吉利德科學 (GILD) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Gilead Sciences second-quarter 2016 earnings conference call.

My name is Candace, and I will be your conference operator today.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I'd like to turn the call over to Sung Lee, Vice President of Investor Relations.

Please go ahead.

Great.

Thank you, Candace, and good afternoon, everyone.

Just after market closed today a press release was issued with earnings results for the second quarter of 2016.

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

Joining today's call will be John Milligan, President and Chief Executive Officer; Robin Washington, Executive Vice President and Chief Financial Officer; Kevin Young, Chief Operating Officer; and Norbert Bischofberger, Executive Vice President of Research and Development and Chief Scientific Officer.

Before we begin formal remarks, let me remind you that we will be making forward-looking statements, including plans and expectations with respect to products, product candidates, financial projections and the use of capital, all of which involve certain assumptions, risks and uncertainties that are beyond our control and could cause actual results to differ materially from these statements.

A description of these risks can be found in the latest SEC disclosures documents and recent press releases.

In addition, Gilead does not undertake any obligation to update any forward-looking statements made during this call.

Non-GAAP financial measures will be used to help you understand the Company's underlying business performance.

The GAAP to non-GAAP reconciliations are provided in the earnings press release as well as on the Gilead website.

I will now turn the call over to Robin.

Thanks, Sung, and good afternoon, everyone.

We are pleased to share results for the second quarter of 2016.

I'll first review our financials and Kevin and John will then make a few comments.

Total revenues for the second quarter were $7.8 billion, with non-GAAP diluted earnings per share of $3.08.

This compares to revenues of $8.2 billion and non-GAAP earnings per share of $3.15 for the same period last year.

Product sales for the second quarter were $7.7, billion down 6% year over year and flat sequentially.

The year-over-year decline was driven by lower HCV sales, partially offset by increased sales in HIV and other therapeutic areas.

Sequentially, we saw an increase in HIV, US HPV, and other product sales that were offset by a decline in HCV sales in Japan and Europe.

Turning to the US, product sales for the second quarter were $4.9 billion, down 12% year over year.

HCV product sales were $2.3 billion, down 33% year over year, driven by lower revenues per patient as a result of increased rebates and discounts due primarily to payer mix and lower patient starts for Harvoni as the initial group of warehouse patients was treated in 2015.

Sequentially, our HCV product sales were up 13%, driven by a $270 million adjustment to our HCV sales returns reserves rate and the initial inventory build for Epclusa.

Strong uptake of our TAF-based regimens drove 23% year-over-year and 11% sequential growth of our HIV product sales.

The quarterly revenues of $2.2 billion were also positively impacted by the upward trajectory of Trevata use for PrEP.

Turning to Europe, product sales for the second quarter were $1.6 billion, down 18% year over year, primarily driven by lower HCV patient starts and a higher proportion of patient starts from countries that have a lower net average price.

Sequentially, sales in Europe were flat excluding the impact of currency movements with HIV sales growth offset by lower HCV sales.

In Japan, product sales for the second quarter were $619 million, down 43% sequentially as a result of lower patient starts on Harvoni and the full-quarter effect of the mandatory price reductions for both Sovaldi and Harvoni, which were discussed during our last call.

Moving to gross margins, our non-GAAP product gross margin for the second quarter of 2016 was 92% and benefited from the reversal of a $200 million litigation charge recorded in the first quarter of 2016 following the favorable decision in the Merck case.

Now turning to expenses, non-GAAP R&D expenses were $1 billion for the second quarter, up 48% compared to the same period last year, primarily due to the purchase of a US Food and Drug Administration priority review voucher and the progression of clinical studies.

Non-GAAP SG&A expenses for the second quarter were up 10% compared to the same period last year, primarily due to higher cost to support new product launches and our geographic expansion.

From a balance sheet perspective, during the second quarter we generated cash flow from operations of $4.9 billion and ended the quarter with $24.6 billion in cash and investments.

While our cash flows will remain in the second half of the year, we anticipate a sequential decrease in Q3 2016 and to require cash payments related to accrued government rebate in the US and abroad, as well as milestone payments associated with our R&D pipeline progression.

We continue to return capital to our shareholders through the dividends and share repurchases.

During the second quarter, we repurchased 10.5 million shares for $1 billion under the $12 billion 2016 share repurchase program.

We received an additional 8.1 million shares in April 2016 from the final settlement of a accelerated share repurchase program announced in February 2016.

The total share repurchases in the first half of the year were 98.2 million at a cost of $9 billion.

As previously communicated, we anticipate share repurchases in the second half of 2016 to be lower than the first half of 2016 as we focus our capital allocations on advancing our R&D opportunities.

Finally, we are updating full-year 2016 guidance, which is outlined on slide 21.

The changes are as follows.

We are lowering net product sales guidance to a range of $29.5 billion to $30.5 billion.

While we are seeing continued strength in non-HCV product sales, given the current trends in payer and patient flow dynamics for HCV, our updated models suggest net product sales will range from being slightly above to slightly below $30 billion for the year.

As such, we believe it is prudent to update our full-year 2016 guidance.

The factors contributing to this conclusion include lower HCV revenue per patient as a result of a mix shift towards more heavily discounted payer segments in the US and countries with a lower net average price in Europe, a trend toward slowing patient starts in the US commercial segment and some earlier launch markets of Europe, the continued gradual trends towards shorter duration and loss of some market share to competition.

This guidance is subject to a number of uncertainties, including potential changes in the global macroeconomic environment, adoption of additional pricing measures to reduce HCV spending, volatility in foreign currency exchange rates, inaccuracy in our HCV patient start estimates, additional competitive launches in HCV, and increase in discounts, chargebacks and rebates due to ongoing commercial payer contract negotiations and a larger-than-anticipated shift in payer mix to more highly discounted payer segments such as PHS, FSF, Medicaid, and the VA.

We are increasing our R&D expense guidance to a range of $3.6 billion to $3.8 billion, driven by acquisition-related expenses for Nimbus Apollo, Inc.

and the purchase of a US Food and Drug Administration priority review voucher, slightly offset by lower-than-anticipated clinical trial expenses.

We are lowering SG&A expense guidance to a range of $3.1 billion to $3.3 billion, primarily driven by the favorable one-time adjustment to the expected invoice from the IRS for the Branded Prescription Drug fee, which lowered Q1 2016 SG&A expense.

Diluted EPS impact of acquisition-related up-front collaboration, stock-based compensation and other expenses increases to a new range of $1.47 to $1.53 as a result of our recent M&A activity.

All other components of our 2016 guidance remained unchanged.

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

Thank you, Robin, and good afternoon, everyone.

Let me say immediately how terrific it is to be back at Gilead in a full-time capacity.

Working with exceptional executive colleagues around the table here in Foster City, interacting with my senior operating management team, and seeing the dedication of thousands of Gilead employees around the world, leaves me in no doubt as to the long-term prospects for this outstanding Company.

While it's early days, over the last two months in my new role I've had the opportunity to reflect on Gilead's recent product introductions, the evolving healthcare landscape, and the operating challenges on our near-term horizon.

I'd like to share three general observations with you today.

First, I am struck by the commitment that is shared by physicians, payers and governments around the world to reduce the prevalence of hepatitis C. Even countries with challenging economic circumstances are finding ways to prioritize the treatment of HCV patients.

In the 2.5 years since the launch of Sovaldi, more than 1 million patients have been treated on a sofosbuvir-based regimen.

Beneath this aggregated number are several landmark statistics.

The United States has already treated nearly 0.5 million patients to date with Sovaldi and Harvoni.

Equally, over 200,000 patients in Europe have been treated with Gilead regimens.

Japan has treated approximately 100,000 patients in a little over a year, and just this year Australia has treated an estimated 17,000 patients in a matter of months.

Health care systems have demonstrably mobilized to reach those patients most in need.

These are remarkable facts that clearly underscore the profile of the products we have introduced.

Equally, they have implications to longer term treatment dynamics and portfolio life cycles.

Secondly, in the area of HIV, I'm impressed by how the clinical data of TAF-based regimens are resonating with the many constituents who tirelessly drive for better patient care.

The understanding that these regimens can help address a growing need for highly effective and safer treatment options for life-long HIV therapy is evidenced by the early success of Genvoya.

I will highlight some impressive data points later.

Thirdly, I'm reminded just how complex the delivery of health care continues to be.

Gilead's focus on flawless execution, on controlling the variables that we can control with the highest levels of conduct and compliance is critical and it is my top priority.

Now I will look into the details of the commercial performance for the second quarter, starting with HCV.

In the US, total HCV revenue is $2.3 billion, up 13% sequentially and down 33% year over year.

Since the beginning of the year, access has improved and almost all major commercial payers have been moved by fibrosis score criteria, joining Medicare and the VA in this regard.

Medicaid remains the only payer segment where use is still generally restricted to the sicker patients.

There are other significant barriers to access, but we are encouraged that some states have recently moved away from fibrosis restrictions towards more open access.

In terms of patient starts, approximately 59,000 people began HCV therapy in the second quarter and an estimated 90% of these patients started on a sofosbuvir-based regimen.

Importantly, third-party databases suggest that new patients are being identified through increased screening efforts.

As evidence, approximately 14 million people were screened for HCV for the period of 2014 through 2015 and approximately 280,000 were confirmed RNA positive in that two-year period.

These figures represent a significant increase from the years prior to the launch of Sovaldi.

We estimate 3 million individuals remain infected with HCV in the US, approximately half of whom are diagnosed.

Although patient starts increased for the second consecutive quarter, and patient inflows into care remained reasonably steady at around 30,000 patients a month, the dynamics vary by patient segment.

Within the commercial and Medicare segments, some larger payers have recently opened up access.

We now estimate that up to 90% of all commercial covered lives have access without regard to fibrosis score.

While the payers that recently opened up access are bringing in more patients, we are seeing a modest downward trend in patient starts among payers that have had full access in place for longer periods of time.

The sickest patients have largely been treated and the movement we are seeing is towards treating genotype 1 patients with lower fibrosis score and thus greater use of the eight-week treatment regimen for Harvoni.

In terms of all new HCV treatment starts in the second quarter, approximately 45% came from within the public payer systems.

We anticipate this percentage will remain largely the same through the remainder of the year.

The VA is one example of a payer within this segment and their commitment to treating and curing veterans who have HCV, using budget allocated by Congress to do so, is truly groundbreaking.

We are aware that in some cities, extra clinics have been scheduled to help shoulder the workload.

However, we also expect that in the longer term, socially disadvantaged patients within the VA system will be harder to reach and bring to care and that the rate of treatment will decline.

Turning to Europe, total HCV revenue in second quarter was $775 million, down 32% year over year and down 7% sequentially.

Overall, Gilead patient starts decreased to around 28,000 for the quarter.

We observed steady treatment rates in Italy and Spain, but lower numbers in early launch markets like Germany and France.

Patient starts in the UK continue to be limited by NHS England budget restrictions.

Additionally, we saw a slight decline in average treatment duration, as countries like Germany are treating more patients with low fibrosis scores who qualify for an eight-week treatment duration.

In several European markets, locally documented cure rates are equal to, if not better than, what was demonstrated in Sovaldi and Harvoni clinical studies.

This has resonated with governments and payer bodies and some countries, such as France are considering removing all fibrosis score criteria.

We will watch this picture closely and share evolving news with you in the future.

Moving to Japan, as Robin mentioned, revenue was $619 million, down 43% sequentially.

We believe this was related to two factors.

First, the decline in genotype 1 new patient starts following the Q1 2016 peak, when a very large number of individuals with advanced disease initiated therapy.

Second, the full three-month effect of a mandatory price reduction previously described on last quarter's call.

Finally for HCV, Epclusa was recently approved in the US, the EU, and Canada.

These approvals are true milestones in patient care since Epclusa is the first pan-genotypic once-daily single-tablet option.

Epclusa will be an important treatment option in the US as an estimated 20% to 25% of HCV patients have genotypes 2 and 3 and equally across Europe, there are some countries that have up to 30% of patients with genotype 3 alone.

In concluding my remarks on hepatitis C, I will return to my earlier comments.

Gilead is proud to part of a fundamental disease paradigm shift, delivering disease cures to virtually all patients treated.

That's why we developed Sovaldi, Harvoni and Epclusa and have a third single-tablet regimen in clinical testing.

Whilst the pace of new patient treatment may slow in coming years and quantifying that pace is incredibly hard, there is still an opportunity to identify and cure many HCV-infected people around the globe.

Moving to HIV, we are pleased with the launch of our TAF-based products in the US and in the European markets while we have already achieved reimbursement.

In the US, total HIV and other antiviral revenue was $2.2 billion, up 11% sequentially and Genvoya revenue nearly doubled in Q2 versus Q1.

The (inaudible) represents the most successful HIV launch since the introduction of Atripla, the first single-tablet regimen, a decade ago.

After its first six months of availability, Genvoya is already the most prescribed regimen for both treatment naive and switch patients.

78% of all Genvoya prescriptions have come from switches.

Half of the switches have come from Stribild and importantly, 10% of switches have come from non-Gilead therapies.

Among all patients who switch, we have seen an increase our inability to retain patients on a Gilead product.

While still in the early stages of the Odefsey and Descovy launch, we are seeing similar patient dynamics to Genvoya.

Over 90% of all Odefsey and Descovy prescriptions have come from switches, and 6% and 11% of switches respectively have come from non-Gilead therapies.

Finally in the US, I would like to highlight the growing use of Truvada for PrEP.

We estimate somewhere in the order of 60,000 to 70,000 patients were using Truvada for PrEP in the second quarter.

This number accounts for approximately one-third of Truvada demand.

This is encouraging as we know Truvada has been important role to play as part of comprehensive HIV prevention for many at-risk individuals.

Turning to Europe, total HIV and other antiviral revenue was $755 million, up 5% sequentially, driven by the launches of Genvoya and Descovy.

Genvoya has gained pricing approval in 11 countries, and is now the market leader in Germany for both treatment naive and switch patients after only six months of availability.

We anticipate additional launches in France, Italy and the UK in the second half of the year.

Genvoya is a preferred regimen in several HIV treatment guidelines, including Italy where it was added before pricing and reimbursement.

Preferred listings are anticipated in other EU guidelines later this year and into 2017.

EACS guidelines are expected to be updated following the HIV Glasgow 2016 conference in October.

Finally, I would like to briefly update you on the outstanding performance of the Gilead US cardiovascular team.

Letairis and Ranexa together generated $356 million in revenue during the quarter, representing a 12% year-over-year increase.

Today, over 0.25 million people in the United States regularly receive Ranexa and Letairis remains the overall ERA market leader in PAH.

In closing, Gilead achieved a great deal across our operations during the quarter and I am confident that we will continue to make significant progress in the second half of 2016.

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

Thanks, Kevin.

Before I get started I just want to say it's great to have you back on the Gilead team full time as our new Chief Operating Officer.

Today in addition to the remarks of Robin and Kevin regarding the quarter, I'd like to make a few comments of my own.

Over the last 2.5 years, we've made great progress in helping to provide access to Sovaldi and Harvoni for HCV patients.

Throughout the world, more than 1 million HCV sufferers have now been treated, with nearly half of those coming from the US.

The launch of these drugs were unprecedented in our industry and patients were treated at a much faster initial rate than we or anyone else thought possible.

Looking back, we can now say that in every country, the peak number of patients treated was achieved within two or three quarters of the launch of Harvoni and that peak number is far higher than what we had -- what had ever been achieved before, about three times that seen with the launch of the HCV protease inhibitors in 2011.

As we reach the mid point of this year, we now see the market maturing to a slower rate of treatment for HCV-infected individuals.

As we think about this more normal pace of patient starts, there are a few things to keep in mind.

As Kevin mentioned, there are about 3 million people who are infected in the US and slightly more than half of those have been diagnosed.

Many of these diagnosed patients have less-advanced liver disease upon reentering care.

For example, in the United States in the second quarter this year, we estimated that only 13% of patient starting treatment had F4 fibrosis scores compared with more than 21% the year prior to that.

With less severely ill patients there's less urgency to immediately treat patients.

This may explain the slower rate of treatment versus last year.

However, we do believe these patients will eventually benefit from treatment and this means the flow of patients will continue for many years to come.

There's also an opportunity to diagnose patients and bring them into care.

As Kevin mentioned, we estimated that about 280,000 HCV patients were diagnosed in the US within the last two years, showing the value and importance of the US GDC and CMS recommendations for HCV testing.

So while there's been a slowing of treatment compared with the rush of patients when Sovaldi and Harvoni were first approved, the HCV market is attractive over longer term, providing good revenues, strong cash flow and earnings per share on top of our base business of chronic therapies.

Because of this, our focus on improving share for HCV-infected individuals has not wavered.

Beyond the recent approvals of Epclusa, we are actively working on a third single-tablet regimen that combines the two active ingredients in Epclusa with a third investigational compound, voxilaprevir.

This combination, known as SOF/VEL/VOX, is being evaluated in four Phase III clinical trials among patients who have previously failed direct-acting antiviral treatments.

It's also being studied for its potential to offer an eight-week treatment duration for treatment naive patients of all genotypes.

We expect to have top-line data available for SOF/VEL/VOX by the end of the year.

We're making tremendous headway in HIV as well, both in our portfolio of newer products and our pipeline.

We've had several key approvals, with Descovy approved in the US and Europe last quarter and Odefsey approved in Europe earlier this month.

It's clear these medicine offer a significant advance for patients and that advance has been recognized now by multiple professional and public health groups, including the International Antiviral Society of the USA and the Department of Health and Human Services, both of which released updated guidelines supporting the use of TAF-based regimens for initial HIV therapy.

We continue to generate clinical data that support the favorable scientific and medical profile of our TAF-based products.

List week we announced the results of two Phase 3B switch studies evaluating Odefsey in virologically suppressed adults switching from Complera or Atripla.

Odefsey achieved similar rates of virological suppression as the TDF-based regimens.

These studies reinforce the efficacy of Odefsey, as well as the renal and bone safety advantages and we plan to present full data sets later this year.

Last month we presented the first human data on Bictegravir, our investigational unboosted integrase inhibitor at the American Society for Microbiology.

Data from four preclinical and Phase 1 studies examined the antiviral potency, resistance profile, pharmacokinetics and safety of Bictegravir, providing the rationale to further evaluate the compound.

Bictegravir, as part of a single-tablet regimen in combination with TAF and emtricitabine, is currently in Phase 3 trials.

Enrollment of more than 2,300 patients across four registration all studies was completed earlier this month.

The 48-week end points for these studies will be reached in the second quarter of next year and if the data play out as we hope, NDA and MAA filings could occur in the third quarter of 2017.

With the approval and rapid adoption of our TAF-based regimens and exciting new SGR in Phase 3 development and an active HIV research pipeline, I'm confident that we will be able to extend our leadership position in the HIV market and broaden our ability to help even more patients around the world.

Outside of or work in antivirals, Gilead is focused on solving some of the biggest health challenges today.

Several important data sets that are anticipated the second half of this year may help us define a strategy and pathway forward for tackling these challenges.

In our ASK program, where we have four active clinical programs, we'll have data from the Phase 2 studies of GS-4997, our ASK-1 inhibitor, and Simtuzumab, our monoclonal antibody against [Waksel] 2. The Phase 2 study of Simtuzumab for primary sclerosing cholangitis owing will also conclude and we will also have data from the Phase 2 studies of GS-4997 in diabetic nephropathy and pulmonary arterial hypertension, or PAH.

Finally, we expect data from two Phase 3 studies of Momelotinib for myelofibrosis before the end of the year.

If these data are positive these studies will form the basis for an NDA filing in the first quarter of 2017.

These are important milestones and represent a great deal of work across the organization to enroll and advance these studies and analyze complex data sets as they become available.

Gilead continues to innovate at every level and every part of the organization.

Next month, we will publish our first corporate social responsibility report that looks at assets, sustainability, grant making and other positive contributions to the communities we serve and I urge you to read it.

I'm proud of the work that's being lead by our employees and extend my many thanks to them for all of the ways they are making a difference around the world.

Thank you and let's now open up the call for questions.

Operator?

(Operator Instructions)

Our first question comes from the line of Geoff Meacham of Barclays.

Afternoon, guys.

Thanks for taking the question.

Kevin good to have you back on the call and in the seat, of course.

I want to dig into your comments and also John's comments on the help C new starts.

I guess I'm curious here because you have better F-0, F-1 access, you have positive impact theoretically from the CDC guidelines and very low penetration in markets such as the prison population.

I'm curious why -- could you put your finger on one or two things that you feel like could ultimately become a growth driver to get us back to better sequential growth?

I'm just trying to figure out what the tipping point is on some of these different volume drivers.

Thanks.

Geoff, nice to hear your voice as well.

Thank you for your comments.

I'm not at all pessimistic about the long-term prospects for hepatitis C. In fact, I'm rather optimistic.

I think what we have seen 2014, 2015, is an enormous group of the less-well patients treated, particularly by specialist hepatitis C treaters.

It's really quite amazing.

I think that this quarter, and we highlighted perhaps going forward, is really sort of a payer mix situation that we've got.

The VA is definitely increased in terms of its contribution to the 59,000 total HCV starts, which of course was an increase on quarter one.

A lot of VA patients are coming through and the VA is very, very motivated to try to essentially eradicate the virus from that population.

I think yes, we did see pick up in two of the large payers that came on stream with open fibrosis scores from the beginning of the year, but we did see some down tick in other commercial payers, so net-net it was slightly a decrease in overall commercial patients.

What I feel about the long term and as we go into years further forward and we find of hit an equilibrium of patients is all around what I mentioned and John mentioned around diagnosis.

There's been a considerable pick up in the number of HCV tests.

2014 and 2015, about a 65% increase in the number of HCV tests.

280,000 in that two-year where HCV RNA positive.

So as John said, they will eventually work their way through to treatment.

There's still over a quarter of the population being diagnosed [is at four], so there's still a lot of sickness out there in patients.

Whilst the healthcare system here and in some of the European markets have done heroic things in treating patients in the last two years, I still think with 1.5 million diagnosed patients in the United States that we are going to see a continued healthy flow of patients that can benefit from our products.

Okay.

Thanks, Kevin.

Thank you.

Our next question comes from Geoffrey Porges of Leerink.

Thanks very much.

For Kevin, welcome back and good to hear you.

Following up on this somewhat vexing issue of the HCV outlook, historically in this category after each market has peaked, it's begun a steady, slow, sometimes slow anyway, decline.

We certainly saw a rapid decline after the protease inhibitors, more slow decline after we went to Ribavirin and with the introduction of pegylated interferon.

Are you suggesting to us that you think that there's a stable outlook for the HCV revenue on a market-by-market basis from these levels or are you suggesting that we should see more like an orderly and steady decline?

Could you particularly comment about Europe where I think it was surprising to see patient numbers in the big early markets roll over so quickly, particularly Germany and Japan.

Is that a one-time step down or are we going to continue at or below this level going forward?

Yes, thanks for the question, Geoff.

I think it is encouraging that patient starts in the US and Europe have been reasonably steady over the past three quarters.

Japan is a different story I can certainly at some point comment on that this afternoon.

I think from my perspective and Robin (inaudible) John around the table here, I think it's more of the latter comment that they will continue to be a gradual decline in new patient starts but an equilibrium will be eventually hit.

Quite the timing of that, Geoff, it's really, really, really hard to peg.

I've just got to believe that with the amount of testing, with the amount of diagnosis, with the CDC guidelines Gilead itself in Q3, Q4 of this year are going to do some more educational programs around the need to test and treat.

That -- we will eventually hit an equilibrium.

In terms of Europe, Italy and Spain are very steady.

I should tell you that in Italy there are still 200,000 quite sick individuals, people to be treated and they are in treated care and the Italian government do want to go ahead and try and mobilize providers to do that treatment, so it's still an enormous number in Italy.

I think the markets that are more akin to the US, like first and foremost Germany and to a slightly less extent France, are starting to see that turn over of patients.

We've got full access in terms of fibrosis, though, in Germany and we're hoping, as I said, that we get broader sets in France.

The UK is a different situation and that's largely due to payer restrictions.

But again, still an enthusiasm to treat but one of two of those markets, there is some maturing going on.

Thanks very much.

Thank you.

Our next question comes from Mark Schoenebaum of Evercore ISI.

Hi.

Good afternoon.

Thank you for taking my call.

This is Regina Greville in for Mark.

I actually wanted to change topics and shift to hepatitis B. On your Q1 call you mentioned your hep B program included the vaccine, the TLR7 agnoist and two other internal preclinical candidates.

When will we see any data on the internal candidates?

Also, you mentioned taking a look at external opportunities for hepatitis B. Is hep B a still potential area for acquisition?

Thank you.

You asked the question about what our pipeline is for hepatitis B. We have, as you know, two compound drugs currently in clinical development.

One is an active vaccine, 4779, a collaboration is with GlobeImmune.

That's currently in the later stages of being evaluated (inaudible) those data has been released a year ago, that did not show any activity, so we don't have high hopes that this compound will work.

Then the TLR7 agnoist is just finishing the first cohort, which is in suppress stations and we are currently initiating the second cohort is ongoing.

We hope that we'll have the presentation (inaudible).

Hopefully it will make the abstract deadline.

Then you said -- you asked the question about we have two other compounds in development.

Well, you know that we're pursuing, maybe I should answer this more generally.

We're pursuing three approaches to hepatitis B cure.

The one is adding another different mechanism to the nucleotide because there is the observation that despite being undetectable, with hepatitis B therapies like (inaudible), there was always a little bit of virus left (inaudible) detectible if you look at very sensitive PCR methods.

By adding another mechanism (inaudible) completely suppressed virus (inaudible) out to zero, would that lead to an eventual cure or hepatitis S conversion.

The second thing we're pursuing is immune therapy, so that belongs to vaccine and to TLR7 that I talked about already.

We have a TLR8 agnoist currently that is working its way towards IND.

Then the third possibility that's the most hopeful but also the one that is least scientifically proven is going directly CCC DNA and that is really too early to talk about at this point.

It's still in the research stages.

Thank you.

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

Hey, guys.

Thanks for the question.

You talked a lot about falling demand in the different buckets but can you talk about the payer mix shift?

Specifically, I wanted to ask on Medicaid.

Can you just help us out with what percent of sales Medicaid is and what is going on in that bucket?

I presume it's a state-by-state negotiation.

Can you talk about what's going on there, is there a state-by-state negotiation you have to go through?

Is that pretty much done?

Walk us through that bucket and what percent of hep C that is in the USA so I can understand that.

Thank you so much.

Hi, Michael, it's Kevin.

Thank you for the question.

I'd prefer not to break out specifically the percentage of the public payers in terms of Medicaid.

As I said, all our public payers lumped together for the quarter were about 45%.

That's an increase from the previous quarter but as I said, that's all driven by VA.

We see very little change really in the scale and size of our Medicaid business.

I think it would be true to say that Medicaid, the states are slowly progressively opening up.

40% Medicaid patients come from the five largest states.

Two of those, New York and Florida, now have no fibrosis score, so as states do progressively consider opening up, they typically come to us for a contract.

We think about those contracts very carefully.

Depending on the size of Medicaid, we obviously put our submission in.

Realistically, I think we may win, we hope, the majority of those but there may be occasions when occasionally a Medicaid state goes to the competition.

Thank you.

Thank you.

Our next question comes from Matthew Harrison of Morgan Stanley.

Great.

Thanks so much for taking the question.

Robin, if you could just address the $279 million one-time swing, we obviously saw a swing in the first quarter and then a swing this quarter again.

Can you just give us some inside into what's going on with those changes in chargebacks and if we should continue to expect to see some of those numbers?

Separately on PrEP, any plans to get a TAF-based regimen approved for PrEP?

Thanks.

Sure, I'll take the first part and then Norbert will take the second.

Matt, first of all there's two separate things that we're talking about here Q2 versus Q1.

First let me address Q2.

We did have a sales return reserve adjustment related to the fact that as we introduced our new hep C product we were required to go out and get an external proxy related to sales return reserves.

Just recently, just this past quarter we closed several of the lots related to our products which means that no further returns are accepted.

So that is the triggering event by which we can look at returns versus how we had been accruing.

The other key thing about the timing of this related to the Epclusa launch.

As you bring on a new product we want to kind of re-base the level of returns that we expected see.

So that's really the adjustment there.

For the most part, you can see it's one-time in nature.

We may have small adjustments going forward but as long as we returns continue where they are than that $279 million is kind of a one-time event.

Last quarter we had a different issue and that related to rebate claims for hepatitis C. AS I said on the call last time, we always have a situation where we are constantly churning up claims around HCV rebate because you get those claims one to two quarters in arrears.

This quarter was a bit different than last quarter in that we saw a modernization of the level of those claims relative to the prior quarter so it wasn't -- it didn't' reversed the other way.

It was just (inaudible) of what we saw in Q1.

We're, for lack of better word, maybe a little bit more caught up relative to returns this quarter than we were at the end of Q1.

So two different items but we called out the $279 million but that was the one-time event but we wanted to insure you understand relative to the future projection of HCV sales.

(Multiple speakers) We also have outside medical community they (inaudible) They have advantages in terms of use for PrEP versus (inaudible) either that were published already and we have data now in human -- in animal models that show that it has the same efficacy.

The thing we're debating in terms of (inaudible) early discussions with the FDA is what clinical study would need to be done that leads to approval?

It would have to be, in almost all likelihood, a comparative study (inaudible) of what would be the sample size and would be the powering and that's currently in discussion we're having with FDA.

We hope we can come to some conclusion within the next month or so (inaudible).

Great, thank you.

Thank you.

Our next question comes from Brian Abrahams with Jefferies.

Hi.

Thanks for taking my question and Kevin, good to hear your voice again.

With the list pricing and label established for Epclusa, just wondering what's the right way to think about Epclusa's potential impact on the genotype 2/3 franchise, particularly with respect to the net price per patient, treatment duration relative to Sovaldi and how we should be thinking about the overall market dynamics.

Just wondering if you could also quantify the inventory build this quarter in there.

Thanks.

Great question, Brian.

Nice to hear your voice as well.

The majority of the revenues in the second quarter, which is right at the end, the majority of that was inventory that Robin called out.

We've really only just begun the introduction, both the promotion and the education around Epclusa.

I'm really pleased the response has been excellent and our advisory boards and our speaker programs has been good acceptance.

Whilst we have obviously a pan-genotypic label, I think the reality is that physicians are very, very comfortable, as are payers, with Harvoni for genotype 1.

Obviously, there's a mix of 12-week treatment and 8-week.

Just for your information, the eight-week course with Harvoni is now 45% of patients treated in the United States.

I think people are just really comfortable with the clinical effect and the value proposition of Harvoni in GT1, which therefore means that the slot that people see Epclusa is in the 2 and 3 patient.

As I highlighted, it's something like in the order of 20% to 25% of patients in United States.

I think the obvious advantage, both clinically and from a payer point of view, is you really do have a 12-week single-tablet regimen.

You don't have to extend the treatment duration.

You don't have to use Ribavirin.

It was quite the number of patients treated with Sovaldi (inaudible), certainly in the United States, so really in some ways it takes away that regimen and is an excellent slot.

We've had very good reception to Epclusa.

It's extremely early days.

It will take us three to six months to get payer approval.

Physicians can apply based on medical need and we know they're doing that, so just very early days and weeks.

It seems to have found a very nice entry point.

Thanks.

Thank you.

And our next question comes from the line of Cory Kasimov of JPMorgan.

Good afternoon, guys.

Thank you for taking my question.

I have a bigger picture question for you.

Really just following the latest management shuffle back in Q2, I'm wondering if these changes portend any material shift or consideration of a shift in, I guess, your commercial or pricing strategy or really the overall strategy for the business or any of the key businesses?

Is this playing into the bump in anticipated R&D with the associated downtick in SG&A as illustrated by your updated guidance?

Thanks.

I think there were a couple questions there.

It's John Martin.

In terms of -- let me get to the last bit.

You said a bump in R&D.

That is true relating somewhat to our acquisition of Nimbus, so there were charges associated with that and there were also charges associated -- I should say expenses associated with the purchase of a FDA priority review voucher.

We were very pleased to get that on board and we'll look forward to explaining when we are going to use that.

Above and beyond that, actually R&D expenses are slightly down beneath what we had forecasted because we continue to hold the cost centers to accountable and continue to drive good value through our clinical teams and getting studies done at a very cost effective way.

In terms of that, there's no difference.

The SG&A line came down a little bit because of some one-time charges that were lower than we -- sorry, the IRS charges was lower than we anticipated so kind of what we would expect.

In terms of signaling about pricing or changes in management about structures, I don't think there's anything to signal there in terms of our pricing strategy.

We're highly competitive.

We think we have a very good differentiated product and we'll continue to do the best for the Company and for patients by coming to the right level of price and access.

I'd just add, Cory, that the Gilead way is always to lead with the science around our products.

Nothing has changed in my eyes as I've come back into the Company.

We lead with science.

That's what you do in specialist markets.

It is a reality that there is no contracting.

I think we've got a phenomenal team working on this.

I met with them two weeks ago and I think they are highly professional.

We always lead with value.

That's the key thing.

We think we've got tremendous products that either control disease or cure disease and they have terrific value and that's the course we are going to stay.

Thank you.

Thank you.

Our next question comes from Phil Nadeau of Cowen.

Good evening.

Thanks for taking my question and Kevin, it's great to have you back.

I have a question on capital allocation.

In the prepared remarks, I think you mentioned in regards to cash flows being lower in the second half of the year that part of that was investment in R&D.

As you just discussed, R&D expenses aren't really changing that much in the guidance, so kind of curious whether you have on your list of things to do in the second half of the year more deals, whether M&A or in licensing and maybe you could give us some thoughts on how aggressive you are likely to be in those areas.

I'll start.

I think relative to the cash flow, what I was messaging was really related to the dynamics of payments, right?

We have accrued rebates and other things that cause volatility to quarterly cash flows.

Overall on cash flows (inaudible) but we definitely expect a sequential decrease in cash flows second half.

Relative to our overall capital allocation, its no different than what we've been messaging.

Again, more focus on our B&D opportunities, which I'll let John speak of a little bit more and again, focus there and that additional focus was somewhat less focused on share repurchases in the second half of the year.

To follow-up on what Robin said, so we were very aggressive in the first quarter of that year.

That's why we've backed off a little bit from where we are in the second half of this year.

Mostly you get the full year effect or a greater effect of repurchasing the almost 100 million shares through Robin's program.

With regard to business development, obviously that is a Company that has been very open about being interested in doing more deals, especially deals of a certain size where we think we can get some leverage and we can use our organization to effectively accelerate or expand indications.

We've done good deals both with Gallapagos and Nimbus recently.

We are very interested in continuing to add more things to our pipeline, especially in the non-antiviral area where we continue to see growth in franchises.

It's our hope as we exit this year we'll have a better, more complete story of programs internally and externally that we can use to talk about why the long-term prospects for growth are as good as we believe they are and that's what we will be focused on.

Thanks for taking my questions.

Thank you.

Our next question comes from Robyn Karnauskas of Citi.

Hi, guys.

Thanks for taking my questions.

I guess the question after hearing some of the comments about thinking about volumes slowing or coming down and then thinking about growth and that changing over time, how do you -- how are you comfortable that you can provide guidance with these two variables?

Do you have any bookends for how low we can go that give you the comfort.

Then the question is, you affirmed guidance last quarter and lowered it this quarter.

What was the one thing you think that really changed your view over the last three months that lead to that?

Thanks.

I'll start and then hand across to Robin.

Robyn, it's really hard.

We've got markets in different stages of development, whether it be US, parts of the US, different countries in Europe and obviously interesting, profound dynamics in Japan.

They're partly made up of patient flows and partly made up of sort of payer flows.

I think the big thing this quarter from the point of view of the US was very much a payer mix with the large addition of patients from the VA.

I think in the last three months that was probably the biggest thing.

We have not changed our prices in the US, Q2 versus Q1.

It was largely we're seeing this dramatic but incredibly successful program from VA.

I agree with Kevin.

I think the heavier percentage of more discounted payers, along with the fact that on the commercial side, we're seeing slight increases in US and Kevin mentioned earlier about what we are also seeing relative to the mix shift in countries in Europe.

Less of Northern Europe, Germany and France and more of Italy than Spain.

The other part of your question is (inaudible) throughout the call, this is a really difficult area to predict.

It's unlike any other.

It's a curative market and it's very large, so (inaudible) total revenues.

It's a question we ask in ourselves as we think in outer years how can we continue or can we really guide around each of these revenues.

We've guided this year but it's definitely something we're giving a lot of thought to as we kind of think about the trends of HCV going forward and all of the dynamics that we're trying to deal with.

It's very complex so more to follow on that.

Great, thank you.

Thank you our next question comes from Ying Huang of Banc of America Merrill Lynch.

Hi, thanks for taking my questions.

I have a quick one on also the pricing environment.

If you look at VA sector and also the commercial factor, what kind of impact are you seeing from competition, particularly Merck (inaudible) from the pricing perspective.

Then Quickly on R&D side, do you plan to develop a doublet maintenance regimen?

For example, recently (inaudible), the combination showed actually good results in heavily pre-treated patients in the conference?

Thank you.

I'll take the first part in terms of pricing and competitive impact.

Very little in terms of our commercial payer areas, because the contracts essentially were set up at the end of last year for the full year, so very little change in market share within the commercial payer segment.

We still have a very strong position in VA with Harvoni and Sovaldi, particularly Harvoni.

I think probably where we see increased competitive activity is in the Medicaid setting where, as I described it earlier, some of the smaller states are requesting contracts as they open up access so I think that's probably where we see the competition.

Again, because of our very strong value proposition, we hope we can be successful in the majority of those but again, on occasions, we may find that they go to the competition.

Yes, you asked the question about the (inaudible) we're of course aware of the data that were presented at [DSAL].

They looked fairly impressive, the number of genotypes with high SVR rates.

However, what they are doing right now in Phase 3 is not looking at the eight-week treatment duration all genotypes in all patients.

I would like to contrast this with our own triple combination SOF/VEL/VOX that John Milligan mentioned.

We are looking essentially at two patient population.

One patient population is experienced, that had previously failed other BAAs.

That treatment duration's for 12 weeks and then were looking at all genotypes, cirrhotic and non-cirrhotic patients for eight-week treatment duration.

We have one study in particular that only looks at eight weeks of treatment duration and the most difficult to treat genotype 3 cirrhotic patients because it's still a population where SVR rates are still in the low [90s] and we could push that up into the high [90s] that would be a step forward.

I think our Phase 3 program, the data support our Phase 2 results then we will be a step ahead of all the competition.

Thank you.

Our next question comes from Ian Somaiya of BMO Capital Markets.

Thanks for taking my questions.

Just wanted to follow-up on the triplet opportunity within hep C. Specifically, Norbert, just I don't know if you could describe the proportion of patients that have maybe failed in the first round of antivirals, whether it be doublet therapy or (inaudible) alone.

I don't know if there's a prevalent pool that you can speak to.

Then maybe I guess more question for Kevin, just how do we think about the triplet and its impact on margin price share?

Ian, we are doing essentially four studies with the triplet, what you call it the triplet, SOF/VEL/VOX.

Two of them are in treatment experienced patients and what we would aspire to is to have this compound be the universal salvage regimen.

Now Kevin, maybe you could comment on what the proportion of patients is that would qualify with this.

Something I can tell you, in Japan there's a fairly large number of patients that have been treated with the Bristol Myers (inaudible).

I think if I remember this correctly, they have SVR rates in Phase 3 of about 80% or thereabouts and they are about 9,000 patients now that we heard of are treatment experienced in that field.

That those 9,000 would immediately be claimed in our own studies.

As I said, I want to say it again, the other two studies is eight-week treatment duration for all patients, all genotypes, cirrhotic and non-cirrhotic.

Kevin?

Yes, it's a good question, Ian.

We're waiting to see some of the clinical -- obviously emerging clinical data.

Right now, we've got a situation certainly in the US.

Japan with it's resistant situation I think is perhaps quite unique in terms of the original use of the Bristol Myers regimen, but I think we've got patients being cured to an incredibly high level with Harvoni and now we've got the right treatment I think in that (inaudible) for twos and threes.

I think in the US, perhaps in Europe, it will be far more modest an opportunity.

Having said that, it depends where we are with those products, our products, where the competition is, obviously, what we decide to do in terms of the pricing strategy.

I think most importantly from a company point of view, we think this is the right thing to do and probably the last step in the whole story around hepatitis C to help treatment experiences or failure patients.

I think first and foremost we think this is the right thing to do for patients in need.

Thank you.

Our next question comes from Alethia Young of Credit Suisse.

Hey, guys.

Thanks for taking my question.

Let me be the thousandth person, Kevin, to say welcome back and it's great to have you here.

Two questions in the same vein.

Just one oncology, does this remain a focus for you guys, as far as building assets there and building out that business as much as it was in the past when you talk about it?

Secondly, Norbert, with NASH, can you just talk about some of the data points coming up and what's going on with the FXR program as well?

Thanks.

Let me start off by first thing and John Milligan will afterwards comment on it too.

We are in oncology.

We have now (inaudible) end of the Phase 3 program, we should have data this year.

If the data is (inaudible) track write application next year, we have the MMP9 in gastric cancer in Phase 3. We are looking at other solid tumors and we're now finally, after sorting out the dosing, starting the first study in combination of a PI3K inhibitor with BTK and CLL.

With regards to NASH, yes, we have now very interesting four modalities or four mechanisms that we are evaluating in NASH and at least three of them we know what they are supposed to do pharmacologically.

We will have data this year on the ASK inhibitor that will includes liver fat analysis along with histology.

The FXR agonist is currently in the Phase 1/Phase 2A study.

By the way, we know about that compound already that it has minimal systemic absorption that they are systemic levels of SGS19.

That was always our idea to have a compound that acts in the GI, that releases SGF19.

The SGF19 has the efficacy and by that rational, we both get the side effects that other FXR agonists have.

Finally, we have OGM ASK inhibitor -- ACC inhibitor, the Nimbus compound.

We know those data were presented at DSAL that it reduces the (inaudible) of Genesis.

What we're going to do based on these data is first ask if we could go into Phase 3 next year and to the other compound into Phase II with the FXR and the ACC inhibitor or even the ACO.

John?

I just would follow up with Norbert's comment by saying yes, we are committed to oncology.

We continue to be interested in assets, collaborations and partnerships where we could enhance our ability to continue to sell this product.

Where we are seeing good progress, as Norbert mentioned, our BTK inhibitor, which is -- we did also with partner from Ono is now making its way into the clinic and we've overcome formulation challenges to allow us to go ahead so that will be very, very, I think, an interesting avenue for us to continue to explore.

Thank you.

Our final question comes from Terence Flynn of Goldman Sachs.

Hi.

Thanks for taking the question.

Just wondering, kind of a two-parter.

The first is just any opportunity to broaden your prescriber base on hep C. Kevin, would love your thoughts on that.

The second question relates to Genvoya.

Can you just give us what percentage of the switches were from Atripla?

Thanks.

Hey, Terence.

First of all, in terms of sort of like any [feature words of market], I did mention Australia earlier.

That's an incredible story of treating and clearing patients and amazing commitment by the government there.

We are seeing more patients treated in Brazil.

It's a lower-priced market but we are seeing more.

We are just beginning our launch in Mexico.

So yes, these are smaller markets.

Typically they are lower priced but those, if you like those smaller waves, are starting to work through.

We are thinking carefully about China and how we launched there, probably in a very modest or a very focused, very efficient way, should I say, so we are expecting, I think, a very reasonable -- around China.

The second question, in terms of switch, about 18% of the switch patients is from Atripla, so I hope that gives you the number.

Thank you and that concludes our question-and-answer session for today.

I'd like to turn the conference back over Mr. Lee for closing remarks.

Great.

Thank you, Candace, 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.

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.