Gilead Sciences Inc (GILD) — Q1 2019 Earnings Call Transcript

Thank you, Jonathan, and good afternoon, everyone. Just after market closed today, we issued a press release with earnings results for the first quarter 2019. 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; Daniel O'Day, Chairman and Chief Executive Officer; Robin Washington, Executive Vice President and Chief Financial Officer; Laura Hamill, Executive Vice President, Worldwide Commercial Operations; and John McHutchison, Chief Scientific Officer and Head of Research and Development. Before we begin with our prepared comments, 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 our latest SEC disclosure documents 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 Dan.

Thank you, Sung, and good afternoon, everyone. I'm really pleased to join all of you today for my first earnings call at Gilead. Rob and Laura and John will take you through the key highlights of the quarter, but I'd like to start by sharing some of the perspectives that I gained since arriving here in March. As many of you know, when I made the decision to join Gilead, I was drawn to the potential that I saw to build on the legacy of transforming care for people with serious illnesses in a company that has a deep commitment to patients and science. I now have a chance to see the extent of that potential up close. Let me share some of what I've observed, the areas that I've focused on up until now, and a few thoughts on what you can expect next. The first thing I'll say is that it's been really exciting to see the scientific strength from the perspective of being inside the company. I've taken part in a series of deep dives into the R&D programs in each of our therapeutic areas. This includes spending time at KITE to dig into our work in cell therapy. I'm excited about the progress that we're making in inflammation and with the results of FINCH 1 and FINCH 3, which are the studies that were announced at the end of March. John will walk you through the detailed study results later in this call, but I just want to express my enthusiasm for this work as we mobilize the organization for the launch of filgotinib, a medicine that will be a significant step forward for patients with rheumatoid arthritis. Inflammation is one of the three emerging areas for us, and we anticipate that filgotinib will be an important future growth driver. As I deepen my understanding of Gilead’s therapeutic areas, I've had the pleasure of participating in two scientific congresses, beginning with CROI or the Conference on Retroviruses and Opportunistic Infections. Here I had the opportunity to watch as we shared the promising results from the DISCOVER study of Descovy for PrEP. More recently, I attended the International Liver Congress in Vienna, where we presented data from across our liver disease programs and had the chance at both of these conferences to meet with key thought leaders and get their perspectives on our R&D programs. During my first two months, I've also begun to get to know our shareholders and to understand their perspectives. These conversations have helped me understand the external view of Gilead, and this feedback will help inform the decisions I make to shape the organization and position Gilead for the future. As I've settled into my new role, I've been greatly impressed with the people at Gilead and the extent of talent across the organization. I spent a lot of time talking to groups and individuals, and it's great to meet so many really smart, passionate, and thoughtful people. So, I'll close my portion of the call by sharing a little about what you can expect from me and when. In terms of immediate priorities, broadly speaking, I'm looking first at three key areas: Number one, strengthening the pipeline, both internal programs and corporate development opportunities. Number two, ensuring optimal commercial delivery both on our current medicines and those that we are getting ready to launch. And number three, the organizational piece ensuring that we have the right people in the right roles and that they are well-equipped for success. I want to make sure we tap into the talent at all levels of the company. In my early days, one area of pressing need has been working to better understand the work we're doing at KITE, identifying what it needs for short- and long-term success in cell therapy. I wanted to make some swift decisions here. At the end of March, we announced internally that KITE would become a separate business unit. We've initiated a search for a CEO of KITE, and once appointed, that individual will report to me and will have full accountability for all aspects of cell therapy. I believe that providing KITE with this degree of autonomy will foster agility, innovation, and entrepreneurialism. Cell therapy is a critical piece of the puzzle regarding the long-term future of oncology and a critical element of Gilead's long-term strategy, helping us to build on a legacy of transformational medicines. Between now and the end of the year, I will also have a series of meetings with the leadership team and the Board to shape our long-term strategy and vision for the future of Gilead. I anticipate that later this year, I will be in a position to begin sharing more with all of you. Finally, I'd like to thank all the people who have contributed to the excellent progress my colleagues will outline today, Gilead's 11,000 employees, our partners, the scientific community, and the patients who take part in our clinical trials. I'm excited to see what we can achieve together in the months and years ahead. Before I turn the call over to Robin, I would like to acknowledge the news we shared earlier this week regarding her retirement from her role as CFO. Over the past two months, I've come to know Robin as an exceptional and talented leader. This is a transition that I know she has contemplated for some time and while I had hoped to have the opportunity to work with her for longer, she has my full support. I'm grateful to Robin for agreeing to stay at Gilead through March 1, 2020, to see us through the completion of the reporting of the company's 2019 financial results. Thank you, Robin, for your leadership during this period and over the past 11 years. I'll now turn the call over to you.

Thank you, Dan, and good afternoon everyone. We are pleased to share our financial results for the first quarter of 2019. Total revenues for the first quarter were $5.3 billion with non-GAAP diluted earnings per share of $1.76. This compares to revenues of $5.1 billion and non-GAAP earnings per share of $1.48 for the same period last year. Turning to product sales. Product sales for the first quarter were $5.2 billion, up 4% year-over-year and down 8% sequentially. This is the first quarter in the past three years where the company has posted year-over-year growth and it reinforces our belief that the company can grow product sales year-over-year on a full-year basis. In the U.S., product sales for the first quarter were $3.8 billion, up 8% year-over-year and down 15% sequentially. The sequential decline was primarily due to the anticipated inventory drawdown associated with our HIV products reflective of the seasonal inventory pattern from the fourth quarter to the first quarter. As expected, our HIV payer mix moved more toward public payers, which also contributed to the sequential decline. Combined inventory and payer mix contributed an estimated $400 million to the sequential decline. Turning to Europe. Product sales for the first quarter were $882 million, down 12% year-over-year and up 8% sequentially. Sequentially, the increase was due to an unfavorable accounting adjustment related to statutory revenue callback reserves recorded in Q4. Without these Q4 adjustments, product sales would have been flat. On a year-over-year basis, the decline was driven by lower HCV sales due to lower patient starts and competitive dynamics and the broader availability of generic HIV products in 2019. Now turning to expenses. Non-GAAP R&D expenses were $871 million for the first quarter, up 7% compared to the same period last year, primarily due to higher investments to support our cell therapy programs. Non-GAAP SG&A expenses were $962 million for the first quarter, up 9% compared to the same period last year, primarily due to higher promotional expenses in the U.S. and expenses associated with the expansion of Gilead's products in Europe and Japan. Our non-GAAP effective tax rate in the first quarter was 16.7% compared to 22.8% in the same period last year due to a $0.09 per share favorable tax settlement. Note that this settlement was reflected in the full year 2019 non-GAAP effective tax rate guidance of 20% to 21% as previously provided. Moving to the balance sheet. During the first quarter, we generated $1.4 billion in cash from operations and ended the quarter with $30.1 billion in cash and investments. We repaid $750 million of debt borrowed in connection with our acquisition of KITE. We paid cash dividends of $817 million and we repurchased 12 million shares of stock for $834 million. As a reminder, the majority of our stock compensation awards are issued in the first quarter. 2019 is progressing consistent with our expectations as we enter the second quarter of our fiscal year and we are reiterating our full year guidance, which can be found on slide 18 in the earnings results presentation. As we mentioned in the previous earnings call, our SG&A guidance included funding to support commercial launch activities for NASH. Given the results of stellar Phase III studies, SG&A funding for these activities will not be utilized in 2019. We do believe there may be opportunities to enhance launch readiness for filgotinib that we are monitoring. As such, we will revisit SG&A and our other guidance assumptions midyear and provide you with an update during our Q2 call. We remain committed to vigilant expense management and ensuring that we retain industry-leading operating margins. I will now turn the call over to Laura.

Thank you, Robin. Good afternoon, everyone. I will provide an update on our commercial performance during the first quarter and share highlights from markets around the world. Beginning with HIV. We continue to see double-digit revenue growth on a year-over-year basis led by the uptake of our Descovy-based regimen and growing use of Truvada for PrEP. In the U.S., HIV revenue was $2.8 billion in the first quarter, up 19% year-over-year and down 17% quarter-over-quarter. As Robin noted, the sequential change reflects the anticipated inventory drawdown and payer mix in the first quarter. This trend is a typical pattern that we see between Q1 and the preceding Q4. Underlying prescription demand remains robust, growing 12% year-over-year. We continue to see excellent adoption of Biktarvy. It has become the top-selling product in the U.S. and generated $739 million in revenue. It remains the number one prescribed regimen in both treatment-naive and switch patients. Approximately 80% of Biktarvy's U.S. prescriptions come from switches, with about 25% coming from Genvoya and 25% coming from dolutegravir-based regimens. Overall, Descovy-based regimens continue to gain share and now account for approximately 80% of Gilead's total U.S. treatment prescription volume. In Europe, total HIV revenue was $569 million in the first quarter, down 7% year-over-year and up 11% quarter-over-quarter. The year-over-year decline was driven by the broad availability of generic versions of Truvada across the EU. The decline, however, is moderating, as we continue to see rapid uptake of our Descovy-based products, which now account for almost 80% of our total HIV revenue in Europe in the first quarter. Biktarvy is now available in Germany, France, and Spain. We anticipate launching in the U.K. and Italy mid-year. We are encouraged by the strong uptake of Biktarvy across all markets where we have launched. In 2018, we launched Biktarvy in Germany in June and France in November. In both markets, Biktarvy has quickly become the number one regimen for naive and switch patients. As you will recall, in Japan, we acquired rights to certain products from our HIV franchise from our marketing partner Japan Tobacco at the beginning of the year. We subsequently received approval for Biktarvy in March and launched earlier this quarter. Now moving to prevention. The use of Truvada for PrEP continues to grow in the United States. As we work to educate at-risk individuals and treating physicians, we estimate more than 200,000 people were taking Truvada for PrEP at the end of Q1. These estimates reflect an external industry-wide restatement from IQVIA, a source that we use to quantify Truvada for PrEP use. On a like-for-like basis, we saw 28% year-over-year growth. We were also very pleased to see the outstanding results from the DISCOVER trial presented at CROI. If approved, we believe Descovy for PrEP will bring a meaningful benefit to at-risk individuals where we have been seeing increases in persistency of use. Now turning to HCV. U.S. product sales for the first quarter were $393 million, down 33% year-over-year and down 4% quarter-over-quarter. The year-over-year U.S. decline was primarily driven by competitive dynamics, including an alignment of the Medicare and commercial pricing at the start of 2019 and lower patient starts. Sequentially, revenue in Q1 was positively impacted by the timing of Department of Corrections orders, which were originally anticipated later in the year. Over the full year, HCV revenue expectations for 2019 remain unchanged. Revenue for our HCV generics sold by our separate subsidiary at Asegua Therapeutics is in line with our expectations. Sales in the first quarter included some wholesaler inventory stocking. Asegua is continuing negotiations with payers, and as we previously communicated, we anticipate Asegua launch will continue to gain momentum in the second half of 2019. In Europe, HCV product sales for the first quarter were $203 million, down 25% from the prior year, due to declining patient starts, and 8% quarter-over-quarter. The quarter-over-quarter increase was primarily due to a Q4 accounting adjustment that Robin mentioned earlier. We are continuing to see favorable share trends, particularly with Epclusa in France, Spain, and the U.K. We launched Epclusa in Japan in late February, and we believe this has the potential to bring meaningful benefits to patients with HCV. Now turning to Yescarta. The commercial performance continues to meet our expectations of steady adoption. Worldwide sales were $93 million during the first quarter, up 90% quarter-over-quarter. Since launch, more than 1,500 patients have been treated with Yescarta, including patients for the commercial market and clinical trials. This is an important milestone for our cell therapy business. In the U.S., hospitals continue to learn how to operationalize CAR T therapy, and physician awareness of Yescarta's data continues to improve. Our efforts remain focused on educating providers about the profile of Yescarta, working with centers on operational setups, and engaging with community oncologists to identify patients for whom Yescarta is appropriate. We're beginning to see benefits from all of these efforts. Additionally, we continue to engage with the Centers for Medicare & Medicaid Services, or CMS, and other stakeholders, as we work to improve Medicare reimbursement and access. Last week, CMS released the 2020 proposed rule for Medicare inpatient prospective payment, which contains an increase and the new technology add-on payment. The proposal is currently open for public comment through the end of June. This is a positive step, and while we believe more needs to be done, we are very encouraged by the progress. In Europe, we are focused on getting sites certified. It's early days for Yescarta in Europe, but we have already achieved reimbursement in countries such as Germany, France, and the U.K. Across Europe, we are continuing to build awareness about the therapy. Finally, I'd like to acknowledge the strong closing performance of our cardiopulmonary team as we lost exclusivity for Ranexa and Letairis. Letairis and Ranexa revenue totaled $352 million for the quarter. As expected, we saw generic versions of Ranexa enter the market during the quarter, leading to a drop in revenue. We anticipate generic competition for Letairis during the second quarter as the FDA approved the single-shared REMS in March. The year is off to a great start. I'd like to thank the teams around the world for their incredible efforts. With a continued focus on our expanding portfolio of products, we are making wonderful progress. Now I'd like to turn the call over to John.

Thank you Laura, and thank you everyone for joining us today. Let me start by saying that this has been another important quarter for the R&D part of our organization, and I remain excited about our ongoing program. So far this year, we have had five Phase 3 registrational clinical trials readout. I will spend some time discussing these studies and then cover other progress we are making across our pipeline. In March, we announced additional positive results from our FINCH program in rheumatoid arthritis. FINCH 1 and FINCH 3 Phase 3 studies of our selective JAK1 inhibitor filgotinib in adults with moderately to severely active rheumatoid arthritis each met their respective primary endpoint. Taken together with the FINCH 2 data reported last year, the three FINCH datasets support the potential of filgotinib as an important treatment option across the broad range of patient populations with rheumatoid arthritis. FINCH 3 evaluated filgotinib in combination with methotrexate and as monotherapy in methotrexate-naive patients. Filgotinib is generally well tolerated and met the study's primary endpoint in terms of the proportion of patients achieving an ACR20 response at week 24 of treatment. In addition, the proportion of patients achieving the primary endpoint was significantly higher for filgotinib 200 milligrams plus methotrexate and filgotinib 100 milligrams plus methotrexate compared with methotrexate alone. Key secondary endpoint, specifically ACR50 and ACR70 or deeper responses and clinical remission rates at week 24 were also significantly higher with filgotinib plus methotrexate compared with patients receiving methotrexate alone. Now the FINCH 1 trial evaluated filgotinib compared to adalimumab or placebo on a stable background dose of methotrexate in patients with a prior inadequate response to methotrexate. The safety profile of filgotinib was also consistent with previously reported results. And the study also achieved its primary endpoint for both doses of filgotinib in terms of the proportion of patients achieving an ACR20 response compared to placebo at week 12. Similar to results seen throughout our FINCH program, FINCH 1 ACR50 and ACR70 deeper responses were also significantly greater for filgotinib compared with placebo at week 12 for both doses. Across the three FINCH trials, we have therefore observed deep, consistent responses similar to or higher than other JAK inhibitors and other approved biologic agents. Given the high proportion of patients achieving remission or control of their disease, these responses are encouraging, and the safety profile associated with JAK1 specificity continues to be differentiated. Based on these data, we will progress the filgotinib rheumatoid arthritis indication filing for regulatory approval in Europe in the second half of this year. As you know, the MANTA study was requested by the FDA. Now that we have the Phase 3 data in hand from three FINCH studies, we have initiated a request to have further interactions with the FDA. Following those discussions, we will be able to provide greater clarity on a filing timeline in the U.S. Now turning to HIV. We are pleased with the results from our DISCOVER trial, a Phase 3 randomized double-blind study of more than 5,000 people, evaluating whether once-daily Descovy is as safe and effective as once-daily Truvada at reducing the risk of HIV infection when used as PrEP or pre-exposure prophylaxis. In a late breakout, oral abstract presented at CROI in Seattle earlier this year, the trial demonstrated that Descovy is non-inferior to Truvada in terms of preventing new HIV infections, with additional statistically significant advantages with respect to bone and renal safety. So based on these data, last month we submitted a supplemental NDA to the FDA for Descovy for the PrEP indication as a potential important new option to prevent HIV infection. If approved, we believe this will help contribute to achieving national and global HIV prevention goals. We submitted a priority review voucher with the filing, and we anticipate approval in the fourth quarter of 2019. Moving to liver disease and our broader NASH development program. In the last two months, we released top-line results from the STELLAR-3 and STELLAR-4 programs, the two Phase 3 studies evaluating the safety and efficacy of our investigational F1 inhibitor selonsertib in patients with reaching fibrosis Stage F3 due to NASH and Stage F4 or compensated cirrhosis due to NASH. Both studies did not meet their primary endpoint at week 48 of a greater than or equal to one-stage histologic improvement in fibrosis without worsening of NASH. Although this is not the outcome we were hoping for, these were important studies to conduct. There's a significant unmet need for patients with advanced fibrosis in this disease. NASH is also a complex biological disease with multiple drivers of the disease and we believe that combination therapy will likely be necessary to effectively treat most of these patients. To that end, the ATLAS trial, a Phase 2 study evaluating combinations of our investigational compounds in patients with NASH and advanced fibrosis is expected to read out in the fourth quarter of this year. At the International Liver Congress in Vienna last month, we had more than 35 abstracts across NASH, viral hepatitis, and primary sclerosing cholangitis. In particular, we presented new data supporting our efforts to develop combination therapies targeting different aspects of NASH, to evaluate the utility of non-invasive tests for the identification of patients living with the disease, and to advance our overall understanding of the complexities and the burden of NASH. Lastly, as it relates to our NASH program, I would like to highlight two recent agreements that will also augment our effort. A few weeks ago, we announced our intent to enter into a clinical collaboration with Novo Nordisk to evaluate the utility of combining their approved GLP-1 drug semaglutide with both our FXR agonists cilofexor and our ACC inhibitor firsocostat for the treatment of patients with NASH. We also announced the strategic collaboration with Insitro to discover and develop therapies for patients with NASH. As part of that three-year collaboration, we will leverage Insitro's proprietary platform which applies machine learning, human genetics, and functional genomics to create disease models for NASH and discover relevant drug targets that have an influence on clinical progression and regression of the disease. We, therefore, have a broad, deep, and strong pipeline in NASH combining both internal programs and multiple external collaborations to advance therapies, and we remain committed to developing effective combination therapies for patients with the disease. Now let's shift gears to cell therapy and the momentum we're seeing there in advancing the next generation of medicine. We're gearing up for ASCO, the American Society of Clinical Oncology, the annual meeting in Chicago in a few weeks. I'm excited by the abstracts we will present. Our anticipated data updates include a presentation of the preliminary results of earlier steroid use with axi-cel in patients with relapsed or refractory large B-cell lymphoma. This study is part of a broader clinical effort to optimize the safety and efficacy profile of Yescarta by evaluating various combination approaches, reaching chemotherapy, and revised safety management practices. I'm also pleased to share that we plan to announce top-line results of ZUMA-2 our registrational trial of KTE-X19 cell therapy in patients with relapsed/refractory mantle cell lymphoma. Pending positive results, we expect to file the U.S. regulatory approval of KTE-X19 in patients with relapse/refractory mantle cell lymphoma for this indication by the end of 2019. This would represent the first regulatory submission for X19. As a reminder, KTE-X19 employs the same engineered T cell construct as Yescarta with a slightly modified manufacturing process to address the specific characteristics of mantle cell lymphoma, acute lymphoblastic leukemia, and other diseases where there's a large burden of circulating tumor cells. KTE-X19 was granted breakthrough designation by the FDA, so the application would be considered for expedited review. Overall, our commitment to cell therapy is simple. We continue to try to reach more patients in need with Yescarta and to try and optimize the safety and efficacy of the treatment. More broadly, we are focused on creating a path to cure with subsequent generation products that enhance the efficacy and safety of cell therapy for hematological malignancies and ultimately solid tumors. We are also advancing allogeneic cell therapies, which would offer significant benefits to patients, making time to treat quicker and also more convenient. As I look across our R&D organization, I am excited about the momentum we have established. In closing, I would like to thank our R&D organization and all of our employees around the world for their hard work and commitment to translate into the most important scientific discoveries into the best treatments for patients. So, let's now open the call for questions. Operator?

Hey guys, thanks for the question and Dan welcome to your first Gilead call.

Thanks Geoff.

So, I know you just finished the listing 2, but at this point how much of a strategic priority would you say the NASH portfolio or the hep B portfolio is? And if the answer is high, how aggressive do you think you want to be on the BD front to add assets to these two categories? Thanks very much.

Thanks, Geoff. It allows me to summarize my observations so far. I've noted the significant strengths in HIV and HCV, as well as the important connections to liver diseases like NASH and hep B. Additionally, I've had a chance to look at our wider inflammation portfolio, specifically with filgotinib leading a comprehensive life cycle management strategy, along with intriguing partnerships and early-stage molecules in this area. In oncology, our cell therapy is in a leading position, with extensive life cycle management efforts and promising collaborations in both biologics and small molecule oncology. While it's still early in my review, I'm impressed by the diversity of our portfolio, partnerships, and recent business development activities. Regarding NASH and hep B, I've realized the considerable and increasing unmet medical needs surrounding NASH. Although the results from the first quarter didn’t align with our expectations, it’s evident that scientific advancements are essential for this complex condition, which poses diagnostic challenges. Gilead's expertise in liver disease makes this a continued focus for us, and I find it particularly noteworthy that this condition may require combination therapies. We anticipate having data on our combination approaches in the latter half of this year, and John has already mentioned some of the partnerships we are forming in this area. For hep B, we currently have an effective treatment that we will maintain focus on, but I am excited about our efforts to push the science forward, especially around the goal of finding a cure. The various scientific strategies being explored by our Gilead scientists have truly impressed me. In summary, I believe that NASH and hep B are critical areas of focus for Gilead, and we need to continue exploring them both internally and through partnerships as part of our broader therapeutic portfolio.

Hi. Thank you for taking my question. Regarding filgotinib, after the FINCH 1 and 3 studies, where do you see the most differentiation for that product compared to currently available late-stage therapies and late-stage JAK1 inhibitors? I understand you are awaiting FDA feedback, but I am interested in your willingness to file before completing the MANTA study. How do you balance speed to market for that product in a competitive landscape against the need to potentially optimize the label right at launch? Thank you.

Thank you, Brian. It's John here. I have a multi-part question. Let me take a moment to summarize our thoughts on the entire data set. We now have the complete data package from a Phase III clinical trial involving over 3,500 patients. We have demonstrated significant efficacy responses across a diverse patient population in our FINCH program, consistent with our Phase II program. For practicing rheumatologists, what matters most is not just reaching ACR20, but achieving strong ACR50 and ACR70 responses, as well as clinical remission. The FINCH trial indicates that we see these deep responses when evaluated by those metrics. Each study met all primary endpoints and showed improvements in functional status. Additionally, where we examined it, we were able to slow the rate of structural damage shown in X-ray files. These additional advantages of the drug were highlighted in our clinical programs. As I mentioned earlier in this call, we have the complete data package and are impressed with the risk-benefit profile, which we believe is relevant to both patients and rheumatologists. We plan to file in Europe in the second half of this year and will soon have discussions with the FDA. We have requested a meeting to discuss the data from the MANTA studies and our Phase III registrational programs, as well as our next steps. The timeline will be developed during that meeting. It's important to us, and Dan has recently approached the program with fresh perspectives, emphasizing the urgency to get this drug approved as quickly as possible while collaborating with regulators worldwide.

Thank you, John. I want to emphasize that I have been impressed with the product profile from all three FINCH studies, especially regarding the consistency of outcomes in both efficacy and safety. With rheumatoid arthritis patients in need of effective medicines that also have solid safety and tolerability, we are eager for the ongoing discussions with the FDA. We have requested a meeting, which we expect to have by midyear, and we look forward to updating you on the next steps. We remain optimistic about this and are excited to bring it to patients globally, including in the U.S., as soon as possible.

Thank you, Dan. I want to highlight the safety profile, which we addressed in a press release because we found it significant. While it's difficult to compare safety across different drugs and trials, the safety profile of this JAK1-specific inhibitor suggests additional benefits for patients. We are observing low rates of infections, discontinuations, herpes zoster, thromboembolic events, and cardiovascular events. We believe these factors represent an important advantage for patients.

Thank you very much. Sorry about that. Robin, it might be premature to say congratulations. I know you're around through the end of the year, but at the very least just wondering if you could help him with some Gmail settings. My storage is getting a little filled up.

I will work on that in 2020, Geoff.

I'm sure you could take care of that. But seriously, Dan, I wonder if you could comment and perhaps Robin could weigh in on this as well about capital allocation. You effectively returned 100% of your cash flow to shareholders through dividends and share buybacks this quarter. And obviously, that's not really sustainable. But Dan, could you talk about how you feel about dividends versus buybacks? And whether you will be willing to make any firm commitment to a certain proportion of cash flow being returned to investors versus other items? Thanks.

Sure Geoff. I know Robin has some thoughts on this too, but I want to share a few points. As you mentioned, my top focus is on the pipeline, understanding it from both Gilead's perspective and what’s happening externally. I’m pleased to dive deeply into our R&D organization, and I’ve also spent considerable time with our corporate development team, which is working closely with our research colleagues to monitor external opportunities. Over the past 1.5 years, we’ve had significant partnership activity that will enhance our portfolio. In terms of capital allocation, I view priorities in this order: first, identifying opportunities to enrich our portfolio through mergers and acquisitions or partnerships, as this serves our long-term interests and those of our shareholders. Second, maintaining an attractive dividend policy, which has been consistent in the past. Third, considering share repurchases when appropriate. These priorities reflect my commitment to creating value for shareholders throughout my journey with Gilead. Robin, what are your thoughts on capital allocation?

Yes, I believe we are very much in agreement on our priorities, Dan. You expressed that clearly. We have consistently emphasized our dividend as the main way to return value to shareholders, and we expect this to continue, as we think it's very important for our shareholders. We've used share repurchases strategically, as you mentioned, where it makes sense. I agree with you, Geoff. While we haven't provided a specific target for cash flow returns, if you look over several years, we've returned approximately 50% of free cash flows to shareholders through dividends and share repurchases, which varies depending on the investments we make to grow the company. We believe we have the financial flexibility to maintain the dividend while also making investments that the leadership team finds essential to grow and enhance our pipeline, as Dan outlined.

Geoff, I've been listening to many of you on the phone and I see quite a bit of alignment between capital allocation policy. I hope we are meeting both your needs and the company's needs, which should align together. Thank you.

Hey, thank you. I wanted to ask a question to Dan. You listed pipeline enhancement as a top priority. Maybe just speak a little bit more to that in terms of how you're thinking about prioritizing parts of the pipeline. I mean at Roche, which obviously you had a long time at, you didn't really do any deals about $8 billion but maybe just talk about how you think about what may be different here at Gilead and maybe the appetite for M&A? How you're looking at the environment out there here at Gilead? Thanks so much.

Thank you, Michael, for your question. To elaborate on the previous topic, our primary focus in M&A activities is driven by scientific considerations. We leverage our expertise within the company, particularly in areas like oncology following the acquisition of KITE, along with our expanding portfolio in liver diseases, inflammation, and HIV. While we are open to exploring opportunities with compelling scientific profiles and significant unmet medical needs where we can make a transformative impact, we remain vigilant in assessing the entire landscape, guided by our scientific foundation. However, having in-house expertise generally enhances our ability to pinpoint the best opportunities. This was true in my previous role and seems to hold here at Gilead as well. Over the last couple of years, I've observed that most opportunities tend to be in the early to mid-stage categories, where there is substantial potential for value creation, especially if we can engage with innovative and relevant science early on. That said, we recognize the importance of evaluating our late-stage portfolio and pipeline to enhance it. We can pursue this in two ways: by accelerating internal programs, which John and the team are actively exploring, and potentially taking calculated risks to apply more resources, or by acquiring intriguing late-stage assets. Overall, Gilead's historical success in late-stage acquisitions over its 30-year history supports our approach, and we will continue seeking such opportunities while remaining science-focused. I believe strategic bolt-on acquisitions will likely be the path we follow. John, do you have anything to add?

I completely agree, Dan. I think we've always had the philosophy and the success with being led by the science. We feel much comfortable in making those decisions when we have the expertise internally, as you articulated. We are opportunistic and prepared to take risks when we feel the science and the opportunity and the need exists.

Great. Good afternoon. Thanks for taking the question. Maybe to follow-up Dan on your comments around the KITE organizational structure and separating that as a own business unit. Maybe talk about what drove the decision? What you hope that will achieve? And maybe any sort of consequences for future BD focused on cell therapy? Thank you.

Absolutely, Carter. Yes, I think the bottom line is that I've been very encouraged by what I've seen at KITE, since I've come in and how the Gilead colleagues have approached their entry into oncology in a very significant way. I think the concept of moving towards a new platform, a new technology in this space as an entry point into oncology having come from a background of deep oncology experience and understanding the depth of a competitive environment is an intriguing way to go. To really go for a future-oriented technology, I think makes a lot of sense. To supplement that with interesting partnerships like the one that John and his team have done in bispecific antibodies for instance with Agenus and/or some of the interesting small molecule work that's going on here within the walls of Gilead. So first and foremost, I think one needs to consider the early but interesting oncology work that's going on here at Gilead. With that context, I said, as I've looked out in discussions with the leadership team, that KITE itself in cell therapy oncology is in an ultra-competitive area. I think we have a leadership position, but I think we need to maintain that leadership position. For the reasons of focus, we decided to create KITE as an independent business unit that will wake up and go to sleep every day thinking about how to be leaders in oncology cell therapy. That's not to suggest that they won't work with the rest of the organization to complement, as we know specifically in oncology the combination approach and the multi-science approach is absolutely the way to go. We need to make sure we secure that leadership in cell therapy, while we complement it with combination approaches in immuno-oncology or targeted therapies or other mechanisms. That's the context. Let's make sure we win in cell therapy and leverage the remaining parts of the Gilead focus on oncology to win in the broader oncology market as well. It's with that lens that I took the decision to create a separate business unit to focus on that, and now in the process of recruiting a CEO that will report to me and will work very closely with the leadership team for success in oncology. On the BD side, they've been very active as you know since the KITE acquisition, a very active M&A and partnership work within cell therapy, which I think is fundamental and essential because the science is occurring of course within KITE and cell therapy, but all around this as well. I've been impressed with the landscape analysis that the BD team has done here with the research and development team at KITE and at Gilead. I think we're really well positioned to continue to scan that environment and to complement it with the appropriate pieces of the puzzle that we need to continue to write the next chapter in cell therapy history. As John articulated, it's advances and hematologic malignancies; it's moving to solid tumors, and it's also getting ready for the future of science, the allogeneic form as well, which has risks, but I think lots of opportunities as well. Very comprehensive approach on the BD side, and that will continue.

Completely agree, Dan.

Hi. Thanks for taking my questions. Maybe for Daniel. Is there anything you actually want to change in the Gilead organization after two months in the job? And then maybe another one for John McHutchison quickly. You decided to have a collaboration with Novo Nordisk in NASH. How does it compare to the other mechanisms of actions in the market today or on the development today if you look at semaglutide data in NASH? Thank you.

Thanks, Ying. Look, let me first say that I've been incredibly welcomed and very impressed after coming into Gilead. I think I probably know more of what I don't want to change than what I do want to change after two months in the role. That is the focus on science. I've been really impressed by the science and the motivation and intelligence of the colleagues at Gilead. I think both the level of expertise that is here in many different areas as well as the intrinsic motivation of our employees is something I’ve been deeply impressed by. In terms of what to change, as I said before, I'm still in the process of evaluating the organization, looking at the pipeline, looking at commercial execution, looking at the organizational structure and people. I think you would agree with me that two months is really a short period of time to evaluate that, which is why I said there are certain things that I'm acting quickly on and won't hesitate to like the KITE decision and there are other things I think I need to learn a little bit more and understand. It will be an evolution, not a revolution, and it will be based upon good observations, good discussions with the leadership teams in terms of how we progress here, so stay tuned on that. I think as a leadership team and a leadership community here at Gilead with the Board, we continue to have our outside ears open to investors and to thought leaders and to what our patient needs are. We'll continue the evolution of the company, and I'll be articulating better what my priorities are as I go into the later part of this year, and we'll certainly inform you as I go. So thank you for the question. And John, will you?

Yes. We know that Novo Nordisk, Ying, that's a compelling mechanism of action. Novo Nordisk is clearly a leader in the pharmaceutical development of products for patients with diabetes and metabolic syndrome. The mechanism of action is not necessarily directly related to NASH, but it has many of the effects you would want to see in patients with NASH. Additionally and importantly, it has a substantial weight loss component to this drug, which we think is very compelling for us to explore with our other mechanisms of action that are really focusing on different and separate drivers of NASH at the genesis. We believe it's a very exciting and a very important collaboration. Novo Nordisk brings a lot of people and a lot of depth of knowledge about metabolic syndrome to the table, whilst we bring a lot of expertise in liver disease. It's a wonderful collaboration that we're just starting, and looking forward to. We will combine semaglutide with our FXR agonists and our ACC drugs as well, and that will be the initial clinical collaboration.

Hi. Thank you so much for taking my question, and welcome again Dan, for your first Gilead call. I wanted to keep it fairly high level today. I'll maybe just ask Dan. Do you see Gilead as growing the top line into the 2020s? And also, what are the biggest risks and the biggest opportunities that you see at Gilead currently?

Thank you, Umer, for the warm welcome. I appreciate it and look forward to collaborating with all of you and sharing my perspectives and visions for the company as I progress. It’s a bit too early to discuss sales for 2020 at this point. In the first two months, I have been concentrating on the pipeline and analyzing our current commercial delivery. Over the next few months, we will start to evaluate this year's progress, the opportunities for next year, and develop some ideas for a plan. It’s still premature for that. However, I can assure you that we will provide insights on this later in the year. To share a bit more about how I view the business today, I see the strengths in HIV as a solid foundation for Gilead and a strong, growing business. Laura mentioned the advancements with Biktarvy. Both Laura and John discussed the promising data for Descovy and the potential there regarding the DISCOVER trial. So, I do observe strong performance in the HIV sector. I believe that HCV is much more predictable now, although it is currently a smaller component of Gilead’s overall revenue. The future opportunities, including filgotinib and others, will be discussed with you and present an upside to that relatively stable base. I need more time than two months to fully analyze how and when those opportunities will emerge, but I've provided an overview during this call today. I believe there are significant opportunities in the early to mid-stage pipeline, particularly with filgotinib. This product profile addresses a need for more treatment options that patients and healthcare providers are seeking—options that are effective, safe, and convenient. I have been working with the organization and the leadership team to explore how we can expedite our plans for filgotinib to prepare for entering this competitive market. Every launch brings both risks and opportunities, but I feel we have a strong product profile to build on for our next focus within the inflammation segment. Additionally, it's important to note the ongoing success of Yescarta and our plans to expand into other diseases and hematologic malignancies. There will be numerous insightful readouts from Yescarta that I reviewed with John just before this call. In the next few years, we expect results that will clarify the potential of cell therapy, both alone and in combination approaches in oncology. I will share a more thorough overview of the business later this year, Umer, but those are some of my initial observations so far.

Good afternoon. Thanks for taking my question. Robin, let me add my congratulations on the announcement of your retirement. Dan, a question for you actually on HIV just to focus there. Gilead's clearly been a leader in HIV treatment for almost two decades. But arguably you fall behind in the development of nucleotide-sparing regimens and long-acting regimens, so you brought fresh eyes to looking at your HIV portfolio. How do you see the treatment of HIV evolving over the next five to ten years? And do you feel like Gilead's HIV pipeline has all the programs that it needs to stay competitive over that period?

Thanks, Phil, and I welcome John and Laura to weigh in on this as well, but I'll give you my top-line take first. That is that there's no doubt that Gilead is the leader in HIV and has been for a long time, and to your point, so we need to make sure that we continue to have the most significant next advance for patients and that's certainly been the case for TAF. From TAF, the regimens and to the Descovy regimens, and now of course with the PrEP data, certainly there's lots more that we can do in improving the patient experience in HIV including long acting as you mentioned and other approaches. I think there's a very comprehensive life cycle plan around this and I think that thinking this got into this in terms of making sure that the next generation programs like a long acting are something that are going to be well received by the patients that are convenient, easy to take and really allow for if you like the next best advance from a daily oral medicine, which is let's face it the highly convenient to begin with. I think they really scrutinize the target profile well, and I think the science that's growing on here is well-positioned to continue to take the next meaningful advances for patients into the future. But I would ask John if you want to feed in on this, great?

Sure. Thanks, Phil. We have led the field of HIV therapeutic development for over a decade. One of the critical components of that approach and our success has been no resistance. That has been achieved with effective three-drug regimens. For example, with all the Biktarvy studies as you know we have no resistance through week 96, which is a critical advantage for anybody. You can't afford to increase the fragility of a regimen by decreasing or diminishing or cutting out one of the components and theoretically or not theoretically increasing the risk of resistance. That's very important. Now two-drug regimens with adherence are potentially not so important, such as an effective long-acting regimen, is actually one of our critical programs internally. We believe that our ultimate goal with the long-acting regimen should be a subcutaneous at-home small volume, non-painful injection that's probably got two components to it but it won't have that adherence issue to it and we'd like to be giving it every three months. That would be a great advance for patients as well. In terms of our other activities in HIV, we have many cure programs as you know. We also have programs for those most in need in terms of the highly resistant groups of patients and then of course, we have all of our PrEP programs as we discussed on the call today. We are very much laser-focused on maintaining our leadership position scientifically and for patients with HIV and preventing HIV by all of these initiatives. So I think the issue of two versus three drug regimens has to be put in the context of the decades of history of this disease and where the long-acting ultimate goal should be.

Hey, good afternoon guys, and thank you for taking my question. I also have one on HIV, but more from a near-term commercial standpoint. I’m curious how you're thinking about potential pricing pressures within the category over the near to medium term from both potential U.S. health care reform as well as competitors entering the space at substantial discounts to Gilead's regimens? Thanks.

Thanks for the question. This is Laura. So let me start off with the pricing pressures in the U.S. health care, and I assume you're talking about is maybe the protected class with the Medicare population. So let me just address that. We've been actively engaged in a discussion around the protected class and this is the Part D benefit for the senior population. All along, I think what's most important for the senior population is to ensure that they have access to safe and effective medicines that are appropriate for the guidelines. We really want to make sure that there is no prior authorization that impedes rapid treatment and renewal of long-term treatment for patients. There's been a significant groundswell across the community of advocacy of people positioned that really believe that it's important for the Medicare population to have access to the HIV regimens that they need and to maintain a protected class. Specific to the Medicare population, as it relates to the commercial population, I would say that we're very pleased with the amazing coverage that we've been able to achieve with Biktarvy. Over 90% of the plans have Biktarvy rapidly available. You can see that in the numbers and what we just said in terms of treatment-naïve and switch patients. How quickly patients are moving to Biktarvy, and obviously 80% of our overall prescription is coming from a Descovy base backbone. We don't feel significant pressure on the commercial side as it relates to coverage and access. As it relates to the overall growth that we see, we had a 12% prescription growth year-over-year. We've continued to maintain double-digit growth for the last couple of years. So I'm very, very pleased with that. Then finally you asked about the competition and pricing pressure. I think we've always tried to make sure we bring innovation into the market. Gilead has been the 11 products in 17 years. We've always been mindful of the pricing in the market to make sure that our innovation gets rapid access and people can access these new brands. If we look at new entrants, I believe that their pricing is relative to the branded pricing of the component. For example, Truvada is really the branded price of the two drugs. I believe Biktarvy has been also priced very competitively within the Descovy base backbone. So we feel very comfortable with our pricing.

Yeah. Cory, I'd just add also. Remember that for Gilead, our franchise has really been driven by volume right? Pricing has been frozen in the public market, since I've been here. We don't get real upside relative to pricing, particularly in the U.S. As you know, ex-U.S. it's pricing decreases. I'm totally in agreement with everything Laura provided in terms of our focus legislatively and competitively. Underlying price has never been a key factor when you take a look at our HIV revenues.

Hi. Good afternoon, everybody. And thanks for filling me in. Two there if I can. One, about HCV, I noticed the agreements you just had in the U.K. and the one you had in Louisiana. Can you just explain to us from a financial perspective how you're thinking about this? There's some implied discount in those contracts. But obviously you're getting access to other patients you wouldn't otherwise. So can you just tell us how you're thinking about this as a strategy? And then, coming back to this issue of HIV pricing I hear you about not raising prices. But Robin, I think you mentioned that with this shift of patients to government programs you're actually seeing a bit of a net decline. If we look at the revenue reported and divided by IMS scripts, we are seeing kind of like modest declines year-over-year in your price point. Should that be the baseline assumption going forward? Essentially more people going on those programs. You guys not raising prices. And that's in effect we should see a net price decrease a little bit per year the way the market is looking right now?

Sure, Ronny, I'll address the second part of your question. I was referring to a change in the timing of public buyers' purchases. This relates to payer mix, as we typically observe a downward shift in Q1 during the ADAP cycle. However, the main reason for our sequential decline this past quarter was not related to pricing but rather inventory. I wanted to make that clear and I’m happy to follow up on this after the call. Laura, would you like to discuss the situation in Louisiana?

The U.K.? Yeah, yeah. So, I think you also mentioned the U.K. If I heard you correctly, I thought it was the U.K., and maybe Louisiana and Washington. Was it all three?

Yes.

Let me discuss the U.K. first, then I'll cover Louisiana. Our aim is to collaborate closely with governments, whether at the federal, state, or country level, to ensure that patients have the necessary access to care. We view HCV as significantly beneficial to the healthcare system. Regarding Louisiana, we are addressing the specific needs of that government. They are looking to treat a larger number of patients within their annual budget constraints. Over five years, while there is a set amount each year, the actual need is to initiate treatment for more people sooner. Our ongoing discussions with Louisiana focus on creating a smoother treatment distribution instead of experiencing peaks and troughs. We are flexible from a payment standpoint to help meet budget needs and enhance access for patients. As for the U.K., we are collaborating on an elimination project, similar to several other global initiatives that Gilead participates in. Our focus is on defining a price and ensuring patients are identified, diagnosed, and treated appropriately. Lastly, with the launch of the AG by our subsidiary Asegua, we've seized an opportunity to cater to the managed Medicaid market. We offer flexibility through our Gilead portfolio, which includes Sovaldi, Harvoni, and Epclusa, alongside Asegua in the commercial market. Specifically addressing the managed Medicaid market, we have tailored solutions to meet their distinct requirements. I hope that answers your question.

Perfect. So, Ronny, I also wanted to revisit the fact that the HIV line includes prevention as well. This does affect the average price per patient because it’s not the STR; you’re looking at the Descovy component. This will also influence the average price per patient as PrEP usage continues to increase.

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