Gilead Sciences, Inc.
Q3 2015 Earnings Call Transcript

Published: 1 Dec 2015

[Matthew Harrison:]

So good morning everybody, I am Matthew Harrison, I am one of the Biotech Analyst at Morgan Stanley. I am pleased to have Robin Washington who is the CFO of Gilead and Patrick O’Brien who runs IR there. So Robin I thought just maybe to start, we can start with some capital allocation questions here.

[Robin Washington:]

Sure.

[Matthew Harrison:]

You are the CFO.

[Robin Washington:]

Absolutely.

[Matthew Harrison:]

And then we can talk a little bit about the products in the pipeline. So, maybe the first thing is just, your cash flow profile has changed substantially over the last call it year and a half and I think on the 3Q call you said you had $11 billion of repurchase either from stock or warrant activity and if we can bind that with your dividend you paid out about 77% of your free cash flow year-to-date. How should we think about that as you think about return to shareholders going forward in terms of sending out your...

[Patrick O'Brien:]

Sorry.

[Matthew Harrison:]

That’s all right I wasn’t on.

[Patrick O'Brien:]

Now.

[Matthew Harrison:]

Now I am on. Could everybody hear me before or you want me to start over? Anyways I was asking about free cash flow. So 70% of your year-to-date free cash flow is -- you paid out. So how should we think about that going forward? I mean do you expect to maintain that similar level of activity, will it fluctuate, do you have a range?

[Robin Washington:]

Yes, so first of all I would just like to say good morning and thank Matthew and NASDAQ for inviting Gilead here and also to acknowledge that today’s World AIDS Day which is a critical area for us since that’s our kind of cornerstone franchise for HIV, but just the physical answer to your question around free cash flow, you are right. I think our success in -- our continued success in HIV as well as with HCV has positioned us well from a free cash flow perspective for many-many years to come. So you are right, we have been returning a significant amount of value to shareholders via share repurchases. We did have an opportunity to prepay some warrants that were outstanding through 2016 and so we took advantage of that relative to managing our overall balance sheet as much as we can. So as a result of that, yes, I think what I said on the call was year-to-date including that warrant payout we have returned over 12 billion in cash to shareholders. Going forward I would say we have talked consistently about our capital allocation strategy being one of a focus on investing in our business, which we want to continue to do. And when we have opportunities above and beyond that, we are using primarily share repurchases along with our dividend that we announced and began in Q2 of this year. That will kind of be our floor relative to investor returns and we will continue to leverage share repurchases. Relative to that level going forward, I think the warrants was a one-time anomaly, absent significant M&A or other externals -- external investments we need to make it’s not an unreasonable level of cash flow for us to returning. If you really step back and think about our overall return since about 2010 it’s been about 60 plus percent of free cash flow returned overall during that period. [Technical Difficulty] Hopefully it’s better, okay.

[Matthew Harrison:]

So perfect, okay.

[Robin Washington:]

Okay.

[Matthew Harrison:]

And then I guess maybe a related question is, your capital has been somewhat lumpy this year and I know you have talked about this in the past and I get a lot of questions on this so maybe if you could just help us think about there is a significant rebate component to what you are doing in HCV. So how should we think about the cash flow on a quarter-to-quarter basis and does that even out over the full year or how should we think about that?

[Robin Washington:]

I mean I think as you said earlier Matt it’s been healthy but keep in mind we launched Harvoni late last year and we also put in place in mid-January several large rebate programs. And it takes a little while for those to work through the system. So, while our revenue was appropriately reflective of those rebates our cash somewhat lags, so you are right, we saw higher level of cash flow in the first half than in Q3. I think it will still take us a little bit of time to work through some of those rebates. We don’t really give quarterly cash flow guidance. But I think overall, the overall balance I think will remain healthy for a while. But we would expect it to be a little less lumpy I don’t know if we will totally get there in 2015 but by mid-2016 we should be there.

[Matthew Harrison:]

Okay, perfect. And then maybe a couple of more questions just related to this before we get into the base business.

[Robin Washington:]

Sure.

[Matthew Harrison:]

One of the other questions I get a lot is you raised $10 billion in debt earlier this year. Given your healthy new level of free cash flow why did you do that, what’s the reasoning behind that, should we read anything into that?

[Robin Washington:]

Well I mean a lot of things get right into it. But I think if you go back over the past several years Gilead has raised anywhere between $4 billion and $8 billion worth of debt every year since we got our credit rating. We did do a higher amount this year. That was part and parcel due to the fact that we escalated the repayment of the convertible debt. So that would have been part of a 2016 debt raise. I think if you step back and look at that $10 billion raise relative to our growth of our balance sheet it still keeps us only at 1x debt-to-EBITDA so one could say we were somewhat underleveraged on as to where we have been and we have been well ahead of our operational metrics. We haven’t necessarily given one since the Pharmasset acquisition and subsequent pay down but then it was 1.5x so even with the $10 billion raise it’s only 1x. I think the other thing is, is we were just being prudent relative to a potential for a rate increase at some point which back in December when we planned it we thought that might end up being in early fall. So, also keep in mind that a significant component of our cash remains offshore as most IP related companies. So it really was prudent capital allocation management and it gives us a lot of flexibility relative to onshore cash as we need it. We don’t need it necessarily to pay a dividend or anything. But we were really just being prudent given the nature of the capital markets.

[Matthew Harrison:]

Okay. And then you just mentioned onshore versus offshore cash. Do you talk about how much of your cash flow generation is U.S.-based versus non-U.S. based?

[Robin Washington:]

We do, we’ve typically talked about the fact that about a third of our cash flow is generated onshore and the rest offshore. Our cash balances are a little high overall onshore just given our recent debt raise. But on average, those are -- there is similar metrics there for cash balances also.

[Matthew Harrison:]

Okay, perfect. And then one of the components around capital deployment that you talked about was M&A. Clearly, in the past, you’ve used M&A to grow business, whether it was through Triangle or through Pharmasset. How should investors be thinking about that as a component of your strategy going forward?

[Robin Washington:]

Yes, I mean, I think as I mentioned earlier, M&A and collaborations has always been a key component of Gilead. We really step back and look at the R&D universe as our opportunity to be a part of and we continually balanced our internal R&D programs with externally what’s out. And keep in mind we are focused on areas of critical unmet medical needs, and it’s important to us to have best-in-class molecules. We try to develop them in-house but if there are opportunities external as we found with Triangle, as well as most importantly with Pharmasset, we take advantage of those. I mean, it’ll remain a critical component of our strategy and part of why we’re focused primarily on share repurchases was to give us optimal flexibility to do that if we feel necessary relative to M&A.

[Matthew Harrison:]

Okay. And I heard John say in the past John Milligan just to be clear, there’re two John’s.

[Robin Washington:]

Yes.

[Matthew Harrison:]

[Multiple Speakers] I’ve heard him say in the past that part of your philosophy is to let external assets mature to a level where you think you can pick the best asset externally. Is that still your philosophy going forward? Could we see you start to maybe be a little bit more aggressive with some earlier stage assets just given the fact that you have a bigger revenue base and what you know potentially grow. How do you think about that relative to sort of what you’ve done in the past?

[Robin Washington:]

And actually we do both of those. I mean Pharmasset you can argue was an earlier stage asset, but at the same time, the data continued to mature it was something that we watched for over a year. As I mentioned it’s just really part of our DNA and our philosophy to be very conscious of externally what’s been developed in relation to our internal molecules. So we’re always watching and monitoring. We do feel that for earlier stage assets it positions us very well to formulate how those follow-on clinical trials will progress; Phase 3, late Phase 2, to have the discussions with the FDA earlier in the process of development, which we think is absolutely critical to ensure we get the best in the most aggressive outcomes in terms of timing that we can get. And our backbone of knowledge and our focus is research and development. So when we can get access to those molecules earlier it’s very beneficial to us. It doesn’t preclude us from looking at other stage assets we have brought commercial assets before CVT is an example. But I would say we look at all of those, so the maturing data, ability to influence the development cycle. But most importantly, we look at the scientific differentiated need. Is it best-in-class molecule, is it differenced, is it better than what we have in-house and we consider all those things when we think about M&A.

[Matthew Harrison:]

Okay. And I guess one other question around M&A just as the big acquisitions that everybody sort of associates with you before that you’ve done have been a sizeable portion of the overall size of the Company, maybe a third maybe a half of the Company. I mean should we be expecting you do something that big going forward, or is it unlikely that we would see that and we should think about you guys doing many sort of smaller deals or more mid-sized deals?

[Robin Washington:]

Yes big is always relative right. I think again it goes back my previous comments. It’s really about differentiated science. I will say that I think we’re comfortable with the size of Gilead. We think it allows us to be very flexible, nimble, quick decision-making. We don’t necessarily see ourselves as a Company that’s focused on managing cost synergies versus more focused on R&D and development, and so that’s our consideration. But I think we’re consciously out there looking. We’re evaluating a lot of different things. We like the therapeutic areas that we’re currently in. We think it’s appropriate that we remained focused in those areas. And we’re also watching our internal pipeline mature. So, I think we’re patient, we’re smart acquirers. We do care about value. But I think we’ve also been able to deliver high returns on the investments that we’ve made and we want to remain in a position to do so. And I think watching that data mature is really important because it allows us to ensure that when we do make a better decision to acquire it’s the right decision and we can get that product commercialized because we don’t want to do is to focus on placing a lot of bets and maybe one or two make it and that limits our flexibility to do the things that we need to do. So we are very conscious of the data.

[Matthew Harrison:]

Okay, got you. So I guess one other thing that I have been recently getting a lot of questions on, you might be limited in what you want to say about this but as we start to look towards 2016 you -- I guess there are two things right, as we think about the guidance you gave for this year, maybe you could just talk about what the key variables are from stuff that we know from this year and how much -- what you think about your ability to have visibility into those variables going forward? So when I think for HCV for example, how much visibility do you think you have in the patient volumes, into pricing, into payer access, which I am sure key variables you think about as you think about developing your guidance for next year?

[Robin Washington:]

Yes, I think you are right it’s a key question and I am not going to necessarily get too far out relative to 2016 guidance. But you are right as to 2015 if you think about the guidance that we provide not only it’s for 2015 but for 2014 and when we first launched we weren’t even able to give guidance, and I think still the fluidity of patient volumes for HCV remains. It is the one variable if you were to metric our guidance. We are fairly predictable business with our HIV and our other products in terms of the predictability you guys can predict them pretty well we have the non-retail section but HCV is -- it's a tough area and it clearly is driven by a lot of all the payer restrictions and external issues that aren’t necessarily in our control. I think we remained confident and most importantly and that Sovaldi and Harvoni are differentiated products, SOF/VEL which we’ve talked about is another differentiated product that’s pangenotypic. I think all those things are going to allow us to continue to remain very competitive from a market share position with HepC, hepatitis C for a long, long time. I mean it’s -- as I said it’s been very fluid and I think we remain fluid. I mean if you look at level of patients that are currently coming into treatment versus who ultimately gets a prescription, there is a lot of restrictions that remain in play. And so I still believe it will take a little bit of time for the payers to get comfortable with the level of patient volumes not only in the U.S. but in the EU, Japan is doing very well for us. We will be able to talk a lot more about Japan and those volumes in Q4. But payer restrictions I think are something that’s not necessarily in our control. I think we have done multiple year arrangements in the U.S. we have in some countries volume-based arrangements, as well as some multiyear funding commitments from certain governments that we have taken into consideration, but most importantly as an organization beyond launching the products we are really focused on bringing patients into treatment and patients into care. That is controllable and I think if we continue to do that and as you see the clinical benefits and the cures happened relative to HCV patients longer term, I think that bodes well for a healthy robust set of patients for a long, long time to comment and we said decades since we launched Harvoni and Sovaldi and we still think it’s a long-term market. But to be frank I think it’s going to be fluid for the next several years until we really can get to what steady state is. It’s difficult for us to model as well.

[Matthew Harrison:]

Okay, got you.

[Robin Washington:]

I don’t know if you got anything to add Patrick?

[Patrick O'Brien:]

No I think with the cure market like HCV as it’s really remarkable how Wall Street was really concerned before we launched that we cure everybody in two, or three years.

[Robin Washington:]

Right.

[Patrick O'Brien:]

Now we know that it’s not going to happen and people are saying well how long is the market going to be?

[Robin Washington:]

Right.

[Patrick O'Brien:]

And to Robin’s point it’s going to live for decade plus for certainly.

[Robin Washington:]

Right.

[Patrick O'Brien:]

So it’s just a different dynamic.

[Robin Washington:]

Yes I mean here in the U.S. like we announced on our earnings call I think we had cured a little over 300,000 patients which relative to Prevalence that’s still under 10% and two years post launch so excited as patients and advocacy groups are with cures, the system is just going to take time. We are not going to always necessarily be at the top and in this capacity as well. I think there are a lot of dynamics at play.

[Matthew Harrison:]

Okay, perfect. I want to spend some time on HCV but I just want to see anybody in the audience have a specific question before we get into product level things? No. Good, okay. So you touched on a couple of things in terms of HCV in the last answer. Maybe if we could just talk some specific things by market so Japan I think is an interesting market that investors haven’t focused on. You have recently launched there, there were some competitors that were already launched there. How do you think about the Japanese market, how should we be thinking about it, obviously in Japan you have to give peak sales guidance there and that relates to sort of the pricing that you give so we have some idea of what peak sales you have given there, which I think for the two products combined is close to as US$2 billion. So maybe you could just talk about the business, how you think over the next 12 to 24 months we should think about Japan and that ramp and those?

[Robin Washington:]

And so just to start as a little background and I think you are right Matt, it’s an exceptionally great market for us. I mean two years ago we had five people in Japan and now we’ve got over 250 and thus far the receptivity to Sovaldi has been great Harvoni just launched in September so we’ll talk a lot more about that. Sovaldi is somewhat unique in Japan because two things, the profile of patients there, they’re typically about 10 years older there’re lot of elderly patients in their 60s that are interferon and tolerant. So you’re right, pricing we did even better than we thought we would do given by the fact that really Sovaldi was the product so we were able to price very well even though there were products proceeding that so. You talked about the peak sales guidance if there is a process in Japan where you kind of have to provide your level of sales and if you overshoot or undershoot significantly you can have ramifications. But it’s just that it’s a projection. I think similarly to what we’ve seen in Europe and the U.S. our initial trajectory has been very strong. We’ll see how Harvoni does. So when that happens are we ahead versus behind I think it’s still a little early to tell. But we’re doing very well and again we think with over 1 million patients there and now with Harvoni launch for genotype-1 it positions us very well. We’ve gotten very good focus from a guidelines recommendation in Japan, as well. So, it’s going to be a very profitable good market for us and I think most importantly we’re going to be able to cure some folks that have not had an alternative in the past.

[Patrick O'Brien:]

And one thing to add to Robin’s commentary there is in Japan about 30% of that million patient population is genotype-2 for which there is no competitor to Sovaldi. So that’s great for us. And I think as we have launched Harvoni and Sovaldi worldwide, we’ve got over 600,000 patient data base of safety and experience and that’s been proving out to be as good or better than what we saw in our clinical trial development. So, what we’re seeing very high near 100% cure rates with a very clean safety side effect profile. The Japanese market is a place where that safety side effect profile is very important.

[Robin Washington:]

Absolutely.

[Matthew Harrison:]

And I guess meaning -- the one other thing I want to ask about Japan. I think Japan is also unique in that, a lot of the patients are diagnosed there. Does that help maybe with the speed of uptake relative to some of the other markets?

[Robin Washington:]

I think initially that to be the case, I think, what we found universally is that with these treatments out there and then our focus on increased diagnosis, it always tends to go up when you’ve got an alternative that people want to take. But I think it’s still a little early to know if that higher level of diagnosis will drive a different curve relative to some of the other markets. But we’ll be able to provide more insight to that over the next several quarters.

[Matthew Harrison:]

And then in Europe to talk a little bit about fixed budget arrangements or volume-based arrangements, does that, from a Company perspective, does that give you more visibility into how you think that market might play out over a multiyear period just because some countries have said we will spend €500 million a year, and that gives you some sort of idea of what’s going on or versus some of the other markets is Europe being less lumpy and more flat?

[Robin Washington:]

Yes I think it gives us some visibility relative to their commitment to treat but we don’t always give that information in the U.S. At the same time, it still has been lumpy, I think primarily driven by the fact that Sovaldi and Harvoni are so transformative, there’ve been people waiting. Right so we worked through some of those initial patients. And even in some of these countries with fixed budgets they tend to spend more initially than later. So our assumption in modelling is that that will flatten out and we may see that happen quicker in Europe because of that where the larger prevalence is particularly in Southern Europe, in Italy, and Spain, where we’ve seen some of that happen. Q3 was a bit odd because you also have on top of just some of the Q2 level of patient volumes the fact that it was summer months. So, there is treatment levels go down because people are on holidays. So I don’t know yet Matt if we’ve got a full set of data points that are consistent relative to the F3s and F4s that were waiting during the launch and now a holiday period to fully understand what that means. But will it get flatter earlier sooner, we think so in Europe and that’s what Paul and the rest of the commercial team is projecting now. That being said, again these are closed payer systems where it’s quick to see the value to treating earlier. And with Harvoni you can treat for eight weeks, so that’s even better for the medical systems longer term. And so I think that along with our focus on getting patients into care still bodes well for a very good consistent European launch also for decades to come given the prevalence there also.

[Matthew Harrison:]

And then Pat did you want to say something?

[Patrick O'Brien:]

No.

[Matthew Harrison:]

And then maybe in the U.S. you also touched on this, payer restrictions have been an issue. How much visibility do you have there in terms of how you think payers might act this year? Or, I know in the past when you talked about the rebating programs, you’ve obviously tried to incentivize them to open up volumes with higher levels of rebates. How successful do you think you’ve been there and what things you’re doing to try and improve access?

[Robin Washington:]

Yes I mean I definitely think 2015 when we put a lot of those in, there was still some shot to the system from 2014 relative to the level of patients that got treated. And as a finance person I think everyone is trying to manage to a number and it’s difficult to do in a curate market. There has been nothing like this that we’ve seen. But now that we do have contracts in place, I do think it’s getting payers the opportunity to really absorb the volumes in 2015 and think probably be able to focus more on the ability to forecast them in 2016 and beyond. We are starting to see some payers start to think about access, and improving access for F0s to F2s which at this time earlier this year and last year which was flat out being rejected. I think it’s a long-term play. I was in Florida, we have a FOCUS program that Paul talked about on the call and that’s a program where we specifically focus not only in HCV but it’s also in HIV at working with community programs and advocacy groups to really improve testing and treatment of care. And it was amazing and even in the world with HIV where the laws were just passed for opt out testing. And so what it really brought home to me is these things play out over multiple years. That being said, we are very focused it’s one of our top priority to get more patients into that funnel. The reality of it is I think care restrictions are here to stay in this class of drugs for a while. We think they will get better overtime but I don’t think they are going to go away.

[Matthew Harrison:]

Okay. I have plenty more questions but we got about five more minutes I don’t know if there is something?

[Unidentified Analyst:]

[Question Inaudible].

[Robin Washington:]

Sure relative to HCV and so I think the question was some of the Northern Asian countries Thailand, Malaysia et cetera. Gilead has got two different programs and we have a overall global pricing program when we look at Prevalence and we look at per capita income and ability to pay. So some of those markets you mentioned are what we call access markets, where we work via Indian generics that supply medicine at much reduced cost, right, because there is no ability to play. Other of those markets with HepC given the prevalence, are opportunities for us. So we are working in the regulatory process in some of those markets. I think Asia in general primarily China and Korea are huge opportunities for us with hepatitis C and that we continue to work on regulatory approvals as well as commercial plans to get more access to patients in those areas as soon as possible.

[Unidentified Analyst:]

[Question Inaudible].

[Robin Washington:]

Yes we are curing hepatitis C, my God.

[Matthew Harrison:]

Thank you for that. But you talk about it being more than a sort of two, three year phenomenon from a business perspective. Can you elaborate a little bit more on that, why is it a 10 year phenomenon and what sort of allegories to other drugs gives you that confidence?

[Robin Washington:]

Sure, we think it’s a decade plus market primarily due to the high prevalence that’s out there. There are numbers upwards till 150,000 to 165,000. But if we back out some of those countries where maybe there is not an ability in developing world. And then China, there is over 100 million patients, right. Probably 40,000 to 50,000 of those are in China. So even if you take the big five Western Europe and then you take South America as well as U.S. there is just a lot of patients and we to-date not including Japan estimate that in two years we have treated about 600,000 patients. So if you look at the magnitude of 600,000 patients to 100 million it’s just a lot of patients out there to be cured overtime and we don’t think necessarily and we’ve said all along that it’s all going to happen immediately. It’s going to take a while for those patients to work through the system. These are typically specialist type of treatments, not general practitioners. So they typically are treated by hepatologists or other type of specialist and they are -- this is one of the many things that they do. So the capacity while I wouldn’t say it’s fully being utilized and in some places we can get to even fully get regulatory approval. There are a lot of patients out there to treat and I think it will take a very-very long time to get there. I think relative to other classes of drug it’s just a huge volume and I think that’s the one thing that differentiates I think that even though it’s a cure and there is more focus on once you treat a patient you have to bring in more particularly in the Western world I think the opportunities are still huge for us to make great in-roads. Even in places like China where our ability to pay is a lot different the volume of patients is so huge that it could still be a very lucrative market for us to cure a lot of patients with HepC there.

[Patrick O'Brien:]

And even focusing that response just on the U.S., I think what gets lost in this discussion is when peginterferon and ribavirin were at their peak treated patients resulting 140,000 patients per annum at their peak. What we have done is remarkable with Sovaldi and Harvoni. We are on-track to treat 240-250 type thousand patients just in the U.S. this year. So there is a huge increase in patients treated and hopefully cured over what was done in the past so at that run rate we have only treated just over 300,000 patients in the U.S. of to 3 plus million that are chronically infected.

[Matthew Harrison:]

Maybe just last question.

[Patrick O'Brien:]

Have some.

[Unidentified Analyst:]

I'm just quite curious on that if you could just explain practically what that means. You been diagnosed in the states, you've got private insurance and you've heard about Harvoni. You go to your physician you say I'd like Harvoni. They go back to your private insurance, is it a tick list and they say sorry you're at the back of the queue come back in a year? Is that literally what happens?

[Robin Washington:]

No it’s a really good question. It is unheard of that you are going to doctor and you get diagnosed and you get a prescription and walk away and you get the drug, there is a prior authorization process that you have to go through if you have insurance and from that there is additional testing that has to be done. You have to be genotyped in a lot of instances as well to know which medication is appropriate for you. But you’re right just going through getting that approval to be treated particularly for healthier patients now can sometimes take four to five calls and even then if your fibrosis score is lower you may not be approved. We’ve also heard of cases where there are additional non-medical type of restrictions being put in place, you’re a smoker or you’ve tested for drug usage, et cetera. All those things are things I think the payers have been using to kind of manage the flow of patients but granted there have been a lot of very sick patient that have had no treatment. We think that’s going to change overtime. But as I said earlier, we think it’s going to take time to get there. We’ve put in place contracts that allows them that to happen but it is a process it is not necessarily like going getting prescribed Tamiflu or something it doesn’t happen overnight, it does take a while.

[Unidentified Analyst:]

But those patients are going to be knocking at the door waiting for it to be released?

[Robin Washington:]

No absolutely I mean we’ve heard cases of patients rejecting the fact that they’ve been told that they’re not sick enough to get access to treatment. So we think there are changes happening relative to the ability to do that. There are state Medicaid programs that aren’t treating patients at all today. So I think again it’s just it’s -- we're in a phenomenal state of innovation here that has to work its way through the system. And I think from a curative standpoint this is very different. The majority of diseases are chronic diseases. And so I think the dynamics of a curative type of process are very different. And I think all the medical systems are getting used to that. The good news is there is an opportunity out there for patients to live healthy long life and not have to go to the doctor at all. And so we think overtime that’s going to bode well for patients and for Gilead.

[Matthew Harrison:]

Great. Robin and Pat, thank you very much.

[Robin Washington:]

Thank you.

[Patrick O'Brien:]

Thanks Matt.