Gilead Sciences' CEO Discusses Q1 2014 Results - Earnings Call Transcript

Gilead Sciences, Inc. (GILD) Q1 2014 Earnings Conference Call April 22, 2014 4:15 PM ET

Executives

Patrick O'Brien - Vice President, Investor Relations

John Martin - Chairman and Chief Executive Officer

John Milligan - President and Chief Operating Officer

Norbert Bischofberger - Executive Vice President, Research and Development and Chief Scientific Officer

Paul Carter - Executive Vice President, Commercial Operations

Robin Washington - Executive Vice President and Chief Financial Officer

Analysts

Geoffrey Meacham - JPMorgan

Mark Schoenebaum - ISI Group

Geoff Porges - Sanford Bernstein

Matthew Roden - UBS Securities

Phil Nadeau - Cowen

Michael Yee - RBC Capital Markets

Brian Abrahams - Wells Fargo

Yaron Werber - Citigroup

Ying Huang - Barclays Capital

Robyn Karnauskas - Deutsche Bank

Ravi Mehrotra - Credit Suisse

Ian Somaiya - Nomura Securities

Joel Sendek - Stifel

Jim Birchenough - BMO Capital

Howard Liang - Leerink

Matthew Harrison - Morgan Stanley

Thomas Wei - Jefferies & Company

Brian Skorney - Robert Baird

Terence Flynn - Goldman Sachs

Operator

Welcome to the Gilead Sciences' first quarter 2014 earnings conference call. (Operator instructions) I would now like to turn the call over to Patrick O'Brien, Vice President of Investor Relations. Please go ahead.

Patrick O'Brien

Thank you, Stephanie. Good afternoon, everyone. We issued a press release this afternoon providing earnings results for the first quarter, which is available on our website where you can also find detailed slides that support today's call.

For our prepared remarks and Q&A, I am joined by our Chairman and Chief Executive Officer, John Martin; our President and Chief Operating Officer, John Milligan; our Executive Vice President of Research and Development, Norbert Bischofberger; our new Executive Vice President of Commercial Operations, Paul Carter; and our Executive Vice President and Chief Financial Officer, Robin Washington.

Before we begin our formal remarks, we want to remind you that we will be making forward-looking statements, including plans and expectations, with respect to our product candidates, financial projections, all of which involve certain assumptions, risks and uncertainties that are beyond our control and could cause our actual results to differ materially from these statements. A description of these risks can be found in our latest SEC disclosure documents and recent press releases.

In addition, Gilead does not undertake any obligation to update any forward-looking statements made during this call. We will be using non-GAAP financial measures to help you understand our underlying business performance. The GAAP to non-GAAP reconciliations are provided in our press release as well as on our website.

I will now turn the call over to John Martin.

John Martin

Thank you, Patrick, and thank you all for joining us today. The first quarter of 2014 was an important step towards realizing a number of milestones for the business, particularly in hepatitis C. Earlier today we reported product sales of $4.9 billion, an increase of 104% year-over-year. This increase was driven by the launch of Sovaldi.

Sovaldi's profile has the potential to transform the treatment of hepatitis C and the rapid uptake speaks to a significant unmet medical need. I couldn't be more proud of the teams at Gilead, who rapidly brought this product to market supported by a robust data package of data from many clinical studies. Paul Carter will discuss the launch in more detail.

Moving to other advances in hepatitis C, FDA granted a PDUFA date of October 10, for the single tablet regimen of once-daily combination of ledipasvir/sofosbuvir for the treatment of chronic hepatitis C genotype 1 infection in adults, and also advised us that an advisory committee would probably not be necessary.

In addition, the European Marketing Authorisation Application for ledipasvir/sofosbuvir has been validated and has been granted accelerated assessment by the European Medicines Agency, a designation for new therapies and medicines of major public interest. If approved, this STR could be available for marketing in EU by the end of 2014.

On April 2, in a press release, topline data were disclosed from a Phase 3 study of sofosbuvir/ribavirin dosed for 12 weeks in genotype 2 hepatitis C infected patients in Japan. In this study, 98% of treatment naïve and 95% of treatment experienced patients achieved SVR12. This study will support regulatory submission in Japan by mid-year.

Earlier this month, at the 49 th Annual European Association for the Study of the Liver, EASL, was held in London. At this meeting, new data on Gilead's products and liver diseases programs were presented in 15 oral talks and over 40 posters, including results from three Phase 3 studies, ION 1, 2 and 3 on the ledipasvir/sofosbuvir fixed-dose combination. Concurrently, the results of these three studies were also published online in the New England Journal of Medicine.

Other presentations at EASL show that both, sofosbuvir/peg/riba and sofosbuvir/ledipasvir with or without ribavirin are viable regimens for the retreatment of patients who had failed previous regimens, including sofosbuvir and containing regimens. In these studies, retreatment resulted in SVRs of 74% to 100%.

In addition, results from our Phase 2 study evaluating GS-5816, the next generation pan-genotypic NS5A inhibitor were presented. Treatment of patients with genotype 1 through 6 with GS-5816 with sofosbuvir for 72 weeks resulted in SVR12 rates of 86% to 100%. Initiation of Phase 3 studies of a fixed-dose combination of GS-5816 and sofosbuvir are expected later this year.

Earlier this month, WHO published guidelines on screening, care and treatment of persons with HCV infection. This quick action by the World Health Organization signals recognition of the recent advancements in the treatment of hepatitis C.

Now, turning to HIV. The two Phase 3 studies comparing the single tablet regimen of ECF TAF in Stribild in treatment naïve patients are fully enrolled and we expect data to become available in the fourth quarter of 2014. In addition, this STR is being evaluated in a number of other studies, including treatment experience patients, patients on stable therapy, who are switched to ECF TAF, patients with mild-to-moderate renal impairment and also in adolescent patients. We currently anticipate filing for U.S. and European approval of ECF TAF in the first quarter of 2015 for naïve, experienced and switch indications.

In oncology, we continue to prepare for the potential approval and launch of idelalisib. The relapsed CLL application was assigned a priority review with a PDUFA date of August 6, and the relapsed refractory iNHL application was assigned a standard review with the PDUFA date of September 11.

As I mentioned earlier, I am proud of what the team has accomplished with the launch of Sovaldi, and I also want to acknowledge the contributions on other important activities by more than 6,000 employees at Gilead.

I will now turn the call over to Paul Carter.

Paul Carter

Thanks, John, and good afternoon, everyone. In the first quarter of 2014, our worldwide total net product revenue increased to $4.9 billion, representing growth of 104% over the prior quarter of last year.

U.S. sales exceeded $3.6 billion and for the very first time European sales exceeded $1 billion in a single quarter. This performance has been driven mainly by healthy demand in our core HIV business and the launch of Sovaldi, which itself had sales totaling $2.3 billion in the quarter.

Off that number, $2.1 billion represent the U.S. sales and most of the remaining revenue came from Germany and France. We had Sovaldi sales in 13 countries worldwide and that number will continue to increase as regulatory approvals and reimbursements are achieved.

Beginning with the United States and HIV, underlying demand was healthy for all products. Nine out of 10 patients new to treatment were prescribed the Gilead medicine, with Gilead's single-tablet regimen being used by seven out of 10 patients new to treatment.

Stribild continued to be the leading HIV regimen for patients that were beginning therapy, capturing three out of 10 prescription growth that Gilead's single-tablet regimens, including Stribild, Complera and Atripla is just under 20% year-over-year.

ADAP purchasing in the first quarter was strong, consistent with expectations for the last quarter and ADAP fiscal year. During our fourth quarter call, we highlighted that approximately $130 million to $150 million of our fourth quarter revenue were related to inventory build across the supply chain to yearend.

In the first quarter, as expected, we saw a drawdown at this inventory, as the big 3 wholesalers' inventory levels declined to near the bottom of established ranges. In addition, we also saw a drawdown by sub-wholesalers.

This is in fact a similar dynamic to that which we've seen in first quarter over the past several years. This collected inventory drawdown resulted in a sequential decline in HIV net product revenue. The underlying demand for Gilead HIV product is however strong and growing, especially for our newest single-tablet regimen Stribild and Complera.

Moving to U.S. hepatitis C performance. Sovaldi sales of $2.1 billion show strong patient demand and the increased inventory levels necessary to support this demand across the supply chain. Since launch, approximately 30,000 patients have begun treatment for hepatitis C with Sovaldi and these have come from all the main pair groups.

The first patient who began 12 weeks of treatment around the time of approval last December have yet to reach the timeframe, when they can achieve an SVR12, which occur the further 12 weeks after completing treatment. Nevertheless, we continue to hit positive reports from physicians about their experience with Sovaldi.

The prescribing of Sovaldi in the U.S. has been driven mainly by hepatologists and gastroenterologists, but internal medicine specialists and primary care physicians, many of them also treat HIV patients have also prescribed. Despite the broad spectrum, we estimate that only half of the physicians visited by our therapeutic specialist have prescribed Sovaldi to date.

This leaves us optimistic about the opportunity that lies ahead. In fact, with an estimated 1.7 million diagnosed patients in the U.S. and around 400,000 under treated care, we have to take just a small fraction of those who can benefit from treatments in the future.

The genotype distribution of patients that have received treatment is representative of the U.S. HCV population. With around 70% usage in genotype 1 and the majority of this usage is being with the so called NEUTRINO regimen or a 12 week regimen in combination with pegylated interferon and ribavirin.

On the payer front, access to Sovaldi has been as we expected, with its formulary status consistent with our experience in HIV reimbursement. Most commercial, Part D and state Medicaid plans take full six months to review new drugs.

Turning to Europe. We are very pleased with our strong HIV performance, which like the U.S. is underpinned by our belief in the benefit the patients of single-tablet regimen. Eviplera is the most prescribed regimen for treatment naïve HIV patient and also continue to expand its lead over Atripla as the regimen most commonly switch to in the big 5 European market.

By the end of the first quarter, we have launched Stribild in 19 countries across Europe. This includes recently in France, which represents the biggest single HIV market in the EU. It is also just this month been launched in Italy, so is now available to patients in all of the European Union big five market.

I would like to highlight that in early launched countries like Germany, the performance of Stribild has been approximately double out of Eviplera at the same time point. Regional reimbursement in Spain and Italy is expected to continue to roll out during the rest of the year.

Moving to Hepatitis C. The European sales for Sovaldi totaled a $164 million in the quarter. While Sovaldi has regulatory approval in the European Union, full pricing and reimbursement, is a country-by-country process with some countries completing that process more quickly than others. Today we have reimbursement in Germany, Austria, Sweden, Finland and to some extent France.

As mentioned in the prior earnings call, we have filed health economic dossiers with all the major reimbursement agencies and we are following the normal process that leads to price and reimbursement approvals.

In France, after completing or completion of the temporary authorization for use or ATU program, but prior to completion of full reimbursement stages, we continue to provide Sovaldi to patients who have pre and post-liver transplant and also patients with advanced liver disease who have failed other HCV treatments or are interferon intolerant. This is in line with the ATU scope and will widen when full reimbursement is agreed.

In the U.K., the National Health Service in England has recently issued a statement confirming that they have approved the filing to Sovaldi for approximately 500 patients. Notably, this is funding pre-NICE approval and recognizes the urgent need for Sovaldi for sicker patients.

The European Association for the Study of the Liver or EASL, just last week published their clinical practice guidelines on the management of HCV infections. Sovaldi is recommended in combination with other agents across all genotypes as well as in several difficult-to-treat groups. These EASL guidelines come soon after newly issued guidelines in Germany and France, which also both recommend Sovaldi.

Outside of North America and Europe, we continue to expand our geographic footprint. I would like to highlight that we are making good progress building out our Gilead organization in Japan in the anticipation of sofosbuvir approvals during 2015.

In closing, I'd like to provide an update on our commercial readiness for oncology. As John mentioned, we have filed for regulatory approval in both the U.S. and EU for idelalisib for using iNHL and CLL. We have completed hiring the U.S. therapeutics specialist team and have fully trained in end-markets. So we are ready and excited to launch idelalisib. A similar process is being followed in Europe consistent with anticipated regulatory and reimbursement timelines.

I'd now like to hand the call over to Robin.

Robin Washington

Thank you, Paul, and good afternoon everyone. Non-GAAP diluted earnings per share for our first quarter 2014 were $1.48. Total revenues for the first quarter were $5 billion, up 97% year-over-year. As Paul mentioned, similar to prior year's strong wholesaler and sub-wholesaler purchases in anticipation of January 1 price increases for HIV and cardiopulmonary products results in an inventory drawdown in the first quarter of 2014.

Non-GAAP product gross margins were 87.4%, up from 74.5% largely driven by Sovaldi sales and an favorable HIV product mix. Sovaldi's impact to gross margin is a combination of Sovaldi revenues as a percent of total net product revenue and the geographic mix of these revenues, which were 92% U.S. sales in the first quarter. Product gross margin for our HIV franchise was favorably impacted, primarily by lower Atripla revenues.

Turning to expenses year-over-year. Non-GAAP R&D expenses were up $98 million reflecting the progression of clinical study activity, primarily in oncology and HIV. Non-GAAP SG&A spending was up $167 million to support the ongoing lunches of Sovaldi in the U.S. and in cautionary as well as the anticipated launch of idelalisib.

Cash flow from operations was $1.5 billion. During the quarter, we raised $4 billion in debt financing for general corporate purposes, including repayment of debt, working capital and share repurchases. We also repaid $840 million in debt from previous finances and purchased $450 million in shares.

Finally, we are reiterating full year 2014 guidance, which excludes Sovaldi product sales and is outlined on Slide 45. The metrics we provided in February for the impact of Sovaldi product sales still applies to our full year results and includes the following estimates.

Non-GAAP product gross margin will increase by approximately 0.75% to 1% for every $1 billion of Sovaldi sales and non-GAAP effective tax rate will decrease approximately 0.75% to 1% for every $1 billion of Sovaldi sales. In closing, we look forward to updating you on our continued progress in the coming months.

We would now like to open the call for questions.

Earnings Call Part 2:

• Q&A with Gilead Sciences, Inc. CEO