Analyst Conference Summary

conference date: July 23, 2014 @ 1:30 PM Pacific Time
for quarter ending: June 30, 2014 (second quarter, Q2 2014)

Forward-looking statements

Overview: Spectacular revenue and earnings.

Basic data (GAAP) :

Revenue was $6.53 billion, up 31% sequentially from $5.00 billion and up 136% from $2.77 billion in the year-earlier quarter.

Net income was $3.65 billion, up 64% sequentially from $2.23 billion and up 373% from $772 million year-earlier.

Earnings per share (EPS, diluted) were $2.20, up 65% sequentially from $1.33 and up 378% from $ in the year-earlier quarter.

Guidance:

Guidance was updated to include the impact of Sovaldi (but noting Sovaldi sales are hard to predict):

Product sales $21 to $23 billion. Gross margin 85% to 88%. R&D expense $2.3to $2.4 billion. SG&A $2.3 to $2.4 billion. Effective tax rate 17.5% to 20.5%. Diluted non-GAAP EPS impact of acquisition, restructuring, and stock based compensation of $0.63 to $0.66.

Conference Highlights:

The widespread treatment with Sovaldi shows the value of the hepatitis C drug. Over 80,000 patients have begun treatment globally. Most international revenue came from France and Germany. Applied for approval in Japan. Will continue to roll out around the world. The overwhelming majority of U.S. state Medicaid plans are now covering Sovaldi. Sales are believe to have matched demand.

The FDA will rule on the combination of Sovaldi with ledipasvir by PDUFA date of October 10, 2014, so a U.S. launch is possible by the end of the year. Gilead is seeing some warehousing of patients awaiting this treatment.

Gilead's first oncology product,

Non-GAAP numbers: revenue was $6.53 billion. Net income was $3.93 billion, up 58% sequentially from $2.49 billion and 368% from $840 million year-earlier. Non-GAAP EPS was $2.36, up 59% sequentially from $1.48 and up 372% from $0.50 year-earlier. % product gross margin.

Product sales were $6.41 billion, up 38% sequentially from $4.65 billion and up 140% from $2.66 billion in the year-earlier quarter. U.S. sales were $4.82 billion.

Royalty, contract and other revenue was $122 million.

Cash and equivalents ended at $9.6 billion. Long term liabilities were $8.5 billion, and $6.2 billion in current liabilities. $72.2 million stock-based compensation expense. $4.2 billion cash flow from operations. $1.2 billion was used for repurchase shares. An additional authorization of $5 billion for stock repurchases was added to the $1.7 billion remaining authorization.

Today it was announced that Zydelig (idelalisib) was approved by the FDA for Relapsed Chronic Lymphocytic Leukemia, Follicular Lymphoma, and Small Lymphocytic Lymphoma.

Among other developments in the quarter, GS-5806 had positive results in a Phase 2a trial for healthy adult patients intranasally infected with respiratory syncytial virus (RSV).

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

Cost of goods sold was $925 million. Research and development expense was $584 million. Selling, general and administrative expense was $614 million . Income from operations was $4.41 billion. Interest income was $102 million. Other expense was $3.6 million. Income tax provision was $656 million. Net loss attributable to noncontrolling interest was $5 million.

Q&A:

Progress in Washington and private payers re Sovaldi pricing? That is a complicated question. We have commissioned and published economic studies on this. We are just now beginning to see the benefits of Sovaldi, as patients reach 12 weeks past the end of their treatments. We have noticed some positive movement in some payers.

Any interactions from FDA re combo HCV therapy? The review is moving ahead nicely. We have answered the usual questions. But all we know for certain is the PDUFA date.

Triplet regimen possibilities, competition with Merck? We disclosed data from an NIH study showing you can take 6 weeks of 3 drugs and get 100% cure rates. So if we need something at a higher hurdle than Sovaldi + Ledipasvir, we could start a study quickly. We have many single compounds that could be added to get a 3 drug regimen.

Guidance implications for hep C sales, just flat in Q3 and Q4? Unlike HIV which is chronic care, Sovaldi cures patients. There are many variables creating the guidance range, including possible warehousing.

We have not come to a decision on fixed dose combo pricing, but we do feel the majority of the value is in Sovaldi.

It is hard to say who is being denied, as opposed to those who are being delayed waiting for the all oral Sovaldi + Ledipasvir combination.

We expect to continue to use share repurchases to return cash to shareholders. We feel our shares are currently undervalued. We could in the future think about a dividend.

HIV single tablet regimen? We continue to see growth. Patients are switching out of Atripla, typically into Stribild or Complera.

idelalisib (now Zydelig)? We were not surprised at how quickly it was approved, given the data, although they were small data sets. Patients are typically old, very sick cases, so people do die during the studies.

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