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

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Gilead Sciences, Inc. (NASDAQ:GILD)

Q2 2014 Earnings Conference Call

July 23, 2014 05:00 PM ET

Executives

Patrick O’Brien – VP, IR

John Martin – Chairman and CEO

John Milligan – President and COO

Norbert Bischofberger – EVP, Research and Development and CSO

Paul Carter – EVP, Commercial Operations

Robin Washington – EVP and CFO

Analysts

Geoff Meacham – JPMorgan

Geoffrey Porges – Bernstein

Mark Schoenebaum – ISI Group

Brian Abrahams – Wells Fargo

Matthew Roden – UBS Securities

Michael Yee – RBC Capital Markets

Phil Nadeau – Cowen & Company

Yaron Werber – Citi

Ian Somaiya – Nomura Security

Ravi Mehrotra – Credit Suisse

Robyn Karnauskas – Deutsche Bank

Josh Schimmer – Piper Jaffray

Howard Liang – Leerink

Brian Skorney – Robert W Baird

Matthew Harrison – Morgan Stanley

Thomas Wei – Jefferies & Company

Terence Flynn – Goldman Sachs

Operator

Ladies and gentlemen, thank you for standing-by and welcome to the Gilead Sciences’ Second Quarter 2014 Earnings Conference Call. My name is Samiya, and I will be your conference operator today. At this time, all participants are in a listen-only-mode and as a reminder this conference call is being recorded.

I would now like to turn the call over to Patrick O’Brien, Vice President of Investor Relations. Please go ahead.

Patrick O’Brien – VP, IR

Thank you, Sam. Good afternoon, everyone. We issued a press release this afternoon providing earnings results for the second quarter, which is available on our Web site 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 & Development, Norbert Bischofberger; our 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 and 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 also 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 Web site.

I would now like to turn the call over to John Martin.

John Martin – Chairman and CEO

Thank you, Patrick, and thank you all for joining us today. I am pleased with our progress and would like to highlight a number of key milestones achieved during the quarter. Just today the U.S. Food & Drug Administration approved Zydelig for the treatment of three B-cell malignancies, chronic lymphocytic leukemia, follicular B-cell lymphoma and small lymphocytic lymphoma. Zydelig is the first in our new class oral medicines that targets PI3K delta and we are pleased to provide this additional treatment option for patients.

Moving to hepatitis C, the rapid adoption of Sovaldi reflects wide spread recognition across the medical community as the benefits of this break through products can brings two patients suffering from hepatitis C. Since approval more than 70,000 patients in United States and 10,000 patients in the EU have been treated with Sovaldi containing regimens. Sovaldi offers higher cure rates with shortened treatment duration at a cost that is comparable to that of alternative treatment options and for many patients who have failed treatment with older regimens Sovaldi provides a new possibility for a cure.

Gilead has generated and is continuing to generate clinical data that support the scientific and medical evidence for treating hepatitis C as many stages of the disease. In fact across all our hepatitis C clinical studies over 6,000 patients have been treated and cured to-date.

In Japan our new drug application has been submitted to Japan’s pharmaceutical and medical devices agency for approval of sofosbuvir in combination with ribavirin for the treatment of genotype 2 infected patients. In the Phase 3 study supporting this application, 97% of patients, dose for 12 weeks with sofosbuvir ribavirin achieving an SVR12, this filing represents Gilead’s first drug application in Japan and they have approved Sofosbuvir would be the first product to be launched and marketed by Gilead in that country.

Our innovation and investment in improving the treatment for hepatitis C continues with the single tablet regimen of ledipasvir/sofosbuvir for patients infected with genotype 1 hepatitis C virus. FDA has assigned a PDUFA date of October 10th and the European Union approval is expected to come later in this year.

In Japan the ledipasvir/sofosbuvir marketing authorization application will be filed in the fourth quarter of this year. This application will be supported by results of a Phase 3 clinical trial conducted in Japan in which genotype 1 infected patients were treated with ledipasvir/sofosbuvir with or without ribavirin for 12 weeks. 22% of the patients have cirrhosis. Overall the SVR12 rate was 99% and the cohort that received ledipasvir/sofosbuvir without ribavirin the SVR rate was 100%.

Ensuring patient access to Sovaldi and all our medicines has been and will continue to be a top priority for Gilead. And we have been actively engaging with payors compelling the benefits of Sovaldi. In addition, we are committed to making Sovaldi available to patients in developed countries and have recently entered agreement with Egypt a country that has the highest presence of hepatitis C in the world.

In HIV, the single-tablet regimen abbreviated ECF TAF is being evaluated in a number of studies including treatment experienced patients, patients on stable therapy switch ECF TAF, patients with mild-to-moderate renal impairment as well as adolescents.

Data from our two Phase 3 studies compared to ECF TAF to Stribild in treatment naïve patients should become available in the third quarter of this year. We anticipate filing for U.S. and European marketing authorization of ECF TAF in the first quarter of 2015 for the treatment — for the use in treatment naive, treatment experienced and renally impaired patients. TAF as a single agent is also being studied in chronic hepatitis B infection. Two studies in 1250 patients are 30% enrolled, one study is e-antigen positive and the other an e-antigen data of hepatitis B infected patients. We expect to complete enrollment of these studies around the end of this year.

We have significant activities ongoing across other therapeutic areas as well. A number of studies of Simtuzumab, our investigation of monoclonal antibody to organic LOXL2 protein are ongoing in a variety of fibrotic diseases and solid tumors. The Phase 2 study and non-alcoholic steatohepatitis is fully enrolled and data are expected in the middle of 2015. We also look forward to providing updates for the Simtuzumab studies in pancreatic and colorectal cancer and myelofibrosis before the end of the year.

GS-9620, a TLR-7 agonist has been evaluated in our Phase 2 study as a potential cure for hepatitis B in with the first patients have been screened at the beginning of July. GS-5745, a MMP9 monoclonal antibody inhibitor is firmly in Phase 1 and has been explored in Ulcerative Colitis and solid tumors. The synergistic activity of Ranolazine in combination with dronedarone an Atrial Fibrillation and the activity of GS-6615 and long QT-3 syndrome were presented recently at the annual Heart Rhythm Society meeting.

While I am only highlighting a few of our R&D accomplishments for this year I’m very pleased with our high level of innovation and productivity I would like the thank the more than 6,000 employees at Gilead and our collaborators and partners around the world for their dedication and immeasurable contributions for the Company. Their work and commitment have enabled us to achieve a number of milestones across different therapeutic areas of the business. And importantly continue to bring life changing therapies to patients and communities of need.

I would now like to turn the call over to Paul.

Paul Carter – EVP, Commercial Operations

Thanks John and good afternoon everyone. In the second quarter of 2014 our worldwide total net product revenue increased to $6.4 billion representing growth of a 141% over the second quarter last year. U.S. sales exceeded $4.8 billion and European sales exceeded 1.3 billion. This performance has been driven mainly by healthy demand in our HIV business and the uptake and stability which had sales totaling $3.5 billion. Of that number $3 billion represent U.S. sales with most of the rest of the remaining revenues coming from France and Germany. Patients are now being treated with Sovaldi in 34 countries worldwide and that number will continue to increase as further regulatory approvals and reimbursements are achieved.

Beginning with the U.S. and HIV, prescription volume continued to grow on our HIV products. Nine out of 10 patients new to treatment were prescribed to Gilead medicine, with seven out of 10 receiving one of Gilead’s TRUVADA-based single-tablet regimens. Of these Stribild continued to be the leading HIV regimen for patients who are beginning therapy, capturing three out of 10 stops. Prescription growth of Gilead’s TRUVADA-based single-tablet regimens including Stribild, Complera and Atripla is 13% year-over-year. I’m pleased to report that Stribild prescriptions alone grew 19% in quarter two over quarter one this year and Stribild is now approaching a $1 billion annual run rate in the U.S.

ADAP purchasing in the U.S. was in line with expectations and historical norms and we did not see any unusual movements in wholesaler inventory levels.

Moving to U.S. hepatitis C performance, Sovaldi sales of $3 billion showed strong patient demand and rapid adoption by physicians. We estimate that approximately 70,000 patients have now prescribed Sovaldi in U.S. since launch. 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 whom also treat HIV patients have also prescribed the treatment. Approximately 70% of the physicians visited by our therapeutic specialists have prescribed Sovaldi to-date.

We are seeing signs that physicians have begun delaying treatment for some patients also known as warehousing in anticipation of the approval of the single-tablet regimen of the differences across the derivatives. The initial patients who started a Sovaldi-based treatment in the U.S. became aware they were cured late in the second quarter. Based on prescription data and our cure rates in Sovaldi clinical trials we estimate that around 9,000 individuals have been cured to-date and that number will continue to accelerate as the year goes on.

Of the patients treated so far we believe that around 80% are new to therapy. The genotype distribution of patients that receive treatment is approximately representative of the U.S. HCV population with around 60% usage in genotype 1, 25% in genotype 2, 10% in genotype 3 and 5% in genotypes 4, 5 and 6 combined. We have noticed the reporting of an increased use of the interferon free regimen used in the Phase 2 Cosmos study comprised of Sovaldi with simeprevir and we estimate that during quarter two 70% of Sovaldi usage was in interferon free regimens including Cosmos.

On the payor front most commercial Medicare policy and state Medicaid plans take a full six months to review new drugs and we’re working with these plans to facilitate patient accessibility to Sovaldi. As anticipated we saw a slight shift in the payor mix in quarter two due to more patients from the BA and other non-retail coming on to treatment. As we exited the second quarter the overwhelming majority of state Medicaid all covering Sovaldi roughly half of them with a prior utilization to label and the other half with restrictions around fibrosis scores. Only three states are not covering Sovaldi pending completion of their review or the establishments of prior utilization criteria.

In the U.S. we have one of the most comprehensive patient assistance programs in the industry to help ensure cost is not a barrier for patients. The components of that program include providing coupons to bring the co-pay down to as low as $5 per month and paying the entire cost for the eligible uninsured. We also provide financial support to an independent non-profit organization offering assistance to patients who cannot cover their out of pocket medication costs.

Turning to Europe we are very pleased with our strong HIV performance again underscoring our confidence in the benefits of TRUVADA-based single-tablet regimens. Gilead single-tablet regimens have grown over 20% in volume year-over-year in the big five EU markets. Of these Eviplera is the most prescribed regimen for treatment naive HIV patients and also continues to extend its lead over Atripla as the most commonly switched to regimen.

Despite the availability of generic fibrates in Europe 70% of switches out of Atripla in quarter two went to Eviplera which since the beginning of the year has been actively promoted to switch in most countries where approved. This again demonstrates the value of TRUVADA-based single-tablet regimens. In fact we have seen little impact to our business from generic fibrates so far.

By the end of the second quarter we have sales from Stribild in 19 countries across Europe including all five EU big five markets. Stribild is now the second most prescribed regimen for switches after Eviplera, gaining most of these switches from previous protease inhibitor or raltegravir containing regimen.

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.

These factors include the ledipasvir/sofosbuvir single-tablet regimen not being approved by the PDUFA date of October 10, 2014. The level and speed of market acceptance of the STR, the pricing and rate of reimbursement for the STR, the amount of patient warehousing and wholesaler inventory decreases prior to approval of the STR which could negatively impact sales of Sovaldi. And finally the launch timing and market acceptance of competitive drugs already on the market or scheduled to enter the market later this year.

Turning to expense guidance, our non-GAAP product gross margin is expected to be in the range of 85% to 88%. We’re increasing our non-GAAP R&D expenses to be in the range of 2.3 billion to 2.4 billion as we continue to invest in our pipeline. We’re increasing our non-GAAP SG&A expenses to also be in the range of 2.3 billion to 2.4 billion, which assumes the continued build out and expansion of our commercial infrastructure in Europe and Asia to support HCV product launches and increased marketing and sales efforts related to the launch of our first oncology product.

For the full year, our non-GAAP effective tax rate is expected to be in the range of 17.5% to 20.5%. As Congress has not extended the federal R&D tax credit for 2014, we have excluded the credit from our guidance. If the R&D tax credit is extended in 2014, we would expect an additional 0.4% reduction in our annual effective tax rate.

We’re anticipating the full year diluted EPS impact of acquisition-related restructuring and stock-based compensation expenses to be in the range of $0.63 to $0.66 per share. This range includes the full year effect of the amortization of end process R&D related to Sovaldi.

Thank you and we look forward to updating you on our progress during our next call. We would now like to open the call for questions, operator?

Question-and-Answer Session

 

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