Home » Gilead Sciences’ (GILD) CEO John Martin on Q2 2014 Results – Earnings Call Transcript

Gilead Sciences’ (GILD) CEO John Martin on Q2 2014 Results – Earnings Call Transcript

Moving to Hepatitis C, we estimate approximately 10,000 patients have now received treatment with Sovaldi in Europe, where sales were $400 million in quarter two. The vast majority of these patients are in France and Germany. While Sovaldi has regulatory approval in the EU the full pricing and reimbursement process varies by country, with some countries completing the process more quickly than others. Negotiations are ongoing in the majority of EU markets, indeed we have filed health economic dossiers with all the major reimbursement agencies and we’re following the processes that lead to final price and reimbursement approval.

In France Sovaldi was given high marks in a recent government health technology assessment in which it was recognized as demonstrating a high level of innovation and is recommended to reimbursement consistent with Sovaldi’s label. While we are going through the rest of the pricing process with the French Ministry of Health we continue to make Sovaldi available to patients in the pre and post liver transplant setting and also for patients with advanced liver disease who failed other hepatitis C treatments or are interferon intolerant. This is in line with the temporary authorization for use or ATU score and is used for widening and full reimbursement is established.

In Germany just last week the government AMNOG process completed its review of Sovaldi, also recognizing the additional benefit that it brings to patients. The AMNOG process will continue over the next month. In the UK the National Institute for Clinical Excellence or NICE has requested additional consultation before a final recommendation on reimbursement can be made. We are confident that upon the completion of the process NICE will be able to make a positive formal recommendation that acknowledges both the clinical and health economic benefits that Sovaldi can bring to the broader UK population. In the meantime the National Health Service in England has approved funding for approximately 500 people recognizing the urgent need to sicker patient. It is also worth noting that Sovaldi has pre-received a positive HTA review in Scotland and this has been accepted by the Scottish Medicines Consortium on the behalf of NHS Scotland.

In Australia Sovaldi was recently approved by the Therapeutic Goods Administration or TGA and discussions for pricing and reimbursements are ongoing. Outside North America and Europe we continue to expand our geographic footprint, the build out of our Gilead organization in Japan is going according to plan, in anticipation of the approval of sofosbuvir in early 2015 and the single-tablet regimen of the difference we’re supposed to get later in 2015. In closing I’m excited to share that earlier today as John mentioned the FDA granted approval of Zydelig for use in three B-cell malignancies.

Our U.S. commercial team has been prepared for this day and will immediately begin to promote Zydelig. We’re very excited to have our first commercial product on oncology. The approvals in Europe are pending and our teams there will be ready for commercial launch consistent with the anticipated regulatory and reimbursement timelines.

I’d now like to turn over the call to Robin.

Robin Washington – EVP and CFO

Thanks Paul and good afternoon everyone. Total revenues for the second quarter were 6.5 billion, non-GAAP diluted earnings per share for the quarter was $2.36. As Paul covered the key commercial drivers and performance for the quarter, I would like to briefly discuss Q2 inventory dynamics for our core business and our recent Sovaldi product launch. As mentioned during our Q1 earnings call, we experienced an inventory draw down in the first quarter for our HIV and cardio pulmonary products following strong wholesaler and sub-wholesaler purchases in December 2013 in anticipation of January 1st price increases. During the second quarter inventory levels remained at the low-end of the range as we did not see a rebuild of inventory within the channel.

Turning to Sovaldi, we estimate the vast majority of U.S. sales for the second quarter were related to demand. Inventory across the supply chain for Sovaldi were at levels necessary to support demand during the quarter. And while the provisions for the inventory management agreements for Sovaldi with the big three wholesalers do not start until September; inventory levels were already within the range of those provisions as of the end of the quarter. As anticipated we have started to see some patient warehousing in advance of ledipasvir/sofosbuvir approval. If this warehousing continues it may have a downstream impact to Sovaldi inventory held in the distribution channel.

Turning to expenses, non-GAAP R&D expenses were up 54 million year-over-year reflecting increases in headcount to support clinical study activities, geographic expansion and marketed product support in addition to infrastructure costs related to expansion of our R&D activities. On a sequential basis, non-GAAP R&D expenses decreased 16 million to 542 million in the second quarter primarily as a result of the ramp down of Sovaldi and ledipasvir/sofosbuvir Phase 3 studies.

During the second half of 2014 we expect non-GAAP R&D expense to increase relative to first half 2014 levels to support expansion of studies in HCV, HIV, inflammation and respiratory therapeutic areas. Non-GAAP SG&A spending was up 193 million year-over-year to support Sovaldi sales, ongoing geographic expansion and the anticipated approvals of our HCV fixed dose combination and idelalisib.

On a sequential basis, non-GAAP SG&A increased by approximately 70 million driven primarily by the support of Sovaldi’s launch. We expect continued and incremental investments in these areas in the second half of 2014. Our non-GAAP effective tax rate for the quarter decreased to 14.6% primarily due to increased sales of Sovaldi and a cumulative touch up adjustment of 3.6 percentage points to the first quarter tax rate to reduce the year-to-date non-GAAP effective tax rate to 18.2%. We have included a reconciliation of this change on Slide 40 in the earnings deck.

The first half revenue performance resulted in another strong quarter of cash flow from operations of 4.2 billion. This reflects strong collections in the current quarter and a larger than normal component of Q1 collections given the ramp of Q1 Sovaldi sales. As committed we increased our level of shareholder return this quarter by repurchasing 15.2 million shares, utilizing 1.2 billion in cash. As of June 30, we had 1.7 billion remaining on our 5 billion repurchase authorization from January 2011, which we will complete in the third quarter prior to its escalation in September 2014.

In addition in May 2014, our Board approved an additional 5 billion in purchase authorization. During the quarter we repaid the remainder of outstanding May 2014 convertible notes as outlined on Slide 56. In first third quarter the warrants related to the May 2014 convertible debt will expire which if settled in cash will result in cash utilization of approximately 3.1 billion to 3.7 billion.

Finally, we are updating full year 2014 guidance which is outlined on Slide 43, to include HCV revenues for 2014. We expect Gilead total net product sales to be in the range of 21 billion to 23 billion. I would like to caution you that it is very difficult to accurately predict revenues from HCV products, which are now included in our total net product sales. As a result, the following factors specific to HCV products could cause our net product revenues to be higher or lower than projected.

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