND REIMBURSEMENT
The business and financial condition of pharmaceutical and biotechnology
companies will continue to be affected by the efforts of government and
third-party payors to contain or reduce the cost of health care through various
means. For example, in certain foreign markets pricing or profitability of
prescription pharmaceuticals is subject to government control. In particular,
individual pricing negotiations are often required in many countries of the
European Community, even if approval to market the drug under the EMEA's
centralized procedure is obtained. In the United States, there have been, and
the Company expects that there will continue to be, a number of federal and
state proposals to implement similar government control. In addition, an
increasing emphasis on managed care in the United States has and will continue
to increase the pressure on pharmaceutical pricing. While the Company cannot
predict whether any such legislative or regulatory proposals will be adopted or
the effect such proposals or managed care efforts may have on its business, the
announcement of such proposals or efforts could have a material adverse effect
on the trading price of the Company's Common Stock, and the adoption of such
proposals or efforts could have a material adverse effect on the Company.
Further, to the extent that such proposals or efforts have a material adverse
effect on other pharmaceutical companies that are prospective corporate partners
for the Company, the Company's ability to establish a strategic alliance may be
adversely affected. In addition, in both the United States and elsewhere, sales
of prescription pharmaceuticals are dependent in part on the availability of
reimbursement to the consumer from third-party payors, such as government
18
and private insurance plans that mandate rebates or predetermined discounts from
list prices. For example, a significant proportion of VISTIDE sales is subject
to reimbursement by government agencies, resulting in significant discounts from
list price and rebate obligations. The Company expects that PREVEON and several
of its other products in development, particularly for AIDS indications, will
have a similar reimbursement profile. In addition, third-party payors, as well
as patient advocacy organizations, are increasingly challenging the prices
charged for medical products and services. If the Company succeeds in bringing
one or more additional products to the market, there can be no assurance that
these products will be considered cost effective and that reimbursement will be
available or will be sufficient to allow the Company to sell its products on a
competitive basis.
HUMAN RESOURCES
As of December 31, 1998, Gilead employed 293 people full-time, of whom 75
hold Ph.D. and/or M.D. degrees and 46 hold other advanced degrees. Approximately
182 employees are engaged in research and development activities and 111 are
employed in finance, sales and marketing, corporate development, legal and
general administrative positions. Gilead believes that it maintains good
relations with its employees.
SCIENTIFIC ADVISORY BOARD
The Company's Scientific Advisory Board is composed of individuals with
expertise in fields related to the Company's programs. This Board holds formal
meetings with scientists from the Company at least once a year. In some cases,
individual members of this Board consult and meet informally with the Company on
a more frequent basis. Each of the members of this Board has a consulting
agreement with the Company.
The members of Gilead's Scientific Advisory Board are as follows:
DANIEL L. AZARNOFF, M.D., has been a member of Gilead's Scientific Advisory
Board since January 1990. He headed G.D. Searle & Co.'s research and development
from 1979 through 1985, and previously was Professor of Medicine and
Pharmacology at the University of Kansas. Dr. Azarnoff is a member of the
Institute of Medicine of the National Academy of Sciences.
JACQUELINE K. BARTON, PH.D., has been a member of Gilead's Scientific
Advisory Board since January 1989. She is a Professor of Chemistry at the
California Institute of Technology ("Cal Tech"), a member of the American
Academy of Arts and Sciences and a recipient of a MacArthur Foundation
Fellowship.
PAUL BERG, PH.D., has been a member of Gilead's Scientific Advisory Board
since April 1998 and also serves on the Company's Board of Directors. Dr. Berg
is currently Cahill Professor in Cancer Research in the Department of
Biochemistry at Stanford University School of Medicine, where he has been on the
faculty since 1959. He received the Nobel Prize for Chemistry in 1980.
PETER B. DERVAN, PH.D., has been a member of Gilead's Scientific Advisory
Board since September 1987. He is Bren Professor of Chemistry at Cal Tech and a
member of the National Academy of Sciences and the American Academy of Arts and
Sciences.
MICHAEL J. GAIT, PH.D., has been a member of Gilead's Scientific Advisory
Board since July 1989. He is a Senior Staff Scientist with the Medical Research
Council in Cambridge, England.
RALPH F. HIRSCHMANN, PH.D., has been a member of Gilead's Scientific
Advisory Board since October 1989. He is a Research Professor of Chemistry at
the University of Pennsylvania. Previously, Dr. Hirschmann was employed by Merck
& Co., most recently as Senior Vice President of Basic Research and Chemistry.
Dr. Hirschmann is a member of the American Academy of Arts and Sciences.
LAWRENCE L.-K. LEUNG, M.D., has been a member of Gilead's Scientific
Advisory Board since September 1994. He is Chief of the Division of Hematology
at the Stanford University Medical School. Dr. Leung was previously Director of
Cardiovascular Biology and Medicine at Gilead.
19
RISK FACTORS
GILEAD IS DEVELOPING DRUGS TO TREAT AIDS AND AIDS-RELATED CONDITIONS, AND
THEREFORE CAN BE ADVERSELY AFFECTED BY CHANGES IN THE REGULATORY AND COMMERCIAL
ENVIRONMENT FOR AIDS THERAPIES.
Several of Gilead's products and products in development address AIDS or
AIDS-related conditions. These products include VISTIDE (cidofovir injection)
for CMV retinitis, PREVEON (adefovir dipivoxil) for HIV and AIDS and PMPA for
HIV and AIDS. The medical, regulatory and commercial environment for AIDS
therapies changes quickly and often in ways that Gilead is unable to accurately
predict. Gilead develops its AIDS products based upon current policy and the
current marketplace for AIDS therapies, as well as its prediction of future
policy and the future marketplace for these therapies. Gilead's business is
subject to substantial risk because these policies and markets change quickly
and unpredictably and in ways that could have a material adverse impact on its
ability to obtain regulatory approval and commercial acceptance of its
AIDS-related products.
GILEAD'S OPERATIONS DEPEND ON COMPLIANCE WITH COMPLEX FDA AND COMPARABLE
INTERNATIONAL REGULATIONS. FAILURE TO OBTAIN BROAD APPROVALS ON A TIMELY BASIS
OR TO ACHIEVE CONTINUED COMPLIANCE COULD DELAY COMMERCIALIZATION OF GILEAD'S
PRODUCTS.
The products that Gilead develops and sells must be approved and are subject
to extensive regulation by the FDA and comparable agencies in other countries.
Gilead has plans to file an application with the FDA for marketing approval of
PREVEON in the second quarter of 1999. In addition, Hoffmann-La Roche, Gilead's
corporate partner for the development and commercialization of GS 4104, expects
to file an application with the FDA for marketing approval of GS 4104 to treat
influenza in the second quarter of 1999. Gilead anticipates conducting a variety
of clinical trials and filing for marketing approval of additional products over
the next several years. These products may fail to receive marketing approval on
a timely basis, or at all. In addition, these products may receive marketing
approvals that place limitations on the uses of the product. These failures,
delays or limitations, as well as other regulatory changes, actions and recalls,
could delay commercialization of any products and adversely affect Gilead's
results of operations.
In addition, even after Gilead's products are marketed, the products and
their manufacturers are subject to continual review. Later discovery of
previously unknown problems with Gilead's products or manufacturers may result
in restrictions on such product or manufacturer, including withdrawal of the
product from the market.
RESULTS OF CLINICAL TRIALS AND APPROVAL OF PRODUCTS ARE UNCERTAIN, AND
GILEAD MAY BE DELAYED IN OR PROHIBITED FROM SELLING ITS PRODUCTS.
Gilead has a number of potential products that have reached the development
stage. These potential products include PREVEON, GS 4104, adefovir dipivoxil for
HBV and PMPA. Gilead will be required to demonstrate the safety and
effectiveness of these and any other products it develops in each intended use
through extensive preclinical studies and clinical trials in order to obtain
regulatory approval of those products. The results from preclinical and early
clinical studies do not always accurately predict results in later, large-scale
clinical trials for several reasons including:
- preliminary results may not be indicative of effectiveness;
- further clinical trials may not achieve the desired result; and
- further clinical trials may reveal unduly harmful side effects or may show
the drugs to be less effective than other drugs or delivery systems for
the desired indications.
Even successfully completed large-scale clinical trials may not result in
marketable products for several reasons, including:
- the potential products are not shown to be safe and effective;
20
- regulatory authorities disagree with the results of Gilead's studies and
trials;
- required regulatory approvals are not obtained;
- the potential products are too difficult to develop into commercially
viable products; or
- the potential products do not obtain market acceptance.
A number of companies in Gilead's industry have suffered significant
setbacks in advanced clinical trials despite promising results in earlier
trials. In the end, Gilead may be unable to develop marketable products.
DELAYS IN PATIENT ENROLLMENT FOR CLINICAL TRIALS COULD INCREASE COSTS AND
DELAY REGULATORY APPROVALS.
The rate of completion of Gilead's clinical trials will depend on the rate
of patient enrollment. There will be substantial competition to enroll patients
in Gilead's clinical trials, particularly for AIDS and HBV therapies. This
competition has delayed Gilead's clinical trials in the past. In addition,
recent improvements in existing AIDS and HBV drug therapy may make it more
difficult for Gilead to enroll patients in its clinical trials as the patient
population may choose to enroll in clinical trials sponsored by other companies
or choose alternative therapies. Delays in planned patient enrollment can result
in increased development costs and delays in regulatory approvals.
PRODUCT DEVELOPMENT EFFORTS MAY NOT YIELD MARKETABLE PRODUCTS DUE TO RESULTS
OF STUDIES OR TRIALS, FAILURE TO ACHIEVE REGULATORY APPROVALS OR MARKET
ACCEPTANCE, PROPRIETARY RIGHTS OF OTHERS OR MANUFACTURING ISSUES.
Gilead's future business success will depend on its ability to successfully
develop and obtain regulatory approval to market new pharmaceutical products.
Development of a product requires substantial technical, financial and human
resources even if the product is not successfully completed. Gilead's potential
products may appear to be promising at various stages of development yet fail to
reach the market for a number of reasons, including:
- lack of efficacy or unacceptable toxicity during preclinical studies or
clinical trials;
- failure to receive necessary regulatory approvals;
- failure to achieve market acceptance;
- existence of proprietary rights of third parties; and
- inability to develop manufacturing methods that are efficient,
cost-effective and capable of meeting stringent regulatory standards.
GILEAD MAY UNDERESTIMATE DEVELOPMENT COSTS, ADVERSELY AFFECTING ITS
BUSINESS.
Due to uncertainties that are part of the development process, Gilead may
underestimate the costs associated with the development of a potential product.
Delays or unanticipated increases in costs of development or failure to obtain
regulatory approval or market acceptance for Gilead's products could adversely
affect Gilead's operating results.
GILEAD DEPENDS ON RELATIONSHIPS WITH OTHER COMPANIES FOR RESEARCH FUNDING,
CLINICAL DEVELOPMENT, SALES AND MARKETING PERFORMANCE AND REVENUES. FAILURE TO
MAINTAIN THESE RELATIONSHIPS WOULD NEGATIVELY IMPACT GILEAD'S BUSINESS.
Gilead has established a number of significant collaborative relationships
with major pharmaceutical companies, including Pharmacia & Upjohn, Hoffmann-La
Roche and Bausch & Lomb. Gilead depends to a large degree on these partners for
its research funding, clinical development and/or sales and marketing
performance. In addition, Gilead has historically relied on collaborative
relationships for a significant
21
portion of its revenues and expects this to be the case in future periods.
Reliance or collaborative relationships poses a number of risks, including:
- Gilead cannot control whether its corporate partners will devote
sufficient resources to its programs or products;
- disputes may arise in the future with respect to the ownership of rights
to technology developed with corporate partners;
- disagreements with corporate partners could lead to delays in or
termination of the research, development or commercialization of product
candidates, or result in litigation or arbitration;
- contracts with Gilead's corporate partners may fail to provide significant
protection or may fail to be effectively enforced if one of these partners
fails to perform;
- corporate partners have considerable discretion in electing whether to
pursue the development of any additional products and may pursue
alternative technologies or products either on their own or in
collaboration with Gilead's competitors; and
- corporate partners with marketing rights may choose to devote fewer
resources to the marketing of Gilead's products than they do to products
of their own development.
Given these risks, there is a great deal of uncertainty regarding the
success of Gilead's current and future collaborative efforts. If these efforts
fail, Gilead's product development or commercialization of new products could be
delayed or revenue from existing products could decline.
INABILITY TO ESTABLISH SUCCESSFUL COLLABORATIVE RELATIONSHIPS MAY IMPAIR
GILEAD'S FINANCIAL RESULTS.
Gilead may seek future collaborative relationships with corporate partners
to fund some of its research and development expenses and to develop and
commercialize some of its potential products. For example, the Company is in
discussions with several potential corporate partners about collaborative
development and commercialization of adefovir dipivoxil for HBV, particularly in
Asian territories. Further, we anticipate that the Company's receipt of revenues
from collaborative agreements will continue to be affected by existing
agreements, as well as by the timing of drug development programs of its
corporate partners. Gilead may not be able to negotiate acceptable collaborative
arrangements in the future, and any arrangements it does negotiate may not be
successful. If the Company fails to establish additional collaborative
relationships, it will be required to undertake research, development, marketing
and manufacturing of its proposed products at its own expense.
GILEAD HAS A HISTORY OF LOSSES, EXPECTS TO OPERATE AT A LOSS FOR THE
FORESEEABLE FUTURE AND MAY NEVER BE PROFITABLE.
Gilead has never been profitable on a full-year basis and may never become
profitable. At December 31, 1998, Gilead's accumulated deficit was approximately
$218.5 million. Gilead's losses have resulted principally from expenses
associated with its research and development programs and, to a lesser extent,
from sales, general and administrative expenses. Gilead's revenues to date have
been generated primarily from collaborative arrangements rather than product
revenues. Gilead's current product revenues are derived solely from sales of
VISTIDE in the United States and a royalty arrangement for VISTIDE sales with
Pharmacia & Upjohn outside of the United States. VISTIDE has limited sales
potential relative to many pharmaceutical products.
GILEAD'S EXISTING PRODUCT AND PRODUCTS UNDER DEVELOPMENT MAY NOT BE ACCEPTED
BY PHYSICIANS, INSURERS AND PATIENTS.
Many of Gilead's products in development, if approved for marketing, have no
established market. The ability of these products to achieve and sustain market
acceptance will depend on the receipt and scope of regulatory approvals and
whether or not government authorities and managed care organizations will
adequately reimburse patients who use these products.
22
In addition, Gilead needs to convince the medical and patient advocacy
community of:
- the effectiveness of these products in treating disease;
- the safety of these products when administered to patients; and
- the advantages of these products over competitive products.
Physicians, patients, patient advocates, payors and the medical community in
general may not accept and use any products that Gilead may develop. If Gilead's
products are not accepted, its results of operations will suffer.
MANY OTHER COMPANIES ARE TARGETING THE SAME DISEASES AND CONDITIONS AS
GILEAD. COMPETITIVE PRODUCTS FROM OTHER COMPANIES COULD SIGNIFICANTLY REDUCE THE
MARKET ACCEPTANCE OF GILEAD'S PRODUCTS.
Gilead's products and development programs target a number of diseases and
conditions, including viral infections and cancer. There are many commercially
available products for these diseases. Certain of these products are well
established therapies and have generated substantial sales. In addition, a large
number of companies and institutions are conducting well-funded research and
development activities directed at developing treatments for these diseases.
Products currently on the market and those under development by Gilead's
competitors could make its technology and products obsolete or noncompetitive.
Gilead expects that competition for the treatment of these diseases will
increase in the future as new products enter the market and advanced
technologies become available. Gilead will also be competing to license or
acquire technology from other companies.
Most of Gilead's competitors and potential competitors have substantially
greater resources than Gilead. Those resources include superior product
development capabilities and financial, scientific, manufacturing, managerial
and human resources. These competitors may achieve superior patent protection,
obtain key technology, receive regulatory approval or achieve product
commercialization earlier than Gilead.
THE SIGNIFICANTLY GREATER RESOURCES OF THE MARKETING ORGANIZATIONS OF LARGE
PHARMACEUTICAL COMPANIES COULD HINDER GILEAD'S ABILITY TO COMPETE SUCCESSFULLY.
Gilead's products compete, and the products Gilead may develop are likely to
compete, with products of other companies that currently have extensive and
well-funded marketing and sales operations. Because these companies are capable
of devoting significantly greater resources to their marketing efforts, Gilead's
marketing or sales efforts may not compete successfully against the efforts of
these other companies.
GILEAD'S EXISTING PRODUCTS ARE SUBJECT TO REIMBURSEMENT FROM GOVERNMENT
AGENCIES AND OTHER THIRD PARTIES. PHARMACEUTICAL PRICING AND REIMBURSEMENT
PRESSURES MAY REDUCE PROFITABILITY.
Successful commercialization of Gilead's products depends, in part, on the
availability of governmental and third-party payor reimbursement for the cost of
such products and related treatments. Reimbursement is generally provided by
government health administration authorities, private health insurers and other
organizations. Government authorities and third-party payors increasingly are
challenging the price of medical products and services, particularly for
innovative new products and therapies. This has resulted in lower average sales
prices. For example, a majority of VISTIDE sales is subject to reimbursement by
government agencies, resulting in significant discounts from list price and
rebate obligations. Gilead expects that several of its products in development,
particularly for AIDS indications, if they receive regulatory approval, will
have a similar reimbursement profile. Even if reimbursement is available,
reimbursement policies may adversely affect Gilead's ability to sell its
products on a profitable basis.
In addition, in many international markets, governments control the prices
of prescription pharmaceuticals. In these markets, once marketing approval is
received, pricing negotiation can take another six to 12 months or longer.
Product sales, attempts to gain market share or introductory pricing
23
programs of Gilead's competitors could require Gilead to lower its prices in
these countries, which could adversely affect its results of operations.
GILEAD MAY NOT BE ABLE TO OBTAIN EFFECTIVE PATENTS TO PROTECT ITS
TECHNOLOGIES FROM USE BY COMPETITORS, AND PATENTS OF OTHER COMPANIES COULD
REQUIRE GILEAD TO STOP USING OR PAY FOR THE USE OF REQUIRED TECHNOLOGY.
Gilead's success will depend to a significant degree on its ability to:
- obtain patents and licenses to patent rights;
- preserve trade secrets; and
- operate without infringing on the proprietary rights of others.
Gilead has rights to United States and foreign issued patents and has filed
and will continue to file patent applications in the United States and abroad
relating to its technologies. There is a risk, however, that patents may not
issue from any of these applications or that the patents will not be sufficient
to protect Gilead's technology. Patent applications in the United States are
confidential until a patent is granted. As a result, Gilead would not know if
its competitors filed patent applications for technology covered by its pending
applications. Gilead also can not be certain that it was the first to invent the
technology that is the subject of its patent applications. Competitors may have
filed patent applications or received patents and may obtain additional patents
and proprietary rights that block or compete with Gilead's patents.
Gilead does not have patent filings covering adefovir dipivoxil in China or
in certain other Asian countries, although it does have an application pending
in Japan. Asia is a major market for hepatitis B therapies, one of the potential
indications for adefovir dipivoxil. Gilead may obtain patents for certain
products many years before marketing approval is obtained for those products.
Because patents have a limited life, which may begin to run prior to commercial
sale, the commercial value of the product may be limited.
Gilead's competitors may file patent applications covering its technology.
If so, Gilead may have to participate in interference proceedings or litigation
to determine the right to a patent. Litigation and interference proceedings are
expensive even if successful. In August 1998, the Company was served with a
patent infringement lawsuit filed by Chiron Corporation alleging that Gilead's
research infringes Chiron's patents covering the hepatitis C protein and gene
sequences and their use in screening for potential hepatitis C therapeutics.
Gilead's success depends in large part on its ability to operate without
infringing upon the patents or other proprietary rights of third parties. If
Gilead infringes patents of others, it may be prevented from commercializing
products or may be required to obtain licenses from these third parties. Gilead
cannot be certain that it would be able to obtain alternative technologies or
any required license. Even if Gilead were to obtain such technologies or
licenses, it cannot be certain that the terms would be reasonable. If Gilead
fails to obtain such licenses or alternative technologies, it may be unable to
develop some or all of its products.
In addition, Gilead uses significant unpatented proprietary technology and
relies on unpatented trade secrets and proprietary know-how to protect certain
aspects of its production and other technologies. Gilead's trade secrets may
become known or independently discovered by its competitors.
MANUFACTURING PROBLEMS COULD DELAY PRODUCT SHIPMENTS AND REGULATORY
APPROVALS.
Gilead generally relies on third parties for the manufacture of bulk drug
substance and final drug product for clinical and commercial purposes, including
for VISTIDE, adefovir dipivoxil, PMPA and GS 4104. Gilead depends on these third
parties to perform their obligations effectively and on a timely basis. If these
third parties fail to perform as required, Gilead's clinical trials or
submission of products for regulatory approval may be delayed. These delays
could impair Gilead's ability to deliver commercial products on a timely basis
and could impair its competitive position.
24
GILEAD MAY NOT BE ABLE TO OBTAIN MATERIALS NECESSARY TO MANUFACTURE ITS
PRODUCTS.
Many of the materials Gilead utilizes in its operations are made at only one
facility. A shutdown in any of these facilities due to technical, regulatory or
other problems, resulting in an interruption in supply of these materials, could
have an adverse impact on Gilead's financial results. For example, Gilead has
qualified only one supplier with the FDA for the bulk drug substance used in
VISTIDE and one different supplier for the final drug product. Gilead has also
established a second source of bulk drug substance supply for VISTIDE but has
not yet qualified this source with the FDA and cannot be certain that the FDA
will approve this second source. Because the suppliers of key components and
materials must be named in the New Drug Application filed with the FDA for a
product, significant delays can occur if the qualification of a new supplier is
required. If supplies from Gilead's suppliers were interrupted for any reason,
Gilead could be unable to ship VISTIDE or any of its products in development.
GILEAD HAS LIMITED EXPERIENCE MANUFACTURING PRODUCTS AND COULD BE ADVERSELY
AFFECTED IF IT FAILS TO DEVELOP MANUFACTURING CAPACITY.
For some of Gilead's potential products, Gilead will need to develop further
its production technologies for use on a larger scale in order to conduct
clinical trials and produce such products for commercial sale at an acceptable
cost. Gilead cannot be certain that it will be able to implement any of these
developments successfully.
The manufacturing process for pharmaceutical products is highly regulated,
and regulators may shut down manufacturing facilities that they believe do not
comply with regulations. The FDA's current Good Manufacturing Practices are
extensive regulations governing manufacturing processes, stability testing,
record-keeping and quality standards. Similar, but not identical, regulations
are in effect in other countries.
GILEAD'S BUSINESS MAY GIVE RISE TO PRODUCT LIABILITY CLAIMS NOT COVERED BY
INSURANCE OR INDEMNITY AGREEMENTS.
Testing, manufacturing, marketing and use of VISTIDE and Gilead's products
in development involve substantial risk of product liability claims. These
claims may be made directly by consumers, healthcare providers, pharmaceutical
companies or others. Although Gilead maintains product liability insurance, a
single product liability claim could exceed its coverage limits, and multiple
claims are possible. If that happens, the insurance coverage Gilead has may not
be adequate. A successful product liability claim in excess of Gilead's coverage
could require Gilead to pay substantial amounts. This could adversely affect
Gilead's results of operations. Moreover, the amount and scope of any coverage
may be inadequate to protect Gilead in the event of a successful product
liability claim. In addition, in the future such insurance may not be renewed at
an acceptable cost or at all.
GILEAD'S USE OF HAZARDOUS MATERIAL, CHEMICALS, VIRUSES AND RADIOACTIVE
COMPOUNDS EXPOSES IT TO POTENTIAL LIABILITIES.
Gilead's research and development involves the controlled use of hazardous
materials, chemicals, viruses and various radioactive compounds. Although Gilead
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, Gilead
cannot completely eliminate the risk of accidental contamination or injury from
these materials. In the event of such an accident, Gilead could be held liable
for significant damages or fines.
IF GILEAD OR THIRD-PARTY SUPPLIERS AND BUSINESS PARTNERS FAIL TO ADEQUATELY
ADDRESS YEAR 2000 ISSUES, ITS BUSINESS COULD BE ADVERSELY AFFECTED.
Gilead is implementing a Year 2000 project designed to address the issue of
computer software and hardware correctly processing dates through and beyond the
Year 2000. Due to the uncertainty inherent in the Year 2000 problem, however,
there can be no assurance that Year 2000 failures will not have a material
impact on Gilead's operations, financial results or financial condition. In
addition, Gilead cannot predict whether its critical third-party suppliers and
business partners will achieve Year 2000 compliance, or whether the failure of
any third party to do so would have a material effect on Gilead's business.
25
ITEM 2. PROPERTIES
Gilead's administrative offices and research laboratories are located in
Foster City, California. The Company leases approximately 163,200 square feet of
space in seven adjacent buildings. The leases on this space expire March 31,
2006, and the Company has an option to renew the leases for two additional
five-year periods. The Company believes that it will need to expand its
facilities in the future to support any significant growth in its operations.
Gilead anticipates it will be able to expand its facilities in nearby locations.
There can be no assurance, however, that such space will be available on
favorable terms, if at all.
ITEM 3. LEGAL PROCEEDINGS
In August 1998, the Company was served with a patent infringement lawsuit
filed by Chiron Corporation in the U.S. District Court for the Northern District
of California. In the lawsuit, Chiron alleges that Gilead is conducting
scientific research that infringes Chiron's patents covering the hepatitis C
protein and gene sequences and their use in screening for potential hepatitis C
therapeutics. Gilead has taken the position that its research activities do not
infringe the Chiron patents and believes that the lawsuit will not have a
material impact on Gilead's business, operating results or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Gilead common stock is traded on The Nasdaq Stock Market under the symbol
"GILD." The following table sets forth for the periods indicated the high and
low prices per share of the Company's common stock on The Nasdaq Stock Market.
These prices represent quotations among dealers without adjustments for retail
mark-ups, mark-downs or commissions, and may not represent prices of actual
transactions.
As of February 26, 1999, there were approximately 480 stockholders of
record. No dividends have been paid on the common stock since the Company's
inception, and the Company does not anticipate paying any dividends in the
foreseeable future.
26
ITEM 6. SELECTED FINANCIAL DATA
We derived this information from Gilead's audited financial statements for
the year ended March 31, 1995 through the year ended December 31, 1998. This
information is only a summary, and you should read it in conjunction with
Gilead's historical financial statements and related notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained elsewhere herein, and the annual and quarterly reports and other
information on file with the Securities and Exchange Commission. See Items 7 and
8.
GILEAD SCIENCES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------
(1) In October 1995, Gilead changed its fiscal year end from March 31 to
December 31, effective with the nine months ended December 31, 1995.
(2) No dividends have been declared or paid on Gilead's common stock.
27
ITEM 7. 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. In June 1996, the FDA
granted marketing clearance of VISTIDE for the treatment of CMV retinitis in
patients with AIDS. Since that time, the Company has independently marketed
VISTIDE in the United States with an antiviral specialty sales force and has
entered into a collaboration agreement with Pharmacia & Upjohn to market VISTIDE
in all countries outside the United States.
The Company began to incur significant expenses relating to
commercialization of VISTIDE and other potential product candidates in 1996.
With the exception of the second quarter of 1997 and the third quarter of 1996,
when the Company earned significant one-time fees related to collaborations, the
Company has incurred losses since its inception. Gilead expects to continue to
incur losses for at least an additional year, 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 and
other potential products.
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,
financial results and Year 2000 matters. These statements involve inherent risks
and uncertainties. The Company's actual financial and operating results may
differ significantly from those 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 under "Risk Factors" on
pages 19 to 24 of this Report. In particular, factors that could result in a
material difference include, but are not limited to, those relating to the
ongoing development and commercialization of the Company's potential
pharmaceutical products and, in the case of Year 2000 matters, the ability to
identify and correct all relevant computer code and the success of remedial
efforts implemented by third-party suppliers and business partners.
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, expensive and uncertain 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, nor can there be assurance that the
Company will either achieve or sustain profitability. As of December 31, 1998,
the Company's accumulated deficit was approximately $218.6 million.
28
As a result of the proposed acquisition of NeXstar described below, Gilead's
business will be subject to additional risks related to NeXstar's business.
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
operating results, financial condition and stock price. In addition, the
forward-looking statements included in this Report relate to Gilead as a
stand-alone business, and do not take into account the potential impact of the
proposed acquisition of NeXstar.
RESULTS OF OPERATIONS
REVENUES
The Company had total revenues of $32.6 million, $40.0 million and $33.4
million for the years ended December 31, 1998, 1997 and 1996, respectively.
Total revenues include revenues from net product sales, contracts, including
research and development ("R&D") collaborations, and net royalties.
Net product sales revenue was $6.1 million, $11.7 million, and $8.5 million
for 1998, 1997, and 1996, respectively. All of the Company's product sales
revenue relates to VISTIDE, which the Company began to sell in mid-1996. As
expected, VISTIDE sales declined in 1998, primarily due to a decline in the
incidence of CMV retinitis as a result of more effective HIV therapies. The 38%
increase in net product sales revenue in 1997 as compared to 1996 is due to the
fact that 1997 results represent a full year of sales, while 1996 revenue
reflects approximately six months of sales. The Company anticipates that VISTIDE
product sales revenue will be comparable to 1998 levels or will decline further
in 1999 and later years as HIV therapy continues to improve.
Net royalty revenue was $2.3 million in 1998 and $0.9 million in 1997, and
was derived from two sources. During 1998 and 1997, respectively, the Company
earned $1.7 million and $0.7 million of net royalties from Pharmacia & Upjohn on
sales of VISTIDE outside of the United States. This amount increased primarily
because the number of countries in which Pharmacia & Upjohn sells the product
expanded in 1998 as compared to 1997. The Company expects that royalties from
Pharmacia & Upjohn's sales of VISTIDE will continue to increase during 1999 as a
result of recognizing a full year of sales in a greater number of countries. The
Company also reported $0.6 million and $0.2 million in 1998 and 1997,
respectively, of royalty revenue from Roche Labs for co-promoting Roferon in the
United States for the treatment of chronic hepatitis C virus infection. This
co-promotion agreement with Roche Labs concluded at the end of 1998. While the
Company expects to receive transition payments under this agreement in 1999,
such amounts are not expected to be significant. Royalty revenue is recognized
as income when received, which is generally in the quarter following that in
which the corresponding sales occur. The Company did not earn significant
royalty revenue before 1997.
Contract revenue was $24.2 million, $27.4 million and $24.9 million in 1998,
1997, and 1996, respectively. The most significant source of contract revenue in
each of these three years relates to the development of GS 4104 under an R&D
collaboration agreement between the Company and Roche. GS 4104 is an orally
administered compound to treat and prevent viral influenza in humans. During
1998, 1997 and 1996, the Company recorded approximately $16.4 million, $14.2
million and $11.4 million, respectively, of contract revenue under this
agreement with Roche. The $16.4 million recorded during 1998 represents
reimbursed R&D expenses and includes $5.2 million attributable to R&D 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 and
recognized as revenue in 1998. During 1997 and 1996, the Company recognized as
contract revenue R&D reimbursements of $8.2 million and $1.1 million,
respectively. Also during 1997 and 1996, the Company recognized milestone
payments of $6.0 million and a license fee of $10.3 million, respectively.
Gilead is entitled to additional milestone payments of up to $34.0 million upon
achieving certain developmental and regulatory milestones. R&D reimbursements
under the Roche agreement are expected to be significantly lower in 1999 as
compared both to 1998 and 1997. The reimbursements will approximate actual
related R&D costs the Company incurs.
29
Contract revenue for each year in the three-year period ended December 31,
1998 also includes reimbursement of research expenses under the Company's
collaborative R&D agreement with Glaxo related to the Company's antisense
program ($1.8 million in 1998 and $3.0 million in both 1997 and 1996). In June
1998, the agreement and the funding for the program were terminated, resulting
in reduced revenue in 1998 as compared to 1997 and 1996.
In 1998, Gilead and Isis entered into an agreement under which Gilead sold
Isis the holdings of its antisense patent estate, including patents and patent
applications covering antisense chemistry and antisense drug delivery systems.
Under the terms of the agreement, Isis is required to pay Gilead a total of $6.0
million in four installments. The first $2.0 million was paid in December 1998,
and the remaining $4.0 million is payable in three additional payments (one
payment per year in 1999, 2000 and 2001). The total sale price of $6.0 million
is included in contract revenue in 1998.
During 1997, Gilead recognized a $10.0 million milestone payment under its
collaborative agreement with Pharmacia & Upjohn following the marketing
authorization for VISTIDE in the European Union, which is the only milestone
payment provided for under that agreement. The Company also recognized as
revenue a $10.0 million license fee from Pharmacia & Upjohn in 1996, the year
the agreement went into effect.
COSTS AND EXPENSES
Cost of product sales was $0.6 million, $1.2 million and $0.9 million for
the years ended December 31, 1998, 1997 and 1996, respectively, and resulted
from sales of VISTIDE. The Company's declining cost of sales corresponds to the
decrease in net product sales.
The Company's R&D expenses were $75.3 million for the year ended December
31, 1998, compared to $59.2 million for the year ended December 31, 1997. This
27% increase is primarily attributable to costs associated with the ongoing
series of PREVEON Phase III clinical trials, as well as the expanded access
program for patients with HIV infection, which commenced in the fourth quarter
of 1997. PREVEON is an investigational reverse transcriptase inhibitor currently
being studied to treat HIV. Increased R&D expenses also reflect costs associated
with an additional product candidate that is advancing into later stage clinical
trials (adefovir dipivoxil for the treatment of chronic hepatitis B infection).
R&D expenses of $41.9 million in 1996 increased by 41% in 1997. The increase in
1997 as compared to 1996 is primarily attributable to costs associated with GS
4104 clinical trials, as well as PREVEON clinical trials and the commencement of
the expanded access program for patients with HIV. The Company expects its R&D
expenses to continue to increase significantly in 1999 over 1998 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 $31.0 million in
1998 compared to $25.5 million in 1997, an increase of 22%. This increase
represents costs incurred to expand sales, marketing and operational capacity in
anticipation of the potential commercial launch of PREVEON and to support a
greater level of R&D activities. SG&A expenses were $26.7 million during 1996,
which is 5% greater than SG&A expense levels in 1997. The Company launched its
first product, VISTIDE, in June 1996, and the level of expenses in that year is
largely attributable to costs incurred to establish the Company's United States
marketing and sales capabilities. As expected, these expenses were somewhat
lower in 1997. The Company's selling, general and administrative expenses are
expected to increase substantially during 1999, as Gilead continues to expand
its sales and marketing capacity and increase support activities for its R&D
efforts.
NET INTEREST INCOME
The Company had net interest income of $18.3 million, $17.8 million and
$14.3 million in 1998, 1997 and 1996, respectively. The increased level of net
interest income in 1998 as compared to 1997 is primarily due to increased
returns on the investment portfolio in 1998. Net interest income in 1997
exceeded the
30
1996 amount mainly due to the full-year benefit in 1997 of the investment of the
proceeds from the Company's public offering of common stock in 1996 and a $40.0
million equity investment by Pharmacia & Upjohn in 1997. The Company expects net
interest income to decline substantially in 1999 due to increased spending
levels and the corresponding decreasing balances of invested cash.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments totaled $279.9 million
at December 31, 1998, compared to $322.3 million at December 31, 1997. This
$42.4 million decrease is primarily due to the net use of cash to fund
operations of $46.7 million, partially offset by proceeds of $9.0 million from
the issuance of common stock under the Company's stock purchase plan and from
the exercise of stock options. Significant changes in working capital during
1998 include a decrease in other current assets of $9.6 million. The decrease
results from the payment in full during 1998 of reimburseable R&D expenses and a
milestone payment totaling approximately $12.4 million due from Roche, partially
offset by an increase in inventory of $3.0 million as well as a $1.0 million
receivable from Isis at December 31, 1998 in connection with the sale of the
Company's antisense patent estate. The balance of the amount due from Isis, $3.0
million, is reported as a noncurrent receivable in other assets at December 31,
1998 and comprises substantially all of the $2.9 million increase in that
balance as compared to the end of the prior year. The balance of other accrued
liabilities is $12.4 million and $5.7 million at December 31, 1998 and 1997,
respectively. Of this $6.7 million increase, $5.0 million represents an accrued
liability to Roche, which represents Roche's 1998 R&D funding in excess of the
Company's related R&D spending. The Company's deferred revenue is $3.3 million
and $9.5 million at December 31, 1998 and 1997, respectively. At December 31,
1997, deferred revenue includes $7.2 million from Roche, representing its
advance reimbursement of budgeted R&D costs for the first quarter of 1998. The
December 31, 1998 balance did not include a comparable amount because the 1999
budget was not approved at that date.
At December 31, 1996, cash and cash equivalents and short-term investments
were $296.0 million. The $26.3 million increase at December 31, 1997 as compared
to the prior year is primarily attributable to a $40.0 million preferred stock
investment from Pharmacia & Upjohn and proceeds of $13.2 million from the
issuance of common stock under the Company's stock purchase plan and from the
exercise of stock options, partially offset by $19.9 million of net cash used in
operations. Significant changes in working capital during 1997 include a $13.7
million increase in other current assets, of which $12.4 million represents
reimbursable R&D expenses and a milestone payment due from Roche. Accrued
clinical and preclinical expenses increased by $8.0 million as a result of a
having a larger number of products in later stage clinical trials. Also, the
Company's deferred revenue increased by $9.0 million during 1997 as a result of
increased deferred revenues from Pharmacia & Upjohn and Roche. In October 1996,
the Company entered into a $3.0 million term loan to finance its facilities
expansion, which began in the fourth quarter of 1996.
During 1999, the Company expects that its balances of cash and cash
equivalents and short-term investments will continue to decline substantially as
R&D, SG&A and capital equipment spending levels increase.
The Company believes that its existing capital resources, supplemented by
net product sales, contract revenue and net royalty revenue, will be adequate to
satisfy its capital needs for the foreseeable future. As of December 31, 1998,
Gilead was entitled to cash payments of up to $34.0 million from Roche upon
achieving specific developmental and regulatory milestones, although there can
be no assurance that the milestones will be met. The Company's future capital
requirements will depend on many factors, including the progress of the
Company's R&D efforts, 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,
levels of administrative and legal expenses, the status of competitive products,
the establishment of manufacturing
31
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 had federal net operating loss and federal research and
development tax credit carryforwards of approximately $223.0 million and $7.9
million, respectively, at December 31, 1998. Utilization of the net operating
losses and credit carryforwards may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986. The acquisition of NeXstar is not expected to have a
material impact on the ability to utilize these tax loss and credit
carryforwards.
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 is implementing a Year 2000 project to address the issue of
computer software and hardware correctly processing dates through and beyond the
Year 2000. The goal of this project is to ensure that all computer software and
hardware that the Company uses or relies upon is retired, replaced or made Year
2000 compliant before December 31, 1999.
There are three primary aspects to the Company's Year 2000 project:
computers and other equipment, information systems software and third-party
suppliers and business partners. Gilead is addressing each of these areas on a
phased basis, as follows: 1) educating the internal user community at Gilead; 2)
conducting an inventory of all software and hardware; 3) evaluating all software
and hardware for Year 2000 compliance; 4) implementing modifications, retirement
or replacement of software or hardware, prioritized based on an analysis of
importance to Gilead's business; 5) testing and validating all modified or
replaced software and hardware; and 6) designing and implementing contingency
and business continuation plans for critical systems.
To date, Gilead has completed the education and inventory phases of the
project, and estimates that 80% of software and hardware has completed the
evaluation phase. Implementation of modifications or replacements and testing
and validation are on schedule, and the Company anticipates that, for business-
critical systems, all of these activities will be complete by the end of 1999.
The Company has prioritized the implementation phase to first address
software or hardware that affects product manufacturing, quality control and
safety, employee safety, revenues or cash reserves. Two systems that have been
identified as critical to Gilead's operations are software programs from JD
Edwards, Inc. ("JDE") and Beckman-Coulter, Inc. ("Beckman"). The JDE system is
an enterprise-wide program that tracks financial information, processes sales
orders and monitors purchasing and manufacturing activities. During 1998, the
Company upgraded the JDE system to a Year 2000 compliant version, which is
presently operational. The Beckman system monitors and records laboratory data.
The Beckman system upgrades are approximately 80% complete and are scheduled to
be finished during the second quarter of 1999.
To date, the Company has initiated evaluations of more than 90% of its
critical third-party suppliers and business partners. The Company anticipates
completing these evaluations by the second quarter of 1999, on a prioritized
basis. Responses to Gilead's inquiries regarding Year 2000 compliance in many
cases have been general and nonbinding. To date, substantially all respondents
indicate that their Year 2000 compliance efforts are progressing on schedule,
and that their computer systems either are or will be Year 2000-compliant at the
appropriate time. A significant majority of these respondents are presently in
the final testing phase of their Year 2000 compliance projects, and many of them
indicate that they are concurrently developing contingency plans.
32
Among the most critical third parties the Company relies on are the
financial institutions that manage Gilead's cash and investments of
approximately $280 million, the Company's stock transfer agent, contract
manufacturers, contract research and laboratory organizations and the FDA. The
Company intends to continue monitoring and evaluating these third parties to the
extent practical through the end of 1999.
Gilead anticipates that the total cost of its Year 2000 compliance efforts
will not be material to its financial condition or results of operations. The
current estimate for external costs of total compliance efforts is approximately
$2.1 million, of which $1.1 million has been incurred to date. Of the amount
incurred to date, $0.8 million has been expensed and the remainder has been
capitalized. The $1.0 million of remaining costs includes $0.8 million of
capitalizable costs, primarily computer hardware and software, and $0.2 million
of costs to be charged to expense, primarily consulting fees. These external
costs are included in Gilead's operating budget for 1999. However, this estimate
does not include any costs to Gilead that may be associated with the failure of
any third-party supplier or business partner to achieve Year 2000 compliance.
The Company is also developing a series of contingency plans for certain of
its critical applications. These plans involve, among other actions, manual
solutions, increased inventories and modified staffing strategies. These
contingency plans are expected to be finalized and ready for implementation, if
necessary, before the end of 1999.
The Company's Year 2000 project is designed to significantly reduce
uncertainty and risk arising from the Year 2000 problem. The Company believes
that the implementation actions described above reduce the potential for
disruption of operations or significant financial impact. Due to the uncertainty
inherent in the Year 2000 problem, however, there can be no assurance that Year
2000 failures will not occur. Should such a Year 2000 failure occur with any of
Gilead's business critical operating systems, appropriate contingency plans have
been established which the Company believes would result in only a temporary
disruption in its ability to sell and distribute products. The Company does not
believe that any such disruption would have a material impact on its financial
condition or results of operations.
The Company cannot predict with any certainty whether its critical
third-party suppliers and business partners will achieve Year 2000 compliance,
or whether the failure of any such third party to do so would have a material
effect on the Company's business. However, the Company has established
contingency plans for maintaining operations with all its critical third-party
suppliers and business partners to minimize any disruption in its day-to-day
business operations.
MARKET RISK
The Company's non-trading portfolio of investments creates an exposure to
interest rate risk. By policy, the Company limits amounts invested in securities
by maturity, industry group, investment type and issuer, except for securities
issued by the U.S. government. The goals of the Company's investment policy, in
order of priority, are as follows:
1. Safety and preservation of principal and diversification of risk.
2. Liquidity of investments sufficient to meet cash flow requirements.
3. Competitive after-tax rate of return.
33
Changes in interest rate levels affect the fair value of these financial
instruments. A sensitivity analysis to measure potential losses in the fair
value of Gilead's short-term investment portfolio arising from a change in
interest rates indicates that a one percentage point increase in interest rates
would have decreased the fair value of the short-term investment portfolio by
approximately $2.7 million at December 31, 1998. A one percentage point decrease
in interest rates at December 31, 1998 would have increased the fair value of
the short-term investment portfolio by $2.7 million. These amounts were
determined by calculating the weighted average effects of duration and convexity
on the estimated overall portfolio return given the specified changes in
interest rates. The adjusted portfolio returns were then multiplied by the fair
value of the portfolio to derive the change in portfolio value that would result
in each 100 basis point interest rate change scenario. The model assumes there
are no changes in credit risk spreads.
All of Gilead's revenue is invoiced in U.S. dollars. The Company has no
active foreign subsidiaries. Gilead's exposure to foreign currency exchange rate
fluctuations arises from certain purchases denominated in foreign currencies.
The Company periodically enters into foreign exchange forward contracts with
financial institutions in accordance with its foreign exchange risk management
policy to hedge the currency exchange risk associated with certain firmly
committed purchase transactions. In general, these contracts mature within three
months or less and do not expose the Company to market risk because gains and
losses on the contracts offset gains and losses on the transactions being
hedged. At December 31, 1998, the Company's outstanding forward foreign exchange
contracts, their fair values and the unhedged exposure were immaterial. Due to
the Company's hedging activities, the Company's potential loss of earnings from
a change in foreign exchange rates is minimal. The effect of foreign exchange
rate fluctuations on Gilead in the year ended December 31, 1998 was not
material.
PROPOSED MERGER AGREEMENT
On March 1, 1999, Gilead and NeXstar announced a definitive merger agreement
providing for the acquisition by Gilead of all the outstanding common stock of
NeXstar. The merger is structured as a tax-free, stock-for-stock transaction.
The Company intends to account for this merger under the pooling-of-interests
method. NeXstar, headquartered in Boulder, Colorado, is engaged in the
discovery, development, manufacture and commercialization of products to treat
serious and life-threatening illnesses. In addition to its Boulder headquarters,
NeXstar maintains research, development and manufacturing facilities in San
Dimas, California, and marketing subsidiaries worldwide. Under the terms of the
merger agreement, NeXstar stockholders will receive between 0.3786 and 0.5000 of
a share of Gilead common stock for each share of NeXstar common stock. The exact
exchange ratio will be determined based on the trading range of Gilead common
stock over a specified period prior to completion of the merger. The merger is
subject to certain conditions, including approval of the stockholders of Gilead
and NeXstar. The transaction is expected to be completed in mid-1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are set forth beginning at
page 44 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
Not applicable.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
The names of the directors in alphabetical order, and certain information
about them as of March 18, 1999, are set forth below:
------------------------
(1) Member of the compensation committee
(2) Member of the audit committee
Dr. Berg joined the Gilead board of directors in April 1998. Dr. Berg is
currently Cahill Professor in Cancer Research in the Department of Biochemistry
at Stanford University School of Medicine, where he has been on the faculty
since 1959. He has served as Director of the Stanford University Beckman Center
for Molecular and Genetic Medicine since its founding in 1985. Dr. Berg is a
director of Affymetrix, Inc. and Transgene, Inc. He is the founder and a
scientific advisor to Schering-Plough's DNAX Research Institute. Dr. Berg also
serves as a member of Gilead's Scientific Advisory Board. Dr. Berg received the
Nobel Prize for Chemistry in 1980.
Mr. Davignon joined the Gilead board of directors in September 1990. He has
served as the Chairman of Societe Generale de Belgique, a diversified financial
and industrial company, since 1985. Mr. Davignon served as the European
Community's Commissioner for Industry and International Markets from 1977 to
1981, and as the EC's Vice President for Research, Industry and Energy Policies
from 1981 to 1984. Mr. Davignon is a director of Fiat S.A., Compagnie de Suez,
Minorco S.A. and a number of other European companies.
Mr. Denny joined the Gilead board of directors in January 1996. Mr. Denny is
a Managing Director of William Blair Capital Partners V and VI, private equity
funds. Mr. Denny is a retired Vice Chairman of Sears, Roebuck & Co. As Vice
Chairman, he had responsibility for Allstate Insurance Corporation, Coldwell
Banker Real Estate Group and the corporate financial organization. Previously,
he served as Executive Vice President and Chief Financial and Planning Officer
of G.D. Searle & Co., as well as Chairman of Pearle Health Services, Inc., a
Searle-affiliated company. He is a director of Allstate Corporation, Astra A.B.,
GATX Corporation and ChoicePoint, Inc. and is a Chairman of Northwestern
Memorial Hospital.
Dr. Martin is Gilead's President and Chief Executive Officer. Dr. Martin
joined Gilead in October 1990 as Vice President for Research and Development,
was appointed Chief Operating Officer in October 1995, and was appointed
President and Chief Executive Officer and elected to the Gilead board of
directors in April 1996. From 1984 to 1990 he was employed at Bristol-Myers
Squibb, a pharmaceutical company, where he was Director of Antiviral Chemistry.
Dr. Martin was employed at Syntex Corporation,
35
a pharmaceutical company, from 1978 to 1984. Dr. Martin is the co-inventor of
ganciclovir, a pharmaceutical now used for treatment of cytomegalovirus
infection. He is currently the President of the International Society for
Antiviral Research. Dr. Martin received his Ph.D. in organic chemistry from the
University of Chicago.
Dr. Moore joined the Gilead board of directors in January 1996, and served
as a member of Gilead's Business Advisory Board from July 1991 until January
1996. Dr. Moore is a co-founder and Chairman Emeritus of Intel Corporation,
where he previously served as Chairman, President and Chief Executive Officer.
He also served as Director of Research and Development for the Fairchild
Semiconductor Division of Fairchild Camera and Instrument Corporation. Dr. Moore
is a director of Transamerica Corporation and is Chairman of the Board of
Trustees at the California Institute of Technology. He received the National
Medal of Technology in 1990.
Mr. Rumsfeld joined the Gilead board of directors in July 1988 and was
elected Chairman of the Board in January 1997. Mr. Rumsfeld has been in private
business since August 1993. He served as the Chairman and Chief Executive
Officer of General Instrument Corporation, a diversified electronics company,
from 1990 to 1993, and was Chief Executive Officer of G.D. Searle & Co., a
pharmaceutical company, from 1977 to 1985. Mr. Rumsfeld formerly served as
Presidential Envoy to the Middle East, U.S. Secretary of Defense, White House
Chief of Staff, U.S. Ambassador to NATO and a U.S. Congressman. Mr. Rumsfeld is
a director of ABB AB, Gulfstream Aerospace Corp., RAND Corporation and Tribune
Company. In 1977, Mr. Rumsfeld was awarded the Medal of Freedom, the nation's
highest civilian award.
Dr. Shultz joined the Gilead board of directors in January 1996. Dr. Shultz
currently serves as Distinguished Fellow at the Hoover Institution and as a
director of the Bechtel Group, Inc., AirTouch Communications and Gulfstream
Aerospace Corporation. Dr. Shultz served as U.S. Secretary of State from 1982 to
1989 and earlier served as Secretary of Labor, Director of the Office of
Management and Budget and Secretary of the Treasury. Previously, he served as
Dean of the Graduate School of Business at the University of Chicago and as
President of the Bechtel Group, Inc. In 1989, Dr. Shultz was awarded the Medal
of Freedom, the nation's highest civilian honor.
EXECUTIVE OFFICERS
The names of Gilead's executive officers who are not also directors of
Gilead and certain information about each of them are set forth below:
Jeffrey W. Bird, age 38, is Gilead's Senior Vice President, Business
Operations. Dr. Bird joined Gilead in September 1988 and worked as Director of
Scientific Programs and Research Scientist until March 1990. After completing
his medical degree, he returned to Gilead in December 1991 as Director of
Corporate Development, became Vice President of Corporate Development in March
1995 and was appointed Senior Vice President, Business Operations in January
1998, at which time he became an executive officer. Dr. Bird received his M.D.
and Ph.D. degrees at Stanford University Medical School.
Norbert W. Bischofberger, age 43, is Gilead's Senior Vice President,
Research. Dr. Bischofberger joined Gilead in 1990 as Director of Organic
Chemistry, became Vice President of Organic Chemistry in March 1993 and was
named Vice President of Research in August 1995. Dr. Bischofberger was appointed
Senior Vice President, Research in January 1998, at which time he became an
executive officer. Prior to joining Gilead, Dr. Bischofberger worked in research
at Genentech, Inc. from 1986 to 1990, most recently as Manager of DNA Synthesis.
He received his B.S. in chemistry at the University of Innsbruck in Austria, and
his Ph.D. in Organic Chemistry at the Eidgennossische Technische Hochschule
(ETH) in Zurich, Switzerland.
Howard S. Jaffe, age 41, is Gilead's Senior Vice President, Drug
Development. Dr. Jaffe joined Gilead in December 1991 as Vice President,
Clinical Affairs, became Vice President and Chief Medical Officer in March 1995
and became Senior Vice President, Drug Development in August 1996. Dr. Jaffe is
36
an assistant clinical professor and attending physician at the University of
California, San Francisco. From 1986 until joining Gilead, he was employed by
Genentech, Inc., most recently as Director of Clinical Research and Cytokine
Project Team Leader. Dr. Jaffe received his M.D. from the Yale University School
of Medicine and performed his residency and fellowship training at the
University of California, San Francisco.
Mark L. Perry, age 43, is Gilead's Senior Vice President, Chief Financial
Officer and General Counsel. Mr. Perry joined Gilead in July 1994 as its Vice
President and General Counsel and became Chief Financial Officer in May 1996.
Mr. Perry was appointed Senior Vice President, Chief Financial Officer and
General Counsel in January 1998. He has also served as Corporate Secretary since
May 1994. From 1981 to 1994, Mr. Perry was with Cooley Godward LLP in San
Francisco and Palo Alto, California. Cooley Godward serves as Gilead's primary
outside counsel. Mr. Perry was an associate with Cooley Godward from 1981 to
1987, and a partner from 1987 to 1994. Mr. Perry received his J.D. from the
University of California, Davis and is a member of the California bar.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires Gilead's
directors and executive officers, and persons who own more than ten percent of a
registered class of Gilead's equity securities, to file with the SEC initial
reports of ownership and reports of changes in ownership of common stock and
other equity securities of Gilead. Executive officers, directors and greater
than ten percent stockholders are required by SEC regulation to furnish Gilead
with copies of all Section 16(a) forms they file.
To Gilead's knowledge, based solely on a review of the copies of such
reports furnished to Gilead and written representations that no other reports
were required, during 1998, all Section 16(a) filing requirements applicable to
its executive officers, directors and greater than ten percent beneficial owners
were met.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Each non-employee director of Gilead receives a fee of $1,000 for each
meeting attended. In the year ended December 31, 1998, the total compensation
paid to current non-employee directors was $19,000. The members of the Gilead
board of directors are also eligible for reimbursement for their expenses
incurred in connection with attendance at Gilead board of directors meetings in
accordance with Gilead's policy.
Each non-employee director of Gilead also receives stock option grants under
the Directors' Option Plan. The Directors' Option Plan provides for
non-discretionary grants of nonstatutory stock options to non-employee directors
of Gilead, on an automatic basis pursuant to a pre-approved schedule. Options
granted under the Directors' Option Plan are at prices not less than fair market
value on the date of grant, become exercisable over a period of five years in
equal quarterly installments at the rate of 5% per quarter and expire after ten
years. Such vesting is conditioned upon continuous service as a non-employee
director of or consultant to Gilead. The exercise price of options granted must
be paid in cash or shares of common stock of Gilead at the time the option is
exercised.
Each non-employee director was granted as of January 2, 1996, or will be
granted on the date he or she is first elected to be a non-employee director, an
option to purchase 25,000 shares of Gilead common stock, the initial grant.
Thereafter, on each anniversary date of a non-employee director's initial grant,
such non-employee director shall automatically be granted an option to purchase
5,000 shares of Gilead common stock, the annual grant. A non-employee director
who is also the Chairperson of the Gilead board of directors shall be granted an
option to purchase an additional 20,000 shares of Gilead common stock at the
time of his or her initial grant or later election as Chairperson, and an
additional 4,000 shares
37
of Gilead common stock at the time of his or her annual grant. Each non-employee
director who also serves on a standing committee of the Gilead board of
directors shall automatically be granted an option to purchase an additional
1,000 shares of Gilead common stock at the time of his or her initial grant, and
an additional 1,000 shares of Gilead common stock at the time of his or her
annual grant, for each such committee. Each non-employee director who serves on
a standing committee and who is also the Chairperson of that committee shall
automatically be granted an option to purchase an additional 2,000 shares of
Gilead common stock at the time of his or her annual grant. No other options may
be granted under the Directors' Option Plan.
During 1998, Gilead granted options covering 66,000 shares (net of
cancellations) to its current non-employee directors, at exercise prices ranging
from $25.00 to $38.25 per share. Each option granted had an exercise price equal
to fair market value on the date of grant.
As of February 26, 1999, options to purchase a total of 305,000 shares of
Gilead common stock were outstanding under the Directors' Option Plan.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY OF COMPENSATION
The following table shows, for the years ended December 31, 1998, 1997, and
1996, certain compensation awarded or paid to, or earned by, Gilead's Chief
Executive Officer and its four other most highly compensated executive officers
at December 31, 1998 (the "named executive officers"):
SUMMARY COMPENSATION TABLE
------------------------
(1) Includes amounts earned but deferred at the election of the named executive
officer pursuant to Gilead's 401(k) employee savings and retirement plan. To
date, Gilead has not made any matching contributions under such plan.
38
(2) Gilead has not granted any stock appreciation rights, has not made any
long-term incentive plan awards and did not make any restricted stock grants
to the named executive officers during the periods covered.
STOCK OPTION GRANTS AND EXERCISES
As of February 26, 1999, options to purchase a total of 3,921,698 shares of
common stock had been granted and remained outstanding under the 1991 Stock
Option Plan, and options to purchase 842,530 shares of common stock remained
available for grant thereunder. In addition, as of such date, options to
purchase a total of 190,351 shares of common stock were outstanding under
Gilead's 1987 Incentive Stock Option Plan and 1987 Supplemental Stock Option
Plan and pursuant to certain option grants made outside of Gilead's option
plans.
Gilead grants both incentive stock options and nonstatutory stock options to
its executive officers under the 1991 Stock Option Plan. The following tables
show, for the year ended December 31, 1998, the last fiscal year, certain
information regarding options granted to, exercised by, and held at year end by
the named executive officers:
OPTION GRANTS IN LAST FISCAL YEAR
------------------------
(1) The terms of such options, which include both incentive and nonstatutory
stock options, are consistent with those of options granted to other
employees under Gilead's 1991 Stock Option Plan. The options vest at the
rate of 20% after one year and 5% per quarter thereafter during the
optionee's employment. Subject to certain exceptions, the maximum term of
options granted under the 1991 Stock Option Plan is ten years.
(2) Based on options to purchase 1,062,400 shares of Gilead common stock granted
to employees, including executive officers, for the year ended December 31,
1998.
(3) The potential realizable value is based on the term of the option at the
date of the grant (10 years). It is calculated by assuming that the stock
price on the date of grant appreciates at the indicated annual rate,
compounded annually for the entire term, and that the option is exercised
and sold on the last day of the option term for the appreciated stock price.
Actual gains, if any, are dependent on the actual future performance of
Gilead common stock and the timing of exercise and sale transactions by the
holder. There can be no assurance that the amounts reflected in this table,
or that any gains, will be achieved.
39
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
------------------------
(1) Represents the fair market value of Gilead common stock on the date of
exercise (based on the closing sales price reported on the Nasdaq Stock
Market or the actual sales price if the shares were sold by the optionee)
less the exercise price, and does not necessarily indicate that the shares
were sold by the optionee.
(2) Includes both in-the-money and out-of-the-money options.
(3) Fair market value of Gilead common stock at December 31, 1998 ($41.0625,
based on the closing sales price reported on the Nasdaq Stock Market), less
the exercise price.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of Gilead common stock as of February 26, 1999 by: (1) each current director and
nominee for director; (2) each named executive officer (as defined above in Item
11); (3) all executive officers and directors of Gilead as a group; and (4) all
those known by Gilead to be beneficial owners of more than five percent of
Gilead common stock and series B preferred stock on a combined basis.
40
------------------------
* Less than one percent
(1) This table is based upon information supplied by Gilead's officers,
directors and principal stockholders and Schedules 13D and 13G filed with
the Securities and Exchange Commission. Unless otherwise indicated in the
footnotes to this table, and subject to community property laws where
applicable, each of the stockholders named in this table has sole voting
and investment power with respect to the shares indicated as beneficially
owned. Applicable percentages are based on 30,884,298 shares of Gilead
common stock and 1,133,786 shares of Gilead series B preferred stock
outstanding on February 26, 1999, for a total of 32,018,084 outstanding
shares, adjusted as required by rules promulgated by the SEC.
(2) Based on a Schedule 13G filed with the Commission on January 24, 1999. The
Wellington Management Company, LLP is a registered investment adviser. The
Wellington Management Company in its capacity as investment adviser is
considered a "beneficial owner" in the aggregate of 4,287,860 shares of
Gilead common stock. Such shares are owned by numerous investment advisory
clients of The Wellington Management Company, none of which is known to
have beneficial ownership of more than 5% of that class of securities of
Gilead. As of December 31, 1998 The Wellington Management Company had
shared voting power with respect to 1,770,280 shares and shared dispositive
power with respect to 4,228,860 shares.
(3) Based on a Schedule 13G filed with the Commission on February 12, 1999. T.
Rowe Price Associates, Inc., in its capacity as a registered investment
adviser is considered a "beneficial owner" in the aggregate of 3,164,300
shares of Gilead common stock. Such shares are owned by various individual
and institutional investors for which T. Rowe Price Associates, Inc. serves
as investment adviser with power to direct investments and/or sole power to
vote the shares. For purposes of the reporting requirements of the
Securities and Exchange Act of 1934, T. Rowe Price Associates is deemed to
be a beneficial owner of such shares; however, T. Rowe Price Associates
expressly disclaims such beneficial ownership.
(4) Based on a Schedule 13G filed with the Commission on February 8, 1999. The
Capital Research and Management Company is a registered investment adviser
that manages The American Funds Group of mutual funds. The Capital Research
and Management Company in its capacity as investment adviser is considered
a "beneficial owner" in the aggregate of 2,895,000 shares of Gilead common
stock. Such shares are owned by accounts under the discretionary investment
management of The Capital Research and Management Company. As of December
31, 1998, The Capital Research and Management Company had sole dispositive
power with respect to 2,895,000 shares.
(5) Based on a Schedule 13G filed with the Commission on February 8, 1999. The
Capital Guardian Trust Company is a California state-chartered trust
company that acts as investment manager to large
41
institutional accounts (primarily pension funds). Capital International
S.A. provides investment management services to institutional accounts. The
Capital Guardian Trust Company and Capital International S.A., in their
capacity as investment managers, are considered "beneficial owners" in the
aggregate of 1,865,000 shares of Gilead common stock. Such shares are owned
by accounts under the discretionary investment management of The Capital
Guardian Trust Company and Capital International S.A. As of December 31,
1998, The Capital Guardian Trust Company had sole voting power with respect
to 1,662,000 shares and sole dispositive power with respect to 1,865,000
shares and Capital International S.A. had sole voting and dispositive power
with respect to 30,000 shares.
(6) Includes 318,325 shares subject to stock options exercisable within 60
days.
(7) Includes 39,889 shares held in a grantor annuity trust for which Mr.
Rumsfeld is the donor and trustee and 37,000 shares subject to stock
options exercisable within 60 days.
(8) Includes 12,534 shares held in trust for which Dr. Bischofberger and his
wife are trustees and 96,599 shares subject to stock options exercisable
within 60 days.
(9) Includes 13,548 shares held in trust for which Dr. Jaffe and his wife are
trustees and 82,665 shares subject to stock options exercisable within 60
days.
(10) Includes 500 shares held in account for Mr. Perry's minor child for which
Mr. Perry is the custodian and 86,000 shares subject to stock options
exercisable within 60 days.
(11) Includes 72,597 shares subject to stock options exercisable within 60
days.
(12) Includes 19,998 shares held by a partnership in which Mr. Denny is a
managing partner, as to which Mr. Denny disclaims beneficial ownership.
Also includes 7,426 shares held in partnership with Mr. Denny's wife and
26,100 shares subject to stock options exercisable within 60 days.
(13) Includes 53,330 shares subject to stock options exercisable within 60
days.
(14) Includes 30,866 shares subject to stock options exercisable within 60
days.
(15) Includes 21,400 shares subject to stock options exercisable within 60
days.
(16) Includes 5,200 shares subject to stock options exercisable within 60 days.
(17) Includes 830,082 shares subject to stock options exercisable within 60
days. See notes (6) through (16) above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1990, Gilead entered into a Relocation Loan Agreement with John
C. Martin, currently Gilead's President and Chief Executive Officer. The
principal amount of the loan is $100,000 with a term of ten years. The loan is
non-interest bearing and 100% of the principal amount will be forgiven on a pro
rata basis over years six through ten as long as Dr. Martin is still employed by
Gilead. In the event Dr. Martin ceases to be employed by Gilead, the loan
becomes interest-bearing and due within ninety days. The loan is secured by a
deed of trust on Dr. Martin's residence. As of December 31, 1998, $40,000 was
outstanding.
In October 1994, Gilead entered into a Loan Agreement with Mark L. Perry,
currently Gilead's Senior Vice President, Chief Financial Officer and General
Counsel. The principal amount of the loan is $100,000 with a term of ten years.
The loan is non-interest bearing and 50% of the principal amount will be
forgiven on a pro rata basis over years six through ten as long as Mr. Perry is
still employed by Gilead. In the event Mr. Perry ceases to be employed by
Gilead, the loan becomes interest-bearing and due within sixty days. The loan is
secured by a deed of trust on Mr. Perry's residence. As of December 31, 1998,
the entire loan amount was outstanding.
42
During 1998, Gilead paid an aggregate of $2,551,134 to Pharma Research
Corporation, a contract research organization. James M. Denny, a member of
Gilead's board of directors, is a managing director of William Blair Capital,
LLC, which manages William Blair Capital Fund V, which owns a controlling
interest (45% of the voting stock) in Pharma Research Corporation. Mr. Denny is
not involved in the supervision of the operations of Pharma Research
Corporation. Pharma Research Corporation provided services to Gilead prior to
William Blair Capital's investment.
Gilead has entered into indemnity agreements with all of its officers
(including the named executive officers) and directors which provide, among
other things, that Gilead will indemnify such officer or director, under the
circumstances and to the extent provided for therein, for expenses, damages,
judgments, fines and settlements he may be required to pay in actions or
proceedings which he is or may be made a party by reason of his position as a
director, officer or other agent of Gilead, and otherwise to the full extent
permitted under Delaware law and Gilead's by-laws.
43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS FORM 10-K:
(1) All schedules are omitted because they are not required or the required
information is included in the financial statements or notes thereto.
(2) Exhibits
44
------------------------
+ Previously filed.
* Confidential treatment has been requested.
(1) Filed as an exhibit to Registrant's Registration Statement on Form S-8 (No.
33-46058) and incorporated herein by reference.
(2) Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No.
33-44534) or amendments thereto and incorporated herein by reference.
(3) Filed as an exhibit to Registrant's Registration Statement on Form S-3 (No.
333-868) or amendments thereto and incorporated herein by reference.
45
(4) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1994 and incorporated herein by reference.
(5) Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No.
33-55680) or amendments thereto and incorporated herein by reference.
(6) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993 and incorporated herein by reference.
(7) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1994 and incorporated herein by reference.
(8) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994 and incorporated herein by reference.
(9) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the nine
month period ended December 31, 1995.
(10) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 and incorporated herein by reference.
(11) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein by reference.
(12) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 and incorporated herein by reference.
(13) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by reference.
(14) Filed as an exhibit to Registrant's Current Report on Form 8-K filed on
March 9, 1999 and incorporated herein by reference.
(B) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Registrant during the fourth
quarter of the fiscal year ended December 31, 1998. On March 9, 1999, the
Registrant filed a Current Report on Form 8-K regarding the proposed merger with
NeXstar Pharmaceuticals, Inc.
46
GILEAD SCIENCES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
CONTENTS
47
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Gilead Sciences, Inc.
We have audited the accompanying consolidated balance sheets of Gilead
Sciences, Inc. as of December 31, 1998 and 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Gilead
Sciences, Inc. at December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
January 21, 1999
48
GILEAD SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
See accompanying notes
49
GILEAD SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See accompanying notes
50
GILEAD SCIENCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
See accompanying notes
51
GILEAD SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
See accompanying notes
52
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
Gilead Sciences, Inc. (the "Company" or "Gilead") was incorporated in the
State of Delaware on June 22, 1987. All of the Company's operations are located
in the United States. The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary Gilead Sciences Limited, which
was formed under the laws of the United Kingdom in November 1995. To date, the
subsidiary has been inactive and has no material assets or liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
BUSINESS SEGMENTS
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, which addresses how public business enterprises must report
information about operating segments. For a number of years, the Company has
been primarily engaged in one reportable operating segment, the discovery,
development and marketing of a new class of human therapeutics based on
nucleotides. Gilead's President and Chief Executive Officer evaluates
performance and allocates resources based on the operating results of the whole
Company. The operating expenses of the Company are not allocated to individual
business components so that no measure of profit or loss for any individual
component of the Company is available. Gilead attributes revenues from customers
to individual countries based on the location of the customer. At the present
time, the Company is organized and managed along functional lines.
VISTIDE-Registered Trademark- (cidofovir injection), a drug for the treatment of
cytomegalovirus ("CMV") retinitis in patients with AIDS, received marketing
clearance from the FDA in June 1996 and is the Company's first commercially
available product. Gilead sells this product in the United States through major
drug wholesalers and it is currently the Company's only source of product sales
revenue. Gilead has recorded no product sales from customers outside of the U.S.
Gilead also derives revenue from contracts, including reimbursement of
research and development ("R&D") costs and the sale of patent rights, and from
royalties. During 1998, Gilead recognized royalty revenue from sales of VISTIDE
outside the United States by Pharmacia & Upjohn S.A. ("P&U"), and from the
co-promotion with Roche Laboratories Inc. ("Roche Labs") of
Roferon-A-Registered Trademark- (Interferon alfa-2a, recombinant) for the
treatment of chronic hepatitis C infection in the United States. Gilead has
recorded contract revenue from P&U, F. Hoffmann-La Roche, Ltd. and Glaxo
Wellcome Inc. ("Glaxo"), companies located in Sweden, Switzerland and the United
Kingdom, respectively. The amounts, sources and nature of the Company's contract
and royalty revenues are described in more detail in Note 3. Long-lived assets
located outside of the U.S. are immaterial at December 31, 1998 and 1997.
REVENUE RECOGNITION
The Company recognizes product sales revenue at the time product is shipped.
Provisions are made for estimated product returns, cash discounts and government
discounts and rebates. Gilead retains no
53
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
future performance obligations under the terms of its product sales. Contract
revenue recognized under the Company's collaborative R&D agreements, license and
supply agreements and patent rights purchase agreement is recorded as earned
based upon the performance requirements of the contract. Payments received in
advance under these agreements are recorded as deferred revenue until earned.
Under the Company's collaborative R&D agreements, the Company has no explicit or
implied obligation or intent to repay any amounts earned and recognized. Royalty
revenue is recognized when received, which is generally in the quarter following
that in which the corresponding sales occur.
RESEARCH AND DEVELOPMENT COSTS
All R&D costs, including those funded by third parties, are expensed as
incurred.
STOCK-BASED COMPENSATION
In accordance with the provisions of SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, the Company has elected to follow Accounting
Principles Board Opinion ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations in accounting for its employee stock
option plans. Under APB No. 25, if the exercise price of the Company's employee
and director stock options equals or exceeds the fair value of the underlying
stock on the date of grant, no compensation expense is recognized. Subsequent to
the effective date of SFAS No. 123, the Company's policy is to record
compensation expense over the vesting period for stock grants to consultants and
scientific advisors based on the fair value of the options. See Note 7 for pro
forma disclosures of stock-based compensation pursuant to SFAS No. 123.
BASIC AND DILUTED LOSS PER COMMON SHARE
For all periods presented, both basic and diluted loss per common share are
computed based on the weighted average number of common shares outstanding
during the period. Convertible preferred stock and stock options could
potentially dilute basic earnings per share in the future, but were excluded
from the computation of diluted loss per share as their effect is antidilutive
for the periods presented.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with insignificant interest
rate risk and a remaining maturity of three months or less at the purchase date
to be cash equivalents. Gilead may enter into overnight repurchase agreements
under which it purchases securities with an obligation to resell them the
following day. Securities purchased under agreements to resell are recorded at
face value and reported in cash and cash equivalents.
SECURITIES AVAILABLE-FOR-SALE
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation at each balance sheet
date. The Company's debt securities are classified as available-for-sale and
carried at estimated fair values in cash equivalents and short-term investments.
At December 31, 1998, cash and cash equivalents includes $30.5 million of
securities designated as available-for-sale ($28.5 million at December 31,
1997). Fair values of available-for-sale securities are based on prices obtained
from commercial pricing services. Unrealized gains and losses on
available-for-sale
54
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
securities are excluded from earnings and reported as a separate component of
stockholders' equity. Interest income includes interest, dividends, amortization
of purchase premiums and discounts, and realized gains and losses on sales of
securities. The cost of securities sold is based on the specific identification
method.
CONCENTRATIONS OF CREDIT RISK
Cash and cash equivalents and short-term investments are the financial
instruments that primarily subject the Company to credit risk. By policy, the
Company limits amounts invested in securities by maturity, industry group,
investment type and issuer, except for securities issued by the U.S. government.
Gilead is not exposed to any significant concentrations of credit risk. The
goals of the Company's investment policy, in order of priority, are as follows:
1. Safety and preservation of principal and diversification of risk;
2. Liquidity of investments sufficient to meet cash flow requirements; and
3. Competitive after-tax rate of return.
ACCOUNTS RECEIVABLE AND OTHER CURRENT ASSETS
Trade receivables, net of allowances for returns, discounts, rebates and bad
debts, are reported on the consolidated balance sheet in other current assets.
At December 31, 1997, other current assets includes reimbursable R&D expenses
and a milestone payment totaling approximately $12.4 million due from F.
Hoffmann-La Roche, Ltd. and Hoffmann-La Roche Inc. (collectively, "Roche"). For
additional information, refer to Note 3.
PROPERTY AND EQUIPMENT
All of the Company's capitalized software is purchased. Gilead has no
internally developed computer software. Property and equipment are stated at
cost and consist of the following (in thousands):
55
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and equipment are depreciated on a straight-line basis over their
estimated useful lives, as follows:
Leasehold improvements and equipment subject to financing obligations are
amortized on a straight-line basis over the shorter of the estimated useful life
of the item or the term of the related lease or borrowing.
LONG-LIVED ASSETS
The carrying value of long-lived assets is reviewed on a regular basis for
the existence of facts or circumstances both internally and externally that may
suggest impairment. Specific potential indicators of impairment include:
- a significant decrease in the fair value of an asset;
- a significant change in the extent or manner in which an asset is used or
a significant physical change in an asset;
- a significant adverse change in legal factors or in the business climate
that affects the value of an asset or an adverse action or assessment by a
regulator;
- an accumulation of costs significantly in excess of the amount originally
expected to acquire or construct an asset; and
- operating or cash flow losses combined with a history of operating or cash
flow losses or a projection or forecast that demonstrates continuing
losses associated with an income-producing asset.
Should there be indication of an impairment, the Company will confirm this
by comparing the estimated future cash flows expected to result from the use of
the asset and its eventual disposition to the carrying amount of the asset.
Assets are grouped at the lowest level for which there are identifiable cash
flows that are largely independent of the cash flows generated by other asset
groups. If the fair value of the asset is less than the carrying amount of the
asset, an impairment loss, measured as the excess of the carrying value of the
asset over its fair value, will be recognized. The cash flow estimates used in
such calculations are based on management's best estimates, using appropriate
and customary assumptions and projections at the time. The Company has not
recorded any losses related to the impairment of long-lived assets in the years
ended December 31, 1998, 1997 and 1996.
56
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ACCRUED LIABILITIES
Other accrued liabilities are summarized as follows (in thousands):
FOREIGN CURRENCY INSTRUMENTS
The Company periodically enters into foreign exchange forward contracts with
financial institutions in accordance with its foreign exchange risk management
policy to hedge the currency exchange risk associated with certain firmly
committed purchase transactions. In general, these contracts do not expose the
Company to market risk because gains and losses on the contracts offset gains
and losses on the transactions being hedged. The Company's exposure to credit
risk from these contracts is a function of changes in interest and currency
exchange rates and, therefore, varies over time. Gilead limits its risk that
counterparties to these contracts may be unable to perform by transacting only
with major U.S. banks. The Company also limits its risk of loss by entering into
contracts that provide for net settlement at maturity. Therefore, the Company's
overall risk of loss in the event of a counterparty default is limited to the
amount of any unrecognized and unrealized gains on outstanding contracts (i.e.,
those contracts that have a positive fair value) at the date of default.
Gains and losses on these contracts are deferred and reported as a component
of the related transaction in the period in which it occurs. At both December
31, 1998 and 1997, the Company's outstanding forward foreign exchange contracts
and their fair values were immaterial.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which establishes
accounting and reporting standards for derivative instruments, including forward
foreign exchange contracts, and for hedging activities. SFAS No. 133 is
effective for years beginning after June 15, 1999. Under Gilead's existing
derivatives activity levels and hedging strategies, the adoption of SFAS No. 133
would not have a significant impact on the Company's present financial
accounting and reporting practices.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the 1998
presentation.
57
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. INVESTMENTS
The following is a summary of available-for-sale securities (in thousands):
The following table presents certain information related to sales of
available-for-sales securities (in thousands):
At December 31, 1998, $63.6 million of the Company's portfolio of short-term
investments (excluding asset-backed securities) has a contractual maturity of
less than one year and $94.4 million of the portfolio has a contractual maturity
greater than one year but less than three years. None of the estimated
maturities of the Company's asset-backed securities exceed three years. Under
the Company's investment policy, it may enter into repurchase agreements
("repos") with major banks and authorized dealers provided that such repos are
collateralized by U.S. government securities with a fair value of at least 102
percent of the fair value of securities sold to Gilead.
3. CONTRACT REVENUE AND ROYALTIES
PHARMACIA & UPJOHN
In August 1996, the Company and P&U entered into a License and Supply
Agreement ("P&U Agreement") to market VISTIDE in all countries outside the
United States. Under the terms of the P&U
58
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. CONTRACT REVENUE AND ROYALTIES (CONTINUED)
Agreement, P&U paid Gilead an initial license fee of $10.0 million. During the
second quarter of 1997, VISTIDE was approved for marketing in the European Union
by the European Commission, which triggered an additional cash milestone payment
of $10.0 million by P&U to the Company. Also as a result of achieving this
milestone, in the second quarter of 1997 the Company issued and P&U purchased
1,133,786 shares of Series B Convertible Preferred Stock for approximately $40.0
million, or $35.28 per share. For additional information about the preferred
stock, refer to Note 7.
Under the terms of the P&U Agreement and related agreements covering
expanded access programs for VISTIDE outside of the United States, the Company
is responsible for maintaining the cidofovir patent portfolio and for supplying
to P&U bulk cidofovir used to manufacture the finished VISTIDE product
("Product"). Gilead is entitled to receive a royalty based upon P&U's sale of
Product. It receives a portion of the royalty upon shipping either bulk drug
substance or Product to P&U, and the remainder upon P&U's sale of Product to
third parties. Any royalties that Gilead receives before Product is sold to
third parties are recorded as deferred revenue until such third-party sales
occur. At December 31, 1998, the Company has recorded on its balance sheet
approximately $3.3 million of P&U deferred revenue ($2.1 million at December 31,
1997).
HOFFMANN-LA ROCHE
In September 1996, Gilead and Roche entered into a collaboration agreement
("Roche Agreement") to develop and commercialize therapies to treat and prevent
viral influenza. Under the Roche Agreement, Roche received exclusive worldwide
rights to Gilead's proprietary influenza neuraminidase inhibitors. In October
1996, Roche made an initial license fee payment to Gilead of $10.3 million,
which the Company reported as contract revenue. Upon achieving certain
developmental milestones, in both the second and fourth quarters of 1997, Gilead
earned cash payments of $3.0 million per quarter, for a total of $6.0 million.
Gilead is entitled to additional cash payments of up to $34.0 million upon
achieving additional developmental and regulatory milestones. If any commercial
products are developed under the collaboration, Roche will pay Gilead royalties
based on net product sales.
Under the Roche Agreement, Roche reimburses the Company for its related R&D
costs under this program by funding such costs quarterly and generally in
advance, based on an annual budget. Reimbursements are included in contract
revenue as the Company incurs the related R&D costs. Amounts incurred by the
Company in excess of amounts funded may also be reimbursed, subject to Roche's
approval. In this event, revenue is not recognized until such approval has been
obtained. Conversely, if amounts funded by Roche exceed the Company's related
R&D costs, the Company may be required to repay such excess funding to Roche.
For the years ended December 31, 1998, 1997 and 1996, the Company recorded
approximately $16.4 million, $8.2 million and $1.1 million, respectively, of R&D
reimbursement revenue related to the Roche Agreement, which is reported as
contract revenue in the accompanying consolidated statements of operations. The
$16.4 million recorded as revenue during 1998 includes $5.2 million attributable
to R&D 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 and recognized in contract revenue in 1998. Except for this $5.2
million, R&D costs related to the Roche Agreement approximate the reimbursement
revenue in each year presented and are included in R&D expenses.
59
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. CONTRACT REVENUE AND ROYALTIES (CONTINUED)
At December 31, 1998, the Company has recorded an accrued liability of $5.0
million, which represents 1998 R&D funding from Roche in excess of actual 1998
R&D costs. The Company and Roche are in the process of finalizing the 1999
budget and, as a result, the Company has not yet received funding for estimated
1999 R&D spending under the Roche Agreement. At December 31, 1997, deferred
revenue includes $7.2 million, representing Roche's advance reimbursement of
budgeted R&D costs for the first quarter of 1998.
In September 1996, Gilead and Roche Labs entered into an agreement to
co-promote Roche's Roferon-A for the treatment of chronic hepatitis C infection
in the United States. Roche paid Gilead a $0.2 million one-time fee in 1996 in
connection with the signing of this agreement. Beginning in 1997, Roche was
required to pay Gilead a royalty based on the net product sales. The Company
recognizes these royalties when received. During 1998, Gilead received $0.6
million, which is reported as royalty revenue. This co-promotion agreement
concluded at the end of 1998. While the Company expects to receive transition
payments under the agreement in 1999, such amounts are not expected to be
significant.
GLAXO WELLCOME
In July 1990, the Company entered into a collaborative research agreement
with Glaxo. Concurrent with the signing of the agreement, Glaxo made an $8.0
million equity investment in the Company and holds 889,911 shares (approximately
2.8%) of the Company's outstanding common stock at December 31, 1998. Under the
terms of the Glaxo agreement, as amended over time, the Company received $1.8
million in 1998, and $3.0 million in both 1997 and 1996, to fund research, which
is reported as contract revenue in the accompanying consolidated statements of
operations. The R&D costs reimbursed by Glaxo approximate the related revenue
and are included in R&D expense. This agreement and the related funding were
terminated in June 1998.
BAUSCH & LOMB
In August 1994, the Company entered into a license and supply agreement with
Bausch & Lomb Incorporated (formerly Storz Instrument Company, a subsidiary of
American Home Products Corporation), to develop and market an eyedrop
formulation of cidofovir for the potential treatment of topical ophthalmic
viruses. The Company received a $0.3 million annual fee under this agreement in
each of the years ended December 31, 1997 and 1996, which is reported as
contract revenue. If specified milestones are achieved, the Company may receive
up to $3.0 million in milestone payments. The Company also may be entitled to
receive future royalties on product sales under the agreement.
ISIS PHARMACEUTICALS
In December 1998, Gilead and Isis Pharmaceuticals, Inc. ("Isis") entered
into an agreement under which Gilead sold Isis its antisense patent estate,
including patents and patent applications covering antisense chemistry and
antisense drug delivery systems. Under the terms of the agreement, Isis is
required to pay Gilead a total of $6.0 million in four nonrefundable
installments. The first $2.0 million was paid in December 1998, and the
remaining $4.0 million is payable in three additional payments (one payment of
$1.0 million in both 1999 and 2000, and one payment of $2.0 million in 2001).
The total sale price of $6.0 million is included in contract revenue in the
Company's consolidated statement of operations for the
60
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. CONTRACT REVENUE AND ROYALTIES (CONTINUED)
year ended December 31, 1998. Gilead has no ongoing research or funding
obligations under the agreement.
4. LONG-TERM DEBT
In October 1996, the Company entered into an unsecured $3.0 million term
loan to finance its office and R&D facilities expansion. The four-year loan
requires quarterly principal payments of $0.2 million, plus applicable interest,
commencing October 1, 1996. The interest rate was fixed at 6.9 percent for the
first year of the loan, and resets periodically thereafter based on applicable
LIBOR rates. At December 31, 1998, the total debt outstanding is approximately
$1.3 million, the current portion outstanding is $0.8 million and the book value
of the debt approximates its fair value.
The terms of the debt require the Company to comply with certain financial
and operating covenants. At December 31, 1998, the Company was in compliance
with all such covenants.
5. COMMITMENTS
The Company leases its facilities pursuant to operating leases that have
expiration dates in March 2006, with two five-year renewal options. Rent expense
net of sublease income under these leases totaled approximately $2.2 million,
$2.3 million and $2.1 million for the years ended December 31, 1998, 1997 and
1996, respectively.
At December 31, 1998, the aggregate noncancelable future minimum payments
under the operating leases, net of aggregate future minimum rentals to be
received by the Company under noncancelable subleases, are as follows (in
thousands):
The Company has in place a letter of credit agreement from a bank, which
secures the aggregate future payments under one of its facilities leases. At
December 31, 1998, a total of $0.5 million was secured under this letter of
credit arrangement.
61
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
6. COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME, which establishes new requirements for reporting and
displaying comprehensive income (loss) and its components. The adoption of SFAS
No. 130 has no impact on the Company's net loss or total 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 (loss). Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
The following reclassification adjustments are required to avoid
double-counting net realized gains on sales of securities that were previously
included in comprehensive income prior to the sales of the securities (in
thousands):
7. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has 5,000,000 shares of authorized preferred stock issuable in
series. The Company's Board of Directors is authorized to determine the
designation, powers, preferences and rights of any such series. The Company has
reserved 400,000 shares of preferred stock for potential issuance under the
Preferred Share Purchase Rights Plan.
In June 1997, the Company issued 1,133,786 shares of Series B Convertible
Preferred Stock to P&U for approximately $40.0 million, or $35.28 per share.
Each preferred share is convertible at the option of the holder into one share
of common stock at any time, and each has a liquidation value equal to its
purchase price. The Series B Preferred Stock has substantially the same voting
rights as the Company's common stock. Dividends are noncumulative and payable at
the rate of 5 percent of the original issue price per year only when, as and if
declared by the Company's Board of Directors. No dividends have been declared or
paid on the Series B Convertible Preferred Stock.
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's Employee Stock Purchase Plan ("ESPP"), employees can
purchase shares of the Company's common stock based on a percentage of their
compensation. The purchase price per share must equal at least the lower of 85
percent of the market value on the date offered or the date purchased. A total
of 1,250,000 shares of common stock are reserved for issuance under the ESPP. As
of December 31, 1998, 794,049 shares had been issued under the ESPP (694,167
shares as of December 31, 1997).
62
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
7. STOCKHOLDERS' EQUITY (CONTINUED)
Emerging Issues Task Force ("EITF") Issue No. 97-12, ACCOUNTING FOR
INCREASED SHARE AUTHORIZATIONS IN AN IRS SECTION 423 EMPLOYEE STOCK PURCHASE
PLAN UNDER APB OPINION NO. 25, provides that new shares authorized under
existing Section 423 employee stock purchase plans may give rise to compensation
expense under circumstances specified in that accounting standard. During 1998,
the Company recognized compensation expense of $0.4 million related to an ESPP
share authorization approved in 1998 in accordance with the provisions of EITF
Issue No. 97-12. In future years, the Company will not be required to recognize
additional compensation expense related to the 1998 share authorization.
STOCK OPTION PLANS
In December 1987, the Company adopted the 1987 Incentive Stock Option Plan
and the Supplemental Stock Option Plan for issuance of common stock to
employees, consultants and scientific advisors. In April 1991, the Company's
Board of Directors approved the granting of certain additional nonqualified
stock options with terms and conditions substantially similar to those granted
under the 1987 Supplemental Stock Option Plan. At the grant date, none of the
options described above had exercise prices that were less than the fair value
of the underlying stock on that date. The options vest over five years pursuant
to a formula determined by the Company's Board of Directors and expire after ten
years. No shares are available for grant of future options under any of these
plans.
In November 1991, the Company adopted the 1991 Stock Option Plan ("1991
Plan") for issuance of common stock to employees and consultants. Options issued
under the 1991 Plan shall, at the discretion of the Company's Board of
Directors, be either incentive stock options or nonqualified stock options. In
May 1998, the 1991 Plan was amended such that the exercise price of all stock
options must be at least equal to the fair value of the Company's common stock
on the date of grant. The options vest over five years pursuant to a formula
determined by the Company's Board of Directors and expire after ten years. At
December 31, 1998, 958,380 shares were available for grant of future options.
In November 1995, the Company adopted the 1995 Non-Employee Directors' Stock
Option Plan ("Directors' Plan") for issuance of common stock to non-employee
Directors pursuant to a predetermined formula. The exercise price of options
granted under the Directors' Plan must be at least equal to the fair value of
the Company's common stock on the date of grant. The options vest over five
years from the date of grant in quarterly 5 percent installments and expire
after ten years. At December 31, 1998, 85,000 shares were available for grant of
future options under the Directors' Plan.
63
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
7. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes activity under all stock option plans for
each of the three years in the period ended December 31, 1998. All option grants
presented in the table had exercise prices not less than the fair value of the
underlying stock on the grant date (shares in thousands):
In 1995, the Company granted 75,000 stock options with exercise prices less
than the fair value of the underlying stock at the grant date. For these options
only, the Company recorded deferred compensation expense of $0.5 million, based
on the difference between the grant price and the fair value of the underlying
stock at the date of grant. This deferred compensation is being amortized to
expense over the five-year vesting period of the options. Amortization expense
for the years ended December 31, 1998, 1997 and 1996 totaled $0.1 million, $0.3
million and $0.8 million, respectively.
The following table summarizes information about exercise price ranges of
outstanding and exercisable options at December 31, 1998 (options in thousands):
PRO FORMA DISCLOSURES
The table below reflects Gilead's net loss and basic and diluted loss per
common share if compensation cost for the Company's stock plans had been
determined based on their estimated fair values at the grant dates for awards
under those plans. Since pro forma compensation cost is amortized over the
vesting
64
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
7. STOCKHOLDERS' EQUITY (CONTINUED)
periods of the related awards, and because SFAS No. 123 is applicable only to
options granted or shares issued subsequent to March 31, 1995, its pro forma
effect will not be fully reflected until 1999.
Fair values of the options were estimated at grant dates using a
Black-Scholes option pricing model. The Company used the multiple option
approach and the following assumptions:
The weighted average estimated fair value of each stock option granted for
the years ended December 31, 1998, 1997 and 1996 was $15.90, $17.14 and $15.17,
respectively. The weighted average estimated fair value of each ESPP share
granted for the years ended December 31, 1998, 1997 and 1996 was $11.97, $9.57
and $5.49, respectively.
PREFERRED SHARE PURCHASE RIGHTS PLAN
In November 1994, the Company adopted a Preferred Share Purchase Rights Plan
(the "Plan"). The Plan provides for the distribution of a preferred stock
purchase right (a "Right") as a dividend for each share of Gilead common stock
held of record at the close of business on December 14, 1994. The Rights are not
currently exercisable. Under certain conditions involving an acquisition or
proposed acquisition by any person or group of 15 percent or more of the
Company's common stock, the Rights permit the holders (other than the 15 percent
holder) to purchase Gilead common stock at a 50 percent discount from the market
price at that time, upon payment of an exercise price of $60 per Right. In
addition, in the event of certain business combinations, the Rights permit the
purchase of the common stock of an acquirer at a 50 percent discount from the
market price at that time. Under certain conditions, the Rights may be redeemed
by the Company's Board of Directors in whole, but not in part, at a price of
$.01 per Right. The Rights have no voting privileges and are attached to and
automatically trade with Gilead common stock. The Rights expire on November 21,
2004.
8. INCOME TAXES
As of December 31, 1998, the Company had federal net operating loss
carryforwards of approximately $223.0 million. The Company also had federal R&D
tax credit carryforwards of approximately $7.9 million. The net operating loss
and credit carryforwards will expire at various dates beginning in 2001 through
2018, if not utilized.
65
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets for federal and
state income taxes are as follows (in thousands):
The valuation allowance increased by $33.0 million and $15.3 million during
the years ended December 31, 1998 and 1997, respectively.
Utilization of the net operating losses and credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986.
Approximately $14.9 million of the valuation allowance at December 31, 1998
relates to the tax benefits of stock option deductions, which will be credited
to additional paid-in capital when realized.
9. RELATED PARTY TRANSACTIONS
During 1998, Gilead paid an aggregate of $2.6 million to Pharma Research
Corporation, a contract research organization, for services rendered in
connection with clinical studies. A member of Gilead's Board of Directors is the
managing director of an investment fund that owns a controlling interest in
Pharma Research Corporation.
10. SUBSEQUENT EVENTS (UNAUDITED)
On January 26, 1999, the Board of Directors authorized an additional 200,000
shares of common stock as available for grant under the Directors' Plan. This
increase is subject to stockholder approval at the Company's annual
stockholders' meeting to be held in 1999.
On March 1, 1999, Gilead and NeXstar Pharmaceuticals, Inc. ("NeXstar")
announced a definitive merger agreement providing for the acquisition by Gilead
of all the outstanding common stock of NeXstar. The merger is structured as a
tax-free, stock-for-stock transaction. The Company intends to account for this
merger under the pooling-of-interests method. NeXstar, headquartered in Boulder,
Colorado, is engaged in the discovery, development, manufacture and
commercialization of products to treat serious and life-threatening illnesses.
In addition to its Boulder headquarters, NeXstar maintains research, development
and manufacturing facilities in San Dimas, California, and marketing
subsidiaries worldwide. Under the terms of the merger agreement, NeXstar
stockholders will receive between 0.3786 and 0.5000 of a share of Gilead common
stock for each share of NeXstar common stock. The exact exchange ratio will be
66
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
10. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
determined based on the trading range of Gilead common stock over a specified
period prior to completion of the merger. The merger is subject to certain
conditions, including approval of the stockholders of Gilead and NeXstar. The
transaction is expected to be completed in mid-1999.
On March 30, 1999 the Gilead Board amended and restated the bylaws of the
Company, approved an amendment to the 1991 Plan increasing the number of shares
reserved for issuance by 3.5 million to a total of 10 million shares, and
approved an amendment to the ESPP increasing the number of shares reserved
for issuance by 330,000 to a total of 1.58 million shares. This share increase
authorization will not give rise to compensation expense under EITF Issue No.
97-12.
11. QUARTERLY RESULTS (UNAUDITED)
The following table is in thousands, except per share amounts:
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
68
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-46058) pertaining to the Gilead Sciences, Inc. 1987 Incentive Stock
Option Plan, 1987 Supplemental Stock Option Plan, 1991 Stock Option Plan,
Employee Stock Purchase Plan, and 1995 Non-Employee Directors' Stock Option
Plan, the Registration Statement (Form S-8 No. 33-62060) pertaining to the
Gilead Sciences, Inc. 1991 Stock Option Plan, and the Registration Statement
(Form S-8 No. 33-81670) pertaining to the Gilead Sciences, Inc. Employee Stock
Purchase Plan, of our report dated January 21, 1999, with respect to the
consolidated financial statements of Gilead Sciences, Inc. included in the
Annual Report (Form 10-K/A) for the year ended December 31, 1998.
/s/ ERNST & YOUNG LLP
Palo Alto, California
June 22, 1999
69
EXHIBIT INDEX
------------------------
+ Previously filed.
* Confidential treatment has been requested for certain portions of this
Exhibit under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 240.24b-2.