吉利德科學 (GILD) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Gilead Sciences third-quarter 2016 earnings conference call. My name is Candace and I will be your conference operator today.

(Operator Instructions)

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

Thank you, Candace, and good afternoon, everyone.

Just after market closed today, a press release was issued with earnings results for the third 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 disclosure 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.

Thank, Sung, and good afternoon, everyone.

We're pleased to share results for the third quarter of 2016. I will first review our financials and Kevin, Norbert and John will then make a few comments. Total revenues for the third quarter were $7.5 billion with non-GAAP diluted earnings per share of $2.75.

This compares to revenues of $8.3 billion and non-GAAP earnings per share of $3.22 for the same period last year. Product sales for the third quarter were $7.4 billion, down 10% year-over-year and down 3% sequentially. These declines were due to lower HCV sales, partially offset by increased sales in HIV and other therapeutic areas. Sequentially, declines in our HCV sales in the US, Japan and Europe were partially offset by increases in the US HIV and other product sales.

Turning to the US, product sales for the third quarter were $5.1 billion, down 9% year-over-year. HCV product sales were $2 billion, down 37% year-over-year, driven primarily by lower patient starts for Harvoni and lower revenues per patient, primarily due to a higher percentage of sales to more deeply discounted segments. The decline was partially offset by demand for Epclusa, which was launched at the end of Q2 2016 and generated $593 million in its first full quarter of sales. Sequentially, our HCV product sales were down 12%. These sales were essentially flat compared to the second quarter excluding the favorable adjustments for HCV sales return of $279 million that we made last quarter.

HIV and other antiviral sales increased 32% year-over-year and 19% sequentially. The quarterly revenues of $2.6 billion were positively impacted by strong uptake of our TAF-based regimens and a one-time favorable adjustment of $332 million to our rebate reserves, primarily related to our TDF-based regimens. Without the adjustment, US HIV and other antiviral sales grew 15% year-over-year and 4% sequentially.

Turning to Europe, product sales for the third quarter were $1.4 billion, down 16% year-over-year primarily due to lower HCV patient starts and unfavorable currency movement. Sequentially, sales were down 12%, primarily driven by lower HCV patient starts and summer seasonality consistent with the usual decreases in demand during the European summer holiday months. In Japan, product sales for the third quarter were $452 million, flat year-over-year driven by higher sales of Harvoni, which was launched in September 2016, offset by mandatory price reduction for both Sovaldi and Harvoni, which we discussed during our last call. Sequentially, sales were down 27% as a result of lower Harvoni and Sovaldi patient starts.

Now, turning to expenses, non-GAAP R&D expenses were $981 million for the third quarter, up 38% compared to the same period last year, primarily due to the progression of our clinical study, which included a $200 million milestone expense associated with our purchase amendment. Non-GAAP SG&A expenses for the third quarter were down 8% compared to the same period last year primarily due to lower branded prescription drug fee expense.

From a balance sheet perspective, during the third quarter we generated cash flows from operation of $4.3 billion and ended the quarter with $31.6 billion in cash and investments, which is inclusive of the issuance of $5 billion of senior unsecured notes. We have a healthy balance sheet to invest in our pipeline and external opportunity. While our cash flows will remain strong, we do anticipate a sequential decrease in Q4 2016, due to required cash payments related to accrued government rebates, as well as milestone payments associated with our R&D pipeline.

Shareholder return via dividends and share repurchases year-to-date remain strong. In the third quarter we repurchased 11.7 million shares for $1 billion under the $12 billion 2016 share repurchase program. For 2016, the total share repurchases through the third quarter were 110 million shares at a cost of $10 billion. Year-over-year we have seen an 11% decline in our diluted shares primarily driven by purchases. Finally, we are reiterating our full-year 2016 guidance, which was revised on July 25, 2016 and summarized on slide 27 in the earnings results presentation available on our corporate website.

As a reminder, guidance for product sales is subject to a number of uncertainties, including an uncertain local macroeconomic environment, adoption of additional pricing measures to reduce HCV spending, volatility in foreign currency exchange rates, inaccuracy in HCV patient start estimates, additional competitive launches in HCV, an increase in discounts, chargebacks and rebates due to ongoing contracts and future negotiations with commercial and government payers and a larger than anticipated shift in payer mix to more highly discounted payer segments such as PHS, FSS and Medicaid and the VA.

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

Thank you, Robin, and good afternoon, everyone.

I am very pleased to take you through a solid set up operating results for the third quarter. Starting with HIV, Gilead continues to make significant steps in delivering improved, single tablet regimens to patients around the world. We have seen strong adoption of our top-based regimens in the US and in the European markets where we have achieved reimbursement.

In the US, of the nearly 840,000 people on antiretroviral therapy, approximately 80% receive a Gilead regimen. Genvoya is now the most prescribed regimen for both treatment-naive and switch patients. This month we expect cumulative prescriptions of Genvoya to surpass the [triples] prescription at the same point in time post-approval. This will make Genvoya the all-time most successful product adoption in its first year in the 30 year history of HIV therapy in this country.

The uptick of Genvoya, Odefsey and Descovy have largely been driven by the switch from Gilead's old STRs due to the improved safety profile of TAF. But it is also encouraging to see a notable number of patients from non-Gilead therapies moving to top-based regimens. Approximately 10% of Genvoya switches are incremental to the Gilead HIV franchise.

Turning to Europe, total HIV and other antiviral revenue were $728 million, up 1% year-over-year and down 4% sequentially. Third quarter European [funds to do] revenues are typically affected by summer seasonality. In Italy, Spain and Portugal we saw lower prescribing rates consistent with prior years.

Genvoya has been launched in 18 markets in the in the EU, including Spain and Germany where we are seeing rapid uptick, similar to the US. Descovy has been launched and nine markets and Odefsey has been launched in eight markets, the largest being Germany in both cases.

We expect our top-based therapies to continue to grow in Europe with Spain still early in its commercial launch of Genvoya. Pricing and reimbursement discussions are ongoing in France and Italy with the goal of having these complete by year-end.

Guidelines historically have had a significant impact on prescribing patents. Genvoya is already listed with the preferred regimen in several HIV treatment guidelines, including the European AIDS Clinical Society as well as country guidelines in Germany, the UK, Spain and Italy.

I would like to make a few comments about HIV prevention and the use of Truvada for PrEP. The growth in people starting Truvada points to the valuable role that therapy can play when used as part of the comprehensive strategy to prevent transmission. We estimate that in the US approximately 80,000 to 90,000 people were using Truvada for this indication in the third quarter.

We are also starting to see usage of PrEP France, where approximately 2,000 people have begun -- have been prescribed Truvada since it received reimbursements in January of this year. We expect PrEP to continue to be a significant part of Gilead's growth in HIV going forward, particularly in the US. With the rapid adoption of TAF-based regimens, the potential of PrEP and our exciting pipeline programs, especially bictegravir, I'm very positive about the long-term lifecycle potential we have in HIV.

Turning to HCV, approximately 61,000 people in total began HCV therapy in the US in the third quarter of 2016. This represents the fourth consecutive three-month period where patient starts have been in the 50,000 to 60,000 range. We estimate that more than 85% of treated patients in the most recent quarter received a sofosbuvir-based regimen.

The uptick of Epclusa has been most encouraging in its first full quarter post launch. Although it is important to point out that we have observed a small, yet noticeable warehousing effect. As expected, the vast majority of Epclusa is being used in genotype 2 and 3 patients according to our 12-week label. In terms of payer coverage, formulary reviews for Eplcusa are on track. 11 state Medicaid programs have already added Epclusa for genotype 2 and 3 patients and most commercial and Medicare part D plans are providing insurance coverage for Epclusa based on medical need. Finally, the VA has added Epclusa to their national formulary and have begun ordering.

The 2017 commercial and Medicare part D contracting cycle is now essentially complete. And whilst I cannot share with you plan-by-plan details, suffice to say that we are pleased with the picture for the coming year. Discussions with all major the PBMs and MCOs prove to be productive and recognize the clinical leadership of Gilead's HCV options, especially as demonstrated in real-life settings. But barriers to access still remain. As Medicaid continues to be the outlier in terms of access, restricting coverage to only the more advanced patients.

Turning to Europe, total HCV revenue in the third quarter was $604 million, down 30% year-over-year and down 22% sequentially. This was driven by lower HCV patient starts. While overall patient starts declined, our market share remains largely unchanged across the major markets with the exception of the UK, which was slightly down for the quarter.

We estimate that 21,000 patients started on a sofosbuvir-based regimen in the third quarter compared to 27,000 in the second quarter. At our last earnings I described how we were observing lower patient starts in the early EU launch markets of Germany and France. Put simply, many of the high need patients have been treated and cured. We are now starting to see this trend unfold in Southern European countries, particularly in Italy and in Spain.

Performance in the region is also likely somewhat affected by summer seasonality, similar to the dynamics we observed in HIV. Epclusa is now being launched in Germany, Sweden, Norway, Finland and Denmark. I am pleased to say that there have been the same positive receptions as in the US. We expect to launch in the other large EU markets once pricing and reimbursement is in place by the second half of 2017. Not only just 12 weeks of Epclusa deliver incredibly high cure rates, but as the new standard of care, it is considerably cheaper than previously used interferon free regimens, especially treating genotype 3.

As I conclude my remarks on hepatitis C, it is very important to reiterate that more work needs to be done to identify and cured HCV infected people around the globe. A key objective for Gilead is to appropriately raise disease awareness, highlight the importance of age-related testing and encourage linkage to specialty care.

To help with this effort we recently launched new educational campaigns in the US and Japan to urge all individuals at risk for or living with HCV to talk to their health care provider. You may have seen our new advertisement on television here in the US. It debuted last week and I am very pleased with the positive and responsible tone it takes to emphasize to people the need to be screened for a disease that can now be cured in as little as 8 weeks. We have received numerous, positive comments from advocacy groups, providers and, not least, the many people already cured of hepatitis C who want others like them to benefit.

Moving on, one of the liver diseases that warrants some mentioning today is hepatitis B, for which we are well prepared for the launch of TAF. With our PDUFA date coming up, we are hopeful that we will have the opportunity to speak to physicians at the AASLD meeting and in the field about the strong data for this product as soon as next week.

Finally, as I highlighted last quarter, we have a very strong US cardiovascular team that continues to deliver impressive results. The Terisa and Ranexa revenue totaled $385 million for the quarter and surpassed $1 billion in the year-to-date.

In closing, I would like to reiterate the positive progress Gilead is making in addressing viral diseases. We will soon have treated 1.2 million HCV infected individuals around the world, most of whom are now cured. By any measure, this is a profound contribution to global healthcare delivery.

And in the field of HIV, not only are we effectively managing the disease with our new TAF-based regimens but Truvada is helping more and more people avoid infection. I am confident that we will close out the year and continued strong financial performance, underpinned by a passion for operational excellence and our focus on putting the patient first.

I will now hand the call over to Norbert.

Thank you, Kevin.

During the third quarter a number of phase 2 and phase 3 studies concluded, providing insight into efficacy and safety of both the proof and experimental Gilead agents in the areas of HIV, liver disease, inflammation, oncology and cardiovascular disease. Some of these results were disappointment, some were exciting successes. To start off with the disappointment, we now have the final analyses from three 96-week studies of the anti-loxl-2 monoclonal antibody, Simtuzumab.

The data indicate that while safe and well tolerated, there is no evidence of efficacy in one study in Primary Sclerosing Cholangitis and in two studies in NASH. One NASH study was in patients with cirrhosis and one was in patients with branching fibrosis. Consequently, we will not develop Simtuzumab any further in these or any other indications. We will present this data at future conferences.

As for GS-5745, an anti-MMP9 antibody, we stopped the phase 2, 3 study in patients with ulcerative colitis because of the lack of efficacy. This decision followed a planned interim DSMB analysis after the first 150 patients had been enrolled that the study met predefined futility criteria.

Also, and not unexpectedly, there was no evidence of benefitGS-5745 in a phase 2 study in patients with Crohn's disease. Consequently, we will not further pursue GS-5745 for ulcerative colitis or Crohn's. In these studies, GS-5745 was safe and well-tolerated and we're continuing to evaluate GS-5745 in rheumatoid arthritis as an add-on to anti-TNFs or other therapies.

Eleclazine, or GS-6615 failed to meet its primary endpoint in the study of patients with ventricular tachycardia, ventricular fibrillation or VTVF and implanted cardioverter defibrillators. Patients were randomized to do two doses of Eleclazine or placebo. The primary endpoint was the number of electrical interventions, including shocks and pacing by the implanted device and there was no evidence of efficacy of Eleclazine compared to placebo. Consequently, we will not develop Eleclazine any further for VTVF evaluation in the Long QT-3 Syndrome and in Hypertrophic Cardiomyopathy is continue.

But now to the excitement, starting with HCV, the pangenotypic single pill in triple combination regimen of Sofosbuvir, Velpatasvir and Voxilaprevirthe, or I'll call it Sof/Vel/Vox has been studied in four phase 3 studies called polaris 1, 2, 3 and 4. Polaris 1 and 4 evaluated the regimen in patients who had previously failed a direct acting antiviral and included patients with cirrhosis. Treatment of the salvage patients with Sof/Vel/Vox resulted in SVR rates of 96% and 97%.

The two other studies, polaris 2 and 3 compared to triple combination regimen in treatment-naive patients given for 8 weeks to Epclusa given for 12 weeks. Polaris 2 was open to all genotypes where polaris 3 enrolled only genotype 3-infected individuals with compensated cirrhosis where the unmet need is the greatest. In polaris 2 the SVR rates of pain with 12 weeks of Epclusa where numerically higher than those of pain with 8 weeks of the triple combination, whereas in polaris 3 the SVR rates were comparable.

Particularly in polaris 3, which involved the most difficult to treat genotype 3 infected cirrhotic patients, Epclusa for 12 weeks resulted in 96% SVR rates. These results underscore the value of Epclusa as an excellent treatment option for patients across all genotypes and they also suggest that the future role of Sof/Vel/Vox will be for patients who previously failed an antiviral regimen. The full data for these studies will be presented ASLD in a few weeks and we will submit marketing authorization applications to regulatory authorities imminently.

Another exciting result was the anti-fibrotic effect observed with GS-4997, an investigational small molecule inhibitor of apoptosis signal-regulating kinase 1 or ASK-1. GS-4997 was shown to inhibit inflammation apoptosis and fibrosis in settings of increased oxidative stress associated with NASH in pre-clinical models.

This phase 2 clinical study involved 72 patients, two-thirds had F3 stage fibrosis and one-third had F2 stage fibrosis. There was evidence that treatment of GS-4997 for only 24 weeks resulted in fibrosis reversal and decreased fibrosis progression in a dose-dependent manner. At the highest dose tested, which was 18mg, 43% of patients showed at least a one point decrease in their fibrosis score compared to only 20% in the Simtuzumab controller. At the same time, 20% of the Simtuzumab-treated patients progressed to cirrhosis compared to only 3%, or 1 out of 30, at the 18mg dose.

The full data from these studies will be presented at ASLD in a few weeks. Based on these exciting data, we will initiate discussions with regulatory authorities and plan to move GS-4997 into phase 3 clinical development in patients with NASH. Based on the phase 2 results, we intend to evaluate GS-4997 in patients with the highest unmet need. That means those with F3 and F4 stages of fibrosis.

At the same time, we have two other compounds with different mechanisms currently in two phase 2 studies in patients with NASH and fibrosis and that is GS-9674, an FXR agonist, and GS-0976, an ACC inhibitor. And these studies are 24 and 12 weeks duration respectively. Pending demonstration of single agent efficacy and safety in these phase 2 studies, we plan to initiate combination studies with the three agents toward the middle of next year.

In HIV we are continuing to explore the utility of TAF containing regimens in various uses in different populations. Last week, data from three phase 3 studies were presented at the HIV conference in Glasgow. 96-week data were disclosed from one study where 663 virologically-suppressed patients were randomized to either continue under the Truvada-based regimens or to switch to a Descovy-based regimens.

In two other studies, 630 or 875 virologically-suppressed patients on Complera and datripler respectively were randomized to switch to Odefsey or stay on their current regimen. In all studies, switching to a TAF-based regimen was none inferior with regards to efficacy, but was superior with regards to renal and bone laboratory safety parameters.

The phase 3 development of the single tablet regimen of Bictegravir/F/TAF is continuing. Four phase 3 studies are now fully enrolled and we anticipate unblinding these studies towards the middle of next year with regulatory submissions planned for the third quarter of 2017. We also plan to present 48 week phase 2 data on Bictegravir/F/TAF at the scientific meeting in the first quarter of 2017. In oncology the phase 3 study of GS-5745 in patients with gastric cancer is ongoing, as well as a phase 2 study in patients with gastric cancer in combination with nivolumab. We are also evaluating GS-5745 in other solid tumors.

In addition, we have now completed two phase 1 safety studies of our combination kinase inhibitors. We were able to establish safe doses of our PI3K inhibitor, Idelalisib, in combination with our BTK inhibitor GS-4059 and our Syk inhibitor, Entospletinib, in combination the BTK inhibitor GS-4059. Consequently, we will now first evaluate the PI3K/BTK combination with and without anti-CD20 therapy in relapsed refractory CLL patients in collaboration with the German CLL study group.

We will also be announcing the initial phase 1 B2 data on our Syk inhibitor Entospletinib, an acute myeloid leukemia, at the upcoming ASH conference in San Diego. We have entered into a collaboration with the Leukemia Lymphoma Society to provide Entospletinib for their beat AML master trial. This trial will employ the latest genomic technology to match specific AML mutations in newly diagnosed patients over age of 60 with an appropriate investigational drug or drug combination.

In summary, great progress has been made with some of our programs. The very nature of R&D is that you often face both closures and progress. Going forward, I am pleased we now have the ability to focus our attention on development programs in NASH, inflammation, oncology and HIV. We now have seven new molecules in advanced clinical development. The PDUFA date for TAF for HPV is coming up in a few weeks and we plan to file an NDA before the end of the year on Sof/Vel/Vox for use as salvage therapy for patients who have failed a previous direct acting ant-viral.

Four molecules are continuing in phase 3. That is Momelotinib for myelofibrosis, bictegravir F-TAF, the single tablet regimen for HIV infection, Filgotinib for three separate indication, rheumatoid arthritis, ulcerative colitis and Crohn's and GS-5745 in gastric cancer. Finally, we plan to advance GS-4997 for NASH to phase 3.

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

Thanks, Norbert.

I would like to make a few closing remarks before we get to your questions. We continue to have success with the important work we do in HIV and viral hepatitis. There is still a great need for innovation in these fields. Both of diseases include patients whose needs remain unaddressed and both represent global epidemics.

Our researchers are working to bring new options to a wider range of patients than ever before. This includes people with HIV who have been on therapy for decades and may need to change their medication due to side effects, or patients who may be failing to fully suppressor their virus due to the presence resistant.

Approaches our research teams are pursuing include new molecules for trading resistant virus, novel formulations and combinations that may be dosed infrequently and opportunities to cure HIV patients by clearing out the viral reservoir from their bodies. Our innovative work, in conjunction with our many partners, has already allowed our HIV medicines to reach millions of patients worldwide.

We're particularly excited about the roll that TAF will play. With a small daily dose and a proved side effect profile, it is ideal for resource constrained areas of the world and requires only 1/10 of the manufacturing capacity to supply the same number of patients. In the area of viral hepatitis, the data now obtained with Epclusa suggests that we have an excellent option for the many parts of the developing world for genotyping HCV and determine the stage of disease can be difficult, if not impossible. With Epclusa, there's no difference in dosing for the different genotypes or stages of liver disease. And so there is no need for these diagnostic procedures. We are working around the globe to rapidly introduce Epclusa, as well as Sovaldi and Harvoni.

Finally, in hepatitis B, as Kevin and Norbert mentioned, we are approaching the launch of TAF. HPV continues to be an under-treated disease, despite the long-term data showing improvement of liver for people who remain on affective therapy. TAF provides an important new option for patients with chronic HPV and we will have the opportunity to enter to the product at deliver meeting in the next coming weeks in Boston. We also recognize that treating such a prevalent disease chronically is a major global challenge and we continue to seek ways to provide finite duration of treatment that the patients can control or eliminate the virus without having to endure a lifetime of treatment. Gilead's largest research effort is in the area of HPV cure.

Beyond our work in antivirals, we're making great progress in new disease areas for Gilead. We are pleased to be able to share with you today our top line data for GS-4997 and NASH. GS-4997 targets ASK-1, a previously unexplored target for NASH. The data are very suggestive of a strong anti-fibrotic activity after only a 24-week period of treatment and we look forward to future in-depth discussions once the data are presented at ASLD.

We think about GS-4997 as a potential backbone molecule, one that can be used alone or in combination. NASH is an understudied but increasingly prevalent disease and Gilead's liver disease team has now has three exciting molecules to move forward into clinical studies.

We understand that there's a lot of work to do in providing both the rational to the patient and to the payer as to the benefits of treating NASH. An active compound such as GS-4997 could really move this field forward and we are in the process of designing comprehensive studies to demonstrate the health system benefits of treating such a prevalent and growing disease.

In the area of inflammation, we are executing nicely on our development plan. Phase 3 studies of Filgotinib in RA are up and running and studies in Crohn's and ulcerative colitis have just begun screening patients in the first of the studies. I am pleased with the progress we are making and the work of our teams of collaborators to get these trials up and running as quickly as possible. We are also looking forward to exploratory studies of Filgotinib in a wider variety of inflammatory diseases so we can fully understand the potential of this specific JAK1 inhibitor.

As you know, we are also focused on augmenting our portfolio with external opportunities, particularly in the field of oncology. However, our interest in partnerships and potential acquisitions is not limited to oncology and we are considering opportunities for a strong science and will receive the possibilities to developing a truly differentiated product. We have been going through an extensive internal review of programs and opportunities and an important aspect of our approach is that we remain open-minded but disciplined. So while we have the balance sheet to execute on multiple opportunities, we will keep the bar high.

With two months of the year remaining, I want to take the opportunity to thank the 9,000 employees of Gilead for their hard work and dedication. Every day, more than 10 million individuals around the world are taking Gilead medication and every day our teams come to work to improve upon that number.

Thank you for your time and let's now open the call to questions. Operator?

(Operator Instructions)

Our first question comes from the line of Geoff Meacham from Barclays. Your line is now open.

Hi, guys. Good afternoon and thanks for taking the question. John or Kevin, I got one for you. Just I want to ask about hep C but in a broader context. You guys have had flat patient numbers despite better access in the US and revenues down sequentially but on payer mix. So the question is, how do you think about the return on investing continually in hep C either commercially or in new products versus say looking outwards and being more aggressive in a new therapeutic category? Thanks.

Hi, Geoff. It's Kevin. Let me take maybe half a step back from your question just a few moral reservations. I got to tell you that I think we are really executing well in the area of hepatitis C. I have spent a lot of time this quarter with many Gileads and with several providers. And I think the variables that we can directly influence, we're really doing a good job on. Our market share is staying incredibly strong. We are ensuring access while preserving the value of our hepatitis C drugs. We are executing on new versions coming to the market. I think you have seen that with Epclusa.

And the area that we can less control but we can influence, you are now seeing some new activities from us in terms of unbranded awareness campaigns. And you may have seen our advertisement that came on the television just over a week ago. So I think, from my point of view, in terms of operation excellence, we are doing a very nice job.

It is true that the treatments are staying about the same. Actually, I consider that very positive. Let's not forget that we are at treatment levels that are 2.5 times the treatment levels that were there before the Gilead regimens came to the market. So I take at the level of 50,000 to 60,000 patients is very good. The vast proportion of those are Gilead patients. Epclusa had a very big effect in this quarter. So it goes to show that there's still room for new patients, albeit we're entering a high level of satisfaction. But with Harvoni, [petuia] type I -- both 12 weeks and now a high proportion at 8 weeks and now Epclusa for the two and three patients, yes.

We have got patients being cured at very high levels. In terms of our triple, I do agree that it will be a relatively small proportion of patients, but it is the right thing to do and it completes our whole picture for hepatitis C. So I think to have the range of products that we have, to have the efficacy that we have is the right offering for healthcare. So we continue to move forward. And I think we have a healthy franchise and we are getting better access from particularly the commercial pairs. Although, as I pointed out -- and I often discuss with the team, here -- the Medicaid is still a little bit on the slow side in terms of access. But great progress as far as I am concerned in the third quarter.

Geoff, it is John. The second part of your question is -- was something about investing in this area versus other areas. So I would say from a pipeline perspective with Sof/Vel/Vox being our fourth generation of HCV products now being approved, there really isn't much left in terms of unmatched medical need. And so from a pipeline perspective, this is really the end of what we will be developing in terms of HCV molecules. And that will allow us then to turn our attention to the important aspects in our fibrosis and NASH franchises and our oncology franchises. So we have really largely turned our attention away from HCV to those areas already.

Okay. That is helpful. Thanks.

Thank you. And our next question comes from Brian Abrahams with Jefferies. Your line is now open.

Hi, guys. Thanks for taking my question. Norbert, a question on 4997. Wondering if you could talk a little bit more about the go-forward plan there, particularly with respect to potential Phase 3 trial duration and whether or not a fibrosis endpoint might be acceptable just given the effects that you saw in such a such a short time period in Phase 2 and the plan to target more severe progressive patients. And then can you confirm that there were no baseline imbalances in the Phase 2 that might have influenced the fibrosis data or progression to cirrhosis data? Thanks.

Hi, Brian. So the second question, yes, I can confirm that there were no baseline imbalances. And regarding the Phase 3 study, we are going to make the proposal to regulatory authorities to use just fibrosis as the endpoint. We feel very convinced that, that's the right thing to do because as you may know, fibrosis is the only histological correlate to clinical outcomes. There was a large study published a few years ago where they looked at baseline histology and the correlated histological variables with clinical outcomes and steatosis did not correlate, inflammation didn't correlate, ballooning didn't correlate. The only thing that correlated was fibrosis. So we're going to purpose two Phase 3 studies, both looking at fibrosis 48 weeks as the endpoint.

The other thing we're going to do to the studies and if three or four patients begin the rationale, that is where the unmet need is -- then also since ultimately for full approval you will need some clinical endpoint. We think we can get there much faster. Maybe with a 96 week study even if we start off with [F]4 patients. But having all of that said, this all has to be a agreed upon by regulatory authorities. We have a date with the FDA but we have not discussed this with them yet. So stay tuned. Sometime early next year, I think we can update you on the exact plan.

Thanks.

Thank you. And our next question comes from Matthew Harrison of Morgan Stanley. Your line is now open.

Thanks. Thanks for taking the call. Sorry, I was on mute. Can I just ask -- you made two comments related to the HPV that I just wanted to get more clarity on. You talked about you're pleased with the 2017 payer cycle. Can you just tell us if we should expect any significant changes in pricing or not? And then can you describe what you think is the size of the Epclusa warehouse? And if you think you've moved through that or you would expect to see some more of that through the end of the year? Thanks.

Hi, Mark. It is Kevin Young. I will take your second part first. Yes, there was a small warehousing effect. We think that -- and this is anecdotal and qualitative -- we think that provide is probably how people for a quarter -- two to three month period -- so this is nothing like the warehousing we saw with Sovaldi or with Harvoni. So we think it is largely a Q3 affect. It might go into the fourth quarter, into the quarter now. But we really think it is mostly a 2016 effect.

In terms of our negotiations and contracts, I really can't make any specific comments. Obviously, they are confidential. But we are pleased with the outcome. We feel we are in a strong position for 2017. And most providers will have very, very good access in the private and Medicaid -- Medicare part D setting to both Harvoni and Epclusa. So we think we are in good shape and our providers will have the Gilead options to look forward to giving to their patients as we have done in 2016. So feel good about that.

Great. Thanks very much.

Thank you. And our next question comes from John Scotti of Evercore ISI.

Hi. Thanks for taking my question. I wanted to ask one on capital allocation if I may. So last year quarter you spoke about potentially having a more complete story of internal and also external programs by year-end. And you've continued to be relatively light on the buyback in 3Q. So a couple of things -- can you characterize right now your current appetite for M&A and if that has changed? Is the current thinking more along the lines of larger transformative deals or should we expect a string of in-licensing deals than what we saw with Filgotinib? And how should we think about the sense of urgency here given your comments and going into year-end? Thanks a lot.

Hi, John. It's John. I think you asked a capital allocations question and then switched your strategy. We will try to answer that for you. As we said in our opening comments, we are still very actively evaluating opportunities. We're actively evaluating a series of different partnerships. But as I said in my comments, we are going to remain disciplined. We're going to keep the bar high. You don't want the sense of urgency to overwhelm your discipline because then you will do things that don't make long-term sense. And that's been the history in all businesses and that's one we apply here. So we are currently very, very active. We will do things when they make sense for us and not before that. And that is really as much as I can say.

Thank you and our next question comes from Geoffrey Porges of Leerink partners. Your line is now open.

Thank you very much. I appreciate the question. Robin, just a couple for you if we may. First, operating margins trending down by 200 to 300 basis points a quarter, is that something that we should anticipate continuing or are there some variables in there? Secondly on Epclusa, was there any channel inventory build in the reported number? Lastly, how are you judging this sort of share buyback? You spent $10 billion, as you pointed out, this year and the average cost is sort of around $90 [billion]. Compared to other things that you might've invested in, how are you feeling about that buyback going forward? Thanks.

Sure, Geoff. I fill in, in reverse order and adjust the buyback first. We really look at buybacks on a long-term perspective, which is pretty much what I committed or mentioned during the last quarter call. So we are still very comfortable where we are. We did front-load a significant component of our share buybacks. As a matter of fact, I think just in the first quarter we did more than the entire three quarters of 2015. And we mentioned very early on that we would see those declines towards the second half of this year -- very much in alignment with John's comments around being prepared for M&A.

It is still clearly part of our capital allocation strategy along with dividends. But I think balancing that with overall looking for growth is something that we are still focused on doing. And as John mentioned, these things take timing to play themselves out. I'll Kevin answer the inventory question but I think to your question of operating margins, yes the quarterization of our margins do get impacted by revenue dynamics as well as expenses. Keep in mind R&D had a $200 million milestone payment -- this quarter included that. But overall, I think our margins still remain high. High relative to overall industry. (Inaudible) we're comfortable with them, we are very prudent with expense management. You saw SG&A expenses down.

I think the other thing you are slightly seeing is just mix changes between HCV and HIV. That has a little bit of an impact on our gross margins. But overall, with the continued conversion of TAF, long-term you will continue to see that go down. But it will be impacted relative to HPV becoming a smaller component of our total revenue. I cannot really give guidance on our gross margins but I think the bar still remains high for them and we still remain a very disciplined spending type of organization.

Geoff, just a comment on Epclusa. If you recall, we launched Epclusa in the last week in quarter two. So that is when our opening inventory went in. Like any growing products, major wholesalers tick up their inventory basically because they've got a standard calculation for days on hand. Basically that just ticks up as the product grows on you. It comes down as the product comes down. Likely, Sovaldi, because it is now becoming Epclusa, will in the future. So there was nothing unnatural about inventory for Epclusa in the third quarter. But as I said, we did get a very nice bump in usage from a small warehousing of patients.

Okay. Great. Thanks very much, guys.

Thank you. And our next question comes from Cory Kasimov from JPMorgan.

Thanks for taking my question. John, I wanted to go back to your comments on the strategic question you just got. When you talk about having a high bar in the M&A front, does that mean you see a lack of interesting opportunities out there that just don't meet that bar or is this more of a price disconnect given the continued volatility in the market? Thanks.

Discipline has both components to it. There are a number of things that I think are probably too early for us to take part in. There are a number of things that I think are just overpriced. And so it has been a combination of those two things going forward -- looking backward. Going forward, we will have to see what makes sense for us and where we are willing to go to bring in new products.

Okay. Thank you.

Thank you. And our next question comes from Michael Yee of RBC Capital Markets. Your line is now open.

Thanks. Good afternoon. I wanted to ask a question on patient volumes and hep C, specifically as it relates to slide 41. Previously I would've thought that changes in payer access would've opened up the availability to use drugs to get reimbursed for the healthier [F0s and F1s]. I guess with patient volumes flattish, are you seeing these F0s and F1s coming in? Are they coming in? Are they getting treated? Or is there a bottleneck there? They come in and they don't get treated. I just want to understand or dynamic on that and whether you think that, that's going to drive some positives developments on volumes.

And then in Europe, the same question. Europe declined from 27 down to 21. Do you think -- how do you think that plays out going forward? What are the dynamics there for volumes? Thanks so much.

Hi, Michael. Two great questions. Let me try and deal with those in the order. First the US. If you look at our slide, actually the percentage of F0s to F2s has increased over time. It was 50% a little while ago and now it is up to 60%. So clearly a fitter patients, they're less sick are being treated. And of course that's a result of coverage. But I want to say that the patient journey is becoming longer in the US now. If you think about it, patients are really starting further back because they are healthier. We are continuing to see approximately 30,000 patients coming in to specialist care. In other words, 90,000 patients a quarter. 60,000 of those are coming out of the other side and are being treated and cured. That is probably not a bad ratio in itself.

Not every patient is treated and not every patient is immediately treated. Now we shouldn't forget that sometimes patients drift in and out of specialist care. Some patients have compounding factors that complicate the start of therapy -- most notably drug use or alcohol use.

But the patients who are just less sick, have less motivation themselves, and the physician has less motivation to really push those through therapy. And lastly, the paperwork and the administrative process for authorization is still there like it is with any specialist product. So I think those are mostly the dynamics. And it's mostly around the patient being less time in the physician's practice. They're not patients that have been held for a long time. They're not patients that's failed one or two prior therapies and a great urgency by the physician.

In terms of Europe, as I said we did see a downtick in the patients treated in the southern European markets, primarily Italy and Spain. And I think that is because they are working through the sicker patients and are becoming more like France and Germany. There still are more patients in southern European markets but I do think they are clearing the most obvious patients to treat and cure. And I want to emphasize that market share has stayed very, very solid in those markets. And while there is not an obvious mechanism through advertising, television advertising in the European markets, we are doing a lot of partnership with KOLs, with societies, with patient groups to, again, or try to encourage the right screening practices and the right transfer of patients into specialist care.

Thanks.

Thank you and our next question comes from Robyn Karnauskas of Citibank.

Hi. Thank you for the question. Just to ask the [HCV] question from a fourth quarter impaired perspective. And the last fourth quarter you started to see hints of changes in HCV. So given it looks like US has stabilized, are you seeing anything that hints that payers could change, how they are viewing the earning changes in the fourth quarter that you are seeing that could influence 2017? And then given -- you've maintained guidance, how are you thinking now about providing -- what kinds of guidance you might provide in 2017 to help investors feel comfortable that you can predict going forward? Any -- I know you can't give guidance. But can you give any hints on how you are thinking about giving us some color on next year? Thanks.

Hi, Robin. I will take the first part. I think, again, come back to the quality of the discussions that we had for 2017 contracting and I think they were very good. Let's not forget the fact that Gilead are in a very strong place by virtue of our Harvoni being in a good proportion of patients in eight week therapy. So that is a very big advantage for us. And I think that is really appreciated from the point of view of managing costs from a commercial payer.

We didn't see much change in the ratio of the public to private payer in the third quarter. It was still about 45% of patients who were covered as a public patient as opposed to a commercial or Medicare part D plan. Part of the commercial, part of the markets, is of course the VA. The VA was a little bit lower in the third quarter versus the second quarter. They still seem to be very enthusiastic, very engaged in recalling patients. But I think that is perhaps one of the variables that will kind of unfold in 2017 is the VA and their continuing ability to recall and treat patients. But I think with our efforts around highlighting the CDC need to treat the baby boomers and the activity of all companies involved in hepatitis C, I would like to think we can continue our progress in 2017.

Robyn, it is Robin. I will take the second part of that question. Yes, as you know, I think as we said, this is the curative market, [HCV], and it is difficult to predict. Kevin just outlined this kind of patient journey taking a longer bit of time and just changing dynamics. And we've spend a lot of time this fall working through the planning cycle, figuring out what that means around 2017 and beyond. Obviously, I cannot give the answer yet but how we guide will again depend on our ability to bracket the risk and opportunities around those dynamics and what those mean. It continues to change and it's something that we monitor very closely. But that patient flow, as Kevin said, is something that is just very difficult for us to control.

Yes and, Robin, if I might -- how solid and good we feel about HIV going into next year with that chronic model and the uptick of our top-based regimens.

Thank you.

Thank you and our next question comes from Ying Huang of Bank of America Merrill Lynch. Your line is now open.

Thanks for taking my question. The first one maybe is for Kevin. Our channel check indicated that VA is paying about $15,000 to $17,000 per patient. Do you think that is the absolute floor for HCV pricing? And then another question for John and Robin, it sounds like you guys have a really highball for acquisitions. If you don't deploy capital in that position, would you consider hiking dividends to a much higher level like 5% or 6% so that a lot of investors would be willing to take some off of dividend payment? Thank you.

Hi, Ying. It is Kevin. I apologize but in terms of commenting on our net pricing to the various channels to the various constituents, it is not something that we directly comment on. So I couldn't go any further than that at this time.

Yes, Ying, I will take the second half. As we said, the bar is high but we are very engaged and remain engaged in M&A. And when we think about our overall capital allocation, we would not want to do anything that would constrain us with -- and reduce our flexibility to purchase if we found something that we thought could really grow our path line. So we talked with our board all of the time about dividend increases and dividends in general as well as share repurchases and that is something that we will continue to do.

Thank you.

Thank you and our next question comes from Phil Nadeau of Cowen and Company. Your line is now open.

Good evening. Thanks for taking my question. Unfortunately, it is another one on HCV pricing for you, Kevin. You mentioned two factors that impact the average per patient price that have been changing. One is the public versus private payer mix, which you said changed over the last year but maybe stabilized now and then also the rebates given to private payers. You didn't really discuss those too much on this call but in the past your predecessor said that he expected the rebates to actually increase when Merck entered the market next year.

Some of your comments today could suggest the opposite. So I guess I'm kind of just curious for 2017, how should we think about those two factors? Do you think public versus private has plateaued? Is 45% the number we should be thinking about for 2017? And then on the rebates to private payers, should we continue to expect those to tick up in 2017? Or is you feeling different now that you've gone through the negotiation cycles? Thanks.

Difficult for me to comment in any great detail, Phil, on either of those questions. I will take the commercial first. They have gone well. I think, as I keep emphasizing, the advantage we have in eight weeks -- think about it -- 45% right now of Harvoni patients, genotype 1 patients are receiving eight weeks. So if you think about 45% of genotype 1 with just that eight weeks, that is a very good economic offering for our payers that they really appreciate. So, I believe we have done very well in our position going into 2017.

In terms of the ratio between public and private, again, very difficult for me to make a prediction. VA did come down a little bit. But there was an increase just a tick up to replace that by Medicaid. I made the comment that Medicaid opening is really slower than we would like. But I think there may be that change in mix going forward. Difficult to predict VA -- still a big part of the public. And we will just have to see. It is very impressive what they've had done and I know they are very committed. And they feel that they haven't done their job yet. We, and that is Gilead, we estimate that between 35% and 40% of the patients in the VA system have been treated to date. So still a lot of work to do and now I think they want to do it. So 45%, 55% seems to have been the level for the last couple of quarters. And not entirely clear if that is going to be maintained into 2017 but it seems reasonable to me.

That's helpful. Thanks for taking the question.

Thank you and our next question comes from Alethia Young of Credit Suisse. Your line is now open.

Hi, guys. Thanks for taking my question. I want to talk a little bit about Genvoya launch and how it is faster than even the Atripla launch, which was obviously a very good launch. Maybe if you could just frame what's been how doctors are looking at this. Are they looking at it more kind of -- for everyone that needs to come to the doctor, they just go and get this drug? Just give us more flavor on the dynamics. Thanks.

Alethia, thanks for an HIV question. I really appreciate it. (laughter) Alethia, I was just at our international advisory board a couple of weeks ago and we had some of the foremost HIV doctors from around the world. And it was absolutely unanimous. The commitment to switching patients. All things being equal, particularly in terms of pricing, physicians see the benefit in terms of bone and kidney from the point of view of TAF. So I think there is an awful strong commitment. Let's not forget that in most practices now, half of the patients are over the age of 50 and they have been on long-term therapy. And physicians just see a natural and fairly straightforward switch going on.

And I really didn't think I would ever see an uptake quicker than Atripla. As you remember, they were the components of Atripla that could just be put together and the patients switch. These are slightly different with Genvoya because it is the switch of regimen. So I'm delighted with the way it is going. 80% of Genvoya comes from switches and right now half of those switches are from [Stryvle] which is the natural TAF to -- TDF to TAF switch.

So my expectation is that we will continue to convert patients. I am super enthusiastic about it. And once we get more countries online in Europe, I think we can have that same expectation. Germany is going great. Spain is going great and we are on the threshold of getting the most important market up and running and that is France.

Thank you and our next question comes from Terence Flynn of Goldman Sachs. Your line is now open.

Hi. Thanks for taking the question. Maybe just wondering if you guys can comment about the GSKV doublets for HIV. Maybe just help frame for us how think about that, if those aren't successful and either treatment or maintenance setting. Would you look to explore your own doublet regimen or do you think you have already set a high enough bar there? Thank you.

Terrace, the debate in our -- with bictegravir is not doublet or triplet. We are developing bictegravir [epitaph] because it has three excellent components that have proven safety and enormously high efficacy. If you look at the [V triomec] compound, of course that contains [abavacavir]. In that scenario, there is an incentive to get rid of abavacavir and go to a doublet, as you call it. But in our case, that is absolutely -- we have no incentive whatsoever to do that. I would like to point it is an interesting strategy. It is a potential competitor. The only thing I would like to point out, the safety and efficacy has to be still proven in a larger patient population, number one. And number two, in a more diverse patient population -- particularly in patients with high viral levels.

Thank you and our next question comes from Ian Somaiya of BMO Capital Markets.

Thanks for taking my question. A question for Robyn on R&D spend going forward. The Filgotinib program Phase 3 programs may in aggregate cost about $1 billion. You are about to embark on a fairly sizable NASH program. Just how should we think about R&D spend going forward? Are there any trials that are completing that might provide an offset? If you could give us some color related to that.

Yes, so maybe, Ian, I'm going to answer the first question and Robin can join in. So you know, as we indicated before, our hepatitis C research is winding down. Or the development is winding down. Really with this [soft well] box, this would be our last development candidate. And we have spent over the last three years probably most of our money on hepatitis C. So that is winding down. And also HIV is coming down because Bictegravir/F/TAF is going to be our last single tablet regimen for a broad patient population. And that I think will offset the increased spending in the other areas as you pointed out Filgotinib in oncology.

I think Norbert summed it up, Ian. I'd only add that I thing the rigor remains very high internally within Gilead as well. We're always making a very straight off and we look to do it right thing scientifically. So you could see variability in cost. But overall, there is still a high bar internal of how we allocate our research spend. But a lot of our projects ongoing, as mentioned, will be paid for with the decline in some of the larger products we've had with HIV and HCV.

Our final question comes from the line of Jim Birchenough with Wells Fargo. Your line is now open.

Jim, are you there?

Again, Jim, your line is now open. Please check your mute button.

I think that is it, Candace.

There are no further questions at this time. I would like to turn the conference back over to Sung Lee for closing remarks.

Thank, Candace. Thanks, everyone, 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.