吉利德科學 (GILD) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Gilead Sciences second-quarter 2015 earnings conference call.

My name is Candace 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 conference over to Patrick O'Brien, Vice President of Investor Relations.

Please go ahead.

Thank you, Candace, and good afternoon, everyone.

Just after market close today, we issued a press release with details of our earnings results for the second quarter of 2015.

The press release and detailed slides are available on the Investor Relations section of the Gilead Sciences website.

The speakers on today's call will be John Martin, Chairman and Chief Executive Officer; Paul Carter, Executive Vice President of Commercial Operations; and Robin Washington, Executive Vice President and Chief Financial Officer.

Also in the room with us for Q&A session are John Milligan, President and Chief Operating Officer, and Norbert Bischofberger, Executive Vice President of Research and Development and Chief Scientific Officer.

Before we begin our formal remarks, let me 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 website.

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

Thank you, Patrick, and thank you, everyone, for joining us today.

Paul and Robin will elaborate on our commercial and financial results in just a moment.

I would like to first comment on our HIV and HCV development programs.

Our newest antiviral agent path, which is under review as part of multiple products for the treatment of HIV, has a superior safety profile compared to TDF.

This is important because most newly diagnosed patients will now be treated for decades, and at the same time, many HIV-infected individuals who are in treatment, particularly in the US and Europe, are advancing in age.

It has also become clear that upon diagnosis, HIV patients should immediately begin treatment.

This point was driven home by the presentation of the NIH-sponsored Start study results last week at the International AIDS Society conference, called IAS, in Vancouver, and the concurrent publication of the results in the New England Journal of Medicine.

The Start trial was a two-arm randomized study, in which patients with CD4 counts of greater than 500 were randomized to immediate treatment versus deferred treatment, until their CD4 count had declined to 350.

The study was stopped after it was apparent that there was a clear net benefit in the immediate treatment arm.

For patients facing decades of therapy, the profile TAF suggested it would be viewed favorably as a new treatment option.

We now have three TAF-containing products under review: two single tablet regimens and a TAF and emtricitabine coformulated tablet.

Important data from Gilead Study 109 were presented last week at IAS.

Study 109 is an open-label clinical trial with more than 1,400 virologically suppressed patients who are randomized to switch from a TDF-containing regimen to ECF tab or to remain on their TDF-containing therapies.

The study met its primary endpoint and showed statistical superiority of E/C/F/TAF in terms of proportion of patients with HIV RNA less than 50 copies per mL at week 48.

The study also demonstrated statistically significant improvements in bone and renal laboratory parameters.

E/C/F/TAF is poised to be the first TAF-based regimen on the market, with an FDA PDUFA date of November 5, and a regulatory decision expected in Europe before year end.

Our second TAF single-tablet regimen, or F/TAF, was submitted for FDA review earlier this month.

We are using our priority review voucher, which shortens review by four months and means an expected FDA action date in March of 2016.

Submission of a regulatory file application for R/F/TAF in the EU is planned for the third quarter.

In the developing world, more than 30 million people are living with HIV, and nearly 8 million now receive TDF-based treatment regimens.

The switch data presented at IAS and the overall safety profile of TAF make it an important option for these patients, and Gilead has already licensed the technology to our generic manufacturing partners, with a goal of expediting access as soon as initial regulatory approvals are received.

Turning briefly to HCV, since the approval of Sovaldi in December 2013, approximately 470,000 patients globally have initiated treatment with Sovaldi or Harvoni.

The rapid uptake and utilization of these medicines is a testament to the fact that the real-world safety and efficacy parallels the results obtained in our controlled clinical studies.

Three supplemental new drug applications for Harvoni were submitted to FDA last quarter, each of which has been granted priority review.

If approved, these applications will expand the indicated use for Harvoni to include HCV/HIV coinfected patients; patients with genotype 4, 5, or 6; and treatment experience in cirrhotic patients.

A decision from FDA for each of these three sNDAs is expected by November 15.

In closing, I'd like to thank Gilead's dedicated employees for their tireless effort and collaboration with our partners to develop new therapies and deliver them to people around the world.

I will now turn the call over to Paul.

Thanks a lot, John.

I am pleased to provide an update on our commercial business, which in the second quarter generated $8.1 billion in worldwide net product sales.

US revenue was $5.6 billion, a 7% sequential increase and a 16% increase compared to the second quarter of last year.

European revenue was $2 billion during the second quarter, up 8% sequentially and more than 50% on a year-over-year basis despite the foreign-exchange headwinds.

Beginning with hepatitis C, as John mentioned earlier, we are very pleased with the number of patients we are reaching with Sovaldi and Harvoni, which are now approved in 51 and 40 countries respectively.

Total HCV revenue for the second quarter was $4.9 billion.

In the US, HCV product revenue totaled $3.4 billion, with Harvoni representing $2.8 billion of that amount.

In the first half of 2015, an estimated 130,000 US hepatitis C patients started treatments on a Gilead product, almost matching the number of treated patients for all of 2014.

While this demonstrates that improvements in access have been made, there are still many more prescriptions being written than being filled.

Following the nearly 70,000 patients in quarter one, more than 60,000 additional patients started therapy on a Gilead hepatitis C product during the second quarter.

This represents Gilead market share over 90% of all HCV patients, with Harvoni alone representing approximately 85% of all patients captured in the standard third-party tracking data.

We have also maintained our very strong position with US payers, as reflected by our formulary status across all payer segments.

83% of genotype 1 patients have direct access to Harvoni, a percentage that has remained stable since the first quarter.

In Europe, hepatitis C revenue was more than $1.1 billion this quarter, with over 30,000 estimated new patient starts.

We saw particularly high patient initiations in Spain, Italy, and Portugal in the second quarter.

As one example of this, Sovaldi uptake in Spain was driven by unprecedented regional access and a significant increase over historic hepatitis C treatment rates.

Additionally, Harvoni was launched in April and has surpassed the success of Sovaldi, with more than 6,000 Spanish patients starting treatment in the second quarter.

We are seeing a continued broadening of access and reimbursements across multiple European markets.

Harvoni is now reimbursed in four of the five big EUMA countries.

And in France, we completed pricing negotiations for Harvoni in June, opening access to all patients with a fibrosis score of F2 and to all HIV coinfected patients.

This is a broader group of patients than those previously treated under the French ATU or early access program.

Looking ahead, we are confident in the opportunities to reach more patients in Europe, including in the UK, where Sovaldi reimbursement is expected to come online more broadly later this summer and Harvoni will follow after that.

In both the US and Europe, we are starting to see average treatment duration shortening.

For example, fewer patients are being treated for 24 weeks, and in the United States, approximately 40% of Harvoni use in quarter two was for eight weeks.

This is an encouraging trend, as it suggests the payers should be seeing the value of early treatment for appropriate genotype-I patients.

We believe this makes a strong case for payers to further ease restrictions on patient access.

In the US, we saw an unusually large number of patient starts in the first quarter, reflecting warehousing of patients in anticipation of access to Harvoni.

In the second quarter, we saw the number of total prescriptions decline from a peak in the month of March, reflecting a smaller pool of patients who were in need of immediate treatment.

When thinking about hepatitis C patient numbers going forward, this market is still in its early days, with many patients identified and waiting to be treated.

As I mentioned earlier, many prescriptions go unfilled due to denials in the prior authorization process.

Going forward, we believe more payers will lower restrictions, allowing patients with lower fibrosis scores to access treatment.

The increasing amounts of real-world data should reinforce the confidence that our highly differentiated product provides high cure rates that in line with our clinical trials.

Additionally, we and others are increasingly active in generating awareness of hepatitis C and communicating the benefits of hepatitis C testing and early treatment.

We believe our efforts are bringing in new patients to care and will do so in the future.

While the number of new patients starting on treatment will continue to be influenced by the restrictions applied by the payers, we see encouraging trends and remain highly confident, both for remainder of this year and for the long-term sustainability of the hepatitis C market in the United States.

In Europe, the dynamics of our hepatitis C business are defined by each country and their respective launch timings.

Like in the US, at launch, we have seen unusually high numbers of patients being treated, as there has been some warehousing and especially so for Harvoni GT1 patients.

We also see a changing mix, as the high volume Southern European countries like Spain, Italy, and Portugal start to treat patients.

Our pricing arrangements took into consideration macroeconomic circumstances, hepatitis C prevalence, and the country's intent to increase treatment rates from past levels.

As a result, we are likely to see a changing mix in patient volumes, as well as average selling prices over time.

We recognize that there remains a huge unmet medical need in Europe, and that just a small fraction of diagnosed patients have so far been treated.

As in the US, our European teams are working hard to encourage diagnosis and increasing levels of treatments in the years ahead.

Turning to Japan, we are pleased with the initial introduction of Sovaldi for genotype-II patients and excited about the prospects for Harvoni in genotype I. With the approval in July, we expect reimbursement for Harvoni to be in place in Japan later this summer.

There is consensus within the medical community that Gilead's medications offer patients a simple and effective cure for hepatitis C. This is evidenced in treatment guidelines around the world, and from the real-world data that have been and continue to be generated and presented and published in peer review forums.

We will continue to work to bring these treatments to more patients as quickly as possible.

Now turning to HIV, this quarter, HIV revenues increased 8% year on year to $2.7 billion, as our Truvada-based regimens continue to hold their market leadership positions.

In the United States, revenues were $1.8 billion for the second quarter, showing sequential growth of 21%, mostly driven by the price increase on April 1 and favorable sub-wholesaler inventory levels following the draw-down in the first quarter, as well as increased demand.

In the second quarter, we saw the big three wholesaler inventory levels remain at the bottom of established ranges.

Underlying prescription demands remain strong for Stribild and Complera, driving the year-on-year revenue growth of 58% and 35% respectively.

Gilead's HIV medications continue to be prescribed for approximately 8 out of 10 treatment-naive patients initiating therapy.

Six of 10 patients initiated treatment with a Gilead single-tablet regimen, and our newest single-tablet regimen, Stribild and Complera, collectively captured 5 out of 10 new patients.

In Europe, HIV revenues were $742 million for the second quarter.

Despite strong competition, volume has grown in line with overall market growth.

Overall sequential revenue growth declined, due to the impact of negative foreign currency movements net of our hedging activity.

Eviplera and Stribild remained the most prescribed regimens for naive patients in the EU big five, and half of new patients started on Truvada-based single-tablet regimen.

Eviplera and Stribild also remain the most prescribed regimens for switch patients.

Looking to the future of HIV, John already gave a detailed account of where we stand on the regulatory front in bringing our TAF-based treatments to market.

And I can say that the Gilead Commercial Organization is focusing on ensuring a successful launch around the world.

We are excited to introduce the TAF portfolio of products to our customers and to all the patients who can benefit from them.

In closing, we are very pleased with the commercial results for the second quarter.

And, now, I will turn the call over to Robin.

Thank you, Paul, and good afternoon, everyone.

We are pleased to report solid second-quarter results, with non-GAAP diluted EPS of $3.15 for the second quarter, up 33% year over year.

Total revenues were $8.2 billion, up 26% year over year and 9% sequentially.

Despite currency headwinds, net product sales for the quarter were $8.1 billion, up 27% year over year, driven by the launch of Harvoni across various geographies, continued growth of Sovaldi outside the US, and increased sales of our newer HIV single-tablet regimen.

Non-GAAP product gross margin was 90% for the second quarter of 2015, compared to 89% for the second quarter of 2014, benefiting from changes in product mix, including a year-over-year decline in Atripla sales, which have a lower margin.

Turning to expenses, non-GAAP R&D expenses were $702 million for the second quarter, up 30% compared to the prior year due to the continued progression and expansion of our clinical studies, particularly phase III studies in the liver disease and oncology areas.

Non-GAAP SG&A expenses were $761 million for the second quarter, up 34% compared to the prior year, primarily due to an increase in our portion of the branded prescription drug fee and higher costs associated with the growth of our business, including commercial expansion to support our HCV products.

Turning to our balance sheet, we ended the second quarter with $14.7 billion in cash and investments and generated cash flow from operations of $5.7 billion.

On June 29, shareholders received their first quarterly cash dividend of $633 million, or $0.43 per share.

Our Q3 2015 quarterly cash dividend of $0.43 per share was announced this afternoon.

During the quarter, we repurchased approximately 9 million shares at an average price of $102.14, pursuant to our $15-billion share repurchase plan approved in January 2015.

As of June 30, we have $14.1 billion remaining under the current plan and remain active in repurchasing shares.

Additionally, we utilized $3.9 billion in cash for the early retirement of 46 million warrants, which will result in a third-quarter decline in diluted shares outstanding of approximately 25 million shares.

Approximately 9 million warrants remain outstanding at the end of June.

Finally, we are updating full-year 2015 guidance, which is outlined on slide 46.

The changes are as follows.

We expect product sales to be in the range of $29 billion to $30 billion, an increase of 18% to 23% over 2014.

Our guidance for product revenues is subject to a number of uncertainties, including inaccuracy in our estimates of HCV patient starts; a larger-than-anticipated shift in payer mix to more highly discounted payer segments, such as PHS, FSS, Medicaid, and the VA; the commercial launches of Sovaldi and Harvoni in Japan; the potential adoption in Europe of additional pricing measures to reduce HCV spending; and the potential for continued volatility in foreign currency exchange rates.

Product gross margin guidance is now 88% to 90%.

We are lowering R&D expense guidance to be in the range of $2.8 billion to $3 billion, driven by cost efficiencies in our clinical development activities and faster-than-expected enrollment of HIV and HCV studies.

We are lowering SG&A expense guidance to be in the range of $3 billion to $3.2 billion, primarily driven by the favorable one-time adjustment to the expected invoice from the IRS for the branded prescription drug fee.

Our tax rate is now anticipated to be 17% to 18%.

All other components of our 2015 guidance remain unchanged.

In summary, Gilead had another very solid quarter, and we see strong prospects for the remainder of the year with higher than originally forecasted revenues and lower than originally forecasted expenses.

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?

Thank you.

(Operator Instructions)

Our first question will come from the line of Geoff Meacham of Barclays.

Your line is now open.

Good afternoon, guys.

Congratulations on the quarter, very impressive.

I wanted to ask you access question about hep C from Paul.

Look on slide 25 and you've broken out new patients by fibrosis states.

I have a couple of questions.

One, what trends have you seen for F0F1 patients, and then what could be the tipping point for new starts for F0F1?

And then how important is that in you guys' view in the durability for US sales?

Thank you.

Thank you, Geoff.

The data that we have is on intent to prescribe.

We have seen that in this quarter, the data we have, the intent to prescribe was about 55% of prescriptions were F0 through F2.

Now, we actually don't believe that nearly that many prescriptions were actually filled.

By the way, the definition of intent to prescribe is prescriptions that have actually been written, not necessarily filled.

So there are still a lot of restrictions in place in the United States, and I think this is the variable which really will influence the number of patients that we see being treated or the rate of number of patients being treated in the rest of this year and through the next few years.

So clearly, what we are hoping is that those restrictions start to unwind somewhat.

We are encouraged by a couple of things.

We are encouraged that the number of people being treated for eight weeks, genotype 1 patients, has started to increase.

That's now at about 40% of Harvoni prescriptions.

So that kind of implies that less sick patients are being treated.

We also hope that, as I said in my script, starts to provide some encouragement to payers in terms of value, as they think about curing patients.

But we'll have to wait and see over time how these restrictions unfold.

I do think that as the markets start to become a bit more predictable now in terms of the numbers of patients coming through that hopefully payers will also feel more encouraged to open the gates slightly.

Thank you, Paul.

Thank you.

Our next question comes from Mark Schoenebaum of Evercore ISI.

Your line is now open.

Hey guys.

Congratulations on a monster quarter.

If I may, John Milligan, perhaps three pharma CEOs, companies with market caps some cases smaller than yours, have said something to the effect that mid-cap biotech is priced to perfection, one even said it's in a bubble.

The biggest question on everyone's mind for Gilead is who are you going to buy?

Who are you going to buy?

Who are you going to buy?

Every day, this what we talk about in the investment circles.

So I was wondering A, if you could opine on the general state of valuations in small and mid-cap biotech land, and B, just give us an update about what you are thinking on acquisitions.

Are you ready to do them now?

If so, would you be willing to do a series of smaller ones?

And would you be willing to do, for example, a very large transformative type of deal?

Thank you.

Thank you for that one question.

I just followed Geoff's lead.

A couple of things here.

Number one, we've talked about valuation in our industry and I think we have seen a dramatic growth in the valuation of a lot of companies, certainly the small and mid-cap companies.

I have to say that has been accompanied by some really significant increases in innovation and some very interesting and innovative products that have come along.

And so I do think the innovation revolution that we are seeing has driven greater value creation than we have seen in the past.

So it is a little hard to say that we are in a bubble when you have seen such a dramatic innovation, and I ascribe a lot of that value to that innovation.

So that's how I think about.

The second thing I believe was about what are we going to buy.

So I think I am going to give you the answer that I usually give, which is Gilead is in terrific shape.

We've got a very strong workforce.

We've got a really strong balance sheet.

We have great scientific expertise on board, and so that gives us the capability to do a wide range of things.

As you suggested, we could contemplate small deals.

We could contemplate larger perhaps even transformative deals, and we are in a position of strength.

We could be fairly selective in terms of the things that we would like to do and take our time to make sure that those things that we do choose to do, we can execute on them fairly effectively, bring new products to market, and continue to grow our top-line revenue in EPS.

So we'll take all those things into account.

Obviously, further than that I can't comment specifically on any kinds of targets; that would be inappropriate.

Thank you for taking my one question.

You're welcome.

Thank you.

Our next question comes from Geoffrey Porges of Bernstein.

Your line is now open.

Thank you very much for the question and echo the congratulations on the quarter.

Probably the most remarkable guidance we have seen in a long time.

I have a question for Paul on HCV.

You've treated roughly -- well you and your competitors have actually treated a few as well, 300,000 patients in the US over the last 18 months or so.

And, Paul, my question is, is the patient pool that is still to be treated being replenished by a new diagnoses or new patient identifications at the same rate as that 300,000 depletion or faster or slower than that 300,000?

Thank you.

Thank you, Geoff, for the question.

The answer is yes, categorically.

We have some quantitative evidence.

We have plenty of anecdotal evidence.

We talk to doctors the whole time, and -- physicians, I should say, in the US, and all of them tell us that they have many patients in the queue, if you like, waiting for treatment.

And really the barrier to them being treated is the restrictions that the payers are putting on.

We are also ourselves and competitors, but also a lot of stakeholders are working hard to encourage awareness of hepatitis C, encourage testing, encourage people to think about how they link their status to treatment.

We do try and measure that to some extent as well.

We do measure the number of patients that are coming from diagnosis to under-treated care, and our definition of that is people who visited a doctor in the last 12 months with hepatitis C.

We are seeing at a very stable rate actually, around 30,000 a month moving under treated care.

That is the answer why I gave you yes.

We are selling that number I think quite consistently.

As I said, we're doing a lot and it takes time to actually get traction on some of these things.

We are doing a lot of things now with a view to the longer-term future as well, to really try and think about how do we increase diagnosis rates.

We've got about 1.6 million people in the US diagnosed.

We have treated, as you said, maybe 300,000 in the last year or two.

There is still a long way of diagnosed, but we are not resting on our laurels.

We are thinking about how do we start to increase those diagnosis rates as well.

Thank you very much for the answer.

Thank you.

Our next question comes from Matt Roden of UBS.

Your line is now open.

Hi guys.

Congratulations on the quarter.

I hope you can hear me okay; I seem to have some static on the line.

We can hear you Matt.

I just wanted to ask about product sales guidance, nice beat and raise in the quarter here.

But if I plug in half-year sales at about $15.5 billion and look at your full-year sales guidance of $29 [billion] to $30 [billion], it seems to demonstrate that you are probably not thinking that hep C sales are going to roll off a cliff in the US in the back half of the year.

Could you talk a little bit more about your assumptions that went into your sales guidance raise here for this year, in particular around the product mix and geographic mix.

Lastly, I know you only provide guidance for this year's numbers, but anything you can share about you thinking on outlook into 2016 in terms of the mix, to the extent that you can.

Thank you very much.

Thank you, Matt.

Very good question.

Well, we don't think as many patients in the US will be treated for hepatitis C as in the first half.

The reason for that really is not that we feel profoundly patient numbers are being treated less and less, but that we did see a very big spike in quarter one, as I mentioned in the script, because there was such a warehouse of patients waiting and people who really needed to be treated waiting for interferon-free Harvoni to come along.

I do think that we should put it in perspective: Harvoni really did change everything for patients waiting for treatment.

To give some context to that, in quarter four last year, Gilead treated about 45,000 patients.

In quarter two, we just had, we treated over 60,000 patients.

I know that's only 2 data points but that's a 40% increase in patients.

We don't feel that the overall trend is this market is going down and down, but we did have this very big spike in quarter one and we don't see that that's going to be repeated in the US during the rest of the year.

We are still subject to how the restrictions by payers play out in the rest of this year.

I think we have been fairly conservative in our view.

We also have the VA situation, which is well publicized where the VA is depleted of funds at the moment.

We have already seen VA purchases drop off towards the end of quarter two.

Our assumption is that those purchases will start to come back again when their funds hopefully get -- the bucket of funds gets filled hopefully from October.

We have taken that into consideration.

Then outside of the US, we've got various dynamics going on.

And as I said, country by country in Europe, we are launching Harvoni, and we are seeing somewhat like the US, an early spike in volumes, as these people who are very sick and really need immediate treatment do get treated.

And then it starts to stable off.

We also see in Europe budget ceilings.

The level of treatment in some of the countries is so high at the moment that we do recognize that budget ceilings may be reached, and we are taking a fairly conservative view of that as well.

Then we have Japan.

I touched on, we are off to a good start there, but still a lot of uncertainty as to how our launches go, although we are very encouraged.

Sovaldi, of course is the only product interferon-free for GT2 patients.

Harvoni has had incredible 100% SVR clinical data to support its filing for GT1 patients, and we should hopefully get pricing agreed in the next couple months.

So we are excited about Japan.

But I think overall, we are taking a fairly conservative view.

US is still the big market for us, and we're recognizing that the second half is probably going to be smaller than the first half.

That's kind of how we are thinking.

Going into 2016, we hope all the efforts that we are putting into increasing diagnosis, increasing linkage to care start to -- we're calling it linkage to cure now, because our SVR rates really are so high in real life start to play out.

We see there are still a lot of patients in the US, in Europe, around other countries in the world to be treated.

We have only touched the top of the iceberg.

I should mention countries like Canada, Australia, some of the Asian countries that will be coming on stream in the next year or so.

Great.

Thanks very much and congratulations.

Thank you.

Our next question comes from Michael Yee of RBC Capital Markets.

Your line is now open.

Hi, thank you.

Congratulations.

Just a follow up on a couple of these things, taking a step back, should the takeaway be that US patient treated continue to get a bit smaller here over the next few quarters but it is offset by OUS?

And to get people comfortable with the US, where do you think it starts to stabilize or bottom out?

And where do you get comfort with that and then start to pick back up?

And to that, is Medicaid a big part of that?

I know that you were talking about Medicaid state contracts.

Those started to come on and haven't really heard much about that, but we know that's a big part of the population.

So with those contracts, where is that in all of this and where do you think US can start to stabilize and stop declining?

Thank you.

Yes, thank you, Mike.

We don't know for sure yet whether the US is actually stabilized, but we have a sense that directionally, it will stabilize and it will start to grow as payer restrictions start to get loosened up.

We feel very clear about that.

We mentioned the VA just now, the VA should start to come back onstream I think in the fourth quarter.

And we will see a gradual shift of mix of payers in the US, I think slightly towards the public payers.

Year to date, we are about 70/30 public and Medicare -- sorry, private and Medicare to the public payers, and we would anticipate that might grow to 60/40, let's say in the second half of the year.

So I am not sure I have answered your question really.

I guess the Medicaid population, yes.

The Medicaid population will start to come on.

Our competitors have exclusive access to some Medicaids, we have to others.

Harvoni is -- patients in Medicaid, around about 34 states have signed deals with us to make Harvoni available.

That's about two-thirds of the patients covered by Medicaid, so we are getting reasonable access there.

And as I said, I think that mix will start to shift very slightly towards Medicaid during the rest of the year.

Thank you.

Thank you.

Our next question comes from Matthew Harrison of Morgan Stanley.

Your line is now open.

Great.

Thank you for taking the question.

I wanted to ask a little bit more about the access expansion that you have talked about in the US.

What's the biggest hold up in the access expansion?

Obviously, you have put rebates in place.

It sounds like you have put a lot of ways to help people and plans, whether it's eight weeks or things like that to help them expand access.

So what is stopping them, and are there any things that you can do?

What's your confidence that just taking a little bit extra time will allow them to expand access?

I think our confidence is high, Matthew, that restrictions will start to loosen up.

The question really is how long will that take?

I think real-world evidence is a great help there.

So as I said a couple of times, we are seeing numerous studies now being published and presented, which demonstrate that real-world data matches or even is better than our clinical data in some cases.

So I think this gives payers a level of confidence that an expensive investment is worth making, and I think that will start to play out.

I think also the patient stories and their families' stories really do resonate very strongly, and when people hear of friends and relatives who have been cured in a very simple way, and in some cases, in as short as eight weeks, that is a very strong message and a great encouragement.

We are hearing stories, as I am sure you are, that some patients are actually taking legal action against their insurers because their insurer is not paying for them, paying for their treatment despite the fact they're insured.

I think it's just a whole lot of things gradually put pressure on.

And as I also mentioned earlier, not least, as we start to get into a slightly more predictable environment without big spikes of patients that just immediately need treatment and warehousing and so on, once we get to a more predictive situation, this kind of works with the models of the private payers.

And hopefully again, they'll feel more confident in opening up restrictions.

Thank you.

Our next question comes from Phil Nadeau of Cowen & Company.

Your line is now open.

Good afternoon.

Thanks for taking my question.

Just a specific question on the gross to net adjustment in the ACV franchise.

On the Q1 call, you highlighted the fact that it had not fully adjusted during the quarter.

In your prepared remarks this quarter, you suggest that the full effect of the payer contracts is being felt, but based on the last comment, is does sound like you are still going to get more of an adjustment in future quarters because of public pay becoming a bigger portion of reimbursement.

Could you discuss where we are in the evolution of gross to net?

Is this quarter's run rate good for the second half of the year, or is there still more of an adjustment to come?

Thank you.

Phil, this is Robin.

I would say this year, as Paul articulated in the script, we do feel that we got more towards what we would expect with having a full quarter of the contracts in place.

That impact on the gross to net was probably the biggest adjustment that got to near the point estimate that we talked about at the beginning of the year, which we don't necessarily want to repeat.

I would say also, as Paul mentioned, you can expect a little further adjustment based on the payer mix going into the second half.

Again going from 70/30 to 60/40.

But for the most part, I think you are at a stage where we don't anticipate significant changes quarter on quarter at this point relative to gross to net.

Thank you.

That's very helpful.

Thank you.

Our next question comes from Cory Kasimov of JPMorgan.

Your line is now open.

Hey guys.

Thanks for taking the question.

Just following up on Phil's gross to net question, would you expect to go through another round of payer negotiations upon the potential approval of Merck's regimen early next year.

Hi Cory, I will try and answer that one.

We have agreements in place, and I think if we look at all the lives in the US about 96% of lives now are -- that are covered have been agreed.

And Harvoni has access to 83%, either as an exclusive or a parity access.

I would take the opportunity just to emphasize yet again that Gilead does not believe in exclusive access.

We believe in physicians and their patients having the right to prescribe whatever they want to prescribe and not being dictated to by payers.

So certainly, we are not aiming to establish any more exclusivity in a competitive way.

So we have agreements in place with most of the payers; most of those agreements are multi-year.

We hope that we can compete on our products, and we think that's the way it is going to be.

But we will defend our market share vigorously.

We have competed before where the competitor wants to compete on price.

I think that the results speak for themselves.

We will consider every scenario and be ready for it.

All right.

Thank you and great quarter.

Our next question comes from Robyn Karnauskas of Deutsche Bank.

Your line is now open.

Hi guys, thank you for taking my question.

Just to focus on something different in the oncology area, you have Celgene being very aggressive in the blood cancer space with acquisition.

And you have also mentioned many times publicly about thinking about immuno-oncology.

So I was just wondering how aggressive do you think you have to be in oncology to compete?

And do you think, I think you said before blood cancer is crowded.

Do you think it is more likely you could go in a solid tumor direction and how are you thinking about blood cancer verses solid tumor in the new competitive landscape?

Thank you.

Hey Robin.

It's John Milligan.

Yes, that's a good question.

How aggressive do you want to be in a certain area?

It has been fascinating again, the rate of innovation that we have seen in the blood cancer space, and it has gotten extremely crowded leaving fewer opportunities, I think for new products or follow-on products to make headway into this area.

So it has gotten quite crowded.

So we are broadening our criteria for the things that we would be interested in and are looking at a wide range of things.

I think you mentioned immuno-oncology specifically.

We have not called that out specifically as an area of interest, also partially due to how crowded it is.

It certainly is a PD1, PDL1 space, but it wouldn't keep us from thinking about areas that were novel and that could provide further benefit to patients in those areas.

I don't know on what scale we can talk about aggression, but I do think it is clear we're going to be active and we will be open to opportunities that can benefit our portfolio in the best way we think possible.

Robin, I also like to point out that we are pursuing solid tumors.

We have our MMP9 antibody in gastric cancer, pancreatic cancer, (inaudible) in pancreatic and lung cancer.

There is, of course evidence, that these compounds do have effect on myeloid-derived suppressor cells, which is in a way, immuno-oncology as well.

Great, thank you.

Thank you.

Our next question comes from Brian Skorney of Robert W Baird.

Your line is now open.

Good afternoon, guys.

Thank you for taking the question.

Looking at Sovaldi, it looks like it's a pretty big quarter in the US that didn't match up with the prescription data relative to the last few quarters.

I was just wondering if you could give any color, is there some source of Sovaldi revenue that isn't getting captured in there or was there any one times last quarter or this quarter that we need to keep in mind?

Also, I am just curious if there is a specific mid-cap Company who you thinks role in the biotech innovation wave that you mentioned is maybe under-appreciated by the public markets?

I don't think there was anything particular about the Sovaldi.

There was a tiny little bit of inventory growth.

Sovaldi seems to be pretty stable at this point, in terms of patients numbers.

I don't think there was anything special about Sovaldi, Brian.

Okay.

In terms of your question on under-valued small, mid-cap stocks, I am not in the business of giving stock tips to folks.

So I think I will continue to decline that.

Thank you.

Our next question comes from Terence Flynn of Goldman Sachs.

Your line is now open.

Hi.

Thank you for taking the question.

Maybe just a two-part from me.

First, it just looks like if we take sales divided by the patient numbers in the US, it looks like average price per patient was higher this quarter versus last.

Was just wondering if that's simply a mix question, meaning more Sovaldi patients versus Harvoni.

And then the second question was just as we think about 5816 phase 3 data, just how to think about positioning there relative to Sovaldi.

Would you guys pull Sovaldi from the market or would you keep it on the market?

And then, anything to think about on pricing.

Thank you.

Terence, the first question, it's a mix is the answer to your question.

I'll hand you over to Norbert.

Tere, with regards to 5816, one clear opportunity is here treatment of genotype 3 patients.

There is still an unmet need.

You might have seen daclatasvir in combination with sofosbuvir got approved a few weeks ago.

And the response rates while substantial they are sub-optimal, in particular in cirrhotic patients, they have response rates or SVR-12 rates of about 60%.

That's clearly an unmet need.

We are also looking at other genotypes, and with regards to, Sovaldi, no, we would absolutely not pull Sovaldi from the market.

Sovaldi still has a lot of value in subpopulation and in use with other agents like daclatasvir, simeprevir, et cetera.

Thank you.

Our next question comes from Ying Huang of Bank of America Merrill Lynch.

Your line is now open.

Thank you for taking my questions as well, and it was a good quarter.

First of all, can you talk about Europe?

Do you think the growth could be meeting bottleneck as restricted by the government's budget process in the second half and also next year?

And then secondly, your competitor AbbVie commented on the earnings call that they think the US GT1 patients are being treated will be annualized at about 175,00 to 180,000.

Do you agree with that view, or do you think you will see actually a higher number of patients being treated in the US?

Thanks.

So let's just deal with the US patient number question.

I think that we feel that the applicant fee number is a little bit low.

We are fairly confident -- and this depends, somewhat, as I said on the payers in the second half of the year, whether they open restrictions further or not.

And it also, to some extent, makes some assumptions about the VA coming back on stream.

But we see no reason why there shouldn't be 250,000 plus patients treated in the US next year.

That's total patients, not just GT1; and it's total patients not just Gilead's share.

We have said in the past, and I think we still feel this, that the capacity in the US to treat HCV patients is around 300,000.

We have no reason to believe it would be higher than that at this point.

I think in the years going forward, we'll see 250,000 to 300,000 patients being treated in the US and that will ebb and flow somewhat, but the main variable will be restrictions by payers.

Then the European question, well I said that the agreements that we had made with European governments take into consideration ability to pay.

And that's defined by some of the macroeconomic metrics on countries by the prevalence of HCV in those countries.

But probably most importantly by the political will of those countries to increase treatment rates above historical levels.

And so we have worked with them to agree a volume-based rebate structure that encourages high number of patients to be treated.

And we are seeing those becoming -- executing now.

As I said, in Southern Europe, Italy, Spain, Portugal, we are seeing a substantial number of patients being treated.

We are also very aware of the fact that these countries' single-payer systems do have finite budgets, and the countries have made great efforts to increase those budgets to treat more patients, because they do see value of treating their hepatitis C patients.

Whether we hit those budgets or not, I can't predict at this moment.

But one thing is for sure: that either at the rate of patients being treated, they'll either have to slow down somewhat in some of the countries or they'll have to increase their funding over the next couple of years if they want to keep treating at the rate they're doing.

Anyway, we are greatly encouraged that a lot of patients are being treated, and we're greatly encouraged that the real-world data really supports that investment in treating patients.

And we hope that will encourage further increases in budgets.

Thank you.

Our next question comes from John Sonnier of William Blair.

Your line is now open.

Thanks for taking the question, and congratulations on a really nice quarter.

The question is for Paul.

With Japan coming online, can you talk a little bit more about the HCV market opportunity there?

And I am particularly interested in how the pricing mechanism works and whether or not there is any statutory discounting downstream or based on volume?

Thank you.

Hi John.

Yes so Japan is an exciting opportunity for us, and as you may know, it's the first product we have launched in Japan.

So on the back of this, we are actually establishing or have established our Japanese entity and we hope that that entity will be a platform in the future for us to launch a whole series of future products, not just in the hepatitis C space.

So it's exciting.

We have launched for Sovaldi for GT 2. We launched that late in May, the 25th of May, we got pricing agreement and launched.

And it's gotten off to a good start, although it is extremely early days.

There are around 200,000 GT2 patients in Japan who were diagnosed, and as I already mentioned, have really no interferon-free option other than Sovaldi.

So we are very happy to be able to help meet that unmet medical need.

We are working to agree pricing on Harvoni.

We should have that agreed fairly soon, and we are confident that that will be a happy outcome for everyone and we shouldn't have any delays in launch.

There are no statutory discounts on pricing in the first years.

There is a statutory system, and it's typically 2% to 5% discounts every two years or so that we have seen historically.

We would envision that that would happen.

There is also a mechanism whereby you have to forecast your revenues going forward, and there is a system of capping prices based on whether you go through that ceiling that you have self-agreed.

So there are mechanisms, but there is no discounts, per se, on a day-to-day basis and we wouldn't expect any discounts on Sovaldi or Harvoni at least for the first two years.

Thank you.

Thank you.

Our next question comes from Jason Colbert of Maxim Group.

Your line is now open.

Hi this is Jason McCarthy for Jason Colbert.

Congratulations again on another great quarter.

My question is in terms of building the market for Harvoni in the US.

How do you see -- and I know it's been discussed before, the cost-cutting insurance carriers and discounters with like Express Scripts trying to control pricing and how that could impact the growth of Harvoni going forward?

Well, I think we have to just stand back and look at our product and recognize that there is incredible amount of value and incredible amount of innovation, first of all in Sovaldi, then Harvoni, and then in what we're calling our wave 3 and wave 4 products.

I think it's that innovation that is our negotiation strength really, and I think all payers would like fundamentally to make highly innovative medicines that work incredibly well available to their patients.

And so we have to negotiate and come up with terms that work for both sides.

But we are very optimistic and we work very hard to keep good contacts with the payers across the US to make sure that they're fully aware of what's coming next and making sure that we're all on the same page.

So I think we're quietly confident that we can continue to have strong and good relationships and high levels of access to all of our medicines and especially our next HCV innovation.

Okay.

Great.

Thank you very much.

Congratulations again.

Thank you.

Our last question comes from the line of Alan Carr of Needham & Company.

Your line is now open.

Thank you for taking my questions.

Could you comment a bit more about the R&D and SG&A spend this year or this quarter?

It's a bit lower than expected.

I know you commented, I'm wondering if you could say a bit more about that.

Then your thoughts on long-term trends from that into 2016 and 2017.

Sure.

We did see overall on a year-on-year basis, and it did, both of SG&A and R&D increased.

And again, the R&D was driven by just continued acceleration of our pipeline.

But as we always do, we've had really good enrollment levels with those trials.

So as we looked at our out year or our second-half guidance, we are able to trim it back again, still making progress but doing it even faster than we had initially thought.

On the SG&A side, the one big adjustment that you saw Q1 versus Q2 related to the brand of prescription drug fee.

The rest is really just related to the ongoing commercial advancements that we're making.

Paul talked about the launch in Japan.

The other launch is ex-US, as well as just the direct-to-consumer investments that we are making.

Even with all of those as we looked at our guidance again we just -- we have always been focused on conscious expense management and ended up being able to do a little bit better than we thought, hence reducing the guidance.

Most of the SG&A reduction was related to the one-time adjustment in the branded prescription drug fee.

Then with respect to a longer-term trend here, do you expect this to continue at these levels into 2016 or 2017?

Any reason to believe it would be any dramatic growth here or that it might come down?

That's a good question.

We haven't really given long-term guidance.

I think overall, relative to our launches, we will continue to expand geographically, which will drive some of the costs, and as Paul articulated, we are focused a lot on bringing additional patients to care and looking at linking to the care.

I don't see that being major incremental steps up in terms of SG&A.

So there is no significant trend difference in what I'd say, but I am hard pressed to give you too far a look forward without providing additional guidance.

Relative to R&D, I think we have always taken approach that we'll advance things in the clinic as it makes sense, right?

We feel good with the level of spend we have today, but we are very optimistic about our pipeline.

So you could see absolute dollars go up.

Where that falls relative to percentage of revenue is something that will be to be determined as we provide guidance in 2016 and beyond.

Thank you.

That's helpful.

Sure.

Thank you.

There are no further questions at this time.

I would like to turn the conference back over to Mr. O'Brien for closing remarks.

Thank you, Candace.

Thank you for joining us today.

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

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

This does conclude the program, and you may all disconnect.

Have a great day, everyone.