吉利德科學 (GILD) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Gilead Sciences second-quarter 2014 earnings conference call.

My name is Samia, and I will be your conference Operator today.

(Operator Instructions)

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.

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 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 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 in 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 website.

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

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 US Food and 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 a new class of 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 widespread recognition across the medical community of the benefits of -- this breakthrough product can bring to patients suffering from hepatitis C. Since approval, more than 70,000 patients in the 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 at 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, a 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 III study supporting this application, 97% of patients dosed for 12 weeks with sofosbuvir/ribavirin achieved an SVR12.

This filing represents Gilead's first drug application in Japan, and if 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 10, 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 the Phase III 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 had cirrhosis.

Overall, the SVR12 rate was 99%.

And in 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 Bayers to convey the benefits of Sovaldi.

In addition, we are committed to making Sovaldi available to patients in developed countries, and have recently entered into an agreement with each of a country that has the highest prevalence of hepatitis C in the world.

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

Data from our two Phase III studies comparing ECF TAF to Stribild and treatment [IE] patients should become available in the third quarter of this year.

We anticipate filing for US 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 and 1,250 patients are 30% enrolled.

One study is e-antigen positive, and the other, [in] e-antigen negative 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, an investigational monoclonal antibody [targeting] the loxl2 protein are ongoing in a variety of hydriotic diseases and solid tumors.

The Phase II study in nonalcoholic 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 midol fibrosis before the end of the year.

GS-9620, a TLR-7 agonist, is being evaluated in a Phase II study as a potential cure for hepatitis B in patients -- with the first patients having been screened at the beginning of July.

GS-5745, an MAP9 monoclonal antibody inhibitor, is currently in Phase I, and has been explored in ulcerative colitis and solid tumors.

The synergistic activity of Ranolazine, in combination with [fernemerone] and atrial fibrillation, and the activity of GS-6615 in Long QT3 syndrome, were presented recently at the annual Heart Rhythm Society meeting.

While I'm only highlighting a few of our R&D accomplishments for this year, I am very pleased with our high-level innovation and productivity.

I would like to thank the more than 6,000 employees at Gilead and our collaborators and partners around the world for their dedication and immeasurable contributions to 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's changing therapies to patients and communities in need.

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

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 141% over the second quarter last year.

US 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 of Sovaldi, which has sales totaling $3.5 billion.

Of that number, $3 billion represents US sales, with most of the rest of the remaining revenues coming from France and Germany.

Patients have now been 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 US and HIV, prescription volume continued to grow on our HIV products.

9 out of 10 patients new to treatment were prescribed a Gilead medicine, with 7 out of 10 receiving one of Gilead's Truvada-based single-tablet regimens.

Of these, Stribild continues to be the leading HIV regimen for patients who are beginning therapy, capturing 3 out of 10 starts.

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 2 over quarter 1 this year, and Stribild is now approaching a $1 billion annual run rate in the US.

ADAP purchasing in the US was in line with expectations and historical norms, and we did not see any unusual movement in wholesaler inventory levels.

Moving to US 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 been prescribed Sovaldi in the US since launch.

The prescribing of Sovaldi in the US 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 some physicians have begun delaying treatment for some patients -- also known as warehousing -- in anticipation of the approval of the single-tablet regimen of the ledipasvir/sofosbuvir.

The initial patients who started a Sovaldi-based treatments in the US became aware if 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 have received treatment is approximately representative of the US 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 II COSMOS study, comprised of Sovaldi with simeprevir.

And we estimate that during quarter 2, 70% of Sovaldi usage was in interferon-free regimens, including Cosmos.

On the payer front, most commercial Medicare policy and state Medicaid plans take a full six months to review new drugs, and we're working with these payers to facilitate patient accessibility to Sovaldi.

As anticipated, we saw a slight shift in the payer mix in quarter 2, due to more patients from the VA and other non-retail coming on to treatment.

As we exited the second quarter, the overwhelming majority of state Medicaids are covering Sovaldi, roughly half of them with a prior authorization to label, and the other half with restrictions around fibrosis scores.

Only three states are not covering Sovaldi.

Pending completion of their review, all the establishments have prior authorization criteria.

In the US, 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 nonprofit 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's 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 efavirins in Europe, 70% of switches out of Atripla in quarter 2 went to Eviplera, which since the beginning of 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 efavirins so far.

By the end of the second quarter, we have sales from Stribild in 19 countries across Europe, including all five EU Big 5 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 regimens.

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 2. 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 are 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 for 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 settings, 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 ACU scope, and this use will -- [by them] when 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 months.

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 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 for sicker patients.

It is also worth noting that Sovaldi has received a positive HTA review in Scotland, and this has been accepted by the Scottish Medicines Consortium on 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 ledipasvir/sofosbuvir 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 US 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 in 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.

But now, I'd like to turn over the call to Robin.

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 cardiopulmonary products following strong wholesaler and sub wholesaler purchases in December 2013, and in anticipation of January 1 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 US 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 III 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 in 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 catch-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 expiration in September 2014.

In addition, in May 2014, our Board approved an additional $5 billion repurchase authorization.

During the quarter, we repaid the remainder of the outstanding May 2014 convertible notes as outlined on slide 56.

In the 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 FTR.

The pricing and rate of reimbursement for the FTR.

The amount of patient warehousing and wholesaler inventory decreases prior to approval of the FTR, 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 are 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 are 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 products.

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 are anticipating the full-year diluted EPS impact of acquisition-related restructuring in 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 in-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?

s

Thank you.

(Operator Instructions)

Geoff Meacham, JPMorgan.

Congrats on a great quarter.

Thanks, Geoff.

The cost benefit of Sovaldi seems pretty straightforward, but there still are a lot of public comments.

So my question is, is there any color you can give us on the progress you're making in Washington or with private payers on this front?

And then very related, what can be done to more rapidly increase hep C budgets in the state for Medicaid patients and also across Europe?

Thanks.

Jeff, it's John Milligan.

That's a complicated question that you give us there.

So a number of things are being done, of course.

We have had a number of healthcare economic outcome research programs that we have commissioned and have published.

We are talking about the value of Sovaldi.

There is clearly a lively debate within the press.

There's a lively debate within the payer community, and of course, the interest of Washington on this.

It is just now really that we're starting to see some of the benefits of Sovaldi.

We've been talking about this during the script, the fact that we can estimate that over 9,000 patients have now been cured in our commercial programs, that we've cured over 6,000 patients across a wide range of disease states in HCV in our hepatitis clinical trials programs.

And we're starting to see some of these benefits.

So this is the leading edge of benefits that you will see, and that will clearly accelerate as we get into later in the year, as more and more patients will have reached that important time point of 12 weeks past the end of their treatment period.

So I think there'll be a positive momentum and a positive series of stories coming out of that, which will be quite helpful.

Of course, the discussions with the payers center around the volumes that they are seeing.

I don't think anybody disagrees with the fact that Sovaldi is a remarkable drug.

It's been called an outlier in some segments.

I agree with that.

It's an outlier because we are curing people of a horrible disease in a very rapid timeframe, and that's a very unusual thing for payers to think about.

So we have noticed some positive movement of some payers, indicating that they have budgetary room in the second half of this year for this product.

We have -- that has not been universal, but we are in discussions with them and talking about Sovaldi use, and then importantly, the next generation product, the ledipasvir/sofosbuvir, coming forward.

Interestingly, if you picked up on Paul's script, we have noticed that the interferon-free regimens are becoming increasingly important.

And I think it is important to note that a high percentage of patients now seem to be getting Sovaldi plus simeprevir, indicating that all oral regimens are being approved by the payers and are considered an important part of the way to treat this disease going forward.

It's a long answer to your long question.

And the final part, with regard to things like the Senate, we of course are complying with their request for information, and look forward to the opportunities to discuss the value of Sovaldi with members of the senatorial staff.

Thanks.

Geoffrey Porges, Bernstein.

Congratulations again, also a remarkable quarter.

Just a question on timing.

So you mentioned the October 10 PDUFA date for the fixed dose combination.

And that's an eight-month review cycle from filing, and it has been given breakthrough status.

So is there anything going on in your interactions with the agency that suggest that, that might be extended?

And just a related question.

If Paul could comment on TAF and Stribild, another new combination -- just a little bit about what you're seeing in the market in terms of the appetite for replacing the existing combinations with the TAF formulation.

Thanks.

Hi, Geoff; it's Norbert.

I'll take your first question.

The review of ledipasvir/sofosbuvir is moving ahead nicely.

We've found that all the usual questions from agency about clinical CMC.

We've had clinical-type inspections that are done, manufacturing inspections that are done.

At this point, it's all moving ahead nicely, but it would be too much to speculate about the approval date.

All we really know for certain is that the PDUFA date is October 10.

Geoff, on your question about TAF, clearly this drug is not approved yet, and we haven't completed our clinical trials.

And data really will instruct us on how this is going to play out.

I think it's worth mentioning, though, that single-tablet regimens are the way ahead, in our opinion.

And we hope very much that the data coming out of the TAF trials will underscore the importance of Gilead's single-tablet regimens.

Okay.

Thanks very much.

Mark Schoenebaum, ISI Group.

I just wanted to ask about the progress -- maybe this is a question for Norbert or John -- but the progress for your triplet regimens.

Obviously Merck's doing a trial, with four-week data due out by the end of the year.

And there's a possibility the little [bars] have [kept in the high], of course, that they could shorten the duration with the triple regimen down to four weeks.

And I know that you have explored triplet regimens in the past.

A little bit of an update as to where you guys are with that.

And if needed, how quickly you could move forward to react to the Merck data, if indeed it hits the high bar and it looks pretty good.

Thank you.

Mark, it's Norbert.

Very quickly, to remind you, we actually disclosed data from an NIH study, which was in early March at [Croix].

And there we showed that you can indeed take six weeks of three drugs.

So in that case, it was our protease inhibitor GS-9451 with sofosbuvir/ledipasvir, and you get 100% cure rates.

Of course, we knew those data quite a while before we presented, and so we have undertaken now to look at eight weeks in cirrhotic patients.

We're looking at six weeks in cirrhotic patients.

We're looking at four weeks in naive patients, both with three drugs and four drugs.

You will see some of these data that are emerging, hopefully, at AASLD.

If then we see that a certain regimen has the profile that we hope that it has to have -- and remember, the hurdle bar has gone way up, below 95% -- I don't think we would consider anything taken forward into Phase III.

We could then move fairly very quickly into Phase III with whatever regimen we decide we want to do that experiment on.

Thanks.

Very helpful.

Brian Abrahams, Wells Fargo.

Following up on Mark's question, can you clarify what regimens you're looking at with the three and four DA combos from four to eight weeks that you just mentioned, Norbert?

And then, are there other ways beyond those triplet regimens that you could potentially maintain your per-patient hep C revenues, should others add on and get down to four weeks?

Thanks.

Hi, Brian.

We have ledipasvir/sofosbuvir -- of course, that's under review.

That's [that] one, the initial approval.

We have 5816, a sofosbuvir combination that is going into Phase III.

And you will see some something very soon in the second half on clin trials.

Then we have an HIV genotype 1-specific protease inhibitor, 9451.

And we have a genotype 1-specific NS5B non-nuclear site inhibitor, 9669.

In addition, we are now moving very soon into Phase II, with a [pinching] of the protease inhibitor.

So again, to summarize all of this, we are aiming for a pan-genotypic regimen that either can be three drugs -- and it's probably going to be sofosbuvir with 5816 and the pinching of the protease inhibitor.

And we just have to establish the minimum treatment duration.

We are conscious, or we want to be, the treatment duration, not only for treatment-naive non-cirrhotic patients to be shorter, but also the more difficult to treat, treatment-experienced and cirrhotic patients, to apply the same concept.

And again, we hope if everything goes well, we will go into a larger Phase II study in the second half of this year.

Or if we so choose, we could use 9451 and go directly into Phase III.

That all depends on what the emerging data looks like.

Thanks so much.

That's very helpful, and congrats on the quarter.

Matthew Roden, UBS.

Congrats on the really nice launch here.

So on the guidance, where you've included Sovaldi for the first time, so you've beat on HIV and you've beat on hep C so far.

And I think that I want to infer from the delta and sales guidance would imply straight-line hep C sales in 3Q and 4Q, despite current trends and the upcoming single-pill launch.

So what I'm trying to understand is, is this just conservatism given the uncertainties, Robin, that you mentioned?

Or is there a specific reason we wouldn't see an uptick in sales with the single pill?

And then, just related, real quick for Paul, in the hep C launch.

Is it possible for you to break out the proportion of patients who have fibrotic and cirrhotic, and a relative level of confidence that the less urgently sick patients will ultimately be treated down the line?

Matt, it's Robin.

I'll take the first part of the question.

I think the variables that we discussed are the ones I mentioned.

And it can swing from the low or the high range.

I would remind to keep in mind that unlike HIV, which is chronic care, and HCV, we cure patients, right?

So it's not necessarily as linear, right?

But all the things that I talked about -- patient warehousing, movement in inventory levels, the approval date, payer discussions -- all of these could apply some variability in the range provided.

Paul here, just to add just a comment on the fibrosis scores.

If this data is inaccurate, I would say.

But our best estimate is that around 40% of patients are F3, F4; 60% of patients treated to date are zero to F2.

We don't have data on the cirrhotic level.

But I did mention earlier that 80% of the patients treated are new to treatment.

So consequently, 20% are experienced patients and with the sicker ones.

Thank you.

Michael Yee, RBC Capital Markets.

A quick question.

Initially, there was a lot of focus around you getting numbers around how many patients in the US were under care by an expert.

And I noticed the number's gone up a little bit from 388 through 93,000.

Presumably, that could be busted through over the next few years, based on your trajectory.

So just want to understand how you're thinking about opening up that 700,000 or so, I guess 1.4 million, to get to the fully diagnosed number, so we could think about just beyond the next couple years.

And then simultaneously in Europe, a similar thinking, but presumably much lower price.

So when you think out over the long term, what percent of US sales do you think Europe or OUS could be?

Michael, it's John.

With regard to the number of patients diagnosed, we are seeing certainly -- and you probably read about this as well -- a lot of doctors now reaching out to patients who had previously been diagnosed, but have not been under care in the last 12 months.

That's why you see that number shift.

Letting patients know that new options are available and better options are coming, so that there has been an increase in the number of patients seeking care.

So I think that's been an important dynamic that we're witnessing, just really the beginnings of this as we've been launching Sovaldi, and it's now become available in certain plans and certain states.

We are confident that the increased cure rates, the ease of treatment, and these very important regimens that act more broadly across different types of patients will encourage patients to go get tested and bring into care as well.

We think two things will happen.

One, we'll test a higher percentage of people, increasing that diagnosed number.

And that those patients who are diagnosed will eventually seek care.

I have to say, all the controversy around Sovaldi is a constant daily reminder to patients that there's a very important new option available for them as well.

And I have to think that, that's been helpful as well.

So we have a high degree of confidence that in the future there will be more and more people now seeking care from their hepatologists, as they have those options available.

Paul, do you want to take the second part?

If I can remember what it was.

It was what percent of sales (multiple speakers).

I think that's a really hard question, Michael.

There's going to be a different timing, is the reality, because the countries in Europe are going to be slower to reimburse and approve the product.

But I think the prevalence in Europe is just marginally below the US.

So I think in volume terms, the numbers could end up being very similar.

The price points in Europe is going to be slightly less than Europe, the ASP probably.

So I think we can figure out that the numbers are going to be fairly similar -- US probably slightly bigger than Europe in the end.

But spread over a longer timeframe.

Okay.

Thank you.

Phil Nadeau, Cowen & Company.

I did have one on reimbursement.

Could you give us some sense for the portion of people who are currently being denied coverage for Sovaldi?

And how many people need, for example, to have their fibrosis status determined before they do get coverage?

And then relatedly, what's your most recent thinking on the pricing for the combo pill?

I think in the past you've said Sovaldi contributes the highest percentage of value to the pill.

Is that still your position?

Any updated thoughts would be appreciated.

Thanks.

I think I'll have to come back to you on the fibrosis score, Phil.

I don't know the answer to that.

This is Paul, by the way.

Our thinking about the fixed dose combination pricing -- we haven't come to a conclusion yet.

But I do think philosophically we feel that the majority of the value in the fixed dose combination is within Sovaldi.

Phil, I think your question is about reimbursement and denial of care.

We do have a significant number of patients who are getting some form of health from Gilead, especially through patient assistance programs.

We do know that prior authorizations are being used in most of the plans, especially the Medicaid plans, the sense to slow down the rate of patients coming in to care.

And then we also know that physicians are now delaying putting patients on treatment, waiting for the fixed dose combination.

So it's a difficult thing to say who's being denied versus who's being delayed, waiting for the all-oral regimens to come on the market.

It is difficult, and I don't know that we'll have a better answer for you anytime in the future either.

Okay, great.

Thank you.

Yaron Werber, Citi.

I have a little bit of a follow-on, on Phil's question, and it's in two parts.

One, can you think of -- I'm just trying to get a sense -- this is a unique situation we're in.

We're talking about an approved drug with a broad label and potential coverage denials.

Is that something that you can recall in the past, even from a legal standpoint?

Are payers allowed to reject coverage?

And then secondly, just a little bit from a Federal Trade Commission perspective, if you price the fixed dose combo in a way that's competitive, and then Sovaldi plus another drug is materially more expensive, is that an issue from the Federal Trade, given that you're going to be owning the market?

Thank you.

Yaron, your first question is a broad one: has this ever happened in the industry, and I don't know that I can speak to it.

I certainly can't think of any situations that are similar to this, although this drug is different than other drugs.

In many ways, we were -- in the HIV field, we were limiting the patients who were coming onto care via guidelines, not specifically through FDA labeling.

So there were considerations there that were not part of the FDA label, and that's the one that comes to mind.

Obviously, we've broadened those guidelines over time as the medicines got better and doctors got more comfortable putting patients on at higher and higher CD4 counts, and I think that's probably most analogous.

But again, since this is a cure market, you can make rational choices about who should come onto care today, knowing that eventually you'll be able to get to all the patients, even though that may take many years to do so.

And will naturally take many years.

I think the second part of your question was about pricing.

Simply put, we can't comment on pricing, our thoughts around pricing, for an unapproved product.

And so I can't really comment, and won't speculate on the outcome that might happen with regard to that.

Ian Somaiya, Nomura Securities.

I'm going to follow the trend and ask one question, two parts, completely unrelated.

Switching topics a little bit, starting off with NASH, if you could provide us an update on what you feel are the regulatory requirements to get a drug approved for NASH in the US and Europe.

And then on pricing, following up on an earlier question.

I know the thought seems to be that Sovaldi should be driving most or is providing most of the benefit, so they should engender most of the pricing power.

But how do you balance that with a payer environment in the US and Europe which is basically reimbursing two drugs, Olysio and Sovaldi, which are priced very similarly?

So Ian, quickly, the approvable endpoint -- and I'm simply telling you about the conversations we've had with FDA as little as six months ago.

US FDA felt that histology, even for accelerated approval, is not an approvable endpoint.

They wanted to have some clinical evidence of efficacy.

And after a lot of conversations and back-and-forth, and involving experts, FDA agreed that changes in hepatic veneous pressure gradient at 48 weeks they would accept as a clinical endpoint.

And that's the study we're doing right now.

Our study in NASH with people with cirrhosis actually uses hepatic veneous pressure gradient at week 48 as the endpoint.

And we also had another NASH study in bridging fibrosis patients, and in those patients it would be histology.

But the histology would be the link between the two studies, so that ultimately, the approvable endpoint would be hepatic veneous pressure gradient.

But even having that said, FDA could change their mind, so I'm simply telling you what we were told six months ago.

And your second question about pricing in -- this is John Milligan.

These are always complicated things to think about in terms of the value that a product brings, the types of patients it would be appropriate for, and the appropriate level of pricing based on that.

And so these are things that we have to take into consideration, as well as the external environment we're in and the competitive nature of future regimens as we think about pricing.

So all those will factor into what the ultimate pricing decision will be on the fixed-dose combination.

I obviously can't tell you more than that, because these things can't be talked about until after approvability.

But these are the various factors that we use to think about that ultimate price.

Ravi Mehrotra, Credit Suisse.

Obviously, you've got a marked uptick in cash generation, so you elected, [on], some capital allocation policy; you previously talked about dividends.

Are you any nearer to that?

And concomitant to that?

Any philosophical change in thinking how you accelerate your pipeline breadth, given your need, arguably, for higher future revenues, given your higher current base?

Thank you.

Ravi, I'll take the first part.

I think overall, our capital structure practices remain similar to what we've communicated in the past.

We're committed to effectively leveraging our strong cash flow.

And we're disciplined in thinking about it relative to the investments in growing our pipeline, selective M&A, as well as returning capital to shareholders.

The vehicles that we've used to date are share repurchases, with the increased level of cash flows and the repayment of debt.

We expect to continue to use share repurchases over and beyond the $1.7 billion year to date.

We've announced, as we did on the call, that we will repurchase another $1.7 billion this quarter.

And as you know, we have the -- a larger $5 billion repurchase program outstanding.

So at this juncture, we still believe that, that's the best vehicle for us to use.

And it's consistent with our belief that we feel our shares are currently undervalued.

We continue to have discussions with management about using other vehicles, so we could in the future think about a dividend in addition to share repurchases.

Ravi, it's John.

Just to highlight the second part of your question about: would the accelerated amount of cash generation change our thinking about bringing in our pipeline.

Really, the cash generation isn't material to our thinking this way.

We have a lot of good things in our pipeline, as John Martin mentioned.

He was only able to highlight a few of the many exciting things that are going on in our pipeline.

We've never had so many things going forward as we do today, and we feel very confident in the pipeline that we have today.

So as Robin mentioned, our focus will be on selective deals in order to augment our pipeline in certain key areas.

But with all the things going on so well, we feel that there isn't a strong need to do anything more than that.

Got it.

Thank you.

Robyn Karnauskas, Deutsche Bank.

Just to switch actually on HIV.

So it looks like the Stribild, your new patient share is going up.

But we've done some math from the metrics you provided; it looks like the amount of patients were switching off current drug just to sort of stable.

So I just wanted to check and see if the math is right, that the patients on current drugs have switched is stable?

And then, how do you see TAF influencing that switch market?

And do you have any sense of how quickly that could occur over time?

Thanks.

I'll take this question.

So our single-tablet regimen growth, Robyn, both in the US and Europe, continues a nice steady trajectory upwards.

We are seeing some switches out of the fibrins-containing products within our single-tablet regimens.

So patients are switching out of Atripla to some extent, although that is fairly slow.

And the vast majority of those switches out of Atripla are coming to either Stribild or Complera in the US, or Eviplera in Europe.

So we are pretty comfortable with that, and pleased the way things are going.

Your question on TAF is really too early to say, because the data coming out of the [first of the] Phase III studies will be highly instructive as to the future of our single-tablet regimen treatment going forward.

As a follow-up, so our math says about 6% of people switched, and that -- has it been stable over the last few quarters?

Do you have any sense of how come high that could go?

Or is that important or not important to you?

It's very stable.

I can't confirm the number you just quoted, but I think it's at a low single-digit level.

And we're comfortable with that.

Okay, great.

Thanks.

Josh Schimmer, Piper Jaffray.

Prior to the Sovaldi launch, you indicated you're actively preparing payers for its impact.

Can you comment on how effective that's been to date?

Ways you think you may be able to improve payer preparedness for next year and beyond?

And to what extent do you think that may help curtail some of the constant stream of complaints we read about in the press on price?

Thanks.

Josh, it's John Milligan.

Yes, we did talk to payers about the impact.

I think they frankly thought they were going to see something that was much more like a Vertex launch for Incivek.

And so they were surprised that not only did the product launch at such a high rate, but also that it continued to grow.

Whereas it popped out very quickly with Incivek, which is, of course, going to happen in a drug that is a high touch point for physicians, with lots of labor necessary and long duration of treatment.

So I think they just simply didn't understand technically what happens when you only treat patients for 12 weeks.

They clearly understand the dynamic better much better now.

They understand also that the demand for all oral regimens is very high.

Certainly the interest is high.

And I hope they will be preparing for this, but it's hard for me to know exactly what they're going to do and how they're going to think about something like our all-oral fixed-dose combination, which is coming out later this year.

Do you believe that's been a prime driver for the pricing noise concerns and complaints we've heard this year, and will that abate next year as a result?

Well, I don't know if it's been the prime driver.

It's better to speak to the payers, the individuals who have been saying these things, than to me.

I don't know if it's going to have an abatement next year or not.

I do know that as the value story grows, I think there will be a greater appreciation that in fact, these patients have been cured, a lot of ancillary problems that they had will subside.

And we believe that over time, the healthcare system will save a lot of money by these patients being healthy again.

Okay.

Thank you.

Howard Liang, Leerink.

Regarding the three Phase II trials to read out in the fourth quarter for Simtuzumab in pancreatic, colorectal cancer and myelofibrosis, what would you be looking for in order to move forward?

Can you talk about how important these oncology indications are for the amount of seven indications that you're testing for Simtuzumab?

Yes, Howard.

It's Norbert.

We looked into two solid tumor studies -- of course, the endpoint is PFS.

And we will be looking for a convincing difference of PFS on the active arms versus the placebo.

And how convincing, I can't tell you.

Also, both of them have two doses of Simtuzumab, 200 milligrams and 700 milligrams, IV every two weeks.

And what would also be nice to see is some dose response.

Anyway, that would convince us to spend the money and time and resources going to Phase III.

And as you may also know, the endpoint in the myelofibrosis study is histology.

So again, we will be looking at something that just convinces us that it's worthwhile to put these drugs into further development.

How important these things are?

I would say very important.

I always said, with Simtuzumab, it's high risk.

Because it's a novel target, and as you know, a lot of drugs against novel targets have never gone anywhere.

But if it works, this could be a really useful drug for solid tumors.

So we're looking forward to learning more about the Phase II data, and that should happen over the second half of this year.

Thanks very much.

Brian Skorney, Robert W. Baird.

I'm thinking a lot about the shortening duration of hep C therapy.

And I wonder if you could comment strategically what options you have with Sovaldi, in terms of pricing and access, should data justify a four-week regimen through a two-company combination, where Sovaldi is one of the agents.

I'm thinking in particular of Bristol-Myers' forward study.

If that does show four weeks of high SBR, isn't there a scenario where next year, if it was priced competitively, you would see potentially a 50% reduction in the overall price per patient?

If Sovaldi remains at the same price.

So just if you could give any color on other options to change Sovaldi's pricing as a result of that?

Brian, again, we're not going to speculate on any pricing or any regimens in the future that haven't been tested.

We have a lot of options within our own regimens.

There will undoubtedly be options with combinations of regimens in the future, as there's the potential to get down to shorter and shorter durations.

Certainly we've already shown that six weeks is possible with our own combinations, and so there may be others that could get to that as well.

But I don't want to -- I'm not going to publicly speculate about what we might or might not do with regard to pricing in the future.

We'll just have to see how these things play out, and we'll make decisions accordingly in the future.

Okay, that's fair.

Thanks.

Matthew Harrison, Morgan Stanley.

I just wanted to change the topic and ask about idelalisib.

Obviously, you got approval today on both indications.

I just wanted to ask if, one, obviously coming much earlier than you expected, and if that changed how you think about the launch?

And then also what you think about the impact of the black box, as well as the requirement of the REMS.

Thanks.

Matthew, thanks for asking about that.

Idelalisib, it's the first time this comes up.

It's great news for us, it's our first oncology product, and we're all proud and happy about it.

It wasn't a surprise to us that it came sooner, because we always knew FDA was working towards this.

We had breakthrough status on one of the indications.

And the other -- let me make a comment about the black box, from a clinical point of view.

So first of all, idelalisib is a highly effective drug for certain patients, and we believe a lot of patients will benefit from it.

Actually in our clinical studies, looking at some of the statistics, it's 8 out of 10 that derive a benefit.

Secondly, you have to realize, the data sets that we submitted to FDA -- both for the NHL, the two NHLs and the CLL indications -- were relatively small.

It was study 116, which had 110 patients on one arm.

And the total of the SLL and FL patients in the NHL study was about 100.

So you know, we were left with a relatively small data set.

And the data is the data.

These events were observed.

We did have fatalities.

This is in a patient population that is otherwise old age, mostly very sick, takes other medications.

And we, together with FDA, felt that it was appropriate to include conservative warnings in the prescribing information.

I would also like to remind you, we have a total of five additional clinical studies ongoing.

Two in CLL, which in a month or two should be fully enrolled.

Two in NHL, both for relapse, and one in front line therapy in CLL.

So five additional clinical studies.

And from these studies, this will inform us further about the safety profile of idelalisib.

And as the data emerge, we may update the label.

Paul, do you want to add anything?

I'd just like to add that our commercial team has been preparing for the idela launch for quite a while now.

We have a fully recruited team.

We've recruited some very high caliber people from companies that have high levels of oncology experience.

The team is trained, they're in-field and they are promoting the product as of today.

And we are really very excited about it.

Thomas Wei, Jefferies.

A question on TAF.

With the data coming up in the third quarter, I wanted to get your perspective on what you think is a clinically meaningful improvement on either the bone side or the renal side when comparing a TAF versus a [veria] regimen.

Thanks.

Yes, Thomas, we obviously thought about this.

We look at the totality of the [tonafuly] at the F data.

I think we can comfortably and confidently say that the BMD effects overall are not clinically relevant.

You we can also say that, with the exception of a few patients that discontinue, that small degree of decrease in creatinine clearance does not have any clinically significant effects.

So I don't think we're going to see this in the Phase III study, Thomas.

But I think what we will see will be what we saw already in the Phase II study -- that there would be much less or no decrease in BMD.

There would be much less or no decrease in creatinine clearance.

But I think where the clinical relevance comes from is from the renal impairment study.

We have a study now in 290 patients, where we are testing the ECF TAF ratio down to creatinine clearance of 30.

And that will be a really important point.

If you could say there is no renal effects in the laboratory, while there's no BMD effects, moreover you don't have to dose or dose interval adjust down to creatinine clearance of 30.

And if the regulatory authorities accept this, you also don't have to go regularly to the creatinine checks.

I think it would be a very safe, much more -- physicians and patients would feel more comfortable with this regimen than they would be if we didn't have these laboratory abnormalities.

Terence Flynn, Goldman Sachs.

Just a follow-up on that TAF one.

Can you quantify us for us the percentage of patients with HIV that have renal impairment?

And then also stratify by age now the HIV patient cohort that maybe would be at highest risk for having a fracture or low BMD, given their age?

And then the second part of the question is, I noticed during your remarks you said you're seeing a minimal impact from generic Sustiva in Europe right now on market share.

But what about pricing?

Any impact there, either now or maybe in the future?

Thank you.

Terence, just quickly, from a -- I can't give you specific numbers.

But qualitatively, of course, you know that the HIV population in the US and in other parts of the world is aging.

With increasing age, renal function declines.

And so this will be just a more convenient and safer use of the drug if you have borderline creatinine clearance of 60 or 50.

You would not have to worry about any renal adverse events to be happening with TAF.

Whereas, [tomafobid] yet, as you know, has to be dose-interval adjusted when you come down to creatinine clearance of 50, or 70 in the case of Stribild.

Yes, and maybe I can just comment on the pricing question of Sustiva in Europe.

So the product that is affected for us is Atripla.

And we price Atripla on a one-plus-one basis.

What we have seen is, the branded price of Sustiva has followed down, to some extent, the generic price of generic efavirenz.

Nevertheless, the price of Atripla we've managed to keep above slightly that one-plus-one level, and that recognizes the value of the single-tablet regimen.

And as I said also earlier, where patients are switching out of Atripla for CNS reasons associated with efavirenz, most of those switches are coming to Gilead products, notably 70% in quarter 2 went to Eviplera.

Thank you, Sam.

And thank you all for joining us today.

We appreciate your continued interest in Gilead, and the team here looks forward to providing you with updates on our future progress.

Thank you, sir.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude today's program.

You may all disconnect.

Everyone, have a wonderful day.