Analyst Conference Summary

biotechnology

conference date: April 28, 2016 @ 1:30 PM Pacific Time
for quarter ending: March 31, 2016 (first quarter, Q1 2016)

Forward-looking statements

Overview: Revenue down substantially sequentially and not up much y/y. But left 2016 guidance in place and dividend raised to 0.47 per share per quarter.

Basic data (GAAP) :

Revenue was $7.79 billion, down 8% sequentially from $8.51 billion and up 3% from $7.59 billion in the year-earlier quarter.

Net income was $3.56 billion, down 24% sequentially from $4.68 billion and down 18% from $4.33 billion year-earlier.

Earnings per share (EPS, diluted) were $2.53, down 20% sequentially from $3.18 and down 8% from $2.76 in the year-earlier quarter.

Guidance:

Reiterated full year 2016 guidance. Product sales expected between $30 and $31 billion.

Conference Highlights:

The revenue shortfall was largely from a decline in Harvoni sales. A $200 million litigation charge related to the Merck sofosbuvir suit severely impacted the cost of goods sold. Expenses also increased as R&D accelerated and for geographic sales expansion. But seeing strong uptake of the new TAF based HIV revenues.

The dividend was raised to $0.47. It will be for stockholders of record on June 16, 2016 and paid on June 29.

Gilead believes its three new approved HIV regimens will address the long-term needs of patients. NASH work should be accelerated by the new ACC program acquired last month.

Non-GAAP numbers: Net income was $4.27 billion, down 13% sequentially from $4.89 billion and down 7% from $4.60 billion year-earlier. Non-GAAP EPS was $3.03, down 9% sequentially from $3.32 and up 3% from $2.94 year-earlier. 87.2% product gross margin. Stock based comp excluded was $64 million.

Product sales were $7.68 billion, down 9% sequentially from $8.41 billion and up 4% from $7.41 billion in the year-earlier quarter.

Royalty, contract and other revenue was $113 million, down from $189 million year-earlier.

The shortfall in Harvoni revenue, despite international expansion, was due to fewer patient starts in Q4 combined with a higher discount rate that began in the quarter. Patient starts increased in Q1. There was also a payer mix shift towards more deeply discounted government payers. There were higher rebate claims made on sales in prior quarters. Time of treatment on average decreased as fewer require 24 weeks and more are treating for 8 weeks. Believes has 90% market share between Harvoni and Sovaldi.

Genvoya launch is going well. Mostly getting prescriptions from switches, but most are from Stribild or other Gilead regimens. Launched in Germany in Q1 and launched in Spain two weeks ago. Descovy was launched this month; believes it will replace Truvada.

Cash and equivalents ended at $21.3 billion, down sequentially from $26.2 billion. $3.9 billion cash flow from operations. $8 billion was used for repurchase shares. Added authorization for an addional $12 billion repurchase plan. Long term liabilities were $22.8 billion. An upfront license fee required $300 million and $425 million went to the collaboration with Galapagos NV.

In the quarter Odefsey was approved for treating HIV, and is the smallest single tablet regimen now available for that purpose.

Data of the efficacy of newer TAF-based HIV drugs were released in the quarter.

Pre-exposure prophylaxis with Truvada was fully validated and is under evaluation by the EMA.

For Hepatitis B virus (HBV), TAF has been submitted to the EMA and FDA.

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

Harvoni's label received two supplemental indications from the FDA for advanced liver disease. The FDA also granted priority review for a fixed dose combination of sofosbuvir and velpatasvir for HCV genotypes 1-6 with a June 28, 2016 PDUFA (FDA decision date). It is also under review in the European Union

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 $1.19 billion. Research and development expense was $1.27 million. Selling, general and administrative expense was $0.69 billion. Income from operations was $4.65 billion. Other expense was $149 million. Income tax provision was $935 million. Net loss attributable to noncontrolling interest was $1 million.

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

The dividend of $0.47 will be paid on June 29, 2016 to shareholders of record on June 16, 2016.

Q&A:

Given lower revenue per patient, what are expectations for healthier HCV patient numbers going forward? We saw several of the large commercial payers open up access regardless of fibrosis scores during Q1. That triggered previously negotiated discounts. The VA, after limiting treatment in Q4 due to its budget, evaluated the medicines available in January. We gave the VA extra discounts which resulted in them putting our products on their formulary. There are now no fibrosis restrictions at the VA. We started to see a large uptick in treatment numbers from about the middle of the quarter which we think will continue through the year.

Would you be willing to make a hostile acquisition? Acquisitions are a process. You need to know about the pipeline. We prefer friendly, but it would depend on the situation.

EPS not up much despite share buybacks, best use of capital? We look at how to leverage the cash. We had a 17% reduction in share count and did M&A as well. We can be opportunistic with share repurchases. We think the Nimbus acquisition, while small, could have large returns.

Over time, as HCV therapy competition increases, prices will likely move "in one direction," but right now things are stable and we are winning unit volumes.

Oncology space, amount of focus in? We have been focused on kinase inhibitors. We have numerous preclinical candidates that we are looking at. We still want to do oncology. Zydelig has increased our appetite to do oncology programs, despite its relatively small revenue contribution and toxicity problems. We are also looking for external opportunities.

HCV diagnosis rates seem to be increasing, our estimate is 200,000 new in the U.S. in 2015. We have demonstration projects to show the value of diagnosis.

Chinese generic sofosbuvir impact? We could see sofosbuvir in the Chinese market in 2017. The Chinese government is accelerating review and approval of HCV drugs. There are a lot of genotypes in China and genotyping is not common, so the sofosbuvir and velpatasvir combo would be important there. Between 10 and 20 million people are believed to have HCV in China. We would want to price to get good volume.

Japan dynamics? The genotype 2 patients, about 20% of population, have been treated with Sovaldi. We went through the bolus and are stable now. Genotype 1 by Harvoni also treated a lot of patients, but the decline so far is more gradual. "We are not anticipating any further price movements this year in Japan."

Do you see a continuing shift to higher discount government payers? It is not a dramatic move. We see the public payers becoming a larger part of the mix, particularly Medicaid.

Gross to net? We will not be breaking that out again.

What about the previously rejected patients with high fibrosis scores coming back for treatment now? There are lots of patients. There is still bureaucracy gating. We expect patient flows to be fairly stable through this year.

We will defend our market share vigorously against new entrants, but we don't know what the clinical data will look like for future products, and we have our own pipeline. In Europe we are seeing some payers treat all HCV therapies as commodities, we want them to recognize our real world data is considerably superior to competitors. Where physicians choose we tend to have high market share.

NASH therapy development plans? We have 4 products in early clinical studies if you include the Nimbus product we are about to acquire. We would start 4 Phase 2 studies, and try various combination studies. NASH is a complex biological disease so we see more than one therapy being needed.

About 43% of intent-to-treat patients are now 8 week treatments. We won't break it down further.

We are seeing very high HCV rates when urban residents are tested in surgical centers. The rate is around 10%. We have seen it in several cities.

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