Analyst Conference Summary

biotechnology

conference date: July 26, 2017 @ 1:30 PM Pacific Time
for quarter ending: June 30, 2017 (second quarter, Q2 2017)

Forward-looking statements

Overview: Relatively strong quarter, but revenue still down y/y. Full year guidance raised. HIV and HBV combined product sales up substantially y/y.

Basic data (GAAP) :

Revenue was $7.14 billion, up 10% sequentially from $6.51 billion and down 8% from $7.78 billion in the year-earlier quarter.

Net income was $3.07 billion, up 11% sequentially from $2.70 billion and down 12% from $3.50 billion year-earlier.

Earnings per share (EPS, diluted) were $2.33, up 14% sequentially from $2.05 and down 10% from $2.58 in the year-earlier quarter.

Guidance:

Full year 2017 guidance raised to product revenue between $24.0 and $25.0 billion. Product gross margin steady at 86% to 88%. R&D expense between $3.2 and $3.4 billion, SG&A expense between $3.2 and $3.4 billion. Effective tax rate 25 to 28%. Diluted EPS impact of acquisition-related, collaboration, stock based comp and other expense between $0.86 and $0.93 per share.

But cash flows in the second half will slow because of government vouchers being used.

Conference Highlights:

No acquisition announced.

Kevin Young, COO, said "We continue to see strong uptake of our TAF based HIV regimens." Genvoya is particularly strong in prescriptions for new patients.

About 130,000 people were using Truvada for prep (HIV prevention) in the U.S. at the end of the quarter.

HCV patient starts in the first half were higher than anticipated, but the numbers are still expected to gradually decline. HCV revenue was also increased by a one-time recognition of revenue from a European volume contract that expired. Epclusa is ramping rapidly in Europe

Non-GAAP numbers: Net income was $3.37 billion, up 14% sequentially from $2.95 billion and down 19% from $4.18 billion year-earlier. Non-GAAP EPS was $2.56, down 15% sequentially from $2.23 and down 17% from $3.08 year-earlier.

Product sales were $7.0 billion, up 10% sequentially from $6.38 billion and down 9% from $7.7 billion in the year-earlier quarter. $5.0 billion U.S. product sales. $1.4 billion European sales. Rest of world $665 million.

Royalty, contract and other revenue was $95 million, down sequentially from $128 million, and down from $125 million year-earlier.

Cash and equivalents ended at $36.6 billion, up sequentially from $34.0 billion. $3.5 billion cash flow from operations. $130 million was used for repurchase shares. $680 million paid in dividends. Long term liabilities were $28.7 billion.

In July the FDA approved Vosevi for retreatment of adults with chronic hepatitis C.

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.

Selonsertib for NASH is in 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. Six additional Phase 2 study across a range of diseases are planned with partner Galapagos.

New data on TAF based regimens, notably B/F/TAF continued to come in positive.

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

Cost of goods sold was $1.13 billion. Research and development expense was $0.86 billion. Selling, general and administrative expense was $897 million. Income from operations was $4.25 billion. Interest expense $269 million. Other income was $130 million. Income tax provision was $1.05 billion.

The dividend of $0.52 per share per quarter to stockholders of record on September 15, 2017 will be paid on September 28, 2017.

Q&A:

Genvoya launch vs. bictegravir? The data for B/F/TAF is excellent. The Genvoya launch has been excellent, with 65% adoption in Germany. It is a family of drugs, we expect B/F/TAF to be additive to the portfolio. We are gearing up for a launch in 2018.

Sustainability of HCV market, inventory, etc.? We are pleased with the increase in patient starts so far this year. Our guidance was careful. 185,000 to 200,000 U.S. patient starts in 2017 is our current estimate. We are seeing better testing for HCV, but of course those patients are less ill than earlier patients were. We still think the gradual trend is down. In the U.S. inventory was in the usual range, with some volatility from the Epclusa.

Generic Truvada in U.S. timeline? 2021.

Filgotinib thrombo events? Only 3, one ruled not related, one non-likely related, and one possibly related. Filgotinib causes a decrease in platelets.

Access for HCV therapies in U.S., diagnosis volumes? We are not seeing a great deal of change. Patients are trending to naive to therapy with lower fibrosis scores. Access to therapy has been relatively stable. About 20% to 25% of new diagnoses are with advanced disease, but are fitter than in the past. So this will be a long-term market for us. Most of the people who are seeking diagnosis have access to very good healthcare plans.

Filgotinib interim analysis in UC (ulcerative arthritis) in 2018? No, MMP-9 for gastric gancer Phase 3, that is at 30% of endpoints (death), and will come out later this year. If we don't reach the hazard ratio, we will discontinue. [Analyst says there is a slide for Filgotinib, will talk offline]

Explained different categories of virological failure. If patients show up for a first visit, and still have virus, and then disappear (move out of area), it is a virological failure, but "discontinued for other reasons." What KOLs (experts) are looking for is a lack of resistance.

Business developments? No changes in what we are thinking about. We have been actively looking, we have increased the size of our group so we can look at more possibilities.

Truvada for prep numbers? About half our Truvada sales in the U.S. are for prep, and it seems to be regular use by individuals. Retail pharmacies are now talking about prep.

Gilead is using a model for HCV in the USA where there are 3 million infected of whom about 1.5 million are diagnosed.

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