Analyst Conference Summary

conference date: February 3, 2015 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2014 (fourth quarter, Q4 2014)

Forward-looking statements

Overview: Spectacular quarter, announced $15 billion buyback program and begins paying dividends!

Basic data (GAAP) :

Revenue was $7.31 billion, up 21% sequentially from $6.04 billion and up 134% from $3.12 billion in the year-earlier quarter.

Net income was $3.49 billion, up 28% sequentially from $2.73 billion and up 341% from $791 million year-earlier.

Earnings per share (EPS, diluted) were $2.18, up 30% sequentially from $1.67 and up 364% from $0.47 in the year-earlier quarter.

Guidance:

Full year 2015 product sales are expected between $26 and $27 billion. Non-GAAP gross margin 87% to 90%; R&D expense $3.0 to $3.3 billion; SG&A expense $3.0 to $3.3 billion; effective tax rate 18% to 20%. The negative impact on EPS due to acquisition, restructuring, stock-based compensation and other expense estimated at $0.82 to $0.87 per share.

Product revenue is subject to a number uncertainties, including pricing of HCV therapies and the timing of the launch in Japan.

Conference Highlights:

Harvoni has become the most widely used hepatitis C therapy since approved in October. Gilead continues to explore hepatitis C therapies, with data due in Q3, aiming at a single daily pill that will cure all genotypes of the virus. Gilead has made progress in getting Sovaldi to less developed nations.

Dividends will commence in Q2. $0.43 per share, or $1.72 per year. Also authorized a $15 billion 5 year share buyback program. $3 billion remained from the prior program on January 1.

The reinstatement of the R&D tax credit lowered the tax rate in the quarter.

Non-GAAP numbers: Net income was $3.88 billion, up 29% sequentially from $3.01 billion and up 317% from $930 million year-earlier. Non-GAAP EPS was $2.43, up 32% sequentially from $1.84 and up 342% from $0.55 year-earlier. % product gross margin.

Product sales were $7.22 billion, up 21% sequentially from $5.97 billion and up 138% from $3.04 billion in the year-earlier quarter. $5.5 billion were in the U.S. and $1.4 billion were in Europe.

Royalty, contract and other revenue was $92 million.

Payer restrictions were increased when Harvoni was introduced. Inventory was at the high end at the end of the quarter and may draw down in Q1. In process of getting reimbursement approved for Harvoni in European countries. Believes restrictions on reimbursements will be less in Europe than in the U.S. Continues to negotiate with payers in the U.S. and providing rebates to government payers. Believes the number of patients treated will increase in the U.S. in 2015 over 2014.

Cash and equivalents ended at $11.7 billion, up sequentially from $7.69 billion. Long term liabilities were $13.2 billion. $12.8 billion cash flow from operations. $5.3 billion was used for repurchase shares. Raised $4 billion in debt, but repaid $1 billion in prior debt.

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 $1.06 billion. Research and development expense was $1.05 billion. Selling, general and administrative expense was $876 million . Income from operations was $4.33 billion. Other expense was $100 million. Income tax provision was $768 million. Net loss attributable to noncontrolling interest was $25 million.

Q&A:

Intentions with the dividend? It is our intention to grow the dividend over time, but currently the share repurchases will remain the majority way to return cash to shareholders.

System can treat 250,000 patients. We expect more of them to be in discounted segments like Medicare, but we expect the numbers treated to increase. We are getting feedback from doctors that there are substantial numbers of patients who are seeking therapy and being denied. 1.6 million patients have been diagnosed in the U.S. We believe there are about 2 million undiagnosed additional patients.

In Europe we are seeing commitments from public payers to treat a higher number of patients, but even at those rates treatment should be sustainable for 10 to 15 years.

Our guidance is not for a specific patient number, but includes a mix of patient types and discounts. About 70% of patients came from the private sectors. We are not sure what the ratio will be in 2015. A lot of contracts are being negotiated and are in flux right now.

Confidence in discount assumptions? We believe about 60% of coverred lives have now been negotiated, and we took 80% of the 60% for Harvoni. The terms have been designed to increase access. Payers have been taking into account our highly differentiated product (quality vs. competition).

Relative use of 8 and 12 week Harvoni regimens? Initially we expect mostly 12 week because they are more severely ill, which is what we have seen. We expect 8 week patients to increase over time.

Our expectation has always been that HCV therapy prices would come down over time. It came down a little bit more than we thought in Q4, but is about where we expected it.

Can you give us comfort on gross-to-net (price discounts) remaining steady? Looking at future competition and our own next generation opportunities, we have great confidence we will be able to have good product pricing.

Surprised by dividend, any color? The timing reflected the confidence we have in the business, our robust cash balance, and our future cash flows. People can count on the dividend. It does not lessen our ability to aquire products or companies.

In some agreements we have full access based on fibrosis scores for HCV.

About 30% of Sovaldi use in Q4 was in genotype 1, but we would expect that to evaporate in Q1.

The level and aggressiveness of our share repurchases will depend on how we see our share valuation.

We treated about 32,000 patients in Europe with Sovaldi last year. We expect to treat more with Harvoni or Sovaldi this year, and see it as a sustainable market. The capacity may be a number north of 100,000.

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