Analyst Conference Summary

conference date: October 27, 2015 @ 1:30 PM Pacific Time
for quarter ending: September 30, 2015 (third quarter, Q3 2015)

Forward-looking statements

Overview: Continues to show y/y revenue growth. Increased guidance.

Basic data (GAAP) :

Revenue was $8.30 billion, up 1% sequentially from $8.24 billion and up 37% from $6.04 billion in the year-earlier quarter.

Net income was $4.60 billion, up 2% sequentially from $4.49 billion and up 68% from $2.73 billion year-earlier.

Earnings per share (EPS, diluted) were $3.06, up 5% sequentially from $2.92 and up 83% from $1.67 in the year-earlier quarter.

Guidance:

Full year 2015 guidance increased to: product sales of $30.0 to $31.0 billion; non-GAAP gross margin 88% to 90%; R&D expense $2.8 to $3.0 billion; SG&A expense 43.0 to $3.2 billion. Tax rate 17% to 18.0.

The diluted EPS impact of non-GAAP acquisition, restructuring, stock-based compensation and other expenses will be $0.82 to $0.87.

Conference Highlights:

Harvoni and Sovaldi had total $4.8 billion in revenue, down 2% sequentially but up 70% y/y. Harvoni sales were down slightly sequentially while Sovaldi sales were up slightly. HIV therapies, led by Stribild, showed sequential and y/y sales growth. Has more than 90% of HCV market. That market is restricted by payers. NICE (Great Britain) found Harvoni to be cost effective.

TAF based regimen reviews are underway by FDA and EMA, with first PDUFA date on November 5, 2015. Second is April 7, 2016.

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 $4.84 billion, down slightly sequentially from $4.85 billion and up % from $ billion year-earlier. Non-GAAP EPS was $3.22, up 2% sequentially from $3.15 and up 75% from $1.84 year-earlier. 89.6% product gross margin.

Product sales were $8.2 billion, up 1% sequentially from $8.1 billion and up 37% from $6.0 billion in the year-earlier quarter. $5.6 billion were in the U.S. and $1.7 billion were in Europe, up 17% y/y. $958 million rest of world revenue.

Royalty, contract and other revenue was $84 million.

Cash and equivalents ended at $25.1 billion, sequentially from $14.7 billion. $10.0 billion of new senior notes were issued. Long term liabilities were $23.3 billion. $4.1 billion cash flow from operations, down sequentially due to timing of payments, in particular Harvoni rebates. $3.1 billion was used for repurchase shares. $627 million was paid in dividends. $11.1 billion remains in the current share repurchase plan.

Four 5816 with Sovaldi studies reported positive results for HCV genotypes 1 through 6 last month. Gilead will apply for FDA approval soon.

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.

Gilead is making progress on an Ebola therapy. GS-5734 was given to an Ebola patient in England on a compassionate use basis.

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

Cost of goods sold was $1.06 billion. Research and development expense was $743 million. Selling, general and administrative expense was $903 million. Income from operations was $5.59 billion. Other expense was $52 million. Income tax provision was $880 million. Net loss attributable to noncontrolling interest was $8 million.

R&D expense will continue to ramp in 2015 to drive the pipeline, particularly Phase 3 trials for liver oncology.

The dividend of $0.43 per share will be paid on December 30, 2015 to stockholders of record on December 16, 2015.

Q&A:

GS-9883 acceleration of timeline? We have Phase 2 data and the FDA accepted our Phase 2 plan for 2 Phase 3 studies. We hope to start enrollment by the end of the year. It is a fairly recent Gilead invention, so it should have a long patent life.

Fibrosis F0 and F1 patients, anything you can do to encourage payers to let them be treated? We still see very high levels of restrictions, both formally in contracts and in volumes. Some doctors won't even write a prescription because they know the insurers will reject them. We hope as patient flows become stable more F0 and F1 patients will be allowed to get the therapy. 2016 contracts are all in place. Our position is physicians should decide, not payers.

Are most scripts filled F3 and F4? Half the scripts written are F0 to F2, but very few F0 and F1 scripts are being accepted, and even F2 patients are hard to get through the process.

Is the regimen for Genotype 2 and 3 a revenue expander? We see it as a better product for Genotypes 2 through 6, with Harvoni remaining for Genotype 1. We don't think there will be a big warehouse effect.

Valuation resets for merger and acquisition activity? The market has not changed that much for M&A activity. It is about the same as it was at the beginning of the year.

We are fairly confident that we have seen a flattening of U.S. new starts for HCV therapy, and would see Q4 starts as likely indicating start rates in 2016. It was around 60,000 in Q3. In Q1 we had the warehoused patient bolus. But we are also working on patient adds around the world. We have only treated a tiny fraction of diagnosed patients, and there are many undiagnosed patients.

2016 pricing trend for HCV? The 2016 contracts have been finalized. They can choose what level of rebate they can get based on how many patients they accept. We are long-term positive.

HCV new competition in January 2016? We feel our position is very strong.

We are not exploring a 6 week HCV therapy because they don't seem to be effective except on subsets of patients. The FDA is no longer interested in sub-standard cure rates.

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