Analyst Conference Summary

biotechnology

conference date: July 25, 2016 @ 1:30 PM Pacific Time
for quarter ending: June 30, 2016 (second quarter, Q2 2016)

Forward-looking statements

Overview: Not as good as fans had hoped. Sequential revenue down slightly sequentially, but a slight non-GAAP EPS beat. Revised full year guidance down substantially.

Basic data (GAAP) :

Revenue was $7.78 billion, flat sequentially from $7.79 billion and down from 5% from $8.2 billion in the year-earlier quarter.

Net income was $3.50 billion, down 2% sequentially from $3.56 billion and down 22% from $4.49 billion year-earlier.

Earnings per share (EPS, diluted) were $2.58, up 2% sequentially from $2.53 and down 12% from $2.92 in the year-earlier quarter.

Guidance:

For the full year 2016 reduced non-GAAP net product sales estimate by $0.5 billion to $29.5 to $30.5 billion. Gross margin the same at 88% to 90%. R&D estimate increased to $3.6 to $3.8 billion. SG&A estimate decreased to $3.1 to $3.3 billion. Diluted EPS impact of non-GAAP expenses $1.47 to $1.53.

Conference Highlights:

"Announced that Gilead acquired Nimbus, a wholly-owned subsidiary of Nimbus Therapeutics, and its Acetyl- CoA Carboxylase (ACC) inhibitor program. The Nimbus program includes the lead candidate NDI-010976, an ACC inhibitor, and other pre-clinical ACC inhibitors for the potential treatment of non-alcoholic steatohepatitis, hepatocellular carcinoma and other diseases. NDI-010976 was granted Fast Track designation by FDA in February 2016." This will result in higher R&D expense for the remainder of the year. The acquisition was announced in April.

Non-GAAP numbers: Net income was $4.18 billion, down 2% sequentially from $4.27 billion and down 14% from $4.85 billion year-earlier. Non-GAAP EPS was $3.08, up 2% sequentially from $3.03 but down 2% from $3.15 year-earlier. 91.5% product gross margin. Stock based comp excluded was $69 million.

Product sales were $7.65 billion, down less than 1% sequentially from $7.68 billion and down 6% from $8.13 billion in the year-earlier quarter. $4.9 billion U.S. product sales. $1.6 billion European sales as HCV patient starts declined. $619 million sales in Japan due to a mandatory price cut for HCV therapies.

The $200 million litigation charge in Q1 related to the Merck patent case was reversed, helping margins.

Royalty, contract and other revenue was $125 million, up sequentially from $113 million, and up from $118 million year-earlier.

The shortfall in Harvoni revenue, despite international expansion, was due to fewer patient starts combined with a higher discount rate that began in Q1. There was also a payer mix shift towards more deeply discounted government payers. Third party data shows that more patients are now being screened for HCV, increasing the number of U.S. patients requiring HCV treatment to about 3 million, of whom about half have been diagnosed. 280,000 new HCV cases were diagnosed in the U.S. during the past 2 years. Access has been extended to some patients who do not have fibrosis scores. The sickest patients have largely been treated, so more patients are now getting 8 weeks of treatment. The VA has budgeted more money to treat HCV. France is considering removing all fibrosis score criteria. Japan was down 43% sequentially following a bolus in Q1, and due to a price decrease. Recent Epclusa approvals by the FDA and EU should be helpful, especially with Genotype 3 patients.

In retrospect the HCV therapies were introduced faster than anything comparable, so the slow down at this point reflects lesser urgency. But there are a lot of patients left to treat.

Descovy was launched in April; believes it will replace Truvada. Odefsey for HIV was also approved in the quarter, and is the smallest single tablet regimen now available for that purpose.

Cardiovascular revenue in the U.S. was up 12% y/y.

Cash and equivalents ended at $24.6 billion, up sequentially from $21.3 billion. $4.9 billion cash flow from operations. $1.0 billion was used for repurchase shares. Long term liabilities were $23.4 billion. In Q3 cash may decrease due to accrued rebates due the U.S. government. Will slow repurchases in 2H in order to invest more in R&D.

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

Bictegravir (GS-9883) preclinical and Phase 1 data was presented, showing the integrase inhibitor has antiviral efficacy.

Filgotinib Phase 3 trials for Crohn's and rheumatoid arthritis are ongoing.

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 $864 million. Research and development expense was $1.48 billion. Selling, general and administrative expense was $890 billion. Income from operations was $4.54 billion. Other expense was $88 million. Income tax provision was $902 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 for stockholders of record on September 16, 2016 and paid on September 29.

Q&A:

HCV new start numbers down despite improved availability? Optimistic about long-term prospects. We saw an enormous group of very sick people treated in 2015. Revenue decline is due to a payer mix issue, notably the VA patient starts. Starts were up Q2 from Q1. Commercial payers were varied for number of starts, some more and some less. We believe increased diagnosis will eventually drive increased numbers of people treated.

European patient numbers? Starts have been reasonably steady over the past 3 quarters. We expect a continual, gradual decline in new patient starts. Gilead will be introducing educational programs about the need to test and treat for HCV. There are still 200,000 quite sick individuals in Italy to be treated. In Europe the removal of cirrhosis restrictions should help.

Hepatitis B program? We have 4779, a vaccine with GlobeImmune, but early data did not show activity. Our other program is at the second cohort, so we hope to have data before too long. We believe by adding another mechanism to nucleotides we might get a cure. There is also the immune therapy strategy. Going after the DNA is too early in the research phase to talk about.

Payer mix shift for Medicaid? We won't break out the % of Medicaid; public payers altogether were 45% in the quarter, up driven mainly by the VA. Medicaid states are slowly opening up to non-fibrosis patients, but most patients come from just 5 states. We hope to win the majority of Medicaid contracts, but some states may go to the competition.

$279 million one-time swing in charge backs? In Q2 we had a sales reserve adjustment for the new HCV products. That should be one-time, for the most part. In Q1 we had the rebate claims for HCV; in Q2 the level moderated.

Epclusa impact on genotype 2 franchise vs. Sovaldi? Most Q2 revenue was inventory build. We are getting an excellent reception. Physicians and payers are happy with Harvoni for genotype 1. So Epclusa will go mainly to 2 and 3 patients, where a 12 week single tablet regimen is attractive. It will take 3 to 6 months to get payer approvals, but physicians can apply based on need in the meantime.

Uptick in R&D guidance vs. lowering of SG&A? That is mainly Nimbus, plus purchasing a priority review voucher. Other than those R&D is running below forecasts. The SG&A line came down because one-time IRS charges were lower than expected.

Capital allocation plans? The cash flow messaging is due to the rebate payments. Our capital allocation plans have not changed. We bought a lot of stack back in Q1, which is why we can focus elsewhere for the rest of the year. We are interested in doing some more deals of a certain size. Particularly in the non-antiviral areas. By the end of the year we want to be better able to talk about the long term prospects for growth and our pipeline.

We admit it is difficult to guide on HCV revenue due to the complexity of the dynamics.

HCV competition, particularly on pricing? Contracts were set up for 2016, so little change at this point. We have a strong position in the VA. Increased competition is in Medicaid where some of the smaller states may go to the competition.

Is oncology still the focus for adding assets? We are in oncology. We will have Phase 3 data this year and starting more studies. We continue to be interested in assets and collaborations in oncology.

NASH program? We have 4 modalities we are studying in NASH. Our FXR agonist should not get the side effects the others have.

Expansion of HCV markets? Australia, Brazil, and Mexico, for instance. We also are looking at launching in China.

Genvoya switched % from Atripla? 18%.

OpenIcon Analyst Conference Summaries Main Page

Gilead Investor Relations page

More Gilead analyst conference summaries

Search

More Analyst Conference Pages: