吉利德科學 (GILD) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Gilead Sciences' Fourth Quarter 2018 Earnings Conference Call.

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

(Operator Instructions) And as a reminder, this conference call is being recorded.

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

Please go ahead.

Thank you, Jonathan, and good afternoon, everyone.

Just after market close today, we issued a press release with earnings results for the fourth quarter 2018.

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

The speakers on today's call will be: Robin Washington, Executive Vice President and Chief Financial Officer; Laura Hamill, Executive Vice President, Worldwide Commercial Operations; and John McHutchison, Chief Scientific Officer and Head of Research and Development.

Also in the room is Gregg Alton, Interim CEO and Chief Patient Officer.

Before we begin with our prepared comments, 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 our latest SEC disclosure documents and recent press releases.

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

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 you, Sung, and good afternoon, everyone.

We are pleased to share our financial results for the fourth quarter and full year 2018 and provide 2019 guidance.

I will first review financials followed by comments from Laura and John.

2018 was a year filled with accomplishments where we met our financial and operational goals.

Beginning with our HIV franchise, we extended our leadership position and grew the business to an all-time high in product revenue.

We continue to execute and maximize our opportunity in HCV and initiated a plan to launch authorized generics this year, which should keep us very competitive in a durable long-term market.

In cell therapy, we made tremendous progress in the number of centers authorized and saw the steady and measured adoption of Yescarta in the U.S. and the approval of Yescarta in Europe.

We advanced our pipeline and finished the year with a strong balance sheet that will enable us to continue to execute on M&A and partnerships to drive future growth.

Turning to the financials.

Total revenues for the fourth quarter were $5.8 billion, with non-GAAP earnings of $1.44 per share.

This compares to revenue of $5.9 billion, with non-GAAP earnings of $1.78 per share for the same period last year.

For the full year 2018, total revenues were $22.1 billion, down 15% year-over-year.

Non-GAAP diluted earnings were $6.67 per share for the year, down from $8.84 per share for the full year 2017.

The full year 2018 GAAP diluted earnings of $4.17 per share included an unfavorable impact of $0.98 (sic) [$0.99] per share due to an impairment charge for in-processed research and development for the KITE-585 anti-BCMA program for the treatment of multiple myeloma and a noncash tax charge related to intangible assets acquired from Kite.

Now turning to our product sales.

Product sales for the fourth quarter were $5.7 billion, up 4% sequentially and down 3% year-over-year.

For the full year, product sales were $21.7 billion, down 16% year-over-year driven by lower HCV sales.

In the U.S., product sales for the quarter were $4.5 billion, up 8% sequentially and 8% year-over-year.

This marks the first quarter in several years where U.S. product sales grew year-over-year as the revenue growth of our HIV franchise more than offset the market dynamics of our HCV franchise.

While demand, particularly for Biktarvy and Truvada for PrEP, was a driver of sequential growth, the quarter also benefited from seasonal inventory purchases and a favorable payer mix.

These 2 factors contributed an estimated incremental $250 million to the sequential performance.

In Europe, product sales for the quarter were $813 million, down 7% sequentially and 29% year-over-year.

The sequential and year-over-year declines were anticipated and included the full quarter impact and launch of generic HIV products in certain markets as well as an accounting adjustment related to statutory revenue clawback reserves.

Now turning to the expenses for the full year 2018.

Non-GAAP cost of goods sold were $300.6 billion (sic) [$3.6 billion], up 5% compared to $3.4 billion in 2017.

The increase was caused by a $410 million reserve on unfavorable $0.31 EPS impact, primarily for excess Harvoni inventory due to a shift in demand to Epclusa.

Non-GAAP R&D expenses were $3.5 billion, and non-GAAP SG&A expenses were $3.6 billion.

Both expense categories increased by 7% compared to the same period last year, primarily due to a full year of investments to support the growth of our business following the acquisition of Kite.

Our non-GAAP effective tax rate for the full year 2018 decreased to 19.8% compared to 24.5% in the same period last year, primarily due to a reduction of the U.S. corporate tax rate as a result of tax reform and the favorable impact of a tax settlement.

Turning to the balance sheet.

We generated $8.4 billion in cash from operations for the full year 2018 and $2.3 billion for the quarter.

We ended the year with $31.5 billion in cash and cash equivalents.

During 2018, we repaid $6.3 billion of debt, the majority of which was related to our acquisition of Kite, and paid cash dividends of $3 billion.

In 2018, we repurchased 40 million shares for $2.9 billion.

In Q4, we made opportunistically purchases of approximately 14 million shares for $962 million, resulting in a reduction of diluted shares outstanding at year-end.

Earlier today, we announced an 11% increase in our quarterly dividend from $0.57 to $0.63 per share, which will become effective in the first quarter of 2019.

This represents the fourth consecutive year of double-digit increases to the dividend and underscores our confidence in the strength of the business and future cash flows.

In 2019, our capital allocation priorities will remain the same with a focus on M&A and partnerships to augment our pipeline followed by dividends and share repurchases.

Before I provide details for our full year 2019 guidance, I would like to highlight aspects of 2018 performance, as illustrated on Slide 20, which will impact the anticipated level of product revenue growth in 2019 relative to 2018.

In October, during our Q3 earnings announcement, we increased our 2018 full year product revenue guidance due to 2 unanticipated events: our second half 2018 revenues did not reflect the entry of a generic version of Letairis in the U.S. as expected when we issued our original guidance at the beginning of 2018; secondly, we saw the entry of generic versions of our HIV products occurred later in certain ex U.S. countries than we had originally expected.

It is important to keep these events in mind as our 2019 revenue performance unfold as they will have an impact on the level of product revenue growth in the year.

Turning to guidance.

Our 2019 non-GAAP financial guidance is summarized on Slides 19 through 23 in the earnings presentation available on our corporate website.

Product sales are expected to be in the range of $21.3 billion to $21.8 billion.

This guidance is subject to a number of uncertainties, including slower-than-anticipated growth in our HIV franchise; a larger-than-anticipated shift in payer mix to more highly discounted payer segment such as PHS, FSS, Medicaid and the VA; lower-than-expected market share and greater price erosion resulting from the sale of generic versions of TDF, the fixed dose combination of FTC/TDF and the fixed dose combination of FTC/TDF efavirenz; the accuracy of our assumptions about HCV market share; the accuracy of our estimates for HCV patient starts in 2019; unanticipated pricing pressures from payers and competitors; as well as volatility in foreign currency exchange rates, which could be plus or minus $300 million for each 10% change relative to our assumptions.

Non-GAAP product gross margins are expected to be in the range of 85% to 87%.

We expect our non-GAAP R&D expenses to be in the range of $3.6 billion to $3.8 billion.

Non-GAAP SG&A expenses are expected to be in the range of $3.9 billion to $4.1 billion and include investments to prepare for commercial launches in NASH and inflammation.

For the full year, our non-GAAP effective tax rate is expected to be in the range of 20% to 21%.

We anticipate the full-year diluted EPS impact of acquisition-related stock-based compensation and other expenses to be in the range of $1.40 to $1.50 per share.

As we look towards Q1 2019, we anticipate total Gilead product sales will decline sequentially by a percentage similar to what we've seen over the past 2 years, which was in the range of 12% to 14%, primarily driven by the U.S. seasonal inventory patterns and buying patterns of public payers that negatively impact payer mix.

Also factored into the Q1 sequential decline is a step-down in price for our HCV drugs sold into U.S. Medicare.

Despite this anticipated sequential decline in total product sales in Q1, I want to underscore our confidence in the health of our worldwide HIV business from which we expect double-digit year-on-year growth again in 2019.

I will now turn the call over to Laura.

Thank you, Robin.

Good afternoon, everyone.

I will provide an update on our commercial performance during the fourth quarter and share some highlights from markets around the world.

Beginning with HIV.

We achieved an all-time high in quarterly revenues.

This speaks to the appeal of our Descovy-based regimen led by Biktarvy, the growing use of Truvada for PrEP and our ability to execute commercially.

In the U.S., total HIV revenue was $3.4 billion in the fourth quarter, up 30% year-over-year and 13% quarter-over-quarter.

Year-over-year growth was driven by a 13% increase of prescription and also benefited from inventory purchases and favorable payer mix mentioned earlier by Robin.

We continue to see strong adoption of Descovy-based regimens, which accounted for 77% of Gilead's total U.S. HIV prescription volume as we ended the fourth quarter.

This is a remarkable achievement considering the first Descovy-based regimen was introduced just 3 years ago.

Through its first 11 months, Biktarvy remains the best HIV launch of all time in the U.S. as measured by total prescriptions on a launch-aligned basis.

During the fourth quarter, Biktarvy generated $551 million in revenue in the U.S. and is the #1 prescribed regimen for both treatment naïve and switch patients.

Approximately 80% of Biktarvy's U.S. prescriptions came from switches, 25% of these switches from dolutegravir and another 25% coming from Genvoya.

This is a testament to the profile of Biktarvy, its strong efficacy and no identified cases of treatment emergent resistance at week 96 in our Phase III studies.

Biktarvy provides the renal and bone safety advantages offered by Descovy backbone with minimal drug-to-drug interactions.

These are important considerations for an aging HIV population and for younger patients on lifelong treatment.

Moving to prevention.

Truvada for PrEP continues to grow as we invest in the U.S. to raise awareness among at-risk individuals and treating physicians.

We estimate that approximately 202,000 people were taking Truvada for PrEP at the end of the fourth quarter in 2008.

We initiated 2 direct consumer campaigns in mid-2008 and have a dedicated team of therapeutic specialists focused on Truvada for PrEP.

Additionally, we have a number of commercial programs aimed at helping populations disproportionately impacted by HIV where utilization of Truvada for PrEP is low.

While these investments have helped increase awareness, there is still so much more we can do.

The CDC estimates that 1.1 million people in the U.S. could benefit from PrEP.

Now turning to Europe.

Total HIV revenue was $511 million in the fourth quarter, down 21% year-over-year and down 13% quarter-over-quarter.

This decline was driven by the expected availability of generics across all major EU countries.

During 2018, we experienced slower erosion of the HIV franchise due to later generic entry in a few countries, while at the same time, we saw rapid uptake of our Descovy-based products, which accounted for more than 80% of our total HIV revenue in Europe for the fourth quarter.

We are encouraged by the strong uptake of Biktarvy in Germany and in France.

In Germany, Biktarvy was #1 prescribed regimen for both treatment naïve and switch patients during the fourth quarter.

And in France, just 6 weeks after launch, Biktarvy was among the top 5 regiments for switch patients.

We anticipate by mid-year, Biktarvy will also launch in Spain, Italy and the U.K. Once Biktarvy is broadly reimbursed and entrenched in the market, we believe our European HIV business will stabilize and return to growth.

Now turning to HCV.

Product sales for the fourth quarter were $738 million, down 51% year-over-year and 18% quarter-over-quarter, in line with the guidance we provided in 2018.

As previously announced, our authorized generic version of Epclusa and Harvoni have become available in the U.S. this quarter through Asegua Therapeutics LLC, a separate subsidiary.

We expect to see a positive impact on sharing Medicaid markets during the second half of 2019.

Over the long term, we anticipate the adoption of these authorized generics will allow us to be more competitive in a rapidly growing Medicaid segment.

In 2018, we launched a new direct-to-consumer campaign highlighting Epclusa as a pan-genotypic, pan-fibrotic, single-tablet regimen.

Epclusa has the right profile to address the broadest population in HCV.

As a leading liver company, we remain fully committed to serving patients with HCV, contributing to the elimination of this disease and competing with a great deal of confidence based on the profiles of our HCV products.

Turning to Yescarta.

We are building on the momentum generated by the 2-year real-world data prevented at the American Society of Hematology annual meeting.

This year, we expect to steadily and measurably progress in the U.S. and in Europe and potentially see a doubling of our revenue for Yescarta as centers gain experience and community oncologists become increasingly aware of this lifesaving therapy.

We now have 68 centers in the U.S. certified to provide treatment with Yescarta.

In Europe, we are encouraged by the early stages of our launch.

We have treated commercial patients in the U.K. and in Germany, and we have activated sites in France.

In total, we have authorized 12 centers and look forward to additional centers coming online this quarter.

We are pleased with the engagement of countries across EU markets wanting to rapidly offer Yescarta.

Finally, our U.S. cardiopulmonary team continues to deliver impressive results.

Letairis and Ranexa revenue totaled $431 million for the quarter.

We did not see any generic competition for Letairis in the fourth quarter.

We currently anticipate the entry of generics in the second quarter of 2009 (sic) [2019].

We begin the year from a position of strength.

I would like to thank the teams around the world for their incredible efforts.

With a continued focus on our outstanding portfolio of products and operational excellence, we are confident in our ability to deliver on our 2019 goals.

Now I will turn the call over to John.

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

As you know, this is a very exciting time for Gilead's R&D organization.

We anticipate readouts from 5 Phase III clinical trials in the first half of this year.

I will talk briefly about those studies, provide an update on our cell therapy and oncology programs and then close with some thoughts on 2019.

We expect upcoming readouts of STELLAR 3 and STELLAR 4, our ongoing Phase III trials evaluating selonsertib an ASK1 inhibitor in patients with advanced fibrosis due to NASH.

If supported by the data, we expect to file for regulatory approvals in the second half of this year.

In addition, we continue to advance multiple other investigational compounds in NASH as both single agents and as combination therapies.

We anticipate ATLAS, our Phase IIb study of various 2-drug combinations or regimens in patients with NASH and advanced fibrosis, to read out in the fourth quarter.

As we continue to build our pipeline in NASH, I would like to highlight 2 other recent preclinical agreements.

Last month, we announced a collaboration and license agreement with Yuhan to codevelop novel treatments for patients with advanced fibrosis due to NASH that will complement our other internal programs.

In December, we also entered into another collaboration with Scholar Rock to discover and develop highly specific inhibitors of TGF-beta activation.

We will work with Scholar Rock to investigate this novel approach directed towards one of the core pathways driving fibrotic diseases, including NASH and diabetic kidney disease.

Now turning to inflammation.

This quarter, we expect results from FINCH 1 and FINCH 3, 2 Phase III studies of our selective JAK1 inhibitor filgotinib in rheumatoid arthritis.

As you may recall, last year, we announced positive results from FINCH 2, the first of our Phase III studies to read out.

Those results demonstrated that filgotinib met all primary and secondary efficacy endpoints in a difficult-to-treat group of patients.

Now if supported by the data, we expect to be able to then progress the filgotinib rheumatoid arthritis indication filings for regulatory approvals globally.

In the U.S., our ability to file the NDA is dependent on data from the MANTA study, a safety study in men with ulcerative colitis.

This was requested by the FDA and is designed to address nonclinical findings observed in preclinical animal studies.

The FDA recently allowed us to expand the inclusion criteria, which has enabled us to enhance enrollment.

We will continue to evaluate our progress and options to advance time lines.

Once we have the Phase III data from 3 FINCH studies in hand, we will initiate and request further interactions with the FDA and other regulatory groups worldwide.

We will then be able to provide greater clarity as to filing timeline in the U.S.

Moving to HIV.

In the coming months, we anticipate the results from the DISCOVER trial, a Phase III randomized, double-blind study of more than 5,000 people, evaluating whether Descovy is as safe and as effective as Truvada at reducing the risk of HIV infection when used as PrEP or pre-exposure prophylaxis.

The trial speaks to our ongoing commitment to people at risk of HIV infection and those living with HIV, where our goal is to continue to lead and drive innovation across the spectrum of care from prevention to treatment to, hopefully, one day, a cure.

And finally, I'd like to make a few comments on cell therapy.

Our investment in cell therapy is and always has been an investment in the future.

Similar to what we've done in other areas historically, we are committed to leading with cutting-edge science that one day creates a path to a cure.

Last December, the American Society of Hematology annual meeting, we presented a number of significant updates.

The 2-year safety and efficacy ZUMA-1 data presented at the meeting and simultaneously published in Lancet Oncology showed an unprecedented plateau in duration of response and overall survival in patients with refractory large B-cell lymphoma.

After a single infusion of Yescarta with a minimum follow-up of 2 years, more than half of the patients were still alive, and nearly 40% of patients had an ongoing response.

The 2-year point is a major milestone for Yescarta.

This is the longest duration of follow-up of any registrational, clinical cell therapy study, and the results set the bar, reinforcing our leadership in cell therapy.

Also at the ASH meeting, there were numerous presentations highlighting real-world Yescarta data from centers outside of the clinical trial setting.

It was encouraging to see similar 30-day efficacy and safety data in this setting, despite sicker patients compared with ZUMA-1 as well as a consistent manufacturing performance and product turnaround time.

Finally, for Yescarta, we are moving forward in earlier lines of therapy in large B-cell lymphoma and several new indications for other B-cell malignancies as part of our broader registrational plan.

This year, we will also continue several studies aimed at investigating strategies to further improve the safety and the efficacy of Yescarta.

More broadly now in cell therapy, we are advancing an allogeneic platform to IND this year, progressing different cell therapy approaches in multiple solid tumors with next-generation technologies and leveraging our best-in-class cell therapy manufacturing.

We will also continue to pursue scientific collaborations that will help us achieve these goals when they make sense.

With regard to our other oncology programs.

During the fourth quarter, we announced a global collaboration with Tango Therapeutics to discover, develop and commercialize a pipeline of innovative, targeted immuno-oncology treatments to patients with cancer.

Our collaboration will combine Tango's CRISPR-based discovery technology, alongside Gilead's drug discovery and development capabilities.

We also recently entered into a partnership with Agenus focused on the development and commercialization of up to 5 novel immuno-oncology therapies, 3 of which are expected to be in the clinic in 2019.

We believe these double approaches can augment the impressive benefits that have been seen with checkpoint inhibition in a variety of cancers.

Last quarter, we disclosed an initial patent outlining some of our exciting preclinical work related to our small molecule PD-L1 program.

To that end, we have now initiated a Phase I study of GS-4224 in healthy volunteers.

I am confident we will continue to make significant progress in 2019.

I want to close by highlighting several key areas for Gilead this year.

We are focused on returning to growth in terms of product sales and are confident this can be achieved with our operational excellence, a strong and growing HIV franchise and a stabilizing hepatitis C market.

As I have just shared on the R&D side, we continue to make excellent progress with our pipeline, and we are looking forward to the readout of the 5 Phase III studies, as I described today.

With regard to cell therapy, we will maintain our position of leadership as we continue to reach more patients with Yescarta and advance the next generations of cell therapy.

And finally, we are in a position of financial strength, which gives us the flexibility to execute on M&A and partnerships to augment our pipeline.

On behalf of the entire organization, we look forward to welcoming Dan O'Day to Gilead next month as our new Chairman and CEO.

In closing, I would like to thank our 11,000 employees around the world.

It's your commitment and dedication that have made us successful and will continue to make us successful in 2019 and into the future.

So let's now open the call for questions.

Operator?

(Operator Instructions) And our first question comes from the line of Geoff Meacham from Barclays.

John, I want to continue the thought on BD.

I'm looking at the step-up in 2018 that you guys had.

It's mostly on early to mid-stage assets.

So the question is, one, does this change Gilead's appetite for later-stage deals?

And two, what's the appetite for an expansion beyond your core therapeutic areas?

And I realize the answer is likely to change after Dan gives a more detailed review of the business.

Geoff, it's Robin.

Why don't I start?

I'd say, again, the high bar and criteria for us when it comes to M&A is scientific differentiation.

I think you're right to state that we are primarily focused on our existing therapeutic areas.

While these have been small deals, I think we've continued to look for deals with commercial assets as well as later-stage pipeline deals as well, but they happen when they happen.

So as you can see, we've been very active.

We've been even more active the second half of the year, and we'll continue to focus in this area as Dan joins us.

Geoff, it's John, and I'll just add on to what Robin has said also.

We have looked at many other things as well over the last year, and we'll continue to do so.

And it is driven by the science, and it is driven by the opportunity and the importance and impact it will have on certain diseases.

So we will look at late- and earlier-stage opportunities as they come forward.

But as Robin said, the late-stage opportunities are few and far between.

Our next question comes from the line of Michael Yee from Jefferies.

I guess my question is -- although Dan hasn't come onboard yet, I mean, what do you think investors should anticipate or should expect through the course of the year?

Is that him just trying to get onboard familiar with everything and that could take a year?

Do you think that he would -- or management and the board anticipate urgency to put the balance sheet to work?

I mean, I guess, what should investors expect through 2019 as it relates to Dan coming onboard?

Sure.

This is Gregg Alton.

I'll take this question.

I think it's neither of the scenarios that you laid out there.

I think that Dan will come onboard March 1, as you know.

I think he will be patient.

He's going to take his time to get to know the company, spend more time with the management team.

Get to know our strategy.

Certainly, he will then -- I think he'll put his own mark on where he wants to take the company.

I wouldn't expect it to take up a year, but I think he will be patient, and I think he's going to be thoughtful and make sure that he's really understanding what we're doing.

Our next question comes from the line of Brian Abrahams from RBC Capital Markets.

How should we be thinking about your 2019 guidance for HIV with respect to contribution from volume versus price?

And then along those lines, for the longer term, there's been some discussion around CMS practices shifting for protected classes.

Can you talk a little bit about the impact that you foresee, elements like formulary management or prior authorization potentially having on clinical practice and HIV and on potential future revenues for the franchise?

Brian, it's Robin.

Maybe I'll take the first part of your question and then turn it over to Gregg.

So thank you for calling out both those parameters.

I mean, keep in mind that volume is the major driver growth for our business, and that will be the case in 2019.

For our HIV business, we have taken price increases in the U.S. in the past, but keep in mind that the net effect of them has been limited because the majority of our volume goes through public channels.

For instance, ADAP has not had a price increase in -- since 2008, and that's part of our U.S. business.

In Europe, as you know, we actually take price decreases.

So the net result on a worldwide basis is really a low single-digit price benefit when we think about any price increases.

For this year, you can appreciate.

Due to competitive reasons, we're not going to mention if we are or aren't taking price increases at this point in time.

Recall that mid-year, we announced no price increases for 6 months.

But any thinking that we do have around price increases is currently reflected in our guidance, and I'd say that we are aware and continue to be aware of the climate out there, and we've always had a very sensible approach to how we think about pricing.

And so if I can just jump in on the second part of the question relating to the proposal by CMS on the protected classes.

As you're all aware, Gilead has been on the forefront of innovation in HIV for 30 years now, bringing out products for treatment and prevention that improve potency, safety, tolerability, simplicity.

And the protected classes has been a very important component to ensure that patients have access to that and physicians are free to prescribe what's best for their patients.

And the reason for the protected classes, as many of you know, is these are disease areas -- there's 6 disease areas where the products really are not interchangeable, and they really need to be the right -- right for the patients.

This has allowed patients -- individuals to do very well with HIV but also allows us to have a very good public health response to HIV and reducing new infections.

We believe that any challenges to the protected class, particularly the prior authorization or step therapy, would be a significant step backwards in these efforts.

We also share this with a lot of the other therapeutic areas that are impacted by the protected classes, so we are in constant discussions with them.

This is the #1 public policy initiated by Gilead, is ensuring that people understand the importance of protected classes.

We're very engaged with the administration at CMS, HHS as well as the Senate and Congress.

So we are ensuring that we're very vocal there.

We're also very closely tied with the patient groups and the physician groups who care very much about this issue.

So this isn't the first time this has come up, but we take this very seriously.

And we are making sure that the message is very strong that this would be a step backwards, and we also don't see significant cost savings to our health system from doing this and potentially a long-term step back in terms of what we've accomplished.

Our next question comes from the line of Geoffrey Porges from Leerink.

Robin, could you talk us through the increase in SG&A, specifically?

It's about a 10% increase compared to where you are this year.

It's about $500 million above what The Street was expecting.

Can you talk it through where the incremental $500 million is going?

And was it at all possible -- I presume you went through everything else you were spending on previously and couldn't find any way to reduce in other areas?

Yes, thanks for the question, Geoff.

Let me first talk about the sequential increase.

That was driven by a onetime grant, so I wouldn't take Q4 and assume that's the run rate, right?

I mean, during the second half of the year, to your specific question, we have included incremental expenses focused on our new emerging therapeutic area launches, in particular NASH and inflammation.

We've also included some incremental expense for our cell therapy ramp.

As you know, we're continuing to build outside of the U.S. in that area as well.

So those are some of the primary drivers.

The kind of the smaller drivers include just some geographic expansion.

If you saw from our guidance, we're expected to have HIV revenue in Japan next year, so there's some investment that we're [waking] there.

We also continue to get products approved in China, so that's an area of focus.

So yes, there is a second half ramp in our expenses to support those very new launches.

I would say, Geoff, to your point have we thought about trade-offs, yes, we have.

I would say, particularly for NASH, we have -- and maybe Laura can comment on this as well.

We do believe continuing to stay focused on our hep C franchise in a much more competitive environment is the way to go so there are some incremental expenses that we hadn't initially thought about associated with NASH, but we've appropriately included them in our guidance.

Yes, I think Robin did a perfect job covering it.

For HCV, we believe not only from a field force prospective that we want to be fully focused around the world but also in terms of reaching consumers in the United States -- that's a very strong focus.

And external and outside of the United States, there is a number of initiatives to really help with elimination in conjunction with the government, and we're committed to that.

So I think that's really what we were contemplating with selonsertib would we have an opportunity to join forces.

We believe that we should keep those separate and continue to focus on them as individual, very important products uniquely.

Our next question comes from the line of Matthew Harrison from Morgan Stanley.

John, I have one for you, specifically on the NASH study.

Can you talk a little bit about how you powered those studies?

I know you've talked in the past about the 20% delta is clinically meaningful.

I wonder if you can comment if you achieved the delta below that, if those studies could still be statistically successful and how you might look at a result like that.

Thank you, Matthew.

We're excited about the NASH readouts from STELLAR 3 and STELLAR 4. We have 1,600 patients with bridging fibrosis or cirrhosis.

So those results are due to imminently read out this quarter, so we are looking forward to them.

To answer your question, we are looking for a significant increase over placebo response rate, which we believe we can calculate accurately from our previous trials.

And we believe that we would like to show a 10% to 15% increase or a doubling of response rates over placebo to have a meaningful effect in a group of people that have a high likelihood of disease progressing to transplant, et cetera.

So without getting into all the details about the numbers, this would be our first step forward for patients with advanced fibrosis due to NASH and a meaningful improvement if we could allow 1 in 5 of them to prevent progression of the disease to transplant decompensation, et cetera.

We believe that would be meaningful clinically, statistically and otherwise.

Our next question comes from the line of Robyn Karnauskas from Citi.

My question is on PrEP.

So you talked about over 200,000 on PrEP.

And by our math, that could be around $2 billion worth of sales coming from PrEP.

I don't know if that's right.

But my question is more about -- there's data out there saying that this could be a 1 million to 2 million, 3 million people that ideally could benefit from PrEP.

How are you thinking about getting that -- getting Descovy in the hands of those people?

What is the argument you would make to make sure those patients go on PrEP?

And do you think -- my question is more about a lot of these patients are young.

So how are you going to make that argument?

And where do you think PrEP could go?

And what kind of benefits from DTC?

Very long question.

I'm sorry.

Yes.

So how about if I take the conversion question, and on the clinical study, I'm going to leave that up to John.

So this is Laura.

Thank you, Robyn, for the question.

So as it relates to PrEP, as I mentioned earlier, in the United States has 1.1 million people that the CDC estimates that could benefit from PrEP.

And we really believe there's a lot more to do.

There's a lot of populations that are affected that just don't have the awareness that they really need to protect themselves.

So not only do we have a dedicated field force, but we have a lot of community individuals that have come from nonprofits that are very much committed to helping these communities, and we are leaning into these communities to try to raise awareness.

In addition, we've actually put a significant amount of additional funding behind both Biktarvy and Truvada for PrEP in 2019 because we believe that's very important thing to do.

Now to answer your question about the conversion from a TDF-based regimen to a TAP-based regimen or Descovy-based regimen.

Obviously, the clinical trial results, I'll let John talk to.

But what I would say is when we look at the treatment market, as I mentioned, in the U.S., we're at 77% of prescription -- total prescriptions now in Descovy-based backbone.

And in Europe, we're at 80%.

Now we believe that the benefits that accrue to a patient for HIV are the same benefits that we need to have for a patient at risk that is being treated for PrEP.

Some of the duration of therapy is longer than we would -- you may anticipate.

So these otherwise healthy individuals want to have a normal, healthy life, and the Descovy-based regimen really blends for that to be a great treatment option.

I'll then turn it over to John on this study.

So Robyn, the safety advantages of taking a [TAF-based] backbone as has been the case and seen in the conversion rates for the HIV-infected individual will apply equally to the at-risk individual who's taking medication for PrEP.

So we'll be able to show in the study with over 5,000 patients that there are differences, I presume, in terms of safety, kidney and bone.

And because of their young age and their longevity in terms of taking medicines to prevent HIV infection, the same principles apply as it does to somebody who is infected already.

So another way of saying what Laura has already said.

And hopefully, the study will lead us down the answers to that question.

We -- it's reading out in the coming months.

Our next question comes from the line of Alethia Young from Cantor Fitzgerald.

I'm just asking about the MANTA study.

I just wanted to clarify maybe one thing.

Is that study needed for like a label?

Or is it really needed actually for the filing package?

And then just can you update us with a little bit more precision on how those initiatives have played out with the enrollment timelines?

Thanks, Alethia, and thank you for your question on MANTA.

Before I go into it and answer that, first, let me say that I really do appreciate everybody's interest in the program.

It's a somewhat different situation than we've found ourselves in before.

And the data that we're generating in the Phase III trials will provide me with a lot more -- and our team with a lot more details that will allow us to be able to answer your questions with greater clarity regarding the timelines.

So we have had a pickup in enrollment, Alethia, since we've made the modifications to the programs.

And as I said today, really, I think we don't need it for labeling necessary, but it would give clarity as to whether there's any risk associated with male infertility and so forth because it is a male safety study.

So it's not required, but it's obviously advantageous for us to have it in all of those respects.

As I said to you, this is an issue that we -- we are really addressing an FDA issue of the nonclinical filing that we observed in the preclinical animal studies.

We've seen a pickup in enrollment.

I don't want to get into specifics about the numbers, but there has been a significant pickup in enrollment.

And I'll keep watching, and we will keep watching that process very carefully to advance our timeline.

So once we have the data from the 3 Phase III FINCH trials, we will be able to initiate further interactions, discuss the MANTA study and its progress more and then be able to provide you with greater clarity.

Our next question comes from the line of Umer Raffat from Evercore ISI.

I have one for Robin and one quick clarification on something John said.

So Robin, there was an expectation among investors based on a lot of the comments you shared and the rest of the management shared at the January conference that 2018 was a trough and 2019 should be a growth year in product sales.

But judging by guidance, at least, it doesn't quite look like that.

So can you please go over that?

And also particularly curious about hep C because it looks like versus 4Q run rate, there isn't a whole lot of erosion modeled into it?

And John, just to clarify something you mentioned on NASH earlier, is there a hierarchal analysis for the low dose versus high dose in the readout?

Or is the p-value being split?

So Umer, let me start with your question on guidance.

And so I just want to reiterate, as I've said, at your conference -- I mean, we are very focused on returning the growth in 2019 and really believe that's achievable if you look at the strength of our HIV franchise.

As I said, we expect double-digit year-on-year growth, stabilizing trends in our HCV business as well as the momentum of our cell therapy franchise, where as you saw we expected to practically double this year.

I think the other thing we tried to do is to be very transparent in our 2019 guidance of outlining those unplanned factors in 2018 that definitely will impact growth or the level of growth that we expect in 2019.

The other thing I want to point is just our philosophy around setting guidance at the beginning of the year.

It remains pretty consistent with how we've done it prior years, and it includes all the uncertainties that you could expect that could impact our franchises.

I mentioned several on the call.

And just take FX, that alone, volatility could have a, plus or minus, $300 million impact.

So yes, the guidance, particularly our first guidance of the year, does include downside risk, and we're going to monitor those and manage them throughout the year.

But our conviction as well as our confidence around returning a net product revenue growth is very, very strong, and we're going to look forward to updating you throughout the year as activities progress across our franchises.

Umer, in regard to your second question, it's John, we took 2 doses into the Phase III trials, a, because we had target engagement of both doses in terms of immunohistochemistry; we also allowed ourselves to have another chance in terms of the safety profile that might be potentially differentiated at lower or higher doses.

Those were the 2 reasons for taking 2 doses forward into Phase III.

And without getting into all the details of the statistical analysis plan, we will be able to compare both doses to placebo in terms of the primary endpoint.

Our next question comes from the line of Cory Kasimov from JPMorgan.

Wanted to ask on the cell therapy side of things.

Can you talk about the source of your confidence in the projected growth for Yescarta in 2019?

I believe you said it's up $200 million, given there's only $6 million of sequential growth from 3Q to 4Q.

And along these lines, I think you previously guided to having more centers online for the product in Europe by the end of '18 and where you ended up.

So how should we be thinking about kind of the cadence of opening centers into 2019?

And how that plays into your guidance?

This is Laura.

Thanks for the question.

I will say that our launches of Yescarta have really made excellent progress both in U.S. and in EU.

As part of our guidance, we do expect Yescarta revenue to nearly double, as you had mentioned.

So we feel like we have very, very strong momentum.

We are seeing greater depth and breadth of treatment with Yescarta across the 68 certified sites in the U.S. So when we started off, there is a process of the institution really figuring out how to operationalize treatment, and we had a very high amount in the -- for top 20 academic institutions.

We're starting to see that spread further across the 68 institutions and also, like I said, depth of patients going through.

In addition, at ASH, as we've mentioned, the data that was presented for the follow-up to the real-world evidence, I think, really is providing that extra energy in the community about the importance of treating, not only at obviously the 68 sites.

But what's more important is that the community oncologists are referring these patients into the sites for treatment, and we do have a field force focused on helping with that referral process.

And you did ask us specifically about Europe.

So we do have 12 sites in Europe that are actively engaged.

And we will tell you that in terms of what we're seeing in Germany, we're very, very impressed with the results.

And we continue to have additional -- Germany actually and the U.K. And we also have provided product and open up sites in France, and we will continue to expand throughout 2019 in the European markets.

Our next question comes from the line of Phil Nadeau from Cowen and Company.

Question on the HIV franchise.

I think in your prepared remarks, you mentioned that the use of TDF generic regimens is a risk to HIV pricing this year.

And in fact, we have seen some payer programs to incentivize the use of those generic regimens.

So just curious if you could maybe talk in a little bit more detail what you are seeing from payers, any impact on pricing of those generic regimens, how it's being used by physicians.

And should payers get more aggressive about recommending their use?

How would Gilead account for that?

So this is Laura.

Thank you for taking the question.

Yes, that was a pretty consistent question that we had at the JPMorgan conference, too.

And when we look at specifically one, particular payer that was emphasized, we really have not seen any major impact at all.

As a matter of fact, when we look at the program, which was specifically supporting Cimduo, we saw no more than 100 prescriptions generated during the 10-month period of time.

And in addition to that, in December, United basically sent a letter out to physicians saying they were no longer going to run the My Scripts program.

So that's -- I think that, that was an effort that was tried to see if patients would choose to switch back, but we really did not see any impact.

Our next question comes from the line of Salim Syed from Mizuho Securities.

I actually have 2 quick ones, if you don't mind.

The first is on HIV Japan.

So if I recall at the end of last year, towards the end of last year, you guys bought back the HIV rights from Japan Tobacco.

I was wondering if you could just give us some color.

How should we be modeling that opportunity coming out of Japan now that you are marketing that solo?

And what should we be taking out of the royalty line, where, I believe, you previously booked the economics?

And then on the second question, just on your allo CD19 CAR, wondering if you guys view CD19 CAR NK cells therapy as complementary or competition to your allo T-cell therapy?

So maybe I'll start with the HIV question, Salim.

Thanks for asking that.

Yes, we're really excited about the opportunity in Japan.

It is included in our guidance.

And to your point, in the past, we got between about $50 million and $60 million a year in Japan Tobacco royalties, and that was in total revenue, not for the product revenue.

So net-net, this is a positive for us, and that we'll now see those revenues flow through net product revenue, but we'll lose that royalty contract in Other going forward.

So again, I think very excited about gaining the commercial rights to the HIV products.

And Laura, I don't know if you want to expand a bit on the commercialization of that relationship at all.

Yes.

So the teams have been actively working in this move for a smooth transition for the HIV franchise.

I think it's not only the HIV franchise that exists currently, but it's really the opportunity this year, 2019, to launch Biktarvy.

So we're really, really excited about that opportunity.

And the teams, like I said, are working hard, and we appreciate the great partnership with Japan Tobacco on kind of helping us with the conversion and building this franchise for us and helping us with a successful launch.

In terms of the question, Salim, related to the allogeneic program, what -- as I said on the call, we are very pleased to announce that we hope to have our IND for allogeneic CD19 program this year.

And we will engineer certain factors into that program, one of which we've already announced it will be HLA-I related that will have an effect on NK cells that will allow, we hope, an advantage in terms of persistence of those cells -- persistence of the manipulated or engineered CAR T-cells.

So it's an early field.

More to be seen.

Lots of different approaches.

We are pleased with our progress so far.

Our next question comes from the line of Terence Flynn from Goldman Sachs.

Maybe just on selonsertib.

Was just wondering if you can confirm if you'd be able to file on only one positive Phase III trial or if you need both of those trials to file.

And then would love your thoughts on how you see this market playing out over the near and longer term under a positive outcome for the STELLAR studies.

And importantly, what are the key inputs on pricing?

Do you need the event-free survival beta to really drive the value proposition?

Or do you think just the histology data is enough?

Thanks, Terence.

Look, we would like both studies to be positive.

They are imminently going to be available in the next quarter or a few months as well.

If one was positive and one was negative, as you outlined, we'd have to have a discussion with the regulators.

And that would be something that we would discuss, analyzing data in that situation.

Look, in terms of pricing and moving forward, I'll hand those aspects on to Laura.

But...

Yes.

Thank you, John.

Thank you.

So obviously, it's too early to really comment on our pricing strategy.

But of course, we model scenarios.

I will say that the medical affairs team has done a lot of work from a health economics perspective.

We're quite familiar with the overall cost of an F3, F4 patient.

These patients are extremely expensive to the system.

So having that real-world data, which shows us how expensive and unfortunately how many patients when they get to that level really are in pretty dire need, we can take that information, coupled with what John produces from a clinical perspective, and be able to utilize that for our discussions.

Terence, just to add, it is subpar H approval.

So once we have the histological endpoint at week 48, that would then allow approval of the drug that would be linked to the 5-year follow-up to show the improvement in clinical benefit as well as the time.

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

So maybe first for Robin.

In your assumptions for the incremental SG&A for 2019 and perhaps for the launch for filgotinib and NASH, I assume that will probably mostly occur in the second half.

And if NASH unfortunately fails, does that mean SG&A would actually be lower than they were expected?

And then secondly, on the assumption for the HIV launch in your guidance, does that assume incremental more switches from dolutegravir-containing regimens are not in 2019?

Sure, Ying.

So first to talk about SG&A.

As I mentioned earlier, yes, it is -- the ramp in SG&A is more second half 2019.

Don't use Q4 2018 as your baseline.

Yes, it's an unfortunate yes, if for some reason we would not launch, our SG&A expenses would go down, and that is hopefully not what happens.

This is one place where as a CFO, I hope we spend every single dollar that we've allocated.

I'll also add that again because of the health of our HIV franchise, I didn't mention earlier, but there is a component of incremental investment we're making there as well.

But to your question, if NASH did not launch, it would have lower expenses.

If you think about $100 million for us in terms of SG&A spend or expenses in general, it's about $0.06 a share.

And then there was a question on the HIV launch assumptions in terms of a competitor.

I think Ying it's safe to say we're not going to get into our detailed assumptions of our guidance, but we fully anticipate Biktarvy will go on to be the best-selling single-tablet regimen.

Our next question comes from the line of Carter Gould from UBS.

Just wanted to dig in a little bit deeper to the EU dynamics in HIV.

You obviously highlighted a couple of countries still to launch with Biktarvy.

But you were a little more, I guess, opaque on around if that business will sort of stabilize this year and/or return to growth.

Or is that really something we should be looking to 2024?

Any color there'd be appreciated.

Yes.

This is Carter?

Yes.

Okay, hi Carter, this is Robin.

Maybe I'll start, and if Laura has any color.

Yes, I would say, in 2019, we actually don't expect U.S. HIV revenues to grow, but we'll have the full year impact of genericization.

And as Laura talked about, we'll continue to see that ramp of our Descovy-based product.

So keep in mind, over the next 2 years, we'll be launching Biktarvy throughout Europe.

The one component of that quarter sequential decline that we saw was a onetime adjustment we had to make relative to prior periods, where certain southern European countries reach a cap in terms of spending on pharmaceutical products.

And then they do what's called clawback, where we get kind of an additional tax.

There's been a lot of changes in government [spend], and we did make an additional adjustment.

If you take that out, I'd say the sequential declines are more consistent of what we've seen in the past.

But beyond 2019, again, Laura talked about the great uptake of Descovy with Biktarvy, we do expect over time in '20 or '21 to return to growth for EU HIV.

Yes.

So I'll just add a little bit.

I think Robin covered it very well.

In terms of launches, we've definitely been able to with Biktarvy launch.

Like I said, just some at the very end of the year, some of the big countries, we have launches going on all through '19 for Biktarvy.

There will still be erosion [of the] generics to spring through '19.

So we had it in '18.

We'll see it happen through '19.

But we believe we're going to have some erosion, but the conversion of the -- to the Descovy-based regimen being at 80%, those 3 variables, we believe, that we will be able to move through '19 and then continue to grow from that base.

This does conclude the question-and-answer session of today's program.

I'd like to hand the program back to management for any further remarks.

Thank you, Jonathan, and thank you all for joining us today.

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

Thank you, ladies and gentlemen, for your participation in today's conference.

This does conclude the program.

You may now disconnect.

Good day.