Analyst Conference Summary

conference date: October 28, 2014 @ 1:30 PM Pacific Time
for quarter ending: September 30, 2014 (third quarter, Q3 2014)

Forward-looking statements

Overview: Revenue down sequentially, probably due to warehousing HCV patients waiting for release of Harvoni. Revised full 2014 revenue guidance to the upper end of prior guidance. Impact of BPD fee of $0.21 per share probably not included in analyst's prior estimate.

Basic data (GAAP) :

Revenue was $6.04 billion, down 8% sequentially from $6.53 billion and up 117% from $2.78 billion in the year-earlier quarter.

Net income was $2.73 billion, down 25% sequentially from $3.65 billion and up 246% from $789 million year-earlier.

Earnings per share (EPS, diluted) were $1.67, down 24% sequentially from $2.20 and up 255% from $0.47 in the year-earlier quarter.

Guidance:

Full 2014 product sales between $22 and $23 billion. Non-GAAP product gross margin 86% to 88%. R&D expense $2.3 to $2.4 billion. SG&A expense $2.7 to $2.8 billion (increased due to change in accounting for the branded prescription drug fee). Effective tax rate between 17.5% and 19.5%. Diluted EPS negative impact from acquisition-related, restructuring and stock based compensation expense $0.63 to $0.66.

Conference Highlights:

The widespread treatment with Sovaldi shows the value of the hepatitis C drug. $2.2 billion of the $2.8 billion in Sovaldi sales were in the U.S., about $0.6 billion ex-U.S. Sales declined sequentially as physicians warehoused patients waiting for Harvoni, but European sales were up 33% sequentially. At this point only two U.S. state Medicaid programs allow access to Sovaldi. Reimbursement agreements have been made with many countries in Europe. Since launch nearly 100,000 U.S. patients have received Sovaldi.

The FDA approved the combination of Sovaldi with ledipasvir, trade name Harvoni, for Hepatitis C (HCV) on October 10, 2014. $94,000 for 12 week regimen, which is in line with prior therapies, but many patients may be able to take it for just 8 weeks, essentially a 1/3 price reduction. It is a one-tablet per day therapy.

The ultimate goal of Gilead's HCV research program is a once a day pill that will have a very high cure rate for all genotypes. Data on this could be available by the second half of 2015.

Non-GAAP numbers: Net income was $3.01 billion, down 23% sequentially from $3.93 billion and up 242% from $879 million year-earlier. Non-GAAP EPS was $1.84, down 22% sequentially from $2.36 and up 254% from $0.52 year-earlier. 86.9% product gross margin.

Both GAAP and non-GAAP profits were impacted by a catch up (one year) expense of $337 million (or $0.21 per diluted share) related to the BPD (branded prescription drug) fee under the ACA (Affordable Care Act).

Product sales were $5.97 billion, down 7% sequentially from $6.41 billion and up 120% from $2.71 billion in the year-earlier quarter.

HIV franchise continued to grow with 9 out of 10 new U.S. HIV patients treated with a Gilead product. Stribild led the growth.

Royalty, contract and other revenue was $73.6 million.

Cash and equivalents ended at $7.69 billion, sequentially from $9.6 billion. Long term liabilities were $8.9 billion, and $6.1 billion in current liabilities. $4 billion cash flow from operations. $1.7 billion was used for repurchase shares, and a similar amount is expected to be used in Q4. Paid $4.1 billion in cash to extinguish warrants.

Signed licensing agreements with seven Indian generics manufacturers for Sovaldi and Harvoni.

Zydelig (idelalisib) was approved by the FDA for Relapsed Chronic Lymphocytic Leukemia, Follicular Lymphoma, and Small Lymphocytic Lymphoma during the quarter.

To continue to work to a single-dose regimen that works for all HCV genotypes, Gilead continues to conduct trials on combinations that include Sovaldi with 5816 and/or 9857.

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

Cost of goods sold was $987 million. Research and development expense was $630 million. Selling, general and administrative expense was $944 million . Income from operations was $3.48 billion. Interest income was $103 million. Other expense was $5 million. Income tax provision was $647 million. Net loss attributable to noncontrolling interest was $7 million.

Q&A:

HCV Harvoni launch so far? We only have one data point, which was prescriptions filled last week. We are hearing more prescriptions were written, by a broader group of Doctors than wrote for Sovaldi. Adoption rate appears to be faster. People seem to appreciate the simplicity of Harvoni. Payers seem to be happy with the comparative costs to prior therapies, including the % of patients who can do it in 8 weeks. Sovaldi will coexist with Harvoni, especially for genotypes 2, 3 and 6.

F3 and F4 Harvoni patient percentage? We have seen a surprising number of patients with lower scores, about 60% for F0 to F2, 40% for F3 & F4.

Backlog for Harvoni? We don't know how quickly the insurance companies will respond to prescriptions. There may be constraints.

We don't know how many HCV patients are under care right now, but are trying to figure that out. Some people come into care from nowhere. It is a very dynamic process.

Medicaid? We would expect the same as for Sovaldi, but maybe more openness because of the economics of the 8 week regimen.

Next generation combo timelines? With regard to 5816, it would be one pill for all genotypes. We are pursuing shorter treatment regimens for various patient populations. In treatment naive non-cirrotics, we are looking at 4 weeks. But we must wait for trial results.

Payers requiring high-risk liver disease to allow for Harvoni reimbursement? It varies across the payer groups. Some groups are trying to segment it more than others, and definition of high-risk varies. Medicare has said all patients should be allowed therapy. We would expect loosening of the criteria over time. In Europe we are making progress despite their inflexible budgets for HCV, so they will prioritize sicker patients.

Italian agreement? Italy has the higher HCV prevalence for a major EU country, we did reach an agreement, and first patient treatment should be in November.

Egypt? We have an agreement with Egypt for Sovaldi for genotype 4, but they have not begun treatment yet, so it will not be a large number near term. They do want to treat a large number of patients over a few years.

Given our current valuation share repurchases are the best way to return cash to shareholders.

We are still plenty of diagnosed HCV patients and it will take years to work through those.

Timeline for European revenue pickup? Spain, Italy, Netherlands and Belgian have agreements in place but we have not seen patients yet; France we are near a pricing agreement. So European sales of Sovaldi should ramp up next month.

In general, regulatory authorities don't like to shorten treatment duration if it loses even a couple of percent of effectiveness. That is why Gilead is continuing to look at 3 drug combinations.

HIV inventory? It did build slightly in the quarter, likely because it ended on a Tuesday. Inventory likely to remain level in Q4.

Long term HIV sales (past 2020) thoughts? TAF data is very good. We believe it will mainly be current patients converting to TAF.

Japan launch for Sovaldi? We filed Sovaldi with ribavirin for genotype 2 only, about 25% of Japanese. We filed for Harvoni for other genotypes. We have people in place in Japan and should be ready when we get approvals.

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