Analyst Conference Summary

conference date: February 4, 2014 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2013 (fourth quarter, Q4 2013)

Forward-looking statements

Overview: Strong revenue growth on strong Sovaldi introduction. Net income growth lagging, however.

Basic data (GAAP) :

Revenue was $3.12 billion, up 12% sequentially from $2.78 billion, and up 21% from $2.59 billion in the year-earlier quarter.

Net income was $791.4 million, up less than 1% sequentially from $788.6 million, but up 4% from $762.5 million in the year-earlier quarter.

Earnings per share (EPS) were $0.47, flat sequentially from $0.47 and also flat from $0.47 year-earlier.

Guidance:

Full year 2014 non-GAAP: core product sales $11.3 to $11.5 billion, up 6% to 8% y/y; excludes Sovaldi. 75 to 77% gross margin. R&D expense $2.2 to $2.3 billion. SG&A $2.1 to $2.2 billion. Effective tax rate 28% to 29%, excluding renewal of R&D tax credit. Acquisition related and stock-based comp expenses estimated at $0.63 to $0.66 per share.

Conference Highlights:

Record product sales.

Non-GAAP numbers: net income was $929.8 million, up 7% sequentially from $871.9 million and up 13% from $823.4 million year-earlier. Non-GAAP EPS was $0.55, up 6% sequentially from $0.52 and up 10% from $0.50 year-earlier.

Product sales were $3.04 billion, up 12% sequentially from $2.71 billion and up 21% from$2.51 billion in the year-earlier quarter. U.S. sales were $1.94 billion.

Cash and equivalents ended at $2.57 billion. Long term liabilities were $4.3 billion. $71.5 million stock-based compensation.

Sovaldi was approved in the EU in January and has been launched in England, Germany, France, Austria, Sweden and Finland. Sovaldi sales included inventory builds; only about $50 million was for patient demand in the quarter. 70% of patients in the quarter were genotype 1, who mostly received it combined with PEG interferon and ribavirin.

Underlying demand for HIV therapies was strong, but there was also an inventory increase in the quarter in advance of January price increases. Stribild and Complera led the growth.

Sales and marketing organization for oncology in the U.S. is being built out, with Europe to follow.

Numerous other studies are underway or planned; see Gilead pipeline.

Royalty, contract and otehr revenue was $76.6 million

Cost of goods sold was $857.5. Research and development expense was $552.0 million. Selling, general and administrative expense was $513.3 million . Income from operations was $1.20 billion. Interest expense was $73.2 million. Other income was $11.1 million. Income tax provision was $326 million. Net loss attributable to noncontrolling interest was $4.7 million.

Q&A:

Sovaldi experience in U.S.? We thought people might hold off on genotype 1, but so far use had reflected the spectrum. Some genotype 2, about 17% of total. Smaller number of genotype 3. Sense is the advanced patients are being prioritized. In France prescriptions are under the temporary authorization; that will continue until full reimbursement is approved. Patients in France have mainly had advanced disease. So far, German prescriptions reflect U.S. as far as genotypes treated.

Any expectations for Sovaldi prior to all-oral combination? We only just got through our first full month. We don't know when the single tablet will launch.

Types of payers? Majority is private pay right now. We are getting the first state Medicaid listings. We have had a couple of ADAPs list Sovaldi. But these are listings more than patients so far.

ASLD guideline effects? It is just to early. The liver centers are treating the very advanced patients. They had patients lined up. We have a lot of people to talk to, particularly in the GI community, who were not warehousing patients.

SG&A guidance, increase in spend? The SG&A does include the Sovaldi launch expenses, but is regardless of the level of sales. Some is from a step-up in the excise tax. Much is for the growth of number of employees in the company.

HCV co-pay, 30% to 50% of patient statement, how does that not impact SG&A? The co-pay program is included in SG&A guidance, as are grants for access. Commercialization of Sovaldi worldwide will reduce our tax rate over time.

Prior authorization requirement? Every Hep C drug has had a prior authorization rule to check that the drug is being used according to the label.

European pricing? The ATU France price is $76,000; it would change with full reimbursement approval. Our price in the UK is 35,000 pounds or $57,000, which should be about right for most of Europe, for 12 week treatments.

Price competition? Gilead does not think about pricing for a certain market share versus a competitor. Physicians and payers make the choice. We believe the Sovaldi data is very strong and will give it a preeminent position in the eyes of the payers. Our combination with ledipasvir without ribavirin will have a very strong position.

We will be competitive with other combinations. Our data is very good. We might be able to get down to 6 weeks of treatment by adding a third component. "This is transformational medicine."

Screening for HCV? Managed care and payers are not thinking much yet about the new guidelines for Hep C testing for baby boomers. But we want to have new educational campaigns by midyear. 1.7 million Americans are already diagnosed. 4 million is the estimated total HCV population in the USA. Some states are already acting on screening.

The goal of stock-buy backs is to offset dilution, and that was what happened in Q4. We may also return cash to shareholders via buy backs.

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