Analyst Conference Summary

biotechnology

conference date: February 6, 2018 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2018 (fourth quarter, Q4 2017)

Forward-looking statements

Overview: Dividend increased by 10% to $0.57 per quarter. But revenue and earnings continued to decline. GAAP earning hit by new tax law accounting charge of $5.96 billion. Beat non-GAAP EPS consensus of $1.67 by $0.11.

Basic data (GAAP) :

Revenue was $5.95 billion, down 8% sequentially from $6.51 billion and down 19% from $7.32 billion in the year-earlier quarter.

Net income was negative $3.87 billion, down sequentially from $2.72 billion and down from $3.11 billion year-earlier.

Earnings per share (EPS, diluted) were negative $2.96, down sequentially from $2.06 and down from $2.34 in the year-earlier quarter.

Guidance:

2018 $20 to $21 billion net product sales. Non-GAAP: $3.4 to 3.6 billion R&D expense; $3.4 to $3.6 billion SG&A expense.

Non-GAAP effective tax rate 21% to 23%. Impact of acquisition related, up front collaboration, stock-based comp and other expenses between $1.41 and $1.51 per share.

Conference Highlights:

$5.5 billion charge due to the tax law change. But this allows Gilead to repatriate cash over time.

The dividend of $0.57 will by payable on March 29 to stockholders of record as of March 16. The new dividend has increased by 10%. Plan is to

62% of Gilead's U.S. HIV prescriptions are now TAF-based; they are also growing in Europe.

{Bictagravir FDA approval was announced on February 7, 2018]

Could file as many as 4 new drug applications in 2019.

HCV product sales declined dramatically in 2017 vs. 2016. This was from less patient starts, shorter duration of treatment, and more competition. Expects market share could stabilize in 2018.

Gilead acquired Kite Pharma in October for $11.2 billion. Soon afterward received FDA approval for Yescarta, a CART therapy for Large B-cell Lymphoma (after failure of 2 previous lines of therapy). Also acquired Cell Design Labs. "The future is incredibly bright for cell therapy."

Continues to seek collaborations and acquisitions.

Non-GAAP numbers: Net income was $2.34 billion, down 22% sequentially from $2.99 billion and down 35% from $3.59 billion year-earlier. Non-GAAP EPS was $1.78, down 22% sequentially from $2.27 and down 34% from $2.70 year-earlier.

Product sales were $5.84 billion, down 9% sequentially from $6.40 billion and down 19% from $7.22 billion in the year-earlier quarter. $4.1 billion U.S. product sales. $1.1 billion European sales. Rest of world $533 million.

Royalty, contract and other revenue was $112 million, up sequentially from $110 million, and up from $104 million year-earlier.

Cash and equivalents ended at $36.7 billion, down sequentially from $41.4 billion. $2.75 billion cash flow from operations. $106 million was used for repurchase shares. $? million paid in dividends. Long term liabilities were $38.1 billion. $6.0 billion was raised in term loans in October.

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 2 slightly different Phase 3 studies, with data available in 2019. GS-9674, and GS-0976 for NASH are in Phase 2 studies in combination with selonsertib. Last week GS-0976 reported positive Phase 2 results as a monotherapy.

Filgotinib is now in Phase 3 trials for rheumatoid arthritis, Crohn's, and ulcerative arthritis. First data in second half of 2018. Six additional Phase 2 study across a range of diseases are planned with partner Galapagos, with some data available later this year.

More Yescarta data is expected in 2020. KITE 319 results were presented at ASH. 17 of 24 patients had complete remissions.

Numerous other studies are underway or planned; see Gilead pipeline. The Kite Pharma pipeline is now also part of Gilead.

Cost of goods sold was $1.26 billion. Research and development expense was $1.15 billion. Selling, general and administrative expense was $1.25 billion. Income from operations was $2.29 billion. Interest expense $297 million. Other income was $132 million. Income tax provision was $5.96 billion.

Full year 2017 revenue was $26.1 billion, down from $30.4 billion in 2016. GAAP net income was $4.6 billion, or $3.51 per diluted share, compared to $13.5 billion, or $9.94 per diluted share in 2016. Non-GAAP net income was $11.7 billion, or $8.84 per diluted share, compared to $15.7 billion, or $11.57 per diluted share in 2016.

Q&A:

Hep C trends, could you get back to overall revenue growth in 2019? We think it is important to stabilize HCV revenues. We are eager to get vic-TAF launch. We see positive trends going forward, hope that will dominate the discussion in 2018.

Growth by end of year? Yes.

CAR-T investment focus? Gene editing technology; a larger number of disease targets; universal donor CAR-Ts; lessening of side effects.

Sustainability of new tax rate? Range provided in guidance should be stable.

Operating margin guidance? 50% or greater is sustainable, despite being in several large Phase 3 trials and product launches.

NASH fxr profile? FXR agonist is behind in timing. When we have Phase 2 data we will present it at a liver conference. Hypothesis is we do not want a high-systemic exposure.

Share shift in HCV guidance? Not guiding to specific percent, but believes can maintain market leadership.

In Europe, due to generic competition, could lose HIV market share in 2018, but expects to regain that as the newest TAF-based drug is introduced.

Yescarta given possible third player entry next year? Believes first mover has an advantages. We have 28 centers up and capable of prescribing. Payment aspect is important and centers have a learning curve with it. We see a growing number of patients over time. There are more potential patients than we could treat with our current manufacturing capacity.

CAR-T for solid tumors? "I don't think we have everything we need." Challenge is finding a tumor-specific antigen. It is early days, but exciting, as solid tumors are the real commercial opportunity.

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