Analyst Conference Summary

conference date: February 2, 2016 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2015 (fourth quarter, Q4 2015)

Forward-looking statements

Overview: Increased the dividend, starting with Q2. Added another huge stock repurchase program. Revenue continued to increase, confounding chicken-little analysts.

Basic data (GAAP) :

Revenue was $8.51 billion, up 2.5% sequentially from $8.30 billion and up 16% from $7.31 billion in the year-earlier quarter.

Net income was $4.68 billion, up 2% sequentially from $4.60 billion and up 34% from $3.49 billion year-earlier.

Earnings per share (EPS, diluted) were $3.18, up 4% sequentially from $3.06 and up 46% from $2.18 in the year-earlier quarter.

Guidance:

For the full year 2016 net product sales are estimated between $30 and 31 billion. Non-GAAP Product gross margin 88% to 90%. R&D expense $3.2 to $3.5 billion. SG&A expense $3.3 to $3.6 billion. Effective tax rate 18 to 20%. The negative impact on EPS due to acquisitions, stock-based compensation & other GAAP items estimated to be $1.10 to $1.16.

Conference Highlights:

As recently announced, John Milligan is being promoted to CEO and former CEO John Martin to become Executive Chairman of the Board

Harvoni and Sovaldi had a total $4.89 billion in revenue in the quarter, up 2% sequentially from $4.8 billion, and up 27% from $3.84 billion year-earlier. A decline in U.S. revenue to $2.4 billion was offset by an increase in European and rest of world . In the U.S. a shortage of funds for the VA in the quarter was the main negative impact on sales. 400,000 patients have been treated in the U.S. with 3,000,000 remaining plus an unknown number of undiagnosed patients.

Gilead believes U.S. HCV treatment numbers will be similar in 2016 to numbers in the second half of 2015, while numbers will continue to increase in the rest of the world. The payer mix in the U.S. may shift towards public payers. Prices may be negotiated down in Japan. Gilead is confident in its competitive position vs. other HCV therapies, and will introduce new ones later in 2016. The prior HCV gross-to-net estimates were on target for 2015.

TAF based regimen, Genvoya, is now approved for HIV in the U.S. and Europe. Early product update is better than expected. Two other TAF-based regimens are pending approval in 2016. TAF is also being submitted as a therapy for Hepatitis B.

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 $4.89 billion, up slightly sequentially from $4.84 billion and up 26% from $3.88 billion year-earlier. Non-GAAP EPS was $3.32, up 3% sequentially from $3.22 and up 37% from $2.43 year-earlier. % product gross margin.

Product sales were $8.41 billion, up 3% sequentially from $8.2 billion and up 16% from $7.22 billion in the year-earlier quarter. $ billion were in the U.S. and $ billion were in Europe. $ million rest of world revenue.

Royalty, contract and other revenue was $97 million.

Cash and equivalents ended at $26.2 billion, up sequentially from $25.1 billion. For the full year 2015 $20.3 billion cash flow from operations. $10 billion was used for repurchase shares. $1.9 million was paid in dividends. $8 billion remains in the current share repurchase plan. There is an accelerated repurchase agreement in effect for the next 3 months. Long term liabilities were $22.8 billion. 29 million shares were repurchased in Q4 2016.

June 28, 2016 PDUFA (FDA decision date) for sofosbuvir plus velpatasvir pan-genotypic HCV therapy. It is also under review in the European Union.

Zydelig Phase 3 interim analysis results for chronic lymphocytic leukemia were positive.

GS9883 with TAF is being evaluated in 4 clinical trails for HIV.

Filgotinib Phase 3 trials for Crohn's and rheumatoid arthritis are expected to start in 2016.

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 $1.06 billion. Research and development expense was $757 million. Selling, general and administrative expense was $1.07 billion. Income from operations was $5.62 billion. Other expense was $184 million. Income tax provision was $752 million. Net loss attributable to noncontrolling interest was $2 million.

The tax rate benefited from the permanent reinstatement of the R&D tax credit.

Gilead still expects to use its cash flow from time to time to acquire potential therapies or companies.

The dividend of $0.43 will be paid on March 30, 2016 to shareholders of record on March 16, 2016. The Q2 dividend will be increased to $0.47 per share. An additional $12 billion was authorized for stock repurchases following the completion of the existing $15 billion program.

Q&A:

Re 2016 guidance re top line and fibrosis groups? In the U.S. we believe VA purchases will smooth out in 2016. In 2015 we had a big bump in Q1 as warehoused patients came in. We believe U.S. insurers will loosen restrictions. If Medicaid starts treating more patients we could see numbers higher than guidance. Less sick patients tend to use 8-weeks of treatment, so revenue per patient would go down, but if budgets are flat then more patients could be treated. Real world results for Harvoni have been very good.

In Europe we are seeing stabilization in the major markets, but the smaller markets (nations) are starting to come in. We expect to see more patients but for shorter periods of time and so lower $ per patient. In Japan we are still catching up with warehoused patients. There are many smaller nations that have not launched yet.

Galapagos therapy concerns? The data in RA and Crone's show "fairly remarkable efficacy" and filgotinib can be distinguished from competitors by its superior safety.

Market discounting of future growth? Really good question. We tripled revenue in the last couple of years. We are moving our pipeline along as fast as we can, so we see future organic growth. The TAF HIV therapies should drive some growth, as should the upcoming HCV therapies and filgotinib. Our MMP9 antibody now has positive data in 3 inflammatory indications. We could have a major inflammatory franchise. We need to try to ramp up our efforts in oncology by doing additional partnerships, though Zydelig is a good start.

HCV competitive landscape? The first competitor came in about 12 months ago. The assumption by payers then was that the products were interchangeable. But the real world data shows quite a bit of efficacy and safety for Harvoni. We've seen competitors have had to add warnings to there labels. As new competition comes in the payers are more cautious, given their past experience.

Gave the number of patient starts over past quarters, with comments on variations. We believe that as payers see how effective 8 week Harvoni cures are, they will increase the allowed number of patients.

HCV long-term trends. New patient diagnosis vs. prior patients? We have proprietary research we won't share with you. But we can say 20 thousand to 30 thousand patients per month come into treatment per year, with a lower number of patients entering treatment [because the payers won't pay]. So the line at the door gets longer. There is a strong flow of patients still out there, and they are not just difficult-to-manage patients.

Has the drop in stock prices of biotechnology companies lately made acquisitions look more attractive? Yes.

Pricing discounts? We are fully aware of the new pricing regulations in Japan and expect them to affect the pricing of Harvoni. We have factored that into 2016 guidance.

Switches within HIV therapies? We think 18% of the switches to Genvoya are from Stribild.

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