Gilead Sciences Inc (GILD) — Q4 2022 Earnings Call Transcript

Thank you, operator, and good afternoon, everyone. Just after market close today, we issued a press release with earnings results for the fourth quarter and full year 2022. The press release slides and supplementary data are available on the investors section of our website at gilead.com. The speakers on today’s call will be our Chairman and Chief Executive Officer, Daniel O'Day, our Chief Commercial Officer, Johanna Mercier, our Chief Medical Officer, Merdad Parsey, and our Chief Financial Officer, Andrew Dickinson. After that, we’ll open up the call to Q&A, where the team will be joined by Christi Shaw, the Chief Executive Officer of Kite. Before we get started, let me remind you that we will be making forward‐looking statements, including those related to Gilead’s business, financial condition and results of operations; plans and expectations with respect to products, product candidates, corporate strategy, business and operations, financial projections and the use of capital; and 2023 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. All forward‐looking statements are based on information currently available to Gilead, and Gilead assumes no obligation to update any such forward‐looking statements. 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, in our supplementary data sheet, as well as on the Gilead website. Now, I’ll turn the call over to Dan.

Thank you, Jacquie, and good afternoon, everyone. We had the opportunity to connect with many of you a few weeks ago in San Francisco. I’m excited to be able to reconnect now to share our strong fourth quarter and full year results for 2022 in addition to our guidance for 2023. These show the tangible impact of our business transformation, notably the growth trajectory for our HIV portfolio and our fast-growing oncology business. The team will take you through our quarterly results in detail, but I am very pleased to highlight on Slide 4 the strongest full year growth in our base business since 2015 when growth was driven by the peak of HCV sales. Full year 2022 sales of Biktarvy grew 20% year-over-year to $10.4 billion, exceeding $10 billion for the first time. Excluding Biktarvy, our base business in 2022 grew 8% year-over-year and I’m pleased to share that our initial 2023 guidance points to base business growth between 4% and 6%. Andy will share our revenue guidance in detail, but I do want to take this opportunity to recognize the Gilead team for the progress we made in returning to growth. Thanks to their commitment to improving the health of people and communities around the world, Gilead is now poised to extend its reach to more patients and more challenging diseases and conditions than ever before. Beyond our financial results, our clinical progress in 2022 reinforces how far we’ve come. At the end of the year, Sunlenca received its first approval in the U.S. for heavily treatment-experienced adults with multi-drug-resistant HIV infection. This follows a European approval in the third quarter. Sunlenca is the first six-monthly subcutaneous medicines to be approved and we believe it represents the most exciting innovation in HIV therapeutics in recent years, with significant potential across prevention and treatment. We look forward to partnering with the HIV community to increase awareness of Sunlenca and to advance our portfolio of long-acting options. We are anticipating another potential approval any day now with the upcoming PDUFA date for Trodelvy in pre-treated HR-positive/HER2-negative metastatic breast cancer. We also expect to hear from European regulators later this year. In the meantime, Trodelvy’s commercial momentum is building, with full year 2022 sales growth of 79%. In cell therapy, we continue to reinforce our leadership and to execute on plans to broaden availability, with Yescarta most recently approved in Japan for a second-line relapsed refractory large B cell lymphoma. Merdad will take you through our pipeline updates and key milestones in a few moments. For now, I'll simply note the significant expansion in our clinical programs, which have more than doubled in the last four years. We continue to add further programs, including our new preclinical candidates to partner with lenacapavir for long-acting HIV treatment programs, the new Phase III OAK CRE study for a Novel Oral COVID-19 nucleoside, and the five Phase III trials that we expect to initiate this year. Before I hand over to Johanna, I want to briefly review the clinical goals we shared with you a year ago. The Gilead and Kite teams have done a terrific job in both delivering as planned and acting with agility in response to changing circumstances. We had an impressive year of discipline and determined execution in 2022 and fully expect to further strengthen our track record of execution in 2023 and beyond. With that, I'll hand over to Johanna for a review of our fourth quarter and full year commercial performance.

Thanks, Dan, and good afternoon, everyone. Before discussing our commercial results, I want to acknowledge our Gilead team for delivering another outstanding quarter and closing out a very successful year. 2022 was an exceptional year for Gilead with our virology franchise well positioned to continue its leadership for years to come. Significant progress was made in executing our oncology strategy and bringing new medicines to improve the lives of more patients all around the world. Starting on Slide 7, we had a very strong quarter, delivering a total product sales excluding Veklury at $6.3 billion, up 9% year-over-year, or 12%, excluding the impact of FX and the loss of exclusivity of Truvada and Atripla. There was solid growth in each of our core franchises and growth across all geographies, once again, led by HIV and oncology. Quarter-over-quarter sales grew 5%, driven by HIV, Trodelvy, and cell therapy, partially offset by HCV. For the full year, total product sales, excluding Veklury, were $23.1 billion, up 8% year-over-year, or 11%, excluding the impact of FX and the Truvada Atripla LOE, driven by HIV and oncology. As expected, full year Veklury sales were down meaningfully in 2022 compared to 2021. That said, Veklury’s performance has been more sustainable than we previously expected. It’s clear that it continues to play an essential role for hospitalized patients treated for COVID-19. In 2022, Veklury delivered $3.9 billion, including $1 billion in the fourth quarter. Overall, total product sales for the full year of $27 billion was flat compared to 2021, as growth in our base business was offset by the decline in Veklury sales. On Slide 8, HIV sales for the fourth quarter were $4.8 billion, a 5% year-over-year, driven by higher demand as well as favorable pricing dynamics. This was offset in part by a smaller than usual inventory build in the fourth quarter, reflecting our early efforts on seasonal inventory management. Sequentially, HIV sales in the fourth quarter were up 6%, primarily driven by favorable pricing and inventory dynamics as well as higher demand. For the full year, HIV sales of $17.2 billion were up 5% year-over-year due to higher demand primarily related to the continued strength of Biktarvy, in addition to channel mix, leading to higher average realized price. This was partially offset by inventory dynamics and FX. Overall, the HIV treatment market in the fourth quarter grew 1.5% year-over-year in the U.S. and over 2% in Europe. On an annual basis, the market has grown in line with our expectations of 2% to 3%. Moving to Prevention, the U.S. PrEP market grew 18% year-over-year and 3% sequentially in the fourth quarter of 2022, reflecting growing awareness. Descovy sales for the fourth quarter were $537 million, up 13% year-over-year and 7% sequentially. Notably, despite generics and other entrants, demand for Descovy for PrEP continues to increase up more than 20% for the full year, in addition to maintaining a stable market share of over 40%. With these trends and the TAF IP settlement last year, Descovy’s position in the growing PrEP market has only strengthened. Overall, this provides a strong foundation as we look to the potential launch of lenacapavir for PrEP as a true long-acting every six month regimen by the middle of the decade. Moving to Biktarvy on Slide 9, sales for the quarter were $2.9 billion, up 15% year-over-year, primarily driven by higher demand, as well as favorable pricing dynamics, offset in part by lower channel inventory. Quarter-over-quarter, sales were up 6%, similarly driven by higher demand and favorable pricing and inventory dynamics. In every quarter since our launch, we've seen Biktarvy continue to gain market share, and the fourth quarter was no exception, gaining more than 3 percentage points in share year-over-year. This continued momentum is a testament to Biktarvy’s differentiated clinical profile, reinforced by the long-term five-year data we presented last year. Notably in the U.S., Europe, and other major markets, Biktarvy remains the number one regimen for new starts in addition to its number one position in treatments, across most major markets, including the U.S. At the end of 2022, there were almost 1 million people managing their HIV with Biktarvy worldwide. Taken altogether, this has led Biktarvy for the first time to achieve full year sales of over $10 billion in 2022. Looking ahead, we're confident Biktarvy will remain the leading medicine for the treatment of HIV in the U.S., Europe, and other major markets for years to come. Now looking ahead for the first quarter of 2023 for HIV, a few points I just wanted to call out. First, with respect to pricing dynamics as we enter the New Year, we expect a typical first-quarter reset in patient co-pay and deductibles. As always, these will have an unfavorable impact on average realized price in the first quarter. Second, a reminder that we've historically seen inventory build-up in Q4 that has led to notable drawdowns by wholesalers in Q1. While we've implemented new processes to better manage inventory dynamics from the fourth quarter to the first quarter, we continue to expect an inventory drawdown to occur in Q1, albeit at more modest levels compared to the prior year. So with this in mind, we expect HIV sales for the first quarter to decline by low teens sequentially from the fourth quarter. This compares to the 18% sequential decline we reported in the first quarter of 2022. For the full year 2023, I'd like to remind you that some of our HIV performance in 2022 was driven by shifts in channel mix that had a favorable impact on average realized price, contributing in part to the 5% year-over-year revenue growth we reported in 2022. We expect channel mix in 2023 to be relatively similar to last year and therefore do not expect HIV growth to benefit from changes in average realized price like we saw in 2022. As a result, we continue to expect HIV to grow in 2023, albeit at a modestly lower growth rate than 2022. As we think about the future of the HIV market, Gilead is well positioned to provide many people living with HIV and those at risk of HIV with multiple options for care. To that end, we're excited about the recent approvals for Sunlenca in the U.S. and Europe for heavily treatment-experienced adults with multi-drug resistant HIV infection. This first indication represents only 1% to 2% of people living with HIV. There's a huge unmet medical need. These individuals have cycled through multiple antiretroviral regimens, and until now have had very few if any, effective options left available. Sunlenca is now approved in the U.S., U.K., and European markets, and we're working as quickly as possible with regulators and reimbursement bodies to make Sunlenca available in many more countries. We believe that first launch of Sunlenca represents a key milestone for Gilead and looking forward in the treatment and potential prevention of HIV. With Sunlenca, a true long-acting regimen is a reality. As awareness and familiarity of Sunlenca's every six months subcutaneous administration grow among healthcare providers, community groups, and people living with and at risk of HIV, we believe Sunlenca is well positioned for the future. Turning to HCV on Slide 10, sales for the fourth quarter were $439 million, up 12% year-over-year, reflecting timing of Department of Corrections purchases and favorable pricing dynamics in the U.S. Quarter-over-quarter HCV sales were down 16%, primarily due to the resolution of a rebate claim in Europe in the third quarter of 2022 that did not repeat, as well as other pricing dynamics in the U.S., offset in part by the timing of DOC purchases. Going forward, we continue to expect new starts to decline, but are encouraged that our market share remains over 50% in both the U.S. and Europe. Sales of HPV and HDD for the fourth quarter were $255 million. Sales were down 4% year-over-year and down 3% sequentially, primarily due to lower than expected demand and pricing dynamics outside of the U.S. Moving to Veklury on slide 12, sales for the fourth quarter totaled $1 billion, with a full year totaling $3.9 billion. It's clear that the pandemic has evolved, and Veklury’s role in the treatment of COVID-19 has remained unchanged as a key part of the standard-of-care for hospitalized patients. In fact, Veklury is still the only antiviral approved in this setting in the U.S. Veklury continues to be used in over 50% of hospitalized patients who are being treated for COVID-19. We're excited to continue to work on our oral COVID-19 nucleoside, which Merdad will discuss shortly. Moving to oncology, and beginning with Trodelvy on Slide 13, sales of $195 million in the fourth quarter grew 65% year-over-year and 8% sequentially. For the full year, Trodelvy's sales were $680 million, up 79% year-over-year. As we continue to broaden access to Trodelvy around the world, we're encouraged by the growing demand in the existing market. Trodelvy is now reimbursed across the major European markets. In the U.S., demand was up 13% quarter-over-quarter, a growth rate almost doubled from the prior quarter, reflecting the solid contribution of our expanded field force and growing awareness. We're also excited by the expected decision from the FDA later this month, which could expand Trodelvy’s potentially clinically meaningful benefits into the pre-treated HR-positive/HER2-negative metastatic breast cancer setting. We estimate this represents at least 6,000 addressable patients in the U.S., and our U.S. field force has just wrapped up its launch meeting and is energized for the upcoming approval. The opportunity for Trodelvy to benefit patients with pre-treated HR-positive/HER2-negative metastatic disease is supported by the recent NCCN Category 1 preferred recommendation for Trodelvy based on the TROPiCS-02 data. Additionally, the European Medicines Agency recently validated our marketing authorization application for Trodelvy in HR-positive/HER2-negative and we look forward to a decision later this year. Now on to Slide 14, on behalf of Christi and the Kite team, Cell Therapy sales in the fourth quarter were $490 million, up 75% year-over-year and 5% sequentially. Full year Cell Therapy sales were $1.5 billion, up 68% year-over-year. The growth in the fourth quarter and full year were driven by continued uptake of Yescarta in large B cell lymphoma, notably in the U.S. Growing physician familiarity with Yescarta data and Kite's industry-leading manufacturing continue to be key growth drivers. Yescarta sales were $337 million, up 85% compared to the fourth quarter of 2021 and 6% sequentially. We're pleased to see not only strong momentum in second-line LBCL in the U.S., but also continued uptake in third-line LBCL in both the U.S. and across the European market. Yescarta sales were $82 million in the fourth quarter, up 2% quarter-over-quarter, with growing volume demand in both mantle cell lymphoma and adult acute lymphoblastic leukemia. Year-over-year, Yescarta sales were up 44%. We're pleased to see the building momentum of CAR-T Cell Therapy as a treatment class with Yescarta and Tecartus as the leading cell therapies of choice globally. More patients are getting access due to Kite’s industry-leading reliable manufacturing capabilities and the team's expanding footprint of authorized treatment centers around the world. Just last week, the U.K.’s National Institute for Health and Care Excellence or NICE, recommended Yescarta for routine use in third-line large B cell lymphoma. This makes Yescarta the first product available for commissioning in England. Approvals and reimbursement in additional indications that are currently available in the U.S. and other markets are expected to continue over the next year. Yescarta was recently approved for second-line LBCL in Japan, which has the potential to be the second largest cell therapy market outside of the U.S. We look forward to the transfer of the marketing authorization to Gilead and Kite later this year. In the interim, while still early days, we'll continue to work with our partner Daiichi Sankyo to make Yescarta available to approximately 7,000 patients in the second-line plus setting. Kite will begin manufacturing supplies for the Japanese market through our El Segundo, California, facility. With that, I'll hand the call over to Merdad for an update on our pipeline.

Thanks, Johanna. I'm excited to kick off 2023 with strong momentum and leave 2022 behind. The positive data for Trodelvy and domvanalimab, along with the recent approvals for lenacapavir, energize our team as we advance our initiatives this year and beyond. Starting with Brage, lenacapavir has received its first U.S. FDA approval for individuals living with multi-drug resistant HIV when used with other antiretrovirals. Marketed as Sunlenca, lenacapavir is the first and only twice-yearly subcutaneous HIV treatment, offering essential options for those with limited alternatives. Alongside the approval from the European Commission, the FDA approval serves as a significant validation as we continue to develop additional Lenacapavir-based treatments and prevention strategies. For HIV treatment, we currently have 10 partner agents for Lenacapavir in various developmental stages, including two new integrase inhibitors in the pre-IND phase. This year, we plan to share data from the Phase 1/b proof-of-concept study for Lenacapavir and two broadly neutralizing antibodies targeting HIV. In PrEP, our clinical development of Lenacapavir as a standalone therapy for HIV prevention is progressing, with two trials underway and two more expected to achieve FPI in the second half of 2023. Moving to COVID-19 on slide 17, we are advancing our novel oral nucleoside GS-5245. Current treatments, including Gilead's Veklury and vaccinations, have improved the outlook for COVID-19 patients, yet there remains a substantial need for effective and convenient oral treatments. We are collaborating with the FDA and global regulators to initiate a clinical development program for potential global filings. We have launched a Phase III Birch trial targeting high-risk patients, defined as unvaccinated individuals with one or more risk factors or vaccinated individuals with two or more risk factors. The Phase III Oaktree trial will focus on standard-risk patients aged 12 and older without CDC-defined risk factors. We anticipate enrolling the first patients in the U.S. in the first quarter, and we will provide updates as conditions allow, considering the prevalence of COVID-19 at our study sites. Transitioning to oncology on slide 18, we are building on the success of our TOPiCS-02 data regarding Trodelvy. The European Medicines Agency validated our marketing authorization application for pre-treated HR-positive/HER2-negative metastatic breast cancer in early January. As Johanna mentioned, we expect a regulatory decision on our sBLA in the U.S. later this month, and a European decision later in the year. Trodelvy has already transformed the care standard for numerous metastatic TNBC and advanced bladder cancer patients. We believe these regulatory approvals will significantly advance access to this potentially practice-changing therapy for certain HR-positive/HER2-negative metastatic breast cancer patients. Additionally, recently presented data showed that Trodelvy's PFS and OS benefits were consistent across varying levels of tumor Trop-2 expression. This post-hoc analysis, shared during the San Antonio Breast Cancer Symposium, aligned with Trodelvy's findings in metastatic triple-negative breast cancer, where initial Trop-2 expression did not correlate with treatment response. Moving to slide 19, we were pleased to present data from the fourth interim analysis of the ARC-7 trial with our partner Arcus in December during the ASCO Plenary session. ARC-7 is a randomized Phase II proof-of-concept study that enrolled 150 patients, representing the largest dataset in anti-TIGIT studies published today, with over 100 patients in the DOM-containing arms. We observed that both DOM-containing arms exhibited clinically meaningful differentiation compared to ZIM monotherapy across all effectiveness metrics assessed, firmly establishing that Domvanalimab enhances the clinical responses to anti-PD-1 therapy in this cohort. The safety data from the DOM-containing treatment arms showed no unexpected signals, which is encouraging. This ongoing trial will yield further updates at ASCO 2023. While efficacy and safety data will evolve, this fourth interim analysis robustly supports our joint DOM clinical development strategy and the significance of hindering the TIGIT pathway. Given the comprehensive data available, we are confident that DOM with an Fc-silent design can stand out among other anti-TIGIT molecules in this field. Our ongoing Phase III trials of DOM combined with anti-PD-1 treatments in non-small cell lung cancer will provide opportunities to validate this efficacy. We are moving swiftly with our partners in both proof-of-concept and late-stage trials, including four active Phase III studies. Now, addressing magrolimab, our anti-CD47 therapeutic on slide 20, we have three pivotal trials and six proof-of-concept studies across six solid tumor indications. Recently, the independent data monitoring committee reviewed the data from the first interim analysis of the enhanced study in first-line high-risk MDS, and I’m happy to report that there were no new safety concerns, and the study remains unchanged. As a reminder, per prior discussions with the FDA, we are now focusing on mature OS data for filing. The study is designed for the final OS analysis, and Gilead remains blinded to preserve the integrity of the data. We will provide another update in the second half of 2023 following the second interim analysis, acknowledging that these interim analyses are event-driven and subject to timing adjustments. Moving to slide 21, on behalf of Christi and the Kite team, I am pleased to reveal details of another strong quarter of clinical advancements in our cell therapy programs. During ASH, Kite presented over 25 data updates illustrating the transformative nature of cell therapies, including three-year follow-up data from ZUMA-5, showing a 52% response rate in patients with indolent lymphomas treated with Yescarta. Following the impressive ZUMA-12 data on Yescarta in frontline LBCL shared at ASH 2021, we anticipate achieving FPI in our Phase III ZUMA-23 trial focused on frontline high-risk LBCL in the first half of the year. We are also making progress in our Phase II ZUMA-24 outpatient study in second-line LBCL and look forward to sharing interim safety data soon. Although we have much still to explore with Yescarta and Tecartus, we are strengthening our pipeline to ensure Kite maintains its leadership in new indications and next-generation cell therapy technologies. In December, we announced a strategic collaboration with Arcellx for the late-stage product candidate CART-ddBCMA, which is currently being evaluated for multiple myeloma therapy. If approved, we believe we can consistently provide vital therapies to patients, aided by our top-notch manufacturing capabilities. We also announced the expected acquisition of Tmunity Therapeutics, adding an armored CAR T platform and rapid manufacturing technology to Kite. The Arcellx transaction completed earlier this week, and we anticipate finalizing Tmunity later this quarter. Both transactions underscore Kite's leadership in cell therapy and our dedication to developing a vibrant pipeline in this domain. To conclude on slide 22, we are sharing key pipeline milestones for 2023, which includes FPI, data readouts, updates, and regulatory approvals in oncology and neurology. This demonstrates Gilead's progress during its transformation journey, with 59 diversified clinical programs spanning various indications and stages. As our clinical pipeline expands, we are sharpening our execution focus and eagerly await providing updates on our initiatives throughout 2023. Now, I’ll turn the call over to Andy.

Thank you, Merdad, and good afternoon, everyone. Gilead closed out the year with a strong fourth quarter, driven by Biktarvy, Veklury, and oncology. For the full year, our sales, excluding Veklury, grew 8%, which is by far the strongest full-year growth rate Gilead has reported since HCV sales peaked in 2015. Of note, and excluding the impact of the Atripla and Truvada LOEs, HIV grew 8% year-over-year, driven by the continued strong performance of Biktarvy, which grew 20% from 2021 to $10.4 billion. Biktarvy continues to demonstrate strong potential for further growth in 2023 and beyond. Moving to our quarterly results starting on Slide 24. The fourth quarter demonstrated another strong performance across our business. Total product sales, excluding Veklury, grew 9% year-over-year despite an approximately $130 million headwind from FX. If we exclude FX in addition to the impact of HIV LOEs, total underlying sales growth for the fourth quarter was 12% compared with the prior year. Moving to Slide 25. Veklury was down as expected, year-over-year, although it grew 8% on a sequential basis from the third quarter, highlighting that Veklury will continue to play an important role even as COVID-19 progresses into its endemic phase. Non-GAAP product gross margin was 86.8%, up more than 16 percentage points from last year, primarily due to a $1.25 billion charge related to a legal settlement recorded in COGS in the fourth quarter of 2021. Non-GAAP R&D expenses for the fourth quarter of 2022 were $1.5 billion compared to $1.3 billion in the same period in 2021. Higher R&D expenses were driven by timing of clinical investments, mainly in oncology in addition to the impact of inflation on expenses. Fourth quarter acquired IP R&D was $158 million, primarily reflecting the MacroGenics collaboration and the license amendment with Jounce, and lower than prior year due to the $625 million charge related to the exercise of opt-in rights for Arcus assets in the fourth quarter of 2021. Non-GAAP SG&A was $2 billion, up 23% year-over-year, primarily reflecting a charge of $406 million associated with the termination of the Trodelvy collaboration with Everest Medicines. This $406 million charge includes the $280 million that we agreed to pay Everest to acquire the development and commercial rights to Trodelvy in China and other Asian territories in addition to some other termination-related expenses. Excluding this Everest impact, SG&A was down 2% year-over-year. Fourth quarter non-GAAP operating margin was 37%, down sequentially due to the factors referenced earlier, including the $406 million Everest charge and up year-over-year. Excluding the Everest charge, non-GAAP operating margin was 42%. Non-GAAP effective tax rate in the fourth quarter was 16.8%, lower than the prior year, driven by discrete tax charges recorded in the fourth quarter of 2021. Overall, our non-GAAP diluted earnings per share was $1.67 in the fourth quarter compared to $0.69 in the fourth quarter of 2021. Of note, the Everest contract termination impacted non-GAAP diluted EPS by $0.25 a share. This was not reflected in the guidance we shared back in October. Moving to the full year on Slide 26. Total product sales were $27 billion. Excluding Veklury, total product sales were $23.1 billion, up 8% compared to 2021, primarily driven by Biktarvy and oncology. Excluding around $380 million of FX headwinds and the $350 million impact of the Truvada and Atripla LOEs, total product sales, excluding Veklury, were up 11% as compared to 2021. I touched on the main P&L impacts in the overview, but I'll highlight on Slide 27 that our non-GAAP effective tax rate for 2022 was 19.3%, and non-GAAP diluted EPS was $7.26 per share compared to $7.18 per share reported in 2021. I'll move now to guidance on Slide 28. We recognize that the macro environment continues to be uncertain. Our initial 2023 guidance assumes an overall stable macro environment and relatively stable FX at current rates. While inflation is expected to moderate, our 2023 guidance reflects a full year of higher expenses experienced in 2022 associated with inflation. With that in mind, we expect total product sales in the range of $26 billion to $26.5 billion. For total product sales excluding Veklury, we expect sales in the range of $24 billion to $24.5 billion, representing growth of 4% to 6% for our base business year-over-year. We expect Biktarvy sales of approximately $2 billion. As always, Biktarvy sales will continue to track hospitalization rates and will remain highly variable depending on the frequency and severity of surges. Notably, we have seen a decline in hospitalization rates in recent weeks, and we'll continue to monitor the landscape carefully. As a result, and similar to last year, we will update you on our Biktarvy expectations on a quarterly basis. Moving to the rest of the P&L. We expect our non-GAAP product gross margin to be approximately 86%, just slightly below our 2022 results and primarily reflecting the growing contribution from oncology. For non-GAAP operating expenses, we expect R&D to increase by a high single-digit percentage compared to 2022 levels, reflecting our ongoing investment in strategic areas of growth and an increase in activity from later-stage trials. As a reminder, we had 8 Phase III trials start in 2022, and we expect to have 23 active Phase III trials by the end of 2023. Looking ahead, we expect R&D growth to moderate although we will step up investments as needed to support promising programs based on clinical data. Acquired IP R&D includes previously announced payments for our SELEX community and milestone payments for existing collaborations. Consistent with our approach in 2022, we will continue to share our expected acquired IP R&D expenses as we announce additional transactions. Finally, we expect SG&A to decrease by a low single-digit percentage compared to 2022. However, this is primarily due to some expenses reported in 2022 that we don't expect to repeat in 2023. If we normalize the 2022 SG&A expense for these items, we expect full year 2023 SG&A expense to increase by a mid-single-digit percentage on a basis of approximately $5.1 billion in 2022. Altogether, we expect our non-GAAP operating income for 2023 to be $11 billion to $11.6 billion. Our non-GAAP effective tax rate is expected to be approximately 20% again this year. Finally, we expect our non-GAAP diluted EPS to be between $6.60 and $7 for the full year and GAAP diluted EPS to be between $5.30 and $5.70 per share. Moving to capital allocation on Slide 29. Our priorities have not changed. In 2022, we returned over $5 billion to shareholders. This included dividend payments and $1.4 billion in share repurchases. Fourth quarter share repurchases were approximately $800 million. For 2023, we have announced today a 2.7% increase in our quarterly cash dividend to $0.75 per share and remain committed to growing our dividend over time in line with earnings growth. You can also expect to see continued judicious investments in our business, both internally and externally through select partnerships and business development transactions. Finally, we will continue to use share repurchases to offset equity dilution as well as additional repurchases on an opportunistic basis. With that, I'll invite the operator to open the call up for questions.

Hey, guys, thanks very much for the questions. It's great to see yet another impressive quarter of performance from the core business. At the midpoint, guidance assumes 5% year-over-year growth for product sales, excluding Veklury, yet non-GAAP EPS guidance assumes a decline of 6%. Should we expect roughly flat earnings for the next 2 to 3 years as you continue to invest aggressively in the pipeline to set up earnings growth for the second half of the decade? Or is that too conservative? What levers do you have to increase earnings in the near to midterm?

Hey, Tyler, it's Andy. Thanks for the question. We appreciate it. As we mentioned, we don't provide long-term guidance, but I want to emphasize that the base business is performing very well. We had another strong year with Veklury, but as you heard in our prepared comments, the COVID-19 market will continue to be dynamic. This year, our EPS growth from the base business compensated for the decline in Veklury, despite the rising expenses. Moving forward, many of our shareholders focus on non-GAAP EPS excluding Veklury based on their assumptions. We expect that metric for our EPS to grow and for that growth to accelerate over the long term as our products continue to succeed with additional commercial approvals, expanded indications, and new products entering the market. So, you are pointing out the challenge of assessing the impact of Veklury. When we consider the base business, we are very confident in its health and the growth it will generate over time, both on the revenue and profit sides.

Hannah, may we have our next question please?

Afternoon, guys. Thanks so much for the question. I will keep it just to one. When you look at lenacapavir in the U.S., just help us with maybe the expected kind of loss dynamics following the recent approval and just with consideration of the hurdles regarding payer access. You guys had a long history here, but I'm wondering if the environment is different today versus sort of pre-pandemic. Thank you.

Thanks, Geoff, for your question. It's Johanna. I think that we're super excited about Sunlenca's approval. Do remember, though, it's really for a very specific patient population for the heavily treatment-experienced multi-drug resistant population. So that's about 1% to 2% of people living without HIV. That's about 5,000 patients or so in the U.S. So just to give you a little bit of perspective on it. That’s one piece of the puzzle. So far, so we just launched. So it's still early days, and we're excited about it. I think physicians' response has been very strong as well. They really see the innovation of having something every six months coming in and also the promise of what it could mean in the future with prevention indications as well as treatment combinations. More to come on that one. I think it's an incredible opportunity for us to gain awareness for Sunlenca. How to use it in the reimbursement systems. As for your point about pre-COVID to COVID, I think that we've really normalized the market. I think we're back on track regarding HIV, both screening, diagnosis, etc., and treatment. So we do believe that that's probably not in play as we go forward in 2023. But again, it's small revenue, a huge unmet medical need, and an incredible opportunity for patients to have something to ensure that they don't proceed to more like AIDS disease versus just being HIV positive.

Hannah, may we have our next question please?

Hey, thanks for the question. Maybe a question for Merdad. On Trop-2, the competitor AstraZeneca Daiichi continues to be quite bullish and actually have a Phase III lung cancer study readout, and the Street is quite bullish on Trop-2. Can you explain your thoughts around your differentiation? Appreciating your study readout, I think in 2024, and what we should appreciate as to how you will compete there or differentiate and maybe its safety, but maybe walk me through that and help us understand Trop-2 versus your competitor? Thank you.

Yes, thanks, Michael. This is Merdad. You're absolutely right. We do think that there are a couple of things that we think about when we think about differentiation. The first is that we've now been on the market and have several approvals under our belt with Trodelvy. I think that is an important factor for having now been on the market in important indications. To your point, with lung, we will be somewhat behind where our competition is. We do think that the data will have to evolve for us and for them. So far, we have been fortunate to not see ILD in our development program. We will continue advancing our program forward aggressively. We've had a lot of success so far, and I think our plan is to keep going ahead with the differentiated clinical development program so we can get into the broadest population possible.

Hi, thanks for taking my question. And congrats on the quarter. Keeping it on Trodelvy. Merdad, I was hoping if you could provide a little more detail on the upcoming pre-chemo HR-positive, HER2-negative breast cancer trials that you're initiating later this year. Just what that study design would look like? How did you come to conclude that this was the next best study for this population?

Yes, hi thanks, that's an excellent question. I think we haven't really talked about the design yet. In large part, we are working with investigators and regulators on what design will be best in that patient population. We do think that there is an important need in a large population there. We want to navigate that pathway carefully. As we develop that program and the protocol gets finalized, we will be able to share more detail over time.

Hannah, may we have our next question, please?

Hey, can you guys hear me?

Yes.

Good afternoon, and congrats on all the progress. Maybe one on TIGIT and dompenanumab. Just what is it that gives you the confidence that the Fc silent construct is the right approach when I think at least the animal data suggest that this may not be preferred? As you think about the upcoming study, ARC-7, could you talk about the frequency of scans because this has come up as a point of at least discussion with regards to the comparator trials and the frequency of scans? Thank you.

Sure. This is Merdad again. Excellent question. Thank you for that. In terms of our confidence, I think to your point, there was a lot of debate a couple of years ago. We shared in that debate, with what the preclinical data was showing. As you know, the data provided conflicting preclinical data, including some data that suggested maybe an Fc-silent may not work. But which is why we ran the studies the way we did, and very importantly, why we ran ARC-7. The objective there was really to establish whether an Fc-silent would demonstrate a benefit relative to an Fc-active molecule. Part of the hypothesis there is what happens in the periphery and whether depleting effector cells with TIGIT could actually be harmful with an Fc-competent molecule relative to an Fc-nonmolecule. Our confidence really comes from our ARC-7 data. I think the ARC-7 data clearly showed a benefit when added to a PD-1. The PFS data exceed our bar for moving forward. We really believe that we've answered that question in the clinic as to whether the Fc-now matters.

Hannah, let’s move to our next question.

Hi, great. Thanks so much. Just a question on the COVID business. I know it's volatile, and I know at the same time, the Street doesn't seem to model much of a tail for Veklury or GS-5245 at all in numbers beyond this year. We've got Pfizer and others talking about more sustainable COVID businesses, I guess I'm missing your thoughts on just how you're thinking about the business longer-term? Is this a meaningful franchise for you over time? Or are you really thinking of this continuing to fade down beyond this year? Thank you.

Sure, Chris. It's Johanna. Yes. So definitely, we've changed a little bit. Our position on this one has evolved from 2020 to where we are today, obviously. I think we truly believe that the Veklury business is much more sustainable than we've ever seen before. Let alone as we think about kind of where we're going with COVID-19, including the oral that Merdad can speak to. The one piece that we've seen is it's maybe a little bit different than some of the orals that you're referring to; Veklury has been part of a commercial model since October of 2020. We haven't had such big inventory lows at the government level like some others have had. What you see probably 85% to 90% of revenues in 2022 are truly reflecting the demand for Veklury in 2022. Coming into 2023, we feel very strongly that Veklury, because it's still the only antiviral indicated at the hospital level at this point in time, is the treatment of choice when they decide to treat hospitalized patients. An incredible opportunity for us to ensure that Veklury is accessible to all these patients. So that's why we think the model is quite sustainable moving forward. I also just add that our label has broadened over the last year, and we have a very strong body of evidence, including mortality, as well as guidelines endorsement with the NIH and the WHO. All these pieces together make for a strong Veklury position in 2023, but actually beyond. I'll pass it over to Merdad to talk a little bit about how we're thinking about COVID-19 as a whole with the oral.

Yes. Just 2 seconds. I think you're right to point out the uncertainties that we all have and that we've seen with outpatient COVID. We have a lot of confidence in the mechanism of 5245 given our expertise in the molecule itself and how well-behaved it is. We're going to push forward and do our best with both the high-risk and standard risk study, and the uncertainties in terms of the pandemic will really determine what happens from here. We will definitely keep you updated as to how that goes from here on out.

Hey, good afternoon. Congrats on the quarter, and thanks for taking my question. Maybe continuing on the COVID theme on 5245, the Oaktree study. Can you talk about a little bit more about the assumptions you've made in powering the primary endpoint here for the standard risk patients? Help us understand how Oaktree and Birch might fit together to support U.S. and ex-U.S. approvals across the two populations you're studying? Thanks.

Sure. To your point, one group involves individuals in high-risk populations, which is significant. These people have risk factors regardless of their vaccination status, while the standard risk group consists of those without risk factors. These are distinct populations. For the high-risk group, we will focus on preventing hospitalizations, whereas for the standard risk group, we will look for improvements in symptoms. I want to emphasize the uncertainties surrounding these factors; importantly, the underlying event rate is a real consideration. We have made several assumptions about what this background rate will be and have incorporated checkpoints into the trials to confirm our assumptions. This allows us to adjust our program based on the actual event rates, helping to reduce risks and uncertainties. We have approached this with an open mind.

Great. Thanks for taking my question, and congrats on the progress. Maybe if you could comment on your overall market share in the HIV space and how it has been progressing. What I want to understand is if there's a scenario where your entire business growth could be better than the market growth as you gain share at this point? Thank you.

Sure. Hi, Mohit, it's Johanna. As we look at HIV as a whole, we're looking at about a 5% year-on-year growth. Of course, that's mostly driven by demand, namely Biktarvy. It's probably important to talk about the share there. Our total Gilead share is still in the low 70s, and we've been quite stable at that level. We saw a little bit of a dip when we got the Truvada and Atripla LOEs, and that's the only decline we’ve seen there. Where you see nice growth, of course, is Biktarvy. Our year-on-year growth for Biktarvy is 20% in the 50-year post-launch. I think that's the piece of the puzzle that's really driving the overall HIV business. In addition to what's going on in PrEP with Descovy. The market growth has been around 2% to 3% year-on-year, both in the U.S. and Europe; we've assumed this growth for some years to come. I think there's still enormous opportunity for continued growth in that market. One main reason is there is still an opportunity for increasing treatment rates so from diagnosis to treatment; further penetration in underserved patient populations. Currently, with the United Nations goal at 95,95,95 for testing, treatment, and virologic suppression, we're only about 70-75%. If we were to get to those goals, we're looking at over 350,000 more patients in the system. I think there's a great opportunity for us to continue to grow Biktarvy and our HIV business at Gilead.

Hi, I have a question about the current model. I believe that consensus models show significant operating leverage in the long-term projections for Gilead. However, the consensus appears to have very low single-digit growth in operating expenses across sales, general and administrative, as well as research and development. With sales and administrative expenses expected to grow in the mid-single digits this year, following one-time costs, and research and development projected to grow in the high single digits, should we expect that, considering all the collaborations and recent acquisitions, there will be a meaningful increase in R&D from its current level? I'm trying to grasp the direction of operating expenses in the long term.

Hey Omar, it's Andy. Thanks for the question. I want to point out that we are being careful with expenses and do not anticipate indefinite growth in R&D or SG&A. However, we will keep investing wisely in our pipeline, and you are already seeing the benefits; this is crucial. On the R&D side, we have initiated 8 Phase III trials this year, and as mentioned, we plan to start at least another 5 in 2023. We are in an investment phase. When compared to our competitors over the long term, our historical spending on both SG&A and R&D has been below industry averages. We will continue our investments, particularly in the late Phase III trials we have begun. This past year, our R&D expenditure as a percentage of revenue was about 19%, which is below industry standards. The same applies to SG&A. Our guidance also indicates reasonable spending levels compared to our competitors. In the long run, we do not expect R&D or SG&A to grow faster than earnings, and our model has significant leverage. We anticipate that this will become evident, particularly in our top line, and over the coming years, you will see similar effects on the bottom line. Thanks for the question.

Hey, good afternoon, guys. Thank you for the question. What's the latest thinking with respect to the regulatory path forward for magrolimab? The question really is, could we see survival data from that ENHANCE interim later this year that's actually mature enough to file on? Is there anything beyond OS benefit that FDA has pointed to for a complete submission package? Thank you.

Hi, Olivia, this is Merdad. Yes. I think maybe it's good to step back and just clarify our approach concerning interim analysis for our studies. The pivotal macro study is powered for events at the final analysis. We run interim analyses, as is standard for the industry, to evaluate things like safety, but also we spend a little bit of alpha in case there is a dramatic improvement in the primary endpoint to offer ourselves the opportunity to start early to benefit patients. The OS data continue to mature. The next interim this year, depending on events, is not the final analysis, so it truly depends on how big the magnitude of improvement is in OS, whether that leads to a stop in the study or an unblinding in the study. Our expectation is that we go to the final OS analysis. We always hope for an upside surprise at one of the earlier interim analyses. In terms of approval, we need both OS and CR rates for a complete response, but notably, we think we need OS data to support a file.

Thank you. First on the NICE recommendation. Clearly, that's good from a U.K. perspective, but it's the case that NICE recommendations are closely followed by a much larger range of countries. I just wondered if this does indeed have a spillover benefit beyond the U.K. for Yescarta. How important is this approval in the U.K.?

Hey there, Simon, it's Christi. Thank you for the question. We think it's very important because first of all, the number of patients is still very similar at 450, but the process by which patients get approved, obviously should be much smoother and really give patients access much more quickly. To your point, we think as you see this approval, that this will hopefully have an influence on other countries, just like we've seen with the reimbursement for Yescarta in over 20 countries; it was one at a time. As certain countries started to improve, we saw other countries do the same. Based on the second-line ZUMA-7 trial, that will be our next step too to demonstrate how giving a patient a one-time treatment can really help the healthcare system and improve patient outcomes.

Good afternoon, and thanks for taking the question. This is Nicole on for Robyn. Are you seeing any safety signals in essence for NFLSC with Trodelvy and Pembro? Are the safety profiles comparable for both populations? Would this hamper uptake in the first line?

Hi, Nicole, this is Merdad. We haven't really disclosed anything on the safety. Those studies have just gotten underway. We don't have enough data at this point to make a comment one way or the other.

Hi, guys, thanks for taking my question. One for Christi. You're annualizing well above $1 billion for cell therapy products. Can you talk about the recent work you've done to expand manufacturing and how you could think that could support further growth this year and beyond? Thank you.

Sure. That was our focus, and has been our focus is really on the supply side and being able to ensure that we have the capacity to provide for patients. I think that's what you're seeing is our industry-leading manufacturing piece. If you look at GCFO3 here in California, adding the new site to TCFO-4 in Amsterdam and in TCFO-5 in Maryland, we're able to leverage that footprint to grow not only in the assets that we have today, but in the future pipeline, especially as we look at the partnership we have now with Arcellx for multiple myeloma. We are very confident about our ability to supply and the capacity that we've built and today and for tomorrow. Our next focus is on optimization of our manufacturing footprint. We've had some gains on our margin improvements. We need to continue ensuring capacity, which we feel like we've successfully done. Now we can also put focus on optimization, which we've made progress on, but we have several levers there to pull as well. I hope you're hearing from me a big confidence in our ability to deliver for patients from a capacity standpoint.

Thank you. That concludes today's question-and-answer session. I will now turn the call over to the management team for any closing remarks.

Great. This is Dan. I just want to do a couple of things here. First of all, thank you all for joining and your ongoing interest and questions for Gilead. As usual, if we didn't get to all of your questions, please reach out to Investor Relations. As you know, we're very happy to answer those on an ongoing basis. Let me just close by emphasizing that Gilead is in a very different place than it was a few years ago, thanks to the work the team has done to transform the company. We're going into 2023 in a very strong position with our current medicines performing well and tremendous growth potential in our neuro therapies as well as those in development. What you can expect to see next is quarter-on-quarter execution and even faster progress and greater impact in the future. Thank you very much for your time today, and we look forward to speaking to you again soon.