Analyst Conference Summary

biotechnology

conference date: February 4, 2019 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2018 (fourth quarter, Q4 2018)

Forward-looking statements

Overview: Dividend increasing 11%. Revenue up sequentially. Major difference between GAAP and non-GAAP net income and EPS. But missed analysts average estimate.

Basic data (GAAP):

Revenue was $5.80 billion, up 4% sequentially from $5.60 billion and down 3% from $5.95 billion in the year-earlier quarter.

Net income was $3 million, down nearly 100% sequentially from $2.10 billion but up from negative $3.87 billion year-earlier.

Earnings per share (EPS, diluted) were $0.00, down sequentially from $1.60 but up from negative $2.96 in the year-earlier quarter.

Guidance:

Full year 2019 product sales revenue is expected between $21.3 and $21.8 billion. Non-GAAP numbers: Gross margin 85% to 87%. R&D expense $3.6 to $3.8 billion. SG&A expense $3.9 to $4.1 billion. Tax rate 20% to 21%. No EPS guidance except that the negative impact to GAAP EPS from acquisitions, collaboration, and stock-based compensation expense would Be $1.40 to $1.50 per share. Global HIV therapy global growth expected in double digits.

Q1 2019 will see a typical sequential decline of 12% to 14%. HCV prices sold to Medicare will decrease.

Conference Highlights:

The Board of Directors named Daniel O'Day Chairman of the Board and CEO, effective March 1, 2019. Gregg Alton will serve as interim CEO.

Biktarvy sales ramp is the strongest Gilead HIV therapy launch ever.

Hepatitis C therapy revenue continued to shrink. Authorizing generics for the Medicaid market in order to compete better.

Gilead plans to launch an authorized generic versions of Epclusa and Harvoni in the United States in January through a newly created subsidiary, Asegua Therapeutics LLC. List prices will be comparable to current net prices of branded versions.

Dividend of $0.63 per share announced for Q1: payable March 28 to shareholders of record on March 15, an 11% increase.

Non-GAAP numbers: Net income was $1.87 billion, down 20% sequentially from $2.40 billion and down 20% from $2.34 billion year-earlier. Non-GAAP EPS was $1.44, down 22% sequentially from $1.84 and down % from $1.78 year-earlier.

For the full year 2018 revenue was $21.7 billion, down 16% from $25.7 billion in 2017. GAAP net income was $5.45 billion, up 18% from $4.63 billion in 2017. GAAP EPS was $4.17, up 19% from $3.51 in 2017. Non-GAAP net income was $8.73 billion, down 25% from $11.65 billion in 2017. Non-GAAP EPS was $6.67 down 25% from $8.84 in 2017. During 2018, Gilead generated $8.4 billion in operating cash flow, repaid $6.3 billion of debt, paid cash dividends of $3.0 billion and utilized $2.9 billion on stock repurchases.

Product sales were $5.68 billion, up 4% sequentially from $5.46 billion and down 3% from $5.84 billion in the year-earlier quarter. $4.47 billion U.S. product sales. $0.81 billion European sales. Rest of world $398 million.

Royalty, contract and other revenue was $114 million, down sequentially from $141 million, and up from $112 million year-earlier.

Cash and equivalents ended at $31.5 billion, up sequentially from $30.8 billion. $2.3 billion cash flow from operations. $962 million was used for repurchase shares. $736 million paid in dividends. Long term liabilities were $ billion.

Selonsertib for NASH is in 2 slightly different Phase 3 studies, with data available in first half of 2019, one in Q1 and one in Q2. GS-9674, and GS-0976 for NASH are in Phase 2 studies in combination with selonsertib. GS-0976 has reported positive Phase 2 results as a monotherapy. Gilead is developing non-invasive tests to find patients needing treatment, to replace liver biopsies.

Filgotinib is now in Phase 3 trials for rheumatoid arthritis, Crohn's, and ulcerative colitis, all of which are fully enrolled. Phase 3 data expected in first quarter of 2019 for two types of rheumatoid arthritis patients. An NDA filing, however, is dependent on the separate Manta trial, which does not have a definite timeline yet. Six additional Phase 2 study across a range of diseases are planned with partner Galapagos, with more data available later this year. Phase 2 study of psoriatic arthritis achieved is primary endpoint.

More Yescarta data is expected in 2020. KITE 319 results were presented at ASH. 17 of 24 patients had complete remissions. Received regulatory approval of Yescarta in Europe, so building a new facility in Netherlands. An ongoing Phase 3 study, if successful, could expand the label to earlier lines of therapy.

Licensed the Trianni transgenic human monoclonal antibody discovery platform. Also announced a collaboration with Gadeta for gamma delta T cell receptor therapies for cancer.

Discontinued Andecaliximab for gastric cancer, which had been in Phase 3.

Liver disease data including for NASH will be presented at a medical meeting next month.

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

Cost of goods sold was $1.57 billion. Research and development expense was $1.95 billion. Selling, general and administrative expense was $1.13 billion. Income from operations was $1.14 billion. Interest expense $257 million. Other income was $129 million. Income tax provision was $1.01 billion.

Q&A:

Business development plans? The bar for us is scientific differentiation. We continue our focus on the same therapeutic areas. We look outside those areas, and at various stages, but late stage opportunities are few and far between.

HIV insurance practices? Volume is the major growth driver in our business. We have taken price increases in the past, but not in public sector like ADAP. We are not announcing pricing for 2019 at this time, but our thinking is reflected in our guidance. CMS protected classes are used where therapies are not interchangeable, like HIV. We are very engaged with HHS about this.

SG&A increase in 2019? The sequential increase for Q4 was driven by a one-time grant. The 2019 increases are for the new therapy areas including cell therapy and NASH. Also some geographic expansion, including Japan and China.

We are excited about the potential NASH readouts coming up. We are hoping for a meaningful improvement over placebo.

Prep potential population, Descovy? CDC estimates 1.1 million in the US could benefit from Prep. We are trying to raise awareness. We believe the Prep patients should have the same benefits as the regular Biktarvy patients. The study should show the benefits for safety, kidney and bone.

Manta study for a label or the filing package? We have had a pickup in enrollment. The other Phase 3 trials will inform us and the FDA about what is needed from Manta. We don't need it for the label, but it would be advantageous for safety.

Prior 2018 trough statement, versus 2019 guidance? We believe we can return to growth in 2019. The guidance is very transparent about factors that can impact growth. Our first guidance of the year does include downside risk. We will update it throughout the year.

Confidence in Yescarta growth? We are making progress, expect revenue to nearly double. We are seeing certified sites in US treating at a higher rate. ASH data real world follow up is energizing the community. Oncologists are referring patients to the sites. We have 12 sites active in Europe. We are getting impressive result in Germany. Sites will expand in Europe in 2019.

Generic impacts on HIV prices or scripts? So far we have not seen major impact.

HIV Japan? Exciting opportunity in Japan, is included in guidance. We got $50 to $60 million in royalties in the past. We are working on a smooth transition. It includes our launching Biktarvy there.

Selonsertib, can you file on just one positive trials? We would like both to be positive. If just one is positive, we would have to meet with the FDA about the analysis.

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