Gilead Sciences Inc (GILD) — Q4 2019 Earnings Call Transcript

Thank you, Liz, and good afternoon, everyone. Just after the market closed today, we issued a press release with earnings results for the fourth quarter and full year 2019. The press release and detailed slides are available on the Investor Relations website. Speakers on today's call will be Daniel O'Day, Chairman and Chief Executive Officer; Andrew Dickinson, Chief Financial Officer; Johanna Mercier, Chief Commercial Officer; and Merdad Parsey, Chief Medical Officer. Also in the room are Christi Shaw, Chief Executive Officer of Kite; and Diana Brainard, Senior Vice President and Head of our HIV and Emerging Viruses 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 and 2020 financial guidance, 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 earnings press release and our latest SEC disclosure documents. In addition, Gilead does not undertake any obligation to update any forward-looking statements made during the call. Non-GAAP financial measures will be used to help you understand the Company's underlying business performance. Starting in 2020, Gilead will no longer regularly exclude stock-based compensation expense from its non-GAAP financial information. The GAAP to non-GAAP reconciliations are provided in the earnings press release, as well as on our website. I will now turn the call over to Dan.

Thank you, Doug, and good afternoon, everyone. I'll share a few opening comments before I turn the call over to Andy. And then, Johanna will take you through the commercial highlights of the quarter. And Merdad Parsey, whom, as you know, joined us as Chief Medical Officer in November will offer a few remarks before we open up the call to questions. We had a very strong quarter capping a solid year for Gilead. Our financial results in 2019 were driven in large part by the outstanding performance of our HIV franchise. It's now been almost a year since I arrived at Gilead. We made key decisions and changes that have positioned us for success. Over the past decade, the Company has set a high bar, and we hope to raise that high bar over the decades to come. Today, I'm going to focus my comments on three areas. One, our strong base business; two, the existing pipeline opportunities; and three, our new strategy to drive innovation and growth. So, I'll begin by saying a few words about the strengths of our core business, starting with HIV where we again achieved record revenue for both the quarter and the year. Today, approximately 80% of people living with HIV who are on therapy in the U.S. are on a Gilead-based regimen. Across the franchise, we've seen durability and sustainability of the business, which we expect to continue in 2020 and beyond. Much of the strength is driven by Biktarvy. Today, in the U.S., approximately one in two patients who are new to therapy and patients who are switching therapy are initiating on Biktarvy. We're also very pleased with the early progress with Descovy for PrEP, the strength of the launch and the positive response we are seeing from patients and providers. Johanna will share more details shortly on that. Looking to the future, we're focused on the potential of our capsid inhibitor as the anchor molecule for multiple long-acting HIV options. We may be able to dose as infrequently as twice a year, and we're working rapidly to progress this medicine for both HIV prevention and treatment. Rounding out the antiviral picture, we continue to see sustained revenue from our HCV business. Since the introduction of authorized generics in the U.S., we've regained market share and now hold around 60% share through Asegua and Gilead, up 18 points from the beginning of last year. Finally, as we look across our core business, I'd like to highlight the geographic expansion, and in particular China. During the fourth quarter, we had four medicines Vemlidy, Epclusa, Harvoni, and Genvoya included in China's national reimbursement drug list. This is a significant accomplishment that will enable much broader access to these medicines in the region. So, beyond our core business, our current pipeline includes several important opportunities that I'd like to cover. We have 14 late-stage studies underway, four of which have received breakthrough therapy designation from the FDA. During the fourth quarter, we submitted a regulatory filing for filgotinib to the FDA, and it’s now under priority review for rheumatoid arthritis. Filgotinib is also under review in Japan and the EU. We're actively preparing for competitive launches globally, which Johanna will talk more about later. I'm encouraged about the potential of filgotinib to be best in class among the JAK inhibitors, and the strength of the gene we have in place to market the medicine following approval. Beyond filgotinib, we are pleased with what we see in the Galapagos pipeline and believe that the partnership has the potential to drive significant future growth. We are looking forward to the ulcerative colitis data this year, and we remain very optimistic about both our partnership with Galapagos, as well as the promising inflammation pipeline we have in hand. In cell therapy, we have a pioneering platform that is enabling us to advance new therapies with the goal of driving long-term innovation and growth. To that end, our second cell therapy treatment KTE-X19 is now under review in the U.S. and Europe as a treatment for relapsed/refractory mantle cell lymphoma. This followed the presentation of positive data at the American Society of Hematology meeting in the fourth quarter of this year. We also presented data at ASH showing that approximately half of patients treated with Yescarta for relapsed/refractory large B-cell lymphoma were still alive after three years of treatment in the ZUMA-1 study, confirming Yescarta’s benefit-risk profile in the real-world setting. These long-term data speak to the durability of Yescarta's treatment. Finally, in cell therapy, we look forward to sharing results from our Yescarta Phase 3 second line DLBCL trial in the second half of this year. Merdad will offer some more color on our pipeline in just a few minutes. In addition to the programs I described that we have in hand, I introduced our new corporate strategy last month. This strategy will guide our work as we seek to drive innovation and growth over the next decade. Over the next 10 years, we aim to introduce 10 new transformative therapies. To help us achieve that ambition, we will expand our access to internal and external innovation. We've already been very active in business development with around 33 strategic partnerships and investment transactions since January 2018. We'll continue to pursue a broad range of opportunities with a clear focus on our core scientific areas of strength. Specifically, we will continue to make investments in our external pipeline including transformative partnerships such as Galapagos and small to medium-sized bolt-on acquisitions. Andy will talk more in a few minutes about our capital allocation priorities, including today's announcement of a further increase in our dividend and an additional share repurchase authorization and our strong financial position, which gives us the opportunity to look externally as we strengthen our pipeline. Before I hand off to Andy, who will delve into a more detailed financial review, I'd like to say just a few words about the broadening outbreak of coronavirus. As an organization, Gilead has committed to collaborating with global health organizations to support pandemic responses, including this one. Our investigational compound, Remdesivir, has demonstrated in vitro and in vivo activity in animal models against the viral pathogens, MERS and SARS, which are structurally similar to the current strain of the coronavirus. However, there are no antiviral data that show activity against the strain. We're working with the government and non-government organizations and regulatory authorities to develop a strategy to provide Remdesivir to patients with coronavirus for emergency treatment in the absence of any approved treatment options and to support clinical trials to determine whether it can safely and effectively be used to treat the current strain of the coronavirus. As a reminder, Remdesivir is an investigational agent. It is not approved anywhere globally and has not been demonstrated to be safe or effective for any use. I'm proud of our teams and the work we've done to offer expertise and resources to help patients and communities fighting coronavirus. In closing, I'm very optimistic about where we are today and the future. Our base business is strong, durable, and growing. As demonstrated by our fourth quarter numbers and year-end results, our near-term pipeline provides several important opportunities with readouts expected later this year with filgotinib and Yescarta. And over the long term, we've introduced a new strategy to drive growth by growing our pipeline internally and importantly also externally through our ongoing business development activities. On behalf of the leadership team, I'd like to thank all of our employees and partners around the world for their dedication and hard work that led to the success of 2019, and whose commitment is driving our success in 2020 and beyond. I remain excited about the potential of Gilead as we enter the next chapter. With that, I'll turn the call over to Andy.

Thank you, Dan. I'm excited to take on the role of CFO, especially during this time as Gilead enters a new chapter. We're pleased to share our financial results for the fourth quarter and the full year 2019 and provide 2020 guidance today. I'll first review financials followed by comments from Johanna. Turning to our financials. Total revenue for the fourth quarter was $5.9 billion with non-GAAP earnings of $1.30 per diluted share. This compares to revenue of $5.8 billion with non-GAAP earnings of $1.44 per diluted share for the same period last year. Our non-GAAP earnings would have been $1.77 and $1.75 in the fourth quarter of 2019 and 2018, respectively, excluding unfavorable cost of goods sold impacts. These impacts were primarily driven by inventory write-downs of $500 million and $410 million, respectively for slow-moving and excess raw material and work in process inventory largely due to lower long-term demand for our HCV products. For the full year 2019, total revenues were $22.4 billion, up 1% year-over-year. Non-GAAP diluted earnings were $6.63 per share for the year, down from $6.67 per share for the full year of 2018. Excluding the unfavorable cost of goods impacts I mentioned previously, our non-GAAP earnings would have been $7.14 per share for 2019 and $7.01 per share for the prior year. As noted in our earnings press release, our full-year 2019 GAAP diluted earnings of $4.22 per share included a total unfavorable impact of $3.30 per share from the following items. First, pre-tax upfront collaboration licensing expense of $3.9 billion associated with our global research and development collaboration agreement with Galapagos; secondly, pre-tax impairment charge of $800 million recognized in the fourth quarter of 2019, primarily related to in-process research and development intangible assets for the treatment of indolent non-Hodgkin's lymphoma; and pre-tax write-downs of $547 million for slow-moving and excess raw materials and work in process inventory. The unfavorable impact was partially offset by a favorable impact of $1.94 per share due to a deferred tax benefit of $1.2 billion related to an intra-entity transfer of intangible assets and gains of $1.2 billion from equity securities held for investments. Now, turning to our product sales. Product sales for the fourth quarter were $5.8 billion, up 5% sequentially and 2% year-over-year. For the full year, product sales were $22.1 billion, up 2% year-over-year, primarily due to the continued revenue growth of our HIV franchise, partially offset by the impact of loss of exclusivity on our cardiopulmonary franchise and market dynamics of our HCV franchise. In the U.S., product sales for the quarter were $4.5 billion, up 8% sequentially and 1% year-over-year. Demand for Biktarvy and Descovy for PrEP was the primary driver of the sequential growth. The seasonal inventory purchases also contributed approximately $290 million to the sequential performance. In Europe, product sales for the quarter were $840 million, up 4% sequentially and 3% year-over-year. Recall that both the third quarter of 2019 and the fourth quarter of 2018 were negatively impacted by unfavorable adjustments for statutory rebates. Turning to cell therapy. Worldwide Yescarta sales for the fourth quarter were $122 million, up 3% sequentially and 51% year-over-year. The year-over-year increase was driven by a higher number of therapies provided to patients and Kite's continued expansion in Europe. Now, turning to expenses for the full year 2019. Non-GAAP cost of goods sold was $3.5 billion, down 1% compared to $3.6 billion in 2018. The decrease was primarily due to lower royalty expenses, partially offset by higher inventory write-downs. During 2019 and 2018, we recorded write-downs of $547 million and $440 million, respectively for slow-moving and excess raw materials and work in process inventories, primarily due to lower long-term demand for our HCV products. Non-GAAP R&D expense was $3.8 billion, up 7% compared to $3.5 billion in 2018. The increase was primarily due to higher personnel costs to support the cell therapy business. Non-GAAP SG&A expense was $4.1 billion, up 13% compared to $3.6 billion in 2018. The increase was primarily due to higher promotional expenses related to Biktarvy and Descovy for PrEP in the U.S. and expenses associated with the expansion of our business in Japan and China. Turning to our balance sheet. We generated $9.1 billion in cash from operations for the full year of 2019 and $2.6 billion for the quarter. We ended the year with $25.8 billion in cash and marketable debt securities. During 2019, we paid $5.6 billion in connection with our global research and development collaboration with Galapagos and our equity investments in Galapagos. In addition, we repaid $2.8 billion of debt. We paid cash dividends of $3.2 billion and we repurchased 26 million shares of stock for $1.7 billion. Earlier today, we announced an increase in our quarterly dividends from $0.63 a share to $0.68 per share, which will be effective in the first quarter of 2020. This is our fifth consecutive annual increase in our dividends. In addition, our Board authorized an additional $5 billion share repurchase program in January 2020. We now have over $8 billion of share repurchase authorization available. In 2020, our capital allocation priorities will remain unchanged. First and foremost, we will focus on investment to augment internal and external research and development, our internal research, and external development pipeline. Second, we intend to grow the dividend over time, pointing out, of course that any dividend increase is subject to the approval of our Board. Finally, our commitment to repurchase shares in excess of dilution from our equity compensation and at a minimum we expect to repurchase shares in 2020 on par with our 2019 share repurchases. Turning to guidance. Our 2020 non-GAAP financial guidance is summarized on slides 23 to 26 in the earnings presentation available on our corporate website. Before I start, I'd like to highlight three things that are important for you to understand. The first change is that beginning in the first quarter, we will no longer regularly exclude stock-based compensation expense from our non-GAAP financial information. Stock-based compensation has always been an important part of how we reward our employees in a way that aligns their interests with those of our shareholders, and it's an important component of our compensation structure. As such, although it's not a cash expense, we believe it to be a cost that should be included when measuring our financial performance. For comparability purposes, full-year 2019 non-GAAP operating income and non-GAAP diluted earnings per share would have been $10.4 billion and $6.13 per share, respectively, had stock-based compensation expense not been excluded. Our second change is that we're modifying our guidance metrics for 2020 as we will now be providing guidance for earnings and operating income, in addition to the metrics that we've historically shared. Our guidance is aligned with how the management team and our Board evaluate our financial performance and manage our operations. Finally, our guidance excludes the impact of any future significant business development transactions, certain development milestones, and any product option exercise fees that are contingent on various future events, which have a high degree of uncertainty. With that background, we expect that our product sales for 2020 will be in the range of $21.8 billion to $22.2 billion. This guidance reflects robust underlying growth in our base business of approximately $800 million to $1 billion, which is expected to offset the full-year impact of the loss of exclusivity for our cardiopulmonary products in 2019 and the initial entry of the generic version of Truvada in the U.S. later this year. I would also like to highlight that as we look towards Q1 of 2020, we anticipate that total product sales will decline sequentially that quarter by a percentage similar to what we've seen over the past three years, which has been as high as 12% to 14%, primarily driven by U.S. seasonal inventory patterns and buying patterns of public payers that negatively impact our payer mix. We also anticipate that our Q1 2020 product sales will decline in comparison to Q1 2019, primarily due to lower sales of our cardiopulmonary products, Ranexa for Nexon and Letairis. As a reminder, generic versions of our Ranexa and Letairis were launched in the first quarter and second quarter of 2019, respectively. Despite this anticipated sequential decline in total product sales in Q1, I want to underscore our confidence in the health of our worldwide HIV business, from which we expect year-on-year growth again in 2020. Turning to our product gross margins. Our non-GAAP product gross margins are expected to be in the range of 86% to 87% in 2020. We expect that both non-GAAP R&D and SG&A expenses will increase mid-single-digit percentage in support of our continued growth at Biktarvy, our Descovy for PrEP launch, preparation for competitive launches of filgotinib in RA in the U.S., Japan, and Europe, and continued investments in our pipeline, cell therapy, and external partnerships. Non-GAAP operating income is expected to be in the range of $10.1 billion to $10.8 billion. For the full year, our non-GAAP effective tax rate is expected to be approximately 21%. Non-GAAP diluted EPS is expected to be in the range of $6.05 per share to $6.45 per share, which again, I'll remind you, no longer excludes stock-based compensation. GAAP diluted EPS is expected to be in the range of $5.15 to $5.55. Finally, our diluted EPS guidance includes repurchases, largely consistent with 2019. I'll now turn the call over to Johanna.

Thank you, Andy. And good afternoon, everyone. I'm really pleased to share the highlights of our excellent Q4 and full year commercial performance. I wanted to begin with a continued strength of our HIV franchise, which was driven by the continued uptake of Biktarvy as well as the successful early launch of Descovy for PrEP. I'll then provide an update on HCV, touch briefly on our cardiopulmonary business, and finally close with a few remarks as we look ahead to the filgotinib launch. As Dan mentioned, approximately 80% of people living with HIV who are on therapy in the U.S. are taking at least one Gilead drug as a sign of a sustained and durable strength we see across the franchise. We reached another all-time high with our HIV product sales for both the full year and quarter. For 2019, HIV sales were $16.4 billion, up 12% from 2018. Global HIV sales for Q4 were $4.6 billion, up 9% sequentially and 13% year-over-year. This marks the seventh consecutive quarter of double-digit year-over-year growth for the franchise. U.S. HIV product sales were $3.8 billion in Q4, up 11% sequentially and 12% year-over-year. The year-over-year increase was primarily driven by underlying prescription demand growth of 10%. Within our prevention market, we're really pleased with the early progress of Descovy for PrEP, which launched in the U.S. in Q4 2019. Approximately 27% of individuals on PrEP are now taking Descovy, and by Q4 2020, we expect that number will have risen to anywhere between 40% and 45%. Across the prevention market, we saw a growth of more than 20% in the number of individuals taking PrEP year-over-year. There are now more than 230,000 people taking one of our HIV prevention medicines in the U.S., and this only represents approximately 20% of those who could actually benefit from it. Turning to the U.S. HIV treatment market, Biktarvy sales were $1.4 billion in Q4, up 23% sequentially. The market is continuing to consolidate around Biktarvy, which is the number one prescribed HIV regimen in the U.S., and as Dan noted, approximately one in two of every naïve and switch patients are now initiated on Biktarvy. In Europe, Q4 HIV product sales were $562 million, up 1% sequentially and 10% year-over-year. The year-over-year growth was driven by the continued strength of our Biktarvy launches in Europe, declining impact of generic launches, and unfavorable non-recurring pricing adjustments in Q4 of the prior year. Biktarvy is now available in 29 countries in Europe and it's number one in naïve and switch in Germany, France, Spain, and now Italy as well. Turning to our HCV business. Q4 HCV sales were $630 million, down 7% sequentially and 15% year-over-year. 2019 sales were $2.9 billion for the full year, down 20%, primarily due to lower average net selling price and declining patient starts. U.S. revenues for Q4 were $337 million, down 11% sequentially and 18% year-over-year. In the U.S., we now have approximately 60% market share with our Gilead branded and authorized generic partner products and are continuing to sustain revenue. In Europe, HCV product sales for Q4 were $151 million, up 36% sequentially and down 20% year-over-year. The sequential performance was impacted by the seasonality of product sales. Overall, the HCV market continued to see a more predictable decline in patient starts and performed in line with our expectations. Before turning to filgotinib, I just wanted to make a few comments on the cardiopulmonary business where we have seen generic competition enter the market early last year. As anticipated, significant volume erosion has occurred. And as of last December, we have seen 90% erosion of Ranexa and 65% erosion of Letairis, a trend that we expect to continue into this year. So, in closing, I'm really excited to share with you a few words about the filgotinib launch. As Dan noted, our teams have now completed regulatory filings for rheumatoid arthritis in the U.S. where filgotinib is under priority review, as well as in Europe and Japan. In December, we announced a co-promotion agreement in Japan with Eisai. It's estimated that approximately 600,000 to 1 million people in Japan are living with RA, and this agreement allows us to draw on the strengths of both companies with the goal of bringing this important new medicine to those individuals. As you're aware, despite currently available treatment options, many patients are still living with symptoms of inadequately controlled RA around the world. In fact, only one out of five patients living with RA achieve complete remission at year one, which means four out of five do not. Filgotinib has a compelling and differentiated clinical profile that we believe may uniquely address the significant unmet need for patients with RA. We have highly experienced teams preparing for the launch later this year and our focus will be on the strength of our data and the compelling risk-benefit profile which serves across both tested doses of this oral medicine. I look forward to working with this great team of people to deliver on the promise of these medicines. And I'll now turn the call over to Merdad.

Thank you, Johanna, and good afternoon, everyone. It's been a pleasure to meet some of you over the past few weeks. I'm pleased to participate in the first earnings call at Gilead today. I'm excited to join a team to extend the Gilead story and improve the lives of patients around the world. As we implement our new corporate strategy, I'm confident we can leverage our existing pipeline and expand with internal and external approaches. Building on Gilead's impressive innovation in HIV, including the launch of 11 products in 17 years, our goal is to continue to transform the lives of people affected by HIV. Our next wave of HIV innovation will be driven by long-acting options for treatment and prevention. We listen to what patients want and we're committed to continuing to pursue and provide more options that meet the needs of people affected by HIV. We believe our capsid inhibitor has the potential for a truly unique profile, offering both oral and subcutaneous dosing, the potential for self-administration as well as multiple dosing frequencies and options for HIV treatment and prevention. We recently presented data from two Phase 1 studies, demonstrating potent antiviral activity and the potential for dosing in intervals of up to every six months. We've initiated Phase 2 and 3 studies, including one in heavily treatment-experienced patients, and we received breakthrough therapy designation for this use. The capsid inhibitor will be the foundation of our long-acting options and we're exploring multiple partner agents to pair with it. As Dan said, we've set the ambitious goal of bringing 10 transformative medicines to patients over the next decade. The first of these 10 transformative medicines will be filgotinib, which has a potential best-in-class profile. I've been impressed with the strength of the filgotinib data. And speaking with key opinion leaders, there's a real appreciation for the results and excitement for the potential combination of efficacy and safety of this selective oral JAK 1 inhibitor. Across the FINCH studies, we've seen consistently strong efficacy and demonstrated a safety profile that is highly favorable from a benefit-risk standpoint, and this is true at both doses tested. We've now filed filgotinib in three regions, the U.S., Europe, and Japan, and as Johanna mentioned, we are gearing up for the launch. Filgotinib has the potential for five new indication launches in the next four years, and we look forward to the upcoming ulcerative colitis data this year. This timing could get filgotinib one of the first labels in ulcerative colitis for a JAK inhibitor. We've also had the opportunity to meet the Galapagos team and discuss opportunities that are being pursued beyond filgotinib. This remarkable partnership has the potential to double our research footprint and includes several programs that could enhance our inflammation portfolio. Turning to oncology, we have a broad portfolio today including Kite and have a total of 15 clinical stage programs. Our approach is to build transformative therapies across complementary immuno-oncology platforms including both cell therapy and non-cell therapy. We're actively pursuing and evaluating innovative programs and technologies externally to build our presence in oncology. In total, across our current pipeline, we have 40 clinical stage programs. As Dan mentioned, of these programs, 14 are either being registered right now or in label-enabling trials, and four of these programs have breakthrough therapy designation. As we pursue external opportunities, we'll continue to build around antiviral therapies, inflammation, fibrosis, and immuno-oncology. I'm excited to work with Dan and the entire Gilead team to expand on the great things that have been done to date and go further for people living with HIV and all the patients we serve. This work, both internal and external, will enable us to grow in the mid to long term. I look forward to sharing more with all of you about our progress in future calls. Thank you very much. And now, we'll open the call for questions.

Thank you for the question and for sharing your insights on the guidance. I would like to hear your thoughts on the guidance for 2020, especially regarding the revenue outlook, which appears to be flat or slightly down compared to 2019, as well as the earnings per share when excluding stock options, which also seems to be flat or slightly down. Can you share your perspective on whether 2020 will be an investment year or if there is potential for growth in both revenue and earnings per share? Additionally, how do you compare 2020 to your broader expectations for 2021? Thank you.

Yes. Thanks a lot, Michael, for the question. And I would say, again, based upon the strong results coming off of 2019 that our base business, our HIV business is really robust and continues to grow. And of course, we need to offset, as Andy mentioned in his comments, the full-year effect of the cardiopulmonary franchise and just the beginning of the Truvada expiry. And we feel confident in our ability to be able to do that. Our guidance reflects the revenue that is essentially flat year-on-year, and of course, we'll keep you updated as we go throughout the year, based on a variety of events on the commercial side. On the investment side, I would say, yes, absolutely, we feel that we need to invest on the commercial side to make sure that we are preparing ourselves well for the most recent launches that have gone out, and that's Biktarvy and Descovy but also well prepare ourselves for a very competitive launch for filgotinib, where you've heard us say, we really think we have a unique medicine with a best-in-class profile. And we want to make sure, as we know, there's only one chance to get a launch right. We want to make sure we're well prepared for that. Now, we have obviously looked hard at our expense base on a commercial side, reallocated resources from cardiopulmonary and are well-prepared to put our investments on the growth drivers. And as you can see in our qualitative guidance, feel we need to increase slightly from year-on-year for the SG&A guidance. Likewise, with the investments that we've made both in our internal pipeline, the expansion of life cycle programs around medicines like filgotinib and others that we need and including external innovation that we've brought in over the past two years, including 33 different collaborations and/or acquisitions, we want to make sure, we invest appropriately in those to take them to the next decision point and decide about future investment accordingly. And we'll continue to work on that portfolio as we move forward. Andy, do you have some other things you want to add to that?

Yes. Thank you. And, Michael, thanks for the question. I would just add two things. Again, as many of you’ve heard, our primary focus is on building a predictable, sustainable top-line growth profile that you would expect to see of companies like Gilead, so. And that at times requires investment. It has in the history of Gilead, as you go back to the Pharmasset acquisition and the investments that were made following that, and it will going forward. So, that is our primary focus, as you know. And then, I'd also add that we also felt that it was important to provide additional transparency and accuracy in measuring our financial performance. And that's why you're seeing additional guidance that helps give you a fuller picture of how we see the business for the coming year. And I think the guidance speaks for itself, and Dan's points were right on.

Thanks so much for taking my question. As you look across your mid-stage portfolio and to new corporate strategy, I was wondering if you could elaborate a little bit more on the areas of most interest to build out or to wind down. Where does Gilead's team stand today to most optimally take advantage of external opportunities? And how do you guys balance potential versus risk as you look at investing in assets both internally and externally? Thanks.

Great. Thanks a lot, Brian. I'll start, and then I'll ask Merdad to comment on the portfolio because one of the big efforts that we have underway is with Merdad coming to the organization, his breadth of experience in building world-class portfolios. That's exactly what he's involved in right now, and really leveraging the strengths accordingly, across the portfolio. So, I'd say a couple of things, Brian. I think, as you know, we've kind of elevated the full disclosure and openness on our portfolio. We started that at JP Morgan. You can expect us to continue to be very transparent about the portfolio, the decisions we take, and we make. But, I think, just the very fact that we have 40 clinical stage programs, 14 of which are in registrational trials is something that I think may be underappreciated from the outside. Now, you asked about what are the things that are most interesting? I'm going to let Merdad give that as well. But I remind you that our strength in viral diseases will continue to be invested in, and that's the discussion around capsid, and really, truly providing kind of next-generation therapies that we think patients and customers are asking for out there. Having said that, I think the extension of our inflammatory disease portfolio with the Galapagos transaction is something that excites me. I think, there's lots of potential shots on goals there. There are ways to think about, between Gilead and Galapagos, building combination approaches in the future. And I think we've really got a strength in inflammatory diseases that is building. Fibrotic diseases is something that we have a depth of expertise in. And we understand the challenges associated with that disease state. So, as Merdad builds the portfolio, I think he'll come in, we have to make sure that we're putting the right level of investment in there that makes sense for the big unmet medical need, but also the risk associated with some of the natures of those diseases. Finally, there's been significant effort, long before Merdad or I joined on oncology. Of course, the Kite acquisition provides was the immediate step up and knowledge and know-how and a breadth of portfolio there. But the non-Merdad portfolio is something that's really built up over the past couple of years, both internally and through our collaborative. We know it’s early, and we know that we're going to have to continue to pursue those programs and build on it. So, that's my two cents. Merdad, you have a deeper and kind of a refreshed view cause you've just entered not too long ago. So, it'd be good to hear your reaction.

Yes, I agree with what Dan mentioned. He addressed the key points, particularly highlighting the intriguing aspects of the capsid molecule. We are quite enthusiastic about it. One of our main objectives will be to establish partnerships for both treatment and prevention, which is essential as we expand our inflammation portfolio and enhance our reach in that area. In oncology, we intend to focus on developing opportunities, especially in immuno-oncology, and collaborate with our colleagues at Kite to ensure we strike the right balance between our cell therapy and non-cell therapy offerings. More generally, what we’re emphasizing is the importance of focus; being deliberate about where we direct our efforts and expertise to create a coherent portfolio in the areas we’ve discussed. Additionally, we're mindful of managing risk, striving to maintain a balance in our overall portfolio that includes a mix of high-risk, high-reward programs alongside other initiatives that are less risky and more likely to succeed. This balanced approach will apply across our entire portfolio, including oncology, inflammation, fibrosis, and HIV.

Johanna, I wanted to ask you a couple on HIV. So, the Descovy and PrEP targets, what gets you there to 40%, 45% and how are you dealing so far with generics to grab share? And then, when you look at the Biktarvy franchise, obviously pretty dominating share there. But what populations have you seen of late that are going to continue to add to the switch dynamic? I mean, I guess the question is how many of the switches that you've seen thus far in the U.S. are kind of laggards and maybe where they're coming from? Thank you very much.

I'll start with your question about Descovy and then move on to Biktarvy. We finished the year with a 27% share for Descovy, and we're seeing a strong uptake. It's important to note that the prevention market is highly fragmented compared to the treatment market, which has around 3,000 to 4,000 prescribers, while the prevention market has significantly more, potentially five to ten times that amount. Our strategy focuses on the higher volume prescribers who work in both prevention and treatment. These physicians recognize the advantages of transitioning patients from TDF agents to Descovy, particularly regarding bone and renal safety. We're seeing a rapid increase in our share within this segment. Additionally, about 20% to 25% of the volume comes from prescribers who have never prescribed HIV treatment before. We are reaching out to these physicians through various communication methods to educate them on the benefits of Descovy. The month-to-month increase in uptake is encouraging after just three months post-launch. However, we anticipate some challenges from payers. We aim to reach a 40% to 45% conversion rate by the end of the year, especially with Truvada losing its patent in October, which some payers are preparing for. We are closely collaborating with them to ensure that patients receive the most suitable medication. As for Biktarvy, it's been a strong quarter, and I'm proud of our team's achievements. The competition is fierce, but Biktarvy is being prescribed to the majority of patients, thanks to its convenience, tolerability, and resistance barrier. With initiatives to end the epidemic, the rapid start program for Biktarvy has become a key differentiator for physicians, contributing to its growth. Currently, one in two patients starting treatment are beginning with Biktarvy, whether they are naive patients or switches, indicating how the market is aligning with Biktarvy. We expect this trend to continue not only in 2020 but also in the future due to the advantages Biktarvy offers to patients. I hope this addresses your question, Geoff.

Yes. Thank you.

Thank you very much. I appreciate the question. I have to ask one about Remdesivir, which is, have there been any other anecdotal reports or responses other than the one that was in the journal over the weekend? And do you have manufacturing capacity that you could scale up quickly? And then, I just wondered if Merdad could talk a little bit about fibrotic disease. You're obviously still involved in NASH, but there are a lot of other fibrotic diseases. I just wondered if your ambition spans all fibrotic diseases or is it still pretty much confined to NASH? Sorry about the double up.

Thank you for your question. Regarding Remdesivir, we have not received any additional anecdotal reports thus far. We will continue to monitor the situation closely as it develops. Our manufacturing team has been working incredibly hard, and it has been impressive to see their efforts over the past few weeks as we ramp up capacity. Our production capability is increasing daily, and we are exploring all options to be ready for potential developments. We are awaiting both in vitro data and patient data to confirm the drug's efficacy. It’s important to remember that this is still in the investigational phase, and we need more information before making any conclusions. We are making significant investments to ensure we are as prepared as possible. When it comes to fibrotic diseases, we consider this quite broadly. Specifically, we have programs related to diabetic kidney disease and an ongoing study for idiopathic pulmonary fibrosis, which are biologically connected. We carefully evaluate how to apply specific mechanisms to different diseases. As we receive updates on the IPF study, engage with regulatory agencies regarding the NASH program, and observe new molecules emerging, we will proceed cautiously. Fibrosis is a complex area, and we recognize the challenges it presents.

I was hoping you could address what you see as the opportunity in China. You obviously mentioned that fervently and then pointed out some of your HCV medicines are approved there. But I don't think you've talked about how big you think that could be or how much a contributor you think that could be over the next couple of years? Thanks.

Thanks, Matt. We’ll have Johanna address that. Thanks.

We're excited about our first opportunity with reimbursed compounds in China. Specifically, for hepatitis C, we have Harvoni and Epclusa, while another product has gone through a tender process. This represents a significant volume opportunity, as many patients need these treatments, and we can truly help them. For hepatitis B, vemlidy has also received reimbursement, making it a key market in China due to the large patient population. Additionally, Genvoya for HIV will be the first class of products to receive reimbursement in China, and we are cautiously optimistic that more patients will access the treatments they require. However, we recognize that current events in China, particularly the focus on the coronavirus, may delay the uptake of these new products into 2020. Looking ahead, we believe there is a substantial opportunity in China due to the considerable patient pool in the disease areas we are addressing.

I think that's great, Matthew. The only thing I would say, Johanna’s captured it really well. But we kind of put this into the durable base part of our strategic story. I think this is because it is a volume game. I think there is real opportunity here obviously for patients in China but also for our business, but it helps us kind of stabilize and navigate that durable base over the course of the years to come. It’s important for patients and also for our business to build that in. Then we have the inflection points on top of that with Yescarta business, with filgotinib, with a variety of things that we have in our hands right now, and a larger portfolio to inflect for to provide our confidence in the mid-to-long term growth. Thanks.

Hi. Thank you for taking my questions. My first question is for Johanna. I know that in your previous position, you led a top-notch commercial organization in oncology and had a strong presence in primary care with Eliquis. Considering Gilead's current position, how ready is the organization to compete with AbbVie and Pfizer, who are both well-established with their JAKs? I’m trying to gauge the level of organizational readiness, especially regarding what seems to be around $200 million in year-over-year incremental SG&A expenses as we approach the filgotinib launch. My next question is for Merdad. I understand that the selection results for the filgotinib UC trial are expected any day now. Also, I know that it includes patients who have not responded adequately to Entyvio. What percentage of the trial does that represent? Do you anticipate filgotinib will be effective for those Entyvio non-responders? Thank you.

So, specific to filgotinib, I think that you're right. Obviously, we are very well aware that it's going to be a very competitive environment. There's no doubt about that. But, I think we're being really smart about it. What I mean by that is because I think what we're thinking about is making sure we're going to bring focus to the table. We are very clear about where we want to play, and where we play, we win. That's about commercial excellence and medical excellence, to be honest with you. Because medical and commercial are going to need to partner very closely and we are already around the clinical data and the profile of this compound, and how that really needs to be at the center of everything we do with filgotinib. I would also say that, if I take other disease areas where we had similar competitive dynamics and similar competitors, to be honest, we've done quite well in that space. HCV is a great example of that, where we've regained share. Now, we're at 60% share in HCV across the marketplace, which I do think shows others, including internally and externally, that we can be very competitive when we need to be. This is exactly what you're going to see with filgotinib. We are preparing the teams. We are making sure that we are hiring the right people with the right level of experience to ensure that we are absolutely ready for an expected launch later this year. I’m very excited about it, to be honest with you. The team has really come up as aligned, and we’ve brought in some really good external talent that we already had. Some very good internal talent as well. Building the two together, I think we'll make for a very successful launch moving forward.

Maybe I'll start by clarifying the timing because I think you may have given my team a heart attack. I don't think it will be any day now; I believe it will be a little later in the first half of the year. So, please be patient with us. We will get it out there as quickly as we can. Regarding the Entyvio non-responders, I won't know the exact proportion until we analyze the demographics after the trial is completed. So, I won't speculate on that topic either, and I would appreciate your patience. As for response expectations, take a look at this population; they cycle through various medications. While the response rate when they switch to the next medication isn’t typically as strong as that of naive patients, there is good evidence showing that transitioning from Entyvio to a TNF inhibitor, or the other way around, still leads to a significant number of patients responding. Our expectations are quite realistic regarding the responders to filgotinib.

I wanted to ask you about the corporate strategy aspect. Everyone seems to be anticipating that the Company will take on more significant business development. How urgent do you feel about this, especially with the new management team now in place? Additionally, how successful do you believe Gilead can be without external support, mainly relying on the initial two pillars of your strategy?

Thank you, Cory. I'll start, and Andy can add if he wishes. First, I believe we're in a strong position now that we have a complete management team with considerable experience. While we're still gaining experience in some of our new therapeutic areas, we have assembled an accomplished team that knows what good looks like and understands how to take calculated risks. It's relatively recent that we have come together in this way, which enables us to act swiftly when exploring external opportunities in our areas of expertise, which is crucial since we've decided to focus there. Our ability to move quickly is important, and being first at the table can carry different risks depending on the situation. We are well equipped to either lead or closely follow in these efforts and to make things happen. We have a strong pipeline, and there is an urgency about building this. We have clearly outlined the areas we intend to develop. We will also exercise discipline, taking appropriate risks that will enhance the overall structure of our portfolio, akin to what Merdad mentioned earlier. It’s not just about individual targets or assets; it’s also about how they fit with the complementary nature of other therapeutic areas. That's where we will adapt and proceed. Our urgency is high, and so is our expertise. Andy, would you like to add anything?

The only thing I would add, I agree that there is a sense of urgency. We'll be disciplined. I’d say, to some extent, Cory, that that best proxy is just looking at the past couple of years. I mean, we've outperformed commercially the last two years. We've given very clear guidance for 2020. Obviously, we will work incredibly hard to outperform again. We see opportunities, things that we can potentially do better. We would like to find external assets to supplement our pipeline, but we also feel that the durability of our existing business and our existing pipeline are both underappreciated. So to answer your second question on, can we compete without doing large business development deals? Absolutely. I mean, and we think that we can continue to build a sustainable business. Would we like to supplement it with outside assets, especially to build our late-stage pipeline? Yes. We are actively working on that. But, to reiterate what Dan said, we're going to be thoughtful and disciplined in how we do it.

Thanks for taking my question. And if you could talk a little bit about the market opportunity with the capsid inhibitor, especially in heavily treated patients? Should we think about this as an incremental opportunity, or do you think a portion of it could be from existing Gilead products? Thank you.

I think I can touch on it from a commercial standpoint and then maybe pass it over to Diana to touch a little bit more on its clinical profile and its offerings. From a commercial standpoint, we're thinking about the capsid in two ways. One, in prevention and the other one in treatment. Obviously, we think there's probably an opportunity we'll see to see if there's monotherapy and prevention and potentially, we're looking for a combination in the treatment. Diana can touch on that a little bit more. In prevention, I do think with Descovy right now in prevention and the launch of what's going on, we do think that’s probably going to be something that could be very interesting for patients if you think about that marketplace and thinking potentially after six months. That's really what patients are looking for to have something every six months. This could be something very interesting and exciting for patients. That would be with the timing that we're thinking about for this compound assuming all plays out, then it could actually be more of a switch in the prevention market from Descovy to the capsid inhibitor. Having said that in treatment, that could look very different. I think that’s potentially a market expansion because it would really be, if we can find a combination that would really work in the treatment setting, I do think that would offer a long-acting that patients really want. That's the biggest piece of the puzzle. We're trying to do is make sure that we match up what the patients are telling us with our clinical development plan. What I mean by that is as we've done so much market research with our patient pool, what they're telling us is yes, weekly oral would be interesting and potentially something that they might be interested in over a daily compound, but it's not for everyone. When you go from weekly oral to potentially what else would they want, would they rather an injectable, to subcu, subcu wins out, if they'd rather three months in six months, six months wins out. This is really where we have focused our clinical development team to make sure that we're addressing the needs of patients. Maybe with that, I'll turn it over to Diana.

We recognize the bar is very high because Biktarvy has really set the standard. But, we also know that within the U.S., only 85% of people with HIV are in treatment. If we want to end the epidemic, we have to do better. The capsid inhibitor is going to be one of those tools. We really see it, as Johanna was saying, as a market expander because one of the reasons that those people aren't in treatment is that the treatments right now are not amenable to their lifestyles. A long-acting is a way to make the umbrella a little bit larger. It's a complement to Biktarvy and what we have already.

I just wanted to ask maybe perhaps Dan and Merdad about the NASH and hep B space. I mean, I know it's one that's been pretty tough on the clinical side, but obviously there's a lot of leverage to your business since you have the sales force in place. I guess, I'm just trying to figure out where you guys are going to think about that going forward over the next 12 months? Thanks.

For NASH, I think we definitely are working hard on the results from the ATLAS trial. We'll be talking with the regulators and looking to see what the path forward is. As you said, the data will be published at EASL.

The data will be published at EASL.

We are planning a midyear discussion with the agency to explore potential paths forward and make informed decisions based on those discussions. I want to emphasize that our focus has been on F3 and F4 patients, who are more severely affected, unlike most competitors who are targeting milder patient populations, primarily F1s through F3s. This approach presents unique challenges, but we remain dedicated to this area. Similarly, with HBV, which is a core part of our business, we have established therapies and a sales force. We continue to be committed to this area and our primary focus is on finding a cure. We have several ongoing programs aimed at advancing from current treatments to a cure, which will be a challenging journey, but we are steadfast in our efforts.

Thanks so much guys for taking my question. And I appreciate all the color on the guidance, Andy. Just one for me on the long-term picture here. I’m not asking for long-term guidance. Maybe this is for Dan or Andy. Obviously, you guys provided a lot of color. Johanna, you mentioned Biktarvy, a majority of patients through 2033. You guys seem relatively excited about what you have currently in the pipeline with filgotinib etc. But with consensus as you modeled at $22 billion, sort of flattish for the next few years, do you need M&A to grow your top-line or do you think you can grow your top line without any additional M&A? Thanks so much.

Thank you, Salim. I’ll have others weigh in too. The key point I want to address is the durability of our base business, as this significantly affects our confidence in mid to long-term growth. We are very confident about the durability of our base business, which sets us apart from many in the industry. Although we have some patent expirations this year and next, particularly with Truvada, we are prepared for the Descovy patent expirations in 2025 and 2026. This gives us a solid foundation until 2033. In addition, we have internal growth engines that we want to highlight. We expect important developments this year, including results related to ulcerative colitis and treatments for second-line DLBCL, as well as a capsid inhibitor coming next year. There are also promising developments in our Galapagos pipeline, such as the Phase 2 trial for osteoarthritis and an interim readout for IPF next year. We are focused on what we can achieve with our current resources, and I am confident in our ability to grow. Furthermore, we aim to enhance and de-risk our portfolio over time through strategic partnerships and M&A, ensuring even greater strength and reliability in our offerings. This will take time, but we are committed and equipped to achieve it. Would you like to add anything, Andy?

No. I think that’s perfect. I don’t have anything else to add.

One question for Andy, the 2020 guidance, just kind of maybe three moving parts that weren't mentioned on slide 25. I was just curious to get your thoughts on whether these will materially impact revenue in 2020. So, the positive side first is filgotinib, any expectations for filgotinib revenue contemplated in your guidance? Then, maybe as potential headwinds in HIV, the nucleotide sparing regimens are launching, any expectation for those to gain share through the course of the year? On HCV, price has been deteriorating over the last couple of years, any expectations for further declines in price, again, contemplated in the guidance? Thank you.

At a high level, Johanna may want to address the challenges in the HIV market. For filgotinib, we anticipate limited contributions in 2020 due to its projected launch date, but there is potential for upside as it develops. It's been a long time since we've seen significant activity in the HIV market, and our expectations for the competitive environment there are reflected in our guidance. In the HCV market, we expect ongoing price pressure. Although the number of patients treated increased from the third quarter to the fourth quarter, revenues have declined due to the dynamics within that market. Speaking about HCV, it represents a smaller part of our overall business, and our guidance reflects a continued decrease in that area over time, although it remains a significant source of cash flow for us. While the year-over-year increase in revenue is consistent in dollar terms, it represents a smaller percentage, and it may stabilize at some point. That's how I would summarize the situation at a high level. Johanna, would you like to add anything?

Yes. No, I'm totally aligned with what you said. I would just add from HCV standpoint, the only thing I would add to that is, it's just so much more predictable today than it was. The declines are much, much softer. What you're going to see is still continued price erosion across the U.S. and Europe, and the patient starts are a little bit less every single quarter. Having said that, it's nothing like what we've seen in the past. I think much more predictable marketplace for us. In HIV, I think we have had some of those, I guess headwinds, as you say, from a competitor standpoint mid last year, or so when competition came into the marketplace. We have been able to manage that extremely well and very limited impact to Biktarvy and its growth trajectory. We believe the same will continue throughout 2020.

I think that's the end of our call today. Operator?