Analyst Conference Summary

biotechnology

conference date: November 1, 2016 @ 1:30 PM Pacific Time
for quarter ending: September 30, 2016 (third quarter, Q3 2016)

Forward-looking statements

Overview: Softer revenue as HCV therapy revenue appears to have peaked for now. Non-GAAP EPS was below analyst consensus.

Basic data (GAAP) :

Revenue was $7.50 billion, down 4% sequentially from $7.78 billion and down from 10% from $8.30 billion in the year-earlier quarter.

Net income was $3.33 billion, down 5% sequentially from $3.50 billion and down 28% from $4.60 billion year-earlier.

Earnings per share (EPS, diluted) were $2.49, down 3% sequentially from $2.58 and down 19% from $3.06 in the year-earlier quarter.

Guidance:

Reiterated full year 2016 guidance, with net product sales between $29.5 and $30.5 billion.

Conference Highlights:

In the quarter the EU approved Epclusa, a pan-genotypic single tablet regimen for hepatitis C. HCV sales declined, but HIV therapy sales increased y/y. HCV revenue in the U.S. was down on both lower patient starts and higher discounts.

Expects TAF based HIV therapy revenues to continue to grow in Europe, particularly Genvoya.

U.S. contracts for HCV therapies for 2017 have been approved and Gilead is happy with them, but Medicaid still is resisting giving treatment to all but the sickest patients.

The dividend for the quarter will remain at $0.47 per share to be paid on December 29.

Non-GAAP numbers: Net income was $3.68 billion, down 12% sequentially from $4.18 billion and down 24% from $4.84 billion year-earlier. Non-GAAP EPS was $2.75, down 11% sequentially from $3.08 and down 15% from $3.22 year-earlier.

Product sales were $7.41 billion, down 3% sequentially from $7.65 billion and down 10% from $8.21 billion in the year-earlier quarter. $5.1 billion U.S. product sales. $1.4 billion European sales as HCV patient starts declined. $452 million sales in Japan.

Royalty, contract and other revenue was $95 million, down sequentially from $125 million, and up from $84 million year-earlier.

Cash and equivalents ended at $31.6 billion, up sequentially from $24.6 billion. $4.3 billion cash flow from operations. $5 billion of senior notes issued during the quarter. $1.0 billion was used for repurchase shares. Long term liabilities were $28.2 billion.

For Hepatitis B virus (HBV), TAF has been submitted to the EMA and FDA. Gilead is preparing for the commercial launch, with the PDUFA date in just a few weeks.

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.

Simtuzamab results were negative, so the program will be discontinued. GS5745 also failed and will be discontinued except for rheumatoid arthritis. Eleclazine for cardiovascular targets also failed, but is continuing in some indications.

GS-4997 had positive results in NASH Phase 2 studies. Planning for Phase 3 studies. GS-9674 and GS-0976 for NASH are in Phase 2 studies.

Bictegravir/F/TAF has had positive results for HIV.

Gilead has 6 hematology/oncology drugs in its clinical pipeline; three are in Phase 3.

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

Cost of goods sold was $1.13 billion. Research and development expense was $1.14 billion. Selling, general and administrative expense was $831 million. Income from operations was $4.40 billion. Interest expense $242 million. Other income was $119 million. Income tax provision was $951 million.

Gilead still expects to use its cash flow from time to time to acquire potential therapies or companies. Q4 cash flow will be impacted by government rebates.

Q&A:

Return on investment on Hep C vs. a new category? We are executing well on hep c. We are keeping a strong market share, we have new combinations coming to market like Epclusa. We have increased awareness campaigns. There is not much unmet medical need, so we are turning our attention to NASH and other franchises.

4997 trial duration? There were no baseline imbalances in the Phase 2 studies. We want to use just fibrosis as an endpoint for Phase 3. So we will propose 2 Phase 3 studies with 48 week fibrosis endpoints. But we need regulatory approval for this, we should have an update in early 2017.

Warehousing for Epclusa? There may have been a small effect, not like Harvoni.

Capital allocation? We are actively evaluating opportunities in a disciplined fashion.

Margin downward trend? The $200 milestone payment hurt in Q3, but our margins overall are high. HCV has better margins than HIV. We will remained disciplined on expenses.

Buy back at average of $90? We did frontload the buybacks this year. We are still doing buy backs and dividends, but have to balance that against looking for growth.

Hep C patient volumes flat despite higher discounts, are you seeing any F0 and F1 patients getting treated? In U.S. F0 % has gone up. But most patients are having a longer journey. About 90,000 patients per quarter. Less sick patients have less incentive to get on therapy.

Predictability of Gilead going forward? The dynamics for HCV patients are changing, we are working on bracketing the patient flow for our guidance.

VA paying $15,000 to $17,000, is that the floor? Can't comment on pricing to particular channels.

Raise the dividend substantially? No, we don't want to do anything to restrain our M&A measures. But the board does talk about dividends and buybacks.

Genvoya launch? Physicians see the benefit to switching patients to Genvoya. In most practices half the patients are over the age of 50, so the benefits make sense. It is an uptake even faster than Atripla. 80% of Genvoya new patients are from switches, and half are coming from Stribild.

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