Analyst Conference Summary

conference date: April 30, 2015 @ 1:30 PM Pacific Time
for quarter ending: March 31, 2015 (first quarter, Q1 2015)

Forward-looking statements

Overview: Declared first ever dividend of $0.47. Good sales. Revised 2015 guidance up at high end of range.

Basic data (GAAP) :

Revenue was $7.59 billion, up 4% sequentially from $7.31 billion and up 52% from $5.00 billion in the year-earlier quarter.

Net income was $4.33 billion, up 24% sequentially from $3.49 billion and up 94% from $2.23 billion year-earlier.

Earnings per share (EPS, diluted) were $2.76, up 27% sequentially from $2.18 and up 108% from $1.33 in the year-earlier quarter.

Guidance:

The guidance for 2015 was revised substantially upward to: product sales of $28 to $29 billion. Product gross margin 87% to 90%. R&D expense $3 to $3.3 billion; SG&A expense $3 to $3.3 billion. The EPS difference between GAAP and non-GAAP results estimated at $0.82 to $0.87.

However, there are risks to this view, including discounting, competition, and shift in mix to lower margin payers.

Conference Highlights:

Harvoni and Sovaldi had 90,000 new patients in the quarter. But HIV product sales were down 16% sequentially mainly due to an inventory build in Q4 that was drawn down in Q1 and higher % of sales to Medicare.

Prices paid for HCV products decreased in Q1 as discounts were negotiated with payers. The full impact of the discounts will be seen in Q2. Europe revenue was $1 billion despite some restrictions, notably in the U. K. Estimated 21,000 patients started treatment in the quarter.

First ever dividend of $0.43 per share will be paid on June 29, 2015 to stockholders of record on June 16, 2015.

Numerous programs are in place to generate the next round of revenue growth (see below). Gilead has the cash to take opportunities as they arrive.

Non-GAAP numbers: Net income was $4.6 billion, up 18% sequentially from $3.88 billion and up 84% from $2.5 billion year-earlier. Non-GAAP EPS was $2.94, up 21% sequentially from $2.43 and up 99% from $1.48 year-earlier.

Product sales were $7.4 billion, up 3% sequentially from $7.22 billion and up 51% from $4.9 billion in the year-earlier quarter. $5.2 billion were in the U.S. and $3.6 billion were in Europe.

Royalty, contract and other revenue was $189 million.

Cash and equivalents ended at $14.5 billion, up sequentially from $11.7 billion. Long term liabilities were $13.3 billion. $5.7 billion cash flow from operations. $3.0 billion was used for repurchase shares. $15 billion in new share repurchase authorization.

TAF had two positive Phase 3 trial results for HIV-1 infections. Gilead is working on an HIV cure using TLR7 and GS-9620, but that is preclinical.

Gilead is also looking for a combination that would be a functional cure for Hepatitis B.

GS-5816 combined with Sofosbuvir is being studied for difficult to treat HCV genotypes.

Gilead has 10 cancer therapies in Phase 3, and many more at earlier stages of the pipeline. Collaboration with other companies, notably with AstraZeneca for combinations with checkpoint inhibitors, are also underway.

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

Cost of goods sold was $0.88 billion. Research and development expense was $696 million. Selling, general and administrative expense was $645 million. Income from operations was $5.37 billion. Other expense was $132 million. Income tax provision was $907 million. Net loss attributable to noncontrolling interest was $1 million.

R&D expense will continue to ramp in 2015 to drive the pipeline.

Q&A:

Durability of Hepatitis C market? The U.S. had 70,000 starts, mostly Harvoni in type 1, probably some of them had been warehoused. The pipeline widened during the quarter after we negotiated contracts. We see a flattening now due to limits of physician back-office capacity. In Europe Harvoni was only available in 2 nations. The restraint is government budgets. We think we might have 100,000 patients in Europe in 2015.

IMS data on HCV, has U.S. market peaked? Hard to answer as it is still early in the ramp. Payers have different fibrosis restrictions, and some only recently signed contracts. There is a possibility of more U.S. growth during the year, but the data says flat for now.

Cash, cash flow, and use? We expect about 1/3 of cash flow is generated in the U.S. We could support more debt. We are focused on the pipeline, could do acquisitions for early-stage assets, and then the dividends and buy backs.

Medicaid and Hep C ramp? We have contracts with 90% of the covered lives in the U.S. We believe doctors should decide on prescriptions, not payers. Sales are 70% commercial, 30% public, with Medicare Part D about half of the public payers. We have some exclusive contracts, and our competitor has some.

We are looking at a variety of approaches to cure Hepatitis B, with some data in the second half of this year, and some therapies that have not been announced yet.

Appetite for small, medium and large acquisitions? For a while we were limited by our need to market Sovaldi and Harvoni. Now we are not so constrained. We feel we have a full pipeline, but would look for the right fit, regardless of size. We would stick close to our current areas.

Strategy against future HCV competition? After this year we expect payers to loosen up on fibrosis scores. We believe the Harvoni profile will strengthen as we get real world data this year. There are plenty of patients out there to keep this market going for a number of years. We do believe our triple combination will be able to reach shorter duration of treatment, at least for less severe patients. But cure rate seems to be more important to the FDA and doctors than shorter durations.

Hep C discount guidance, 46%? We described gross to net last quarter, which is not the same as discounts. We don't want to continue to talk about that for competitive reasons. Our 2015 guidance includes our assumptions about discounts and gross to net.

AbbVie believes they can increase their run rate and market share in April, how was your April? We don't have the April share data, but we know of no significant share change.

Magnitude of unpaid rebates? It can take 3 to 9 months after a contract is negotiated for the payers to come back to us for rebates that are due. So some cash will go back out.

Sovaldi current new patients, genotypes? Principally in genotype 2 and 3 patients.

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