Gilead Sciences Inc (GILD) — Q2 2019 Earnings Call Transcript

Thank you, Liz, and good afternoon, everyone. Just after market close today, we issued a press release with earnings results for the second quarter of 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; Johanna Mercier, Chief Commercial Officer; and Robin Washington, Executive Vice President and Chief Financial Officer. Also in the room are Diana Brainard, Senior Vice President and Head of our HIV and Emerging Viruses Therapeutic Area; and John Sundy, Senior Vice President and Head of our Inflammation Therapeutic Area. 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.

Well, thank you, Sung, and good afternoon, everyone. It's now month five and I'm really pleased that I've had a chance now to talk with you the second time in the second quarter after the first quarter call with some very good results. I would like to share a few opening comments and then I'm going to turn the call over to Johanna Mercier, who joined us at the beginning of the month, as our new Chief Commercial Officer. I'm very happy to have Johanna with us as well. Robin will then take over and walk you through some of the highlights of the strong quarter. So let me just start by saying, I'm really pleased with the progress we're making across all fronts. As one example, as the leader in HIV, we're very focused on continuous innovation as you may have seen from some of the recent data we presented. Biktarvy is the number one regimen in the United States now. Momentum continues to build and we expect that momentum to continue in the future. I mentioned on the last quarter that I would focus on three key priorities as I came into this organization: The first one was the pipeline; the second one was optimal commercial delivery for both our current products and as we prepare for some new and important and exciting launches; and then thirdly, really people, the organization bringing the right team together at the right time for Gilead. We've had a very busy quarter. We've announced key changes this quarter that helped to address all three of these priorities. Importantly, we've made these changes against a backdrop of strong financials and promising pipeline progress. Let me say a few words about the major steps we've taken to strengthen the pipeline with the Galapagos collaboration; dive a little bit into the highlights from our current pipeline; and touch on the organizational changes as well. First on Galapagos, it’s fresh news. Earlier this month we announced an exciting new collaboration with Galapagos. As you know, Galapagos is a highly productive R&D engine. They have seven medicines now in clinical development including filgotinib, which has a very comprehensive life cycle program. With our increased investments, we expect that the number of new candidates could increase in the future. This is a unique collaboration because it combines complementary strengths between Gilead and Galapagos. Importantly, we've structured this to allow Galapagos to remain independent. I believe that innovation requires independence to be preserved. The structure of this deal allows us to preserve the great science and talent at Galapagos. They can invest and innovate to accelerate progress based upon our investments, and in return we have exclusive access to their proven drug discovery platform. Overall, this collaboration will help patients, science, and our business in a significant way. I'm pleased this was the first collaboration I could announce under my tenure and yet, this is still just the beginning. We will continue to explore other ways to strengthen our pipeline and innovation network. Second, on the pipeline side, let me touch on a couple of things that speak to our growth potential before handing it over to Johanna. First, we had a terrific week last week at the International AIDS Society Conference on HIV Science. We presented clinical data for our first-in-class HIV capsid inhibitor, GS-6207. The early results support further development as a long-acting therapy that will meet the needs of the community we serve. We also presented further data on Descovy for PrEP, additional data that reinforces the profile of Descovy in the PrEP setting. As you know, this is currently under regulatory review in the United States, and we have plans to file Descovy for PrEP in the EU in the first half of 2020. We look forward to the FDA advisory committee that will be held next week. Overall, we're encouraged by the government's engagement around HIV prevention in many forms. The advisory committee will be an important opportunity for Gilead to discuss the benefits of Descovy in prevention settings for individuals at risk for HIV. Secondly, on filgotinib, we intend to file for U.S. approval later this year in rheumatoid arthritis based on our discussions with the FDA. We will also be filing in the EU imminently. Very good news on the path for filgotinib. I recently attended the EULAR meeting, the Annual European Congress of Rheumatology in Madrid, and I witnessed firsthand the enthusiasm among physicians and thought leaders about filgotinib's profile and potential as a best-in-class among the JAK1 inhibitors. Finally, I'd like to welcome Johanna, who you'll hear from next, and Christi Shaw, who joins us from Eli Lilly and will start as CEO of Kite on August 1. With Christi's arrival, Kite will become its own business unit and we remain committed to accelerating the pipeline and maintaining our leadership position in cell therapy. I also want to extend thanks to three leaders leaving Gilead, John McHutchison, Gregg Alton, and Katie Watson, who have all made tremendous contributions to Gilead's progress over the past many years. In closing, I'm increasingly optimistic about Gilead's future and its potential. It's a unique company that cures hepatitis C and transformed HIV. I'm witnessing the unique strengths that made that possible and I'm excited about applying those strengths to the next wave of transformational advances in various diseases. We're making great progress and there’s much more to come, and I look forward to sharing more about my vision later this year, but we're actively implementing our strategy. Thank you to all our employees and partners around the world for their dedication and hard work to achieve a successful quarter. With that, I'd like to turn the call over to Johanna.

Thanks Dan and good afternoon everyone. Although I'm only one month in, I've started to get to know the company and the people, and I just want to express how impressed I've been by the talent and the strength of the team as well as what we've accomplished so far. Today, I wanted to highlight two areas that I believe are real growth opportunities for Gilead: the strength of our HIV business in treatment and prevention, and the potential for filgotinib. Starting with HIV, you'll hear from Robin describing our results for the quarter in more detail, but our HIV portfolio has never been stronger. Biktarvy continues to be a very impressive launch, hitting its first $1 billion quarter in the U.S. for Q2. It's now the number one prescribed regimen in the U.S., as well as number one for naïve and switch patients in Germany, France, and Spain. We just secured reimbursement in Italy and the U.K. in the last two months, indicating more to come. We had a strong showing last week at the International AIDS Society Conference, presenting research that demonstrated the breadth of scientific work from prevention to treatment to cure. This included announcements regarding Descovy for PrEP, which we believe could offer important safety advantages over Truvada, demonstrating superior bone and renal safety, along with rapid onset and longer duration of preventative therapy. These are clinically meaningful to individuals, physicians, and payers for significant reasons. The first reason is that individuals at risk for HIV are generally healthy people, implying the safety bar must be higher. The second reason is persistence on PrEP has increased among those individuals. We are very excited about what’s to come with Descovy in PrEP. Dan mentioned we are under review with the FDA for prevention of HIV. We believe it has significant potential to make a difference in the lives of individuals at risk of HIV. The second growth opportunity is filgotinib; we see tremendous potential here and the teams are actively preparing for its launch. It's a high priority for us. Although we know it's a competitive space, we believe we can make a difference for people living with rheumatoid arthritis and potentially other inflammatory indications due to their debilitating nature. The FINCH studies highlight strong efficacy and tolerability results of filgotinib with clear unmet needs in the market for effective and safe oral agents. More to come on that and the filing this year. I look forward to working with this great team to deliver on this promise, and I want to thank everyone for the warm welcome since I arrived a month ago. Now, I'll turn the call over to Robin. Robin?

Thank you, Johanna, and welcome. Good afternoon, everyone. As Dan mentioned in his opening comments, we had a strong quarter led by our HIV franchise, predictable performance in HCV, and continued growth of Yescarta. Total revenues for the second quarter were $5.7 billion, with non-GAAP diluted earnings per share of $1.82. This compares to revenues of $5.6 billion and non-GAAP diluted earnings per share of $1.91 for the same period last year. Total revenues in non-GAAP earnings per share for the second quarter benefited from approximately $160 million in adjustments for statutory revenue clawback reserves, primarily related to HIV and HCV sales in Europe from prior years, contributing $0.10 per share. Non-GAAP earnings per share for the same quarter last year included a one-time settlement of a tax examination, which contributed $0.15 per share. Starting with HIV, total HIV sales for the second quarter were $4 billion. In the U.S., HIV product sales for the second quarter reached $3.2 billion, up 13% year-over-year, and up 14% sequentially, driven by robust prescription demand growth. This marks the fifth consecutive quarter in which HIV sales have posted double-digit year-over-year growth, and the first quarter in which Biktarvy surpassed the $1 billion mark, accounting for more than 40% of new patient starts. Descovy-based regimens accounted for 83% of our prescription volume for HIV treatment. In Europe, HIV product sales for the second quarter amounted to $623 million, benefiting from adjustments for statutory revenue clawback reserves. Despite experiencing a slight sequential decline in HIV product sales, we continue to see positive performance from Descovy-based products, with Biktarvy now available across the EU5. With increasing access, we are optimistic that declines in our European HIV business will continue to moderate. Turning to HCV, total HCV sales for the second quarter were $842 million, with U.S. product sales down 35% year-over-year, and down 10% sequentially. This was in line with expectations, primarily due to competitive dynamics and lower patient starts. In Europe, HCV product sales for the second quarter were $277 million, benefiting from adjustments for statutory revenue clawback reserves. Moving on to cell therapy, Yescarta sales for the second quarter were $120 million, up 76% year-over-year and 25% sequentially. We are pleased with Yescarta's steady adoption. Our efforts in the U.S. are focused on educating providers about Yescarta and identifying appropriate patients. As CMS finalizes the annual Medicare IPPS rule for fiscal year 2020, we are engaging with officials and other stakeholders to improve Medicare reimbursement and access for patients over 65. In Europe, Yescarta has launched in Germany, the U.K., France, and Spain. Overall, we have been impressed with the speed of reimbursement and the pace at which centers are being certified. Lastly, we have seen generic competition impact our cardiovascular products, as expected, leading to a 51% decline in Letairis and Ranexa sales year-over-year. Now turning to expenses, non-GAAP R&D expenses were $916 million for the second quarter, down slightly from the same period last year. Non-GAAP SG&A expenses were $1 billion for the second quarter, up 21% year-over-year due to higher promotional expenses and the expansion of Gilead's business in Japan and China. Our non-GAAP effective tax rate in the second quarter was 21.5% compared to 13.4% in the same period last year. Moving on to our balance sheet, we generated $2.2 billion in cash from operations, ending the quarter with $30.2 billion in cash and investments. We repaid $500 million of senior unsecured notes, paid cash dividends of $800 million, and repurchased 9 million shares for $588 million. Our guidance has improved, raising our full-year net product sales guidance based on favorable demand trends and the adjustments for Europe statutory revenue clawback reserves expected in the range of $21.6 billion to $22.1 billion. We expect a full-year diluted EPS impact of GAAP to non-GAAP adjustments between $3.90 to $4 a share, as a result of the collaboration agreement with Galapagos. Thank you for joining today's call. Let’s now open up the call for questions.

Great. Good afternoon. Thanks for taking the question. I wanted to ask one related to the HIV pipeline. I noticed that you've got a breakthrough designation on the capsid inhibitor, and I'm just wondering if you could talk a little bit more about the path to registration and how breakthrough enables you to potentially move that product ahead? And if you could just also comment on what you see as the patient opportunity for that product as well?

Great, Matthew. We had Diana here and she will be more than happy to address that.

Yeah. Thanks. Hi, this is Diana Brainard. We're excited that the FDA recognized the importance of the capsid inhibitor GS-6207 by providing it with breakthrough designation for heavily treatment-experienced patients with multidrug resistance. This is a small segment of the HIV population representing a high unmet medical need. These individuals have limited treatment options due to resistance. The capsid inhibitor is first-in-class, meaning there's no pre-existing resistance to this class, making it a unique compound. The long-acting nature adds value across various patient populations. Regarding the registration path, breakthrough designation allows us more frequent communication and dialogue with the FDA. We plan to communicate with them soon to clarify how best to advance our capsid inhibitor in this patient population.

Great. Thank you. Could we have the next?

Hi. Thanks very much for taking my question. Maybe another question on the capsid inhibitor. How important will it be to pair that with additional antiretroviral agents? Can you talk about your development of long-acting forms that could potentially pair with 6207? What do you see the dosing frequency for patients to maintain adequate exposures and minimize injection volume?

Sure. In developing long-acting regimens, we envision that the capsid should partner with a second agent. We have several internal candidates aimed at partnering with the capsid and hope to present data and our plans in the coming months. The capsid is highly potent which allows for long-acting injections with potentially infrequent dosing. The exact frequency will depend on the partner and formulation as we continue to clarify initial regimens.

Hey, thanks for the question. Congrats on a good quarter. I wanted to talk a bit about R&D. Specifically, the absence of John McHutchison. How would you describe the future shape of R&D in the next 12 to 24 months? What role will oncology play? And since the Galapagos deal, how much of your R&D is geared towards early-stage discovery?

Thanks, Michael. I can clarify your second question. The collaboration with Galapagos effectively doubles our research capacity. We are focusing on innovative medicines across development stages. We see the Galapagos model enhancing our late-stage portfolio strength. This quarter, we continue to make progress, particularly with HIV and clarity around filgotinib's path forward. Our emphasis is on long-term growth and ensuring a balanced, innovative portfolio. We can also leverage Galapagos' two late-stage products and explore additional collaborations.

Thank you very much and I appreciate the question. Dan, there have been many interesting moves in the industry with companies shifting portfolios. How do you assess your assets? Are you considering moving anything out of the company or bringing in products? Also, how significant are FTC considerations in these opportunities?

Geoff, I would take a step back and affirm that we focus on the science, which has been transformational for Gilead. We'll look at external scientific opportunities driven by our expertise in key areas such as HIV, oncology, liver disease, and inflammation. We don’t have a one-size-fits-all approach. The Galapagos structure fits our needs well, allowing independence and rights to all outputs of the collaboration. We haven’t faced FTC issues with our transactions at this time.

Hi, thanks for taking my question. Congrats on a solid quarter. I'm intrigued by trends in Europe and your ability to mitigate generic pressures. Can you elaborate on why you believe this is the case, especially considering Europe is cost-conscious? What has driven growth in your TAF franchise there?

Alethia, I believe our underlying opportunity is with Descovy. We’ve seen a moderation in the deceleration due to the strong adoption of products like Biktarvy, resulting in continued growth.

Good afternoon. I wanted to ask Dan or Johanna to elaborate on how to think about PrEP as a growth opportunity for the HIV franchise, especially with your recent access improvements in the U.S., and your plans in Europe amidst historical challenges? Additionally, any insights you could provide regarding the expected focus of the AdCom for Descovy?

Great. Johanna will take the first part of your question, and then Diana can comment on the AdCom.

Thanks, Carter. In PrEP, our Truvada business has shown solid growth, representing a 27% year-on-year increase. However, only about 200,000 individuals are currently on Truvada, suggesting a significant opportunity in reaching the potential 20-25% representation for those in need of prevention treatment. Descovy presents a more beneficial option for this broad population due to superior safety and more extended duration for HIV protection. These factors will play a crucial role as we launch Descovy in the second half of this year. In Europe, while Truvada PrEP isn't available due to its generic status, we plan to file for PrEP approval in the first half of next year.

In regard to the AdCom, the FDA may convene an advisory committee for various reasons. In this case, it's likely part of their effort to enhance awareness and demonstrate commitment to HIV PrEP efforts. It's a platform for experts to discuss the benefits of PrEP and our DISCOVER study results. We are seeking a broad indication for Descovy for PrEP, and study results will be an essential part of that discussion.

Hi. Thanks for taking my questions. I wanted to focus on two pipeline programs: first on filgotinib, specifically about the absence of a DVT imbalance and all thrombotic events. What's your insight on that? Secondly, regarding the Galapagos IPF program, have you analyzed the FVC data on similar patient sets between placebo and active arms?

Thank you, Umer. I’ll get John involved here. John Sundy?

Sure. On filgotinib, we are pleased with the results across all thrombotic events and find no changes in our perspective based on the data presented. Regarding the Galapagos compound, we’ve scrutinized the IPF program data. The data provided confidence to Galapagos to proceed, and we share that confidence.

Great. Thanks for taking my question. Quick question on the capsid inhibitor: Do you believe it could expand the market? When can we learn more about your plans for capsid in PrEP?

We intend for the capsid to exceed 20% of the PrEP market with both Truvada and Descovy, experiencing quarter-on-quarter growth. The capsid inhibitor could be part of our approach to close that gap. It's got long-acting potential, and we're assessing its efficacy in Pre-Exposure Prophylaxis, generating data for future clinical consideration.

For Dan, how should investors think about building out your management team versus building out the company's capabilities via external business development? What correlation exists between folio search for assets and the search for personnel?

They can happen in parallel. The Galapagos collaboration involved dedicated teams from our organization across discovery and clinical programs. We don't see any slowdown in our corporate development; our team remains effective. Our focus remains on hiring new colleagues who commit to our mission as we ensure corporate development continues strong.

I wanted to discuss the proposed changes to Medicare, particularly Part D. If you could disclose what proportion of your U.S. revenue in Q2 came from Part D, and any insights regarding changes benchmarking against your pricing strategy?

Overall, Part D accounts for a low double-digit percentage of our U.S. revenues. Gilead continues to have a high proportion of public payers. We will remain active participants in Part D reform, focusing particularly on cap support for patient expenses.

I wanted to ask about hepatitis B. Do you still consider Gilead capable of leading in hepatitis B? How do you prioritize it relative to oncology or inflammation? Are there particular areas in science you feel you need?

We have tremendous expertise in hepatitis B and our current product Vemlidy provides significant benefits but remains underutilized. We aim to ensure the standard of care becomes more available to patients while exploring promising scientific approaches for hepatitis B. We're focused on how best to invest in this area as we further our commitment. There's no doubt, as our scientists explore avenues for a hepatitis B cure, we are committed to being at the forefront.

I wanted to ask about Yescarta's recent performance. You indicated previously having over 1,500 patients which has accelerated since the previous year. Can you provide more details about the patient dynamics of Yescarta and future expectations?

Thank you, Hartaj. We've observed that the Yescarta data shows sustained responses in patients and it remains our objective to advance it into earlier treatment lines, hematologic malignancies, solid tumors, and potentially allogeneic treatments. The pioneering nature grant us the capacity to address near-term factors affecting Yescarta trajectory such as ongoing reimbursement changes, patient flow dynamics, and hospital readiness. We get a consistent response in DLBCL patients and continue to work closely on optimizing access across the market.

Thank you all for joining today’s conference. We look forward to updating you in our next call.