Analyst Conference Summary

biotechnology

conference date: February 7, 2017 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2016 (fourth quarter, Q4 2016)

Forward-looking statements

Overview: Dividend increased by 10% to $0.52 per quarter. But revenue continues to decline on declining Harvoni sales.

Basic data (GAAP) :

Revenue was $7.32 billion, down 2% sequentially from $7.50 billion and down 14% from $8.51 billion in the year-earlier quarter.

Net income was $3.10 billion, down 7% sequentially from $3.33 billion and down 34% from $4.68 billion year-earlier.

Earnings per share (EPS, diluted) were $2.34, down 6% sequentially from $2.49 and down 26% from $3.18 in the year-earlier quarter.

Guidance:

For the full year 2017 product sales are expected between $22.5 and $24.5 billion. Non-GAAP gross margin 86% to 88%. R&D expense $3.1 to $3.4 billion. SG&A expense also $3.1 to $3.4 billion. Effective tax rate 25% to 28%. The difference between GAAP and non-GAAP EPS is likely in the range of $0.84 and $0.91.

Conference Highlights:

The dividend was raised to $0.52 per share per quarter, up from the prior $0.47. It will be paid on March 30, 2017 to stockholders of record end of day March 16.

Epclusa for HCV sales were a bright spot, climbing to $1.05 billion from nothing year-earlier. However, patient starts for Epclusa is expected to decline in 2017 following a bolus in 2016. Genvoya for HIV also continued to grow revenue, and was introduced in France after the quarter ended.

Prices for Harvoni have dropped to an average of $10,000 per Medicaid patient, but getting approval for each patient is still difficult.

The goal for 2017 is to use more capital for acquisitions of companies and therapies, so not as much of a stock buy back is planned.

HIV therapy sales were up y/y due to the introduction of TAF-based drugs.

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. Budgetary constraints by payers continue to restrict curing patients and to require discounts on pricing.

Non-GAAP numbers: Net income was $3.59 billion, down 2% sequentially from $3.68 billion and down 27% from $4.89 billion year-earlier. Non-GAAP EPS was $2.70, down 2% sequentially from $2.75 and down 19% from $3.32 year-earlier.

Product sales were $7.22 billion, down 3% sequentially from $7.41 billion and down 14% from $8.41 billion in the year-earlier quarter. $4.9 billion U.S. product sales. $1.4 billion European sales. $314 million sales in Japan. Rest of world $556 million.

Royalty, contract and other revenue was $104 million, up sequentially from $95 million, and up from $97 million year-earlier.

Cash and equivalents ended at $32.4 billion, up sequentially from $31.6 billion. $3.5 billion cash flow from operations. $1 billion was used for repurchase shares. Long term liabilities were $28.4 billion.

Vemlidy for hepatitis B was approved in the U.S., Europe and Japan and will show first revenue in Q1.

Gilead has 3 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.

GS-4997 in NASH planning for Phase 3 studies. GS-9674 and GS-0976 for NASH are in Phase 2 studies.

Filgotinib is now in Phase 3 trials for rheumatoid arthritis, Crohn's, and ulcerative arthritis.

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

Cost of goods sold was $1.08 billion. Research and development expense was $1.21 billion. Selling, general and administrative expense was $992 million. Income from operations was $4.05 billion. Interest expense 265$ million. Other income was $140 million. Income tax provision was $821 million.

For the full year 2016 diluted GAAP EPS was $9.94 and non-GAAP EPS was $11.57. Revenue was $30.4 billion, down 7% from $32.6 billion in 2015.

Q&A:

Cash flow and urgency towards deals? In 2017 we will have a very impressive cash flow in 2017. For acquisitions we need the right strategic fit.

Prep plan? We have a small but focused team to promote programs like the HIV prevention program in San Francisco, focused on urban areas. Payers are mostly on board. In Europe governments have mostly given coverage.

Decline in new patient starts from competition? See Slide 24 for our best estimates. Competitors have hit patient starts, and there are multiple launches expected in 2017. But the primary driver is overall patient starts, not our competition. Harvoni is still leading for genotype 1 patients, and there has been tremendous uptake for epclusa for genotypes 2 and 3.

Can you see patient volumes stop dropping in 2018 or any point? The market is hard to predict, because there are no chronic patients, just starts and cures. It depends on opening up the market to less sick patients. If not treated, eventually patients become sicker and need treatment.

Our tax rate is going up because we are growing HIV revenue faster in the U.S. It depends on where we see more patient starts.

Can you grow revenue in 2018 without an acquisition? We don't have a lot of things launching the next two years. The HIV franchise should grow. In 2018 we have some patent expirations. So it will be challenging to grow without an acquisition. We have the cash and cash flow to make acquisitions to support growth.

We are excited about Bictegravir for HIV revenue potential.

2017 guidance is a surprise, are you trying to be conservative? We have not changed our philosophy on guidance. We try to be transparent. The chronic HIV market is much easier to predict than the start-based HCV market.

New diagnoses in 2015 and 2016? Slide 43 has 2015, we don't have 2016 yet. New patients have lesser levels of fibrosis than in the past.

Impact of Bictegravir expected on rest of your HIV portfolio? Genvoya experience bodes well for Bictegravir. We are building our HIV franchise. We hope to get switches from non-Gildead regimens, as we have with Genvoya.

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