Gilead Sciences Inc (GILD) — Q4 2016 Earnings Call Transcript

Thank you, Chelsea, and good afternoon everyone. Just after market close today, we issued a press release with the earnings results for the fourth quarter and full year 2016. The press release and detailed slides are available on the Investor Relations section of the Gilead website. The speakers on today's call will be: John Milligan, President and Chief Executive Officer; Robin Washington, Executive Vice President and Chief Financial Officer; and Kevin Young, Chief Operating Officer. Also in the room with us for the Q&A session are Norbert Bischofberger, Executive Vice President of Research and Development and Chief Scientific Officer; and Jim Meyers, Executive Vice President, Worldwide Commercial Operations. Before we begin formal remarks, let me remind you that we will be making forward-looking statements, including plans and expectations with respect to products, product candidates, financial projections and the use of capital, all of which involve certain assumptions, risks and uncertainties that are beyond our control and could cause actual results to differ materially from these statements. A description of these risks can be found in the latest SEC disclosure document and recent press releases. In addition, Gilead does not undertake any obligation to update any forward-looking statements made during this call. Non-GAAP financial measures will be used to help you understand the company's underlying business performance. The GAAP to non-GAAP reconciliations are provided in the earnings press release as well as on the Gilead website. I will now turn the call over to Robin.

Thank you, Sung, and good afternoon everyone. We are pleased to share our results for the fourth quarter and full year 2016. I'll first review financials and Kevin and John will make a few comments. 2016 was a productive year for Gilead with strong performance across the HIV and cardiopulmonary franchises. The year was not without its challenges, notably navigating the changing dynamics of the HCV market in countries around the world. We continue to be an operationally and financially efficient organization with high operating margins and a healthy balance sheet as 2017 begins. Total revenues were $7.3 billion for the fourth quarter 2016, with non-GAAP diluted earnings per share of $2.70. This compares to revenues of $8.5 billion and non-GAAP earnings per share of $3.32 for the same period last year. For full year 2016, total revenues were $30.4 billion, down 7% year over year. Non-GAAP diluted earnings was $11.57 per share for the year, down from $12.61 per share for the same period last year. Product sales for the year were $30 billion, down 7% year over year driven by lower HCV sales, partially offset by increased sales in HIV and other therapeutic areas. Turning to the U.S. Product sales for the year were $19.3 billion, down 9% year over year. HCV product sales were $8.4 billion, down 32% year over year driven primarily by lower Harvoni demand, higher discounts and payer mix. Within HCV sales, Epclusa, which was launched in June of last year, achieved $1.6 billion of sales in 2016. HIV and other antiviral product sales for 2016 were $9.1 billion, up 27% year over year due to strong uptake of our TAF-based regimens. Turning to Europe, product sales for the year were $6.1 billion, down 15% year over year primarily due to lower HCV patient starts and unfavorable currency movement. In Japan, product sales for the year were $2.5 billion, up 31% year over year primarily driven by higher sales of Sovaldi and Harvoni, which were launched in Japan in May 2015 and September 2015 respectively. The increases were partially offset by the mandatory price reduction on our HCV products of 32% effective last March. Turning to expenses for the full year 2016. Non-GAAP R&D expenses were $3.7 billion, up 32% compared to the prior year, reflecting the continued progression of the product pipeline including milestone payments related to advancing clinical studies and the purchase of an FDA priority review voucher. Non-GAAP SG&A expenses were $3.2 billion, which represents a slight decrease compared to the prior year, driven by lower branded prescription drug fee expenses partially offset by expenses to support new product launches and geographic expansion. Turning to the Idenix Merck litigation matter, which is ongoing. As of December 31, 2016, we have not recorded any charges to our financial statement, as we believe it is not probable under accounting rules that the company will incur a loss on this matter. Our Annual Report on Form 10-K will contain detailed disclosures on the amount of potential damages and royalties Gilead could owe Merck in the event the appellate court upholds the jury's verdict. Turning to cash flow. We generated $16.7 billion in cash from operations for the full year 2016 and $3.5 billion for the quarter. We continued to return capital to shareholders through dividends and share repurchases. During the fourth quarter, we utilized $1 billion in cash to repurchase 13 million shares, bringing our total 2016 share repurchases to $11 billion and 123 million shares. Earlier today, we announced a 10% increase in our quarterly dividend from $0.47 to $0.52 per share, which will become effective in the first quarter of 2017. This increase underscores the confidence of the board and management in the strength of the business and future cash flows. In 2017, leveraging our capital to pursue external opportunities to expand our R&D pipeline is our primary focus. As a result, we will reduce the level of capital dedicated to share repurchases this year and focus a greater percentage of our shareholder return on our dividend. We currently have $9 billion remaining under our 2016 share repurchase authorization, and we'll utilize it over time to maintain our current share count. Over the longer term, we may be opportunistic with additional share repurchases. Finally, I would like to cover our full-year 2017 non-GAAP financial guidance, summarized on slides 21 through 25 in the earnings presentation available on our corporate website. Given the unique dynamics of the HCV market and patient starts, which have the greatest impact on our HCV revenues, we have split our net product sales guidance between non-HCV and HCV net product revenue. Non-HCV net product sales are expected to be in the range of $15 billion to $15.5 billion. HCV net product sales are expected to be in the range of $7.5 billion to $9 billion. Our guidance is subject to a number of uncertainties, including: the accuracy of our estimates of HCV patient starts in 2017; unanticipated pricing pressures from payers and competitors; lower than anticipated market share in HCV; slower than anticipated growth in our HIV franchise; an increase in discounts, chargebacks, and rebates due to ongoing contracts and future negotiations with commercial and government payers; a larger than anticipated shift in payer mix to more highly discounted payer segments such as PHS, FSS, Medicaid, and the VA; market share and price erosion caused by the introduction of generic versions of TDF and the fixed-dose combination of FTC/TDF outside the U.S. later this year; an uncertain global macroeconomic environment; potential amendments to the Affordable Care Act or other government action that could have the effect of lowering prices or reducing the number of insured patients; as well as volatility in foreign currency exchange rates. Slide 24 provides further information on Gilead's estimate of HCV total market patient starts across key commercial geographies, which is the primary factor used in developing our 2017 HCV product sales guidance. We expect our non-GAAP product gross margins to be in the range of 86% to 88%. We expect our non-GAAP R&D expenses to be in the range of $3.1 billion to $3.4 billion. We expect our non-GAAP SG&A expenses to be in the range of $3.1 billion to $3.4 billion. For the full year, our non-GAAP effective tax rate is expected to be in the range of 25% to 28%. We anticipate the full-year diluted EPS impact of acquisition-related, stock-based compensation, and other expenses to be in the range of $0.84 to $0.91 per share.

Thank you, Robin, and good afternoon everyone. Before beginning my comments on the quarter, I'd like to formally introduce our new Executive Vice President of Commercial Operations, Jim Meyers, who joins the earnings call team. Jim has been at the company for 20 years and has been instrumental in building out the company's commercial operations in North America, including leading successful product launches across the company's portfolio of products. I've personally worked with Jim for more than 10 years and can vouch for his unique insights into the complexities of the various markets and therapeutic areas for which we serve patients. Now I would like to provide an update on our commercial performance during the fourth quarter and share a few highlights from markets around the world. Let me say from the outset that I see the very highest levels of operational excellence across Gilead, with people every day supporting best-in-class products in viral, cardiovascular, and pulmonary diseases. But as I will describe in some detail, there are very different external dynamics when comparing treatments for chronic diseases like HIV with treatments that can cure a disease like hepatitis C. Starting with HIV, without question, 2016 was one of our strongest years, led by the rapid adoption of TAF-based regimens. In the U.S., total HIV and other antiviral revenue was $2.4 billion in the fourth quarter, up 20% year over year and down 6% sequentially. As a reminder, third quarter results benefited from a one-time favorable adjustment of $332 million to rebate reserves, primarily related to TDF-based regimens. Excluding this one-time adjustment, there was a 7% sequential increase in the fourth quarter, driven by robust underlying growth and some inventory build consistent with prior years. Genvoya, our first TAF-based single-tablet regimen, surpassed $1 billion in revenue in its first year. No other HIV product has achieved this level of success, and this performance is a testament to the clinical profile of TAF in combination with elvitegravir in one tablet. As highlighted on slide 33, Genvoya quickly became the most prescribed regimen across all U.S. treated HIV patient groups within nine months of launch. At the end of 2016, TAF-based regimens made up 37% of Gilead's HIV prescription volume in the treatment market. This is remarkable considering that Genvoya was launched a little more than a year ago, and Odefsey and Descovy have been on the market for just nine months. Most patients on these products switch from Gilead's older regimens due to the improved safety profile of TAF. Additionally, an estimated 10% of patient switches are coming from non-Gilead therapies, resulting in incremental growth for the franchise. Turning to Europe, total HIV and other antiviral revenue was $705 million in the fourth quarter, down 6% year over year and down 3% sequentially. This was driven by negative foreign exchange and a full quarter impact of an imposed price reduction in France. Strong uptake of Genvoya continues across launch markets in Europe, including Germany, Spain, and the UK. In Spain, Genvoya is the most prescribed regimen for switch patients and the second most prescribed regimen for treatment-naive patients. And just last week, I am delighted to say that Genvoya began its commercial introduction in France. As many of you know, France is the largest developed HIV market outside the U.S. Finally, to complete the European major market picture, we hope to have Genvoya introduced in Italy by early quarter two. Turning to Descovy and Odefsey outside the U.S., we now have the products available in 13 and 11 countries respectively. Additional launches are anticipated in 2017 as pricing and reimbursement discussions continue. Beyond TAF, there continues to be a strong uptake for the use of Truvada for pre-exposure prophylaxis, or PrEP. At the end of 2016, approximately 110,000 people in the U.S. were using Truvada for this indication. When used in combination with other prevention strategies, Truvada for PrEP can have a meaningful impact on public health by helping to reduce HIV transmission rates. The majority of PrEP prescribing to date is concentrated in four cities where awareness is high, most notably San Francisco. The city recently announced a reduction in HIV infection rates as a result of greater testing, the use of anti-retrovirals for treatment, and the adoption of PrEP. There is an opportunity to replicate this success in other areas across the United States, and Gilead has been encouraged to play a more prominent role in PrEP education and has done so via the hiring of a field-based team. We believe that Truvada for PrEP will continue to be an integral part of our growth in HIV in the U.S., as communities embrace the public health benefits of prevention. Before leaving HIV, one event that should be highlighted in 2017 is the loss of the tenofovir disoproxil fumarate exclusivity in some countries outside the U.S. We have forecasted the financial impact of this event on our non-HCV sales guidance as shown in Slide 22 referred to earlier by Robin. Nevertheless, we believe the rapid adoption of TAF for HIV treatment and the uptake in Truvada for PrEP in the United States underpin a strong Gilead growth trajectory some 15 years after the introduction of Viread in 2001. Turning to HCV, in the U.S., total HCV revenue was $2 billion in the fourth quarter, down 15% year over year and down 1% sequentially. Total HCV treatment starts in the U.S. for the full year 2016 were an estimated 231,000, approximately 25,000 less patient starts than in 2015. There were a few one-time events that impacted this number in 2016. Notably, one, the opening of access of two of the largest U.S. commercial payers which happened in quarter one. Two, the increase in the number of patients treated through the VA system, especially in quarter two. And three, the treatment of genotype 2 and genotype 3 warehouse patients following the approval of Epclusa in the second half of 2016. Since we do not anticipate the same or similar factors repeating themselves this year, our expectation is that patient starts in 2017 will be lower than in 2016. Above and beyond the factors I just cited, the decline we expect is also due to a change in the profile of patients coming into treated care. A greater number of patients have less advanced disease, and thus there is less urgency to begin using curative DAAs like Harvoni and Epclusa. In addition, an increasing percentage of untreated patients face circumstances that favor delay such as ongoing drug or alcohol use, co-morbidities or unstable living conditions.

Thanks, Kevin. I'd like to make a few closing remarks before we get to your questions. Gilead was very productive in 2016, launching four important new therapies, two for people with HIV and two for the treatment of viral hepatitis. As mentioned by Robin and Kevin, we are very pleased with the progress of Gilead's TAF-based regimens based on the benefits they provide. With the successful launches of Odefsey and Descovy, we now offer three different and important new options for patients with HIV. We continue to innovate in HIV, and next week we will present data from a Phase 2 study of bictegravir, Gilead's non-boosted integrase inhibitor. The 48-week study compared bictegravir to dolutegravir, each given in combination with F/TAF and the data will be presented at the Conference on Retroviruses and Opportunistic Infections in Seattle. The detailed results are embargoed at this time and we look forward to sharing the data with you as soon as we're allowed to do so. CROI is one of the most important meetings for HIV research and this year's meeting gives us an opportunity to present promising data from multiple research and clinical programs aimed at addressing the unmet needs of people living with HIV. Included in the conference will be data from our programs on novel, long-acting agents, next generation nucleotides for highly treatment-experienced patients, and new data on our efforts to cure HIV patients. Gilead remains firmly committed to R&D focused on improving the lives of people with HIV. Similar to HIV, we have revolutionized the treatment of viral hepatitis by providing medicines that cure chronic hepatitis B infection or managing chronic hepatitis B more effectively. Gilead's HCV therapies offer cure rates between 95% and 99% regardless of genotype with fewer side effects and a far less treatment time than prior treatments. When we launched Sovaldi in late 2013, most of the patients had quite advanced liver disease and had been under care for many years. In nearly every country, the healthcare system expanded to unprecedented levels in order to care for these sicker patients as time was running out for many of them. Following this great success, patients seeking care today have a quite different profile and these patients tend to have less advanced disease and require more time for workup prior to initiating treatment. Additionally, many have co-morbidities or other issues that may prevent treatment until resolved. As a result, our analysis situation predicts that fewer people will be treated in 2017 than in 2016 in the United States, Europe, and Japan. These healthcare systems each should see lower spending in this category as a result. We continue to work to ensure patients have access to HCV medications. For example, in the U.S., we've offered very generous rebates and discounts into the various entities that reimburse for prescription drugs. Contrary to the sometimes misleading headlines citing our list pricing, in 2016 in the U.S., the volume-weighted average price for Harvoni was reduced to less than $15,000 per bottle inclusive of discounts and rebates. This average was skewed by the significant discounts provided to Medicaid and the VA and the 340B program. For example, our average price per bottle to Medicaid is less than $10,000 for states that are opening up access to all patients. Prices for 2017 are expected to be similar. Despite the fact that prices of direct-acting antiviral HCV medications have never been lower, getting payer access to these therapies is often an onerous process for patients and doctors. With the declining rates of patient starts, it's our hope that progress can be made by next year to simplify the access process for patients with less advanced liver disease. Patients who are early in their disease have the highest cure rates and often require only eight weeks of treatment, resulting in an even lower cost per cure. There is still one unmet medical need in HCV treatment: patients who fail direct-acting antivirals. Gilead filed a new drug application for its single-table regimen of SOF/VEL/VOX in December and the FDA granted priority review status with a set target review date of August 8, 2017. A market authorization application in the EU was filed in January. If approved, SOF/VEL/VOX would be the first STR for HCV patients who have failed prior treatments.

Thank you, Josh. It's Andrew Cheng speaking. And I would say that for our Phase 3 trial, right now it's ongoing. We're in the middle of enrollment. So it's very difficult to address how easy we would convert them without knowing the results, quite honestly.

Thank you.

Yeah, hi guys. Thanks for fitting me in. I guess you're describing two very different businesses with the non-HCV sales growth and the declining HCV portfolio without a clear sense of where the bottom is there. So the question is, is there any thoughts of splitting those businesses? It's a question I've got. I've thought about it. I'm wondering what the logical considerations would be against doing that? And then the second part would be assuming the business remains melded together, what commitment can you make to growing the overall business beyond 2017? I understand taking it a year at a time from a projections perspective, but I think investors would like some commitment to growth and to understand the initiatives you're going to take to do that.

Jim, the answer is no. We're not considering splitting up the company. And while it looks good in the world of Wall Street from a multiples perspective, I think it's an economically and financially a bad idea for the company. So we are committed to growing the company. We're committed to our field of NASH. We're committed to growing that HIV field. And we are going to continue to accelerate our pipeline through acquisitions and whatnot over the course of the year. This is a challenging situation. I understand it. We understand it. And we're here somewhat reporting the news to you of what the world of HCV looks like as it's declining faster this year than we would have predicted last year. And we're dealing with it through our strength of our balance sheet, through the cash flow we'll have at HCV, so that we can get the company back to growth. But at this point, I'm not going to give you a point in time when that's going to happen.

Great. Thank you, Chelsea, and thank you all for joining us today. We appreciate your continued interest in Gilead, and the team here looks forward to providing you with updates on our future progress.