Gilead Sciences Inc

NASDAQ:GILD

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Gilead Sciences Second Quarter 2018 Earnings Conference Call. My name is Candice and I'll be your conference operator today. At this time all participants are in listen-only mode, 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.

[Sung Lee, Gilead Sciences, Inc.]

Thank you, Candice, and good afternoon, everyone. Just after market close today, we issued two press releases regarding our CEO John Milligan and earnings results for the second quarter of 2018. The press releases and detailed slides on earnings are available on the Investor Relations section of the Gilead website.

You will notice the change to how we present product sales in the press release. Previously, we grouped HIV and HBV together under antiviral product sales. We now show HIV products alone so that you can better understand the performance of this category.

The speakers on today's call will be John Milligan, President and Chief Executive Officer; Robin Washington, Executive Vice President and Chief Financial Officer; Andrew Cheng, Chief Medical Officer and Executive Vice President; and John McHutchison, Chief Scientific Officer and Head of Research and Development.

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 involves 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 John.

[John F. Milligan, PhD, Gilead Sciences, Inc.]

Thank you, Sung, and good afternoon, everyone. As you saw from our press release, I'll be stepping down as CEO and departing Gilead at the end of this year. It's been an honor to work here for my entire professional career and now that the company is on solid footing for the future, the board and I have agreed it is a good time to turn the reigns over to a new leader.

You've seen the strong results from the second quarter. Beyond these numbers, I believe Gilead is in a position of tremendous strength. When I stepped into the role of CEO there were a number of things I wanted to accomplish on behalf of the company and I'm very pleased with the progress we have made. We have a growing HIV franchise and industry-leading cell therapy program and late-stage pipeline in inflammation and NASH.

We've been working at a fast and unrelenting pace for many years, for me nearly three decades, and while I'm extremely proud of what this company has accomplished, I'm also looking forward to a well-deserved break and will move on to new and different opportunities.

I want to emphasize that this does not change our mission or the strategic direction of our company and with the full faith and support of the Board of Directors we will continue to pursue and execute internal programs as well as external partnerships and transactions that further strengthen our pipeline and our business.

As our press release described, I will be staying in my role until the end of the year while the board has a chance to conduct its search for a new CEO to lead Gilead into its next wave of growth.

So let's get to the business at hand, the great results from this past quarter and I would like to now turn the call over to Robin.

[Robin L. Washington, Gilead Sciences, Inc.]

Thank you, John, and good afternoon, everyone. Before I provide an update on the quarter, I'd like to take a moment to thank John for his leadership, commitment and many contributions to Gilead over the years. Personally, I've appreciated your friendship, support, and I wish you well in your future endeavors.

Turning to the business and the results for the quarter, I'll review the financial results and commercial performance. Andrew will provide updates on HIV portfolio, and then John McHutchison will make a few comments about our pipeline.

We delivered a very strong quarter led by the performance of our HIV franchise with further stabilization in HCV and continued progress of the Yescarta launch. Total revenues for the second quarter were $5.6 billion with non-GAAP diluted earnings per share of $1.91. This compares to revenue of $7.1 billion and non-GAAP earnings per share of $2.56 for the same period last year.

Non-GAAP earnings per share for the quarter benefited from a settlement of a tax examination which contributed $0.15 per share and an effective tax rate for the quarter of 13.4%.

Starting with HIV, product sales for the second quarter were $3.7 billion, up 13% year-over-year and 16% sequentially. The year-over-year increase was primarily due to the uptake of our Descovy-based regimen with a very strong contribution from Biktarvy in the U.S.

Sequentially the increase was primarily due to the following factors. First, the seasonal U.S. inventory draw-down observed in the first quarter, which accounted for more than $200 million and did not recur in the second quarter. Second, U.S. payer mix which is typically about 45% private pay and 55% government, but in the second quarter was approximately equally split between private pay and government segments. We estimate that this benefited the second quarter by approximately $150 million. And, third, the continued rapid uptake of Biktarvy in the second quarter.

Our U.S. HIV business continues to be a major growth driver, delivering 18% year-over-year revenue growth and 11% year-over-year prescription growth, which reflects the strong underlying demand for Descovy-based regimens. 70% of Gilead's total HIV treatment prescription volume was comprised of Descovy-based regimens. We anticipate this percentage to continue to increase over the coming years.

In the first full quarter since its approval in February, Biktarvy delivered $183 million in sales in the U.S. Biktarvy also became the number one regimen for switch patients during the quarter. Based on its current trajectory, we anticipate that Biktarvy will become the number one single tablet regimen for treatment-naïve patients and will overtake Genvoya as the most successful launch in HIV history.

More than 85% of Biktarvy's prescriptions came from switches. Of these switches, approximately a quarter came from Genvoya and another quarter came from regimens containing dolutegravir. The balance came from older Gilead single and multi-tablet regimens.

In March, Biktarvy was added to the U.S. Department of Health and Human Services guidelines for the use of anti-retroviral agents in adults and adolescents living with HIV as one of the recommended initial regimens, and earlier this week The Journal of American Medical Association published updated treatment guidelines from the International AIDS Society-USA Panel, which now includes Biktarvy as a recommended regimen.

Truvada for PrEP continued to grow with an estimated 180,000 individuals in the U.S. taking Truvada for PrEP as we exited the quarter. Also in May the U.S. Food and Drug Administration extended the indication for Truvada for PrEP to include at-risk adolescents. In the U.S., youth aged 13 to 24 comprised 21% of the approximately 40,000 new infections in 2016, according to the U.S. Centers for Disease Control and Prevention.

These statistics demonstrate the need for increased efforts to educate at-risk individuals, particularly young men who have sex with men, about risk-reduction strategies including Truvada for PrEP.

To this end with strong encouragement from the HIV community, we launched two new television campaigns, a non-branded disease awareness program to reach those unaware of their HIV risk, and a branded Truvada commercial. We hope that these two campaigns, together with the ongoing educational initiatives across our organization, will further support the advocacy community's efforts to destigmatize HIV and normalize conversations about HIV prevention among those at the highest risk for infections and the healthcare providers who serve them.

Turning to Europe, HIV sales were down slightly year-over-year due to the availability of generics in several markets. Partially offset by uptake of Descovy-based regimens. These regimens now comprise nearly 60% of our Europe HIV product revenues reflecting the strong physician and patient preference for Descovy-containing regimens over generics.

Genvoya remained the number one regimen for naïve and switch patients across the EU5 collectively for the fifth consecutive quarter. Biktarvy was approved in the EU toward the end of June and immediately launched in Germany and a few other countries. We believe Biktarvy will make significant contributions to our European revenues once pricing and reimbursement are achieved broadly, which can take up to 12 months.

The performance of our worldwide HIV business was very strong in the first half of the year and we expect similar results for the second half of the year.

The U.S. HIV market will continue to deliver robust year-over-year prescription and revenue growth in the second half of 2018 driven by the continued strong uptake of Biktarvy.

Given the payer mix dynamic we experienced in Q2, our Q3 U.S. HIV revenues could look similar to Q2. Additionally it is important to note that in Europe there is typically a third quarter seasonal impact on revenues due to holiday schedules in various countries that also could impact our Q3 revenues compared to Q2. We also expect to see some additional impact from generics in certain European countries. All of these assumptions have been factored into our guidance.

Turning to HCV, product sales for the second quarter were $1 billion, down 65% year-over-year and down 4% sequentially. As anticipated, we are seeing further stabilization of the market, which is reflected in our sequential performance for the quarter.

Patient starts continues to be more predictable, and we still expect a slow and steady decline moving forward. Our belief is that the HCV market is durable and will contribute to our revenues in a meaningful way going forward, albeit at declining rates.

We will continue to compete for market share across the market segments and geographies with increased promotional efforts and focus behind Epclusa, our pan-genotypic, pan-fibrotic, once daily single-tablet regimen.

Turning to cardiovascular products, Ranexa and Letairis delivered their best quarterly performance ever with sales of $208 million and $244 million, respectively. As a reminder, the U.S. patent for ambrisentan, the active agent in Letairis will expire near the end of this month and we expect this to impact our Letairis sales in the second half of the year.

Moving on to cell therapy, sales of Yescarta were $68 million. We continue to be encouraged by the response from the healthcare provider and patient communities for the life-saving potential of Yescarta.

We have completed the authorization of more than 60 cancer centers which cover approximately 80% of the Yescarta-eligible patients in the United States. While we continue to work on authorizing additional centers, our focus now turns to working with centers to enhance patient flows. Furthermore, we are educating community oncologists about cell therapy and how they can connect their patients to cancer centers for appropriate treatment.

In terms of access in the United States, the payer mix has been consistent with expectations. The majority of patients treated with Yescarta were covered by commercial insurance or treated at PPS-exempt centers.

We continue to work to provide better access for patients on Medicare. We provided comments to the Centers for Medicare & Medicaid Services as part of the fiscal year 2019 rule-making process to create a DRG code that is reflective of the value that cell therapy provides to patients. CMS is expected to announce the final in-patient prospective payment system rule in August of this year that will establish in-patient payment rates for the upcoming fiscal year beginning October 1.

Last month we announced that the CHMP adopted a positive opinion on the Marketing Authorization Application for Yescarta in the EU, as a treatment for adults with relapsed or refractory diffuse large B lymphoma and primary large B-cell lymphoma after two or more lines of systemic therapy.

We expect the European Commission to grant Marketing Authorization in the third quarter of this year and our preparations for launch are underway. We plan to complete the authorization of more than 20 centers in the EU by the end of 2018 with our initial launch efforts primarily focused on Germany and France.

Now, turning to expenses. Non-GAAP R&D expenses were $921 million for the second quarter, up 13% compared to the same period last year, primarily due to our purchase of a Priority Review Voucher in the second quarter and investments in our cell therapy program.

Non-GAAP SG&A expenses were $840 million for the second quarter, up 2% compared to the same period last year, primarily due to higher costs to support the growth of our business following the acquisition of Kite.

Our non-GAAP effective tax rate in the second quarter was 13.4% compared to 22.8% in the first quarter of this year. The lower rate in the second quarter was due to a favorable settlement of a tax examination. As a result of this favorable impact, we are lowering our full year non-GAAP effective tax guidance to be in the range of 19% to 21%.

Moving to our balance sheet. As of June 30, we had $31.7 billion of cash and investments. During the second quarter, we generated $1.6 billion in operating cash flow including tax payments of $1.5 billion. And we also paid cash dividends of $740 million and repurchased 6.6 million shares of stock for $450 million.

The year is progressing consistent with our expectations, and we are reiterating our full year guidance with the exception of the non-GAAP effective tax rate, which has been lowered. Also, the diluted EPS impact of GAAP to non-GAAP adjustment has been increased from a range of $1.41 to $1.51 per share to $1.50 to $1.60 per share. Details of our guidance can be found on slide 35 in the earnings results presentation.

One area I'd like to address before closing, is U.S. pricing. We did not implement midyear prices increases on any of our products and have no plans to do so for at least six months. As you know, in HCV we have responded to the evolving, increasingly competitive market by providing payers with substantial discounts. We are confident that our net pricing is competitive and is delivering value for patients and the broader healthcare system.

In closing, we continue to believe that 2018 is a trough year for Gilead on which we can grow in the future. Our confidence in our future is supported by strong and growing HIV business led by the launch of Biktarvy in the U.S., increasing momentum in our cell therapy business, progress in the emerging R&D areas of NASH and inflammation and a healthy balance sheet, which equips us to invest in future opportunities to create long-term shareholder value.

I will now turn the call over to Andrew.

[Andrew Cheng, MD, PhD, Gilead Sciences, Inc.]

Thank you, Robin. It's timely that the 22 International AIDS Conference is taking place this week in Amsterdam. The World AIDS Conference represents the largest conference on any global health issue in the world and has become known as a venue where researchers, policymakers, advocates collaborative help drive an evidence-based response to the HIV epidemic.

I'd like to provide some highlights of Gilead's vision for HIV treatment, prevention and cure, and how we intend to sustain and build on our leadership position. I will summarize some of the exciting data presented in Amsterdam this week that provide context to what we see as remaining unmet needs in this field.

I'd also like to congratulate our partner Janssen on the approval last week of SYMTUZA by the U.S. Food and Drug Administration. SYMTUZA is the fourth Descovy-based, single-tablet regimen and the first commercially available single-tablet regimen containing a protease inhibitor, an important option for patients who previously had to consume two or more tablets each day. Among the results we presented at the International AIDS Conference, where data from a pooled analysis that further demonstrate the lack of resistance seen across the Biktarvy clinical trial program. This analysis generated – evaluated the efficacy of Biktarvy among patients with high baseline HIV RNA greater than 100,000 copies per milliliter and with a baseline CD4 cell count below 200 per microliter. Biktarvy sustained virologic suppression with no treatment emergent resistance to 48 weeks and 99% of patients in both sub groups achieved HIV RNA less than 50 copies per mill. For some people living with HIV, drug resistance is already a fact of life and we are also advancing molecules to meet their needs.

GS-9131 a novel nucleotide reverse transcriptase inhibitor is currently being studded in a Phase 2 trial in people living with HIV who are resistant to nucleosides and we look forward to sharing updates on this study in the future. Although once daily single-tablet regimens have set the current standard for convenience, we recognize that even once-daily dosing can be challenging or impractical for some people living with or at risk for HIV infection. I'm also pleased to share an update on a long-acting formulation of GS-6207, our novel HIV capsid inhibitor. This inhibitor is the most potent anti-HIV molecule ever recorded and results in therapeutically active blood levels lasting greater than 90 days after a single subcutaneous injection in pre-clinical species. Since that time, we have moved a clinical formulation into the clinic and similar to our animal data we have established in healthy volunteers that a single subcutaneous dose of the capsid inhibitor results in therapeutically relevant concentrations for greater than 60 days. Our goal is an effective subcutaneous product that can be self-administered every three months, which could provide an important option for the significant number of people who are unable to adhere to daily oral regimens.

Prevention efforts also took center stage at the conference this week. We now have compelling evidence correlating the use of Truvada for PrEP with declines in new HIV infections in the United States. In an analysis of state-level data conducted through a collaboration by Gilead, Emory University, and the Centers for Disease Control and Prevention and presented this week at the conference states that – states with the highest utilization of Truvada for PrEP from 2012 to 2016 showed significant declines in the number of new HIV infections, while states with the lowest use reported increases in new infection. These data underscore the importance for Truvada for PrEP as an effective public health intervention in the ongoing efforts to decrease new HIV infections.

Turning to our HIV cure efforts. One investigational agent is GS-9620, our toll-like receptor 7 agonist which activates certain immune cells that are important for eliminating infected cells. A second investigational agent is GS-9722 an anti-HIV envelope broadly neutralizing antibody that can kill infected cells. Combination studies are planned following the completion of dose-ranging studies for each compound. In summary, Gilead remains deeply committed to leading and innovating in HIV across the spectrum of care from prevention, to treatment, to HIV cure. We are continuing to make significant progress with Truvada in combination with safer sex practices as a means of preventing new HIV infections.

We have multiple medicines available to address the needs of people living with HIV, including six single-tablet regimens. We are working to address remaining needs in both prevention and treatment. And we remain focused on pursuing discovery of new research that could one day lead to a cure for HIV. We have been the leader in HIV for many years and intend to remain at the forefront of these efforts for as long as HIV is a threat to the health of people worldwide.

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

[John G. McHutchison, AO, MD, Gilead Sciences, Inc.]

Thank you, Andrew, and thank you, everyone, for joining us today. As you heard from Andrew, we are advancing pipeline candidates across the continuum of care for patients with HIV infection. We are also making progress in other therapeutic areas, and I'd like to spend a few minutes highlighting key accomplishments from the first half of this year, as well as additional milestones to look forward to in the second half, starting with cell therapy.

As we anticipate regulatory approval of Yescarta in Europe, we're taking steps to establish worldwide manufacturing capabilities for cell therapy by leasing a new facility in the Netherlands. We anticipate this new European manufacturing facility to be fully operational in 2020 with the capacity to manufacture personalized cell therapies in closer geographic proximity to the patients who will receive them, therefore potentially shortening the turn-around time for people who urgently need such care.

All of us at Gilead and Kite share excitement about both the work being done to launch Yescarta and to advance potential new cell therapies that could help a wider range of patients in the future. I'm particularly enthusiastic about ZUMA-7, our ongoing Phase 3 study comparing Yescarta to the standard of care in second-line treatment of patients with diffuse large B-cell lymphoma. The current standard of care for these patients is salvage chemotherapy often followed by an autologous stem cell transplant. If successful, this study would support the use of Yescarta in earlier lines of therapy and could one day spare people from having to receive stem cell transplantation with all of its concomitant or attendant difficulties and complications.

As significant of an advance as Yescarta represents, it is also just the beginning. It's critical, but an even greater percentage of patients respond to therapy. And that treatment becomes even safer and better tolerated, so that we can treat people sooner. I believe that with the pipeline programs we have and the technology gained through recent partnerships we can make this a reality.

In the 10 months since we acquired Kite, we have initiated seven acquisitions, investments or partnerships that augment our efforts to more rapidly bring forth cellular therapy, treat a broader range of hematological malignancies and also solid tumors. Lastly, we announced a strategic collaboration with Gadeta a privately-held company that focuses on the discovery and development of novel cancer immunotherapies based on gamma delta T cell receptors.

During the quarter, we also announced the new Cooperative Research and Development Agreement, or CRADA, with the National Cancer Institute to develop adoptive cell therapies targeting patient-specific tumor neoantigens. Neoantigens are mutations found on the surface of cancer cells that are unique to each person and their tumor, offering the potential for more targeted antitumor activity particularly in the realm of solid tumors.

Together, these research collaborations add to our capabilities in research and cell manufacturing, and they broaden our approach to developing potentially effective therapies for additional types of cancers including solid tumors.

Moving to liver disease now. Our two ongoing Phase 3 trials, STELLAR 3 and STELLAR 4, evaluating selonsertib, our ASK1 inhibitor in patients with F3 or bridging fibrosis and F4 or cirrhosis, were fully enrolled earlier this year, and data from these studies should be available in the first half of 2019. If positive, we expect to be in a position to file for approval in mid-2019.

Under this timeline, we believe selonsertib could be the first NDA and the first product approved for the treatment of patients with NASH. From a commercial perspective, our teams are also currently building all the necessary capabilities to develop this new market.

Separately, we discontinued the development of selonsertib for severe alcoholic hepatitis after a Phase 2 study of selonsertib in combination with prednisolone showed a lack of benefit on mortality, which is the primary efficacy endpoint of the trial.

Now, it's important to note that alcoholic hepatitis and NASH are two very distinct diseases. Patients with severe alcoholic hepatitis have advanced decompensated disease with severe hepatic dysfunction and a high 30-day mortality, independent of any therapy. This is completely different from patients in NASH clinical studies and for most patients with NASH in general who have preserved liver functions and they have compensated disease. Additional data from the study will be shared at an upcoming scientific conference later this year.

Turning to inflammation. We continue to be enthusiastic about filgotinib. In May, Gilead and Galapagos announced that EQUATOR our Phase 2 study of filgotinib in adults with moderate to severe psoriatic arthritis achieved its primary endpoint of improvement in the signs and symptoms of psoriatic arthritis at week 16 as assessed by the American College of Rheumatology 20% improvement score.

The filgotinib arm achieved an ACR20 response of 80% compared to 33% for the placebo arm. These results indicated filgotinib has the potential to have a significant effect on the signs and symptoms of psoriatic arthritis, a condition for which there is also high unmet medical need.

We also announced that an independent Data Monitoring Committee conducted a planned interim futility analysis of the filgotinib Phase 2b/3 ulcerative colitis study named SELECTION. The DMC recommended that the study proceed into the Phase 3 portion as planned in both biologic experience and biologic naive patients.

In rheumatoid arthritis three studies, FINCH 1, 2 and 3 are fully enrolled. FINCH 2 compared filgotinib to placebo each added to conventional disease-modifying antirheumatic drugs or DMARD in 423 patients who have had an inadequate response to biologics. We expect results from the study later this year.

As you know also our ability to file the NDA for filgotinib is dependent on establishing an adequate safety database at each dose of the drug being studied, as well as data from the MANTA study which is currently enrolling. We expect results from FINCH 1, a 52-week randomized study comparing filgotinib plus methotrexate to adalimumab plus methotrexate, and to methotrexate alone in patients who have had an inadequate response to methotrexate. And from FINCH 3 a 52-week randomized study comparing filgotinib alone to methotrexate alone and to the combination of filgotinib plus methotrexate in methotrexate-naïve patients in the first half of next year.

In summary, we are very excited about our business performance led by robust HIV revenues, a growing cell therapy franchise, stabilizing dynamics in HCV and a pipeline that will generate multiple Phase 3 data readouts across our therapeutic areas within the next 12 months.

I want to take this opportunity to thank John and also Gilead's nearly 11,000 employees for their incredible focus, hard work and execution over the first half of the year.

Let's now open the call for questions. Operator?

[Operator]

Thank you. And our first question comes from Geoff Meacham of Barclays. Your line is now open.

[Geoff Meacham, Barclays Capital, Inc.]

Great. Thanks so much. Hi, John, I just want to say it's been a real pleasure to work with you. You're really going to be missed in the industry.

[John F. Milligan, PhD, Gilead Sciences, Inc.]

Well, thank you, Geoff. I appreciate that.

[Geoff Meacham, Barclays Capital, Inc.]

I'm a little worried about payback from our activist letter.

[John F. Milligan, PhD, Gilead Sciences, Inc.]

I promise not to write any letters to Barclays.

[Geoff Meacham, Barclays Capital, Inc.]

And I bet you'll miss all the M&A questions, I'm sure.

[John F. Milligan, PhD, Gilead Sciences, Inc.]

You know, I will miss this. It's always been a pleasure to work with you guys, and I really enjoyed it over the years. And this is not my last call, so you'll have one more chance to pester me.

[Geoff Meacham, Barclays Capital, Inc.]

All right. So when you look at the backdrop, hep C is stable, obviously, HIV is growing, Kite could be a nice platform. Do you think – is Gilead happy to get back to positive growth trends when you look at late this year and definitely in 2019? Or is it time to get even more aggressive? I'm just thinking either on deals or maybe more rapid deployment of investments, say, in cell therapy or NASH?

[John F. Milligan, PhD, Gilead Sciences, Inc.]

It's a good question, Geoff. I mean, the message that we're trying to send out here today is that we're very confident in our overall strategy. We are going to continue to be very, very active looking at transactions which can further our business, and I think it's fair to say we're never really satisfied with where we are. We're always seeking to do more, faster, and we'll continue to try to do that.

And so we have a very active business development team. You'll see many things coming to fruition in the second half of this year. The announcement today is not going to slow us down, and the board has given us the go-ahead to move with these transactions if they meet our criteria. So I'm confident in the baseline. I'm never satisfied, and I know my team is not satisfied and we will continue to move forward. And so that's our message.

[Geoff Meacham, Barclays Capital, Inc.]

Okay. Thank you.

[Operator]

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

[Michael J. Yee, Jefferies LLC]

Oh, hey, thanks. Good afternoon and I think we're all going to echo our appreciation and all the stuff you've done with us, John. And so to that extent, I guess I would ask, given perhaps some period of uncertainty I think into what that next Gilead is, what do you think investors should anticipate in terms of a either new leadership or a strategy or what do you think could be certainly different? Is that more deal making? Is that going into other areas? What do you think would change? Thanks so much.

[John F. Milligan, PhD, Gilead Sciences, Inc.]

You know, it's a good question, Michael. If you think about my background and my history, I've been here for a long time, from the time the company was a private start-up to the $100 billion market cap company we are today, and so I've seen a lot of growth. But I've been pretty limited in my exposure, and I think the next leader should be somebody who brings expertise, scientific, commercial or other, into new opportunities for us to grow, for example, people who've launched products into new markets such as we're doing NASH or people who really know how to compete in the oncology area, where I have less experience.

And so I think we are looking for a new leader who will bring new ideas, previous history and experiences we don't have, and one who will take the baton from me and move it forward for the company and for the patients we serve. And so I would look for somebody like that.

[Operator]

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

[Brian Abrahams, RBC Capital Markets LLC]

Hi. Thanks for taking my question. Congrats on the quarter. And John, my congrats to you as well on almost three decades there and all your accomplishments.

On the HIV front, coming out of IAS, just wondering your expectations as to what, if any, impact dual regimens could potentially have on pricing, particularly in Europe and/or overall market share?

And then on the housekeeping front, just wondering if you saw any favorable impact from any inventory restocking in HIV revenues this quarter? Thanks.

[Robin L. Washington, Gilead Sciences, Inc.]

So maybe I'll start with the last question, and then turn it over to Andrew to talk about IAS, Brian. No, the performance in Q2 was demand-driven and inventory was stable, right? Wholesaler days on hand remained consistent between Q1, Q2, and I'd say, again, inventory was commensurate with demand.

[Andrew Cheng, MD, PhD, Gilead Sciences, Inc.]

Yeah, Brian, it's Andrew. And I think when we look at the GEMINI data coming out of the Amsterdam meeting from yesterday's presentation, I think we've all seen the results and we still remain interested in better understanding the resistance profile of a two-drug regimen, given some of the methodological differences that we're seeing in patients who may have had virologic failure before week 24 that were excluded from the analysis.

I think when we think about the looking at the big picture for two-drug regimens, in particular of dolutegravir and lamivudine, we are interested in understanding what the long-term resistance profile is as highlighted by some of the recent JULUCA data that highlighted resistance development past week 48. So we'll be very interested to understand how GEMINI regimens work in the real world and are continuing to focus on its – the potency in a two-drug regimen, especially one which has viral load limitations in clinical studies.

[Operator]

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

[Geoffrey C. Porges, Leerink Partners LLC]

Thanks very much. And I echo the congratulations, John. I'd like to be the first to volunteer over the next six months to help teach you how to prepare a resume since it's a path that you've never prepared one before.

[John F. Milligan, PhD, Gilead Sciences, Inc.]

Don't worry. My daughter told me she's going to teach me how to set up a LinkedIn profile.

[Geoffrey C. Porges, Leerink Partners LLC]

I look forward to that. I guess the business is really stunning. It really started out in HIV and now it's come through full circle. It's really very much focused on HIV now but with just a much broader and remarkable product portfolio. So I'd like to hear you comment about what the sustainable growth rate is for the HIV business, at least through 2022 or so. You're in the transition from the legacy combinations over to the TAF-based combinations. Biktarvy is just doing fabulously well, and it's difficult for us to sort of model it exactly how that shift occurs. But what should we be thinking about the sustainable growth rate for this business and the contribution from volume, price and mix, both currently and then going forward?

[John F. Milligan, PhD, Gilead Sciences, Inc.]

Geoff, why don't I start out with this? I mean you mentioned 2022, but we see this as a growing franchise well beyond 2022. We think that the TAF-based regimens will be the backbone of choice for patients. We think Biktarvy will be a very, very large successful product, and we see great opportunities for a number of areas to treat more patients. There still aren't all patients in the United States who are under treatment, and with the simplification, we continue to think that we can expand the number of patients who will be treated across the United States.

As Andrew mentioned, we're making great progress in our long-acting products. I think there's a significant segment of patients who aren't treated today who would choose an every-three-month option. We're very, very encouraged by the pharmaco-kinetic data we're seeing for this molecule. It is a very interesting opportunity for us to grow the field beyond the 750,000 patients treated in the United States to a much higher number. And so I see great opportunities for us to extend and expand the range of that. And I'll turn it over to Robin for her thoughts.

[Robin L. Washington, Gilead Sciences, Inc.]

I think you've covered it, John. And, Geoff, as you've seen, relative to the conversion of Descovy-based products it's been very, very good surge with over 70% in the U.S., 60% in the EU and, as John said, and Andrew and team are continuing to go forth with new innovation and new development, so we're very confident in our ability to continue to grow this franchise even through long-term LOEs. I think innovation of HIV is Gilead, and that'll stay true to what we will always, I think, excel at.

[Andrew Cheng, MD, PhD, Gilead Sciences, Inc.]

Geoff, its Andrew. And I would just only add that when one thinks about the growth rate, one really has to factor the 250,000 to 300,000 Americans who know that they're living with HIV, yet are not receiving any form of anti-retroviral therapy. And so there are many reasons for that. But one of them is that, as I highlighted, the oral therapies may not work for where they are in their life at this point. But as we know, HIV progresses without the anti-retroviral control, and so the capsid is something we're very, very excited about given its profile.

In addition, when we think about Biktarvy, I think we – just adding some color to what we've seen to date is that we've seen Biktarvy open doors for us that really we haven't seen. Multiple examples of doctors or practices that have been closed to us for more than five years that, with the profile that we've seen with Biktarvy, no resistance as well as once daily small tablets plus well-tolerated unboosted integrase inhibitors with few drug interactions, that has really made a difference in how physicians and patients look at this compound. And we've also seen institutions create therapeutic exceptions for Biktarvy to enter their institutions because of its profile.

[Operator]

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

[Matthew K. Harrison, Morgan Stanley & Co. LLC]

Hey, great. Good afternoon. So John, congratulations to you and good luck as you take a well-deserved break. I'd like to ask a sort of product-specific question, if I could, so. And maybe this is for Andrew, but can you just comment on how you did resistance testing in your studies versus the method that they've employed in their studies? And if there are any key differences in that that may have led to sort of lack of seeing some resistant mutants if they were occurring?

[Andrew Cheng, MD, PhD, Gilead Sciences, Inc.]

So, Matthew, thank you for the very good question. It's a very technical one, but I think on – when it came to resistant samples, we began looking at resistant samples at week 8. And with an integrase inhibitor they've come down quite rapidly. We did not require patients to discontinue for them to be what we call a resistance analysis population, so anyone with a viral load after they suppressed of greater than 50 we put into our resistance analysis population. So we looked at them, and we used the second sample to quantify whether or not – because the first patient would come in, they had a greater than 50 viral load, then we'd proceed to get the second confirmatory sample and send that off for analysis.

[John F. Milligan, PhD, Gilead Sciences, Inc.]

Andrew, I think it's fair to say that it's a very, very rigorous analysis to really make sure that there is no resistance.

[Andrew Cheng, MD, PhD, Gilead Sciences, Inc.]

No. Right, John. I think that's right, and I think we're very comfortable with the strong resistance profile of Biktarvy. And as you know, we're very close to presenting 96-week data in upcoming scientific conference.

[Operator]

Thank you. And our next question comes from Robyn Karnauskas with Citi. Your line is now open.

[Robyn Karnauskas, Citigroup Global Markets, Inc.]

Thank you for taking my question, and John, I just want to echo what everyone else has said. It's been a pleasure working with you and learning from you. I guess the question I have is really around NASH. It's gone from – this is a massive market to it's not a market to, oh, now it's a market again. Maybe since you're going into the phase of hiring people and thinking about a launch, can you give us some sense on how you're thinking about what you're learning about the market as its developing? And what you're hearing from what doctors want to see in the space? And how you think it'll evolve with your data and the coming data over the next year? And then part of that would be on M&A. Do you think you have enough drugs in development? Or would you think about adding to the pipeline because there's a lot of other NASH drugs out there as well? Thanks.

[John F. Milligan, PhD, Gilead Sciences, Inc.]

First of all, thank you, Robyn, for those kind words and I'm not sure that I ever thought NASH wasn't a market. I think we've done a lot of digging. We've been doing a lot of early market development work-around NASH, understanding the doctors, the populations, the kinds of diagnostic tests that will be necessary across the different fibrosis scores, trying to really understand what is the best right medical way to get into this area because we're going to have to establish the market, as I think we are likely to be the first drug launched into NASH.

So I think we've got a pretty good understanding of the patients. We have a pretty good understanding of the differing opportunities for the F2 through F4 populations, so I think it has a considerable potential to be a big market for the field and for us, and so I think we're pretty confident in that area.

You asked about M&A, do we have enough molecules? I would say we never feel like we have enough molecules in any area, which is why we continue to innovate in HIV for more than two decades and why we'll continue to look for things that make sense in combination with or adjacent to our portfolio in NASH. So we're kind of relentless in that area.

[Operator]

Thank you. And our next question comes from Umer Raffat of Evercore. Your line is now open.

[Umer Raffat, Evercore ISI]

Hi, guys. Thanks so much for taking my question. I wanted to focus on two things. One, for the ongoing Phase 3 NASH studies, is there an interim of sorts that we should be aware of before the final readouts, first? And then secondly, is there anything we have learned on a blinded basis from the ongoing filgotinib testicular tox studies? Thank you very much.

[John G. McHutchison, AO, MD, Gilead Sciences, Inc.]

Okay. So it's John speaking, and I'll address in terms of the Phase 3 STELLAR trials in NASH, there is no interim analysis. The interim analysis is the endpoint – one of the interim analyses is the endpoint for approval and the subpart H, which is the week 48 biopsy. The study actually continues for five years.

We do have a D&C, of course, that looks at all the safety data regularly. So if there was any obvious safety signal in the risk/benefit change, we would know about that, and so far we've not had any recommendations to change either of those Phase 3 studies in terms of their conduct. In terms of filgotinib and the male safety study, we're enrolling the study it's something that we have to address. We believe our margin is adequate above and beyond the minor histological abnormalities that we're seeing in the pre-clinical models and we'll evaluate the data as it comes in.

[Operator]

Thank you, and our next question comes from Jim Birchenough with Wells Fargo. Your line is now open.

[Nick Abbott, Wells Fargo Securities LLC]

Good afternoon. It's Nick in for Jim and, John, I'm sure Jim will echo my comments thanking you for your candor and transparency over the years. I have a very specific question as to, relating to the Gadeta deal you did last week. Is your concept here that you're going to be adding in the gamma delta T cell receptors to CAR T or TCRs to give you that sort of bi-specific, or do you see this as a standalone or an additional product? Thank you.

[John F. Milligan, PhD, Gilead Sciences, Inc.]

Yeah, that's a great question. Nick, I think it was if we caught your name. So we believe that it is standalone. We believe that the gamma data TCR constructed or engineered into the alphabeta T cell will have all of the advantages of both, properties of both of those cells which will allow us to explore them individually in terms of both hamartiological and also solid malignancy so that's a very short answer to a very complex question but that will be our initial approach and that is the initial program that we'll collaborate on.

[Operator]

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

[Philip Nadeau, Cowen & Co. LLC]

Good afternoon. Thanks for taking my question. John, let me add my congratulations on a fantastic career that's played a big part in the success of Gilead and strides in the treatment of HIV and HCB. Definitely a job well done. Two questions, first on your pipeline there's an entry in the slides that says the KITE-585 program, we're going to have Phase 1 data in the back half of the year and also a go decision on – go/no-go decision on a pivotal study. Can you give us some idea of what data we're likely to see and what the hurdle would be to moving it to pivotals? And if I could just sneak in a question on the commercial, briefly, Robin, I think you mentioned that the HIV payer mix was different in Q2 than in the past. What drove that and is that likely to revert to the normal payer mix in the second half of the year? Thanks.

[John F. Milligan, PhD, Gilead Sciences, Inc.]

Okay. So Phil, its John, and I will talk about the KITE-585 program first which is in Phase 1, dose installation, as you know in people with relapse refractory myeloma. So we will see data as we've said on the slides in the second half of this year and then we will make a decision depending on how the data looks compared to the other data that's come out from other similar BCMA products and determine whether we will take it forward into Phase 2 and that's where we are right now. But we see the value in exploring it, in patients with relapsed refractory myeloma, of course. We have cohorts with people with renal impairment as well, which is also important. Many of these people have renal impairment, so we will also be looking at that as well we have a lot of support from the community we have a single-chain variable fragment that's fully humanized as you know and we have activity in low BCMA expressing targets as well so we'll have to wait and see where the Phase 1 data is and we'll make a decision later this year about moving on to the more registrational trial.

[Operator]

Thank you and our next question comes from -

[Robin L. Washington, Gilead Sciences, Inc.]

Let me just finish, operator, I think Phil asked one question regarding payer mix in HIV for Q2 that I want to be sure I address. And Phil, to be specific you're right, you recall that – if you think about our HIV franchise is typically slanted more to the government payer mix driven by the ADAPs, and that's been fairly consistent, there's always a little variability in there, but overall when you think about it, it's typically a mix of 45% commercial and 55% government. In Q2 we saw that mix more equal, i.e., 50-50, so what I was messaging is if you think about the second half of that normalizes, we quantified it to be approximately about $150 million. It's always tough to be exact because it's really based on some reimbursements and remakes that come in, you know, typically after the quarter-ends so we're always estimating, but we just wanted to be cautious and transparent that if that shifts back to what we normally see it could be a slight headwind relative to sequential growth for U.S. HIV.

Overall, robust growth year-on-year, it's simply an adjustment between quarters, but very much factored into our guidance and again, it's just a slightly larger tilt relative to that mix than we've typically seen in the past.

[Operator]

Thank you and our next question comes from Tyler Van Buren of Piper Jaffray. Your line is now open.

[Tyler M. Van Buren, Piper Jaffray & Co.]

Hi, good afternoon, and thanks for taking the question. It sounds like, I want to ask a question on the cellular therapy business and some of the progress that has been made as of late. It sounds like you guys are pretty adequately penetrated in the center, so could you just provide an update on some of the logistics and some of the improvements that have been made as of late? And I know there's some debate over whether freezing the product is beneficial or not and paying on-demand as opposed to having to pay upfront prior to receiving the product and things like that so curious to get your thoughts, thanks.

[Robin L. Washington, Gilead Sciences, Inc.]

That was Jim?

[John F. Milligan, PhD, Gilead Sciences, Inc.]

Tyler.

[Robin L. Washington, Gilead Sciences, Inc.]

Hi Tyler, maybe I'll start, but I think we can all chime in. Yeah, I mean, we overall are very excited relative to our progress of the Yescarta launch. Our centers, as I mentioned, are on track relative to our coverage. We're focused on bringing additional centers online. And similar to what you said we're really focused on improving the patient flows and just being sure that our centers are focused on our manufacturing process continuing to be excellent and we have good turnaround times.

I'd say overall that our commercial performance has been generally consistent with what we've seen in the ZUMA-1 studies, so we're very confident making good progress; remember we've talked about this being a nice, slow and steady launch. I talked in my prepared remarks about us focused on reimbursement. So overall a very good launch and tracking very good relative to expectations. Maybe I'll turn it over to John to talk about some of the other issues you mentioned.

[John F. Milligan, PhD, Gilead Sciences, Inc.]

Tyler, I don't think – we have an exceptional group of scientists who spend a lot of time thinking about the manufacturing process and how it can be improved so the product has more active greater efficacy, safer and so forth. So as Robin said I'll just reiterate, I mean what we've seen in ZUMA-1 is what we're seeing in clinical practice as well and we are not having a lot of out of specification issues, et cetera. So in terms of freezing products or not freezing products that's not really an issue for this. Products can be frozen if the cells need to be collected and shipped and sent a long distance to somebody that's very remote. Our product could be frozen. That would take an additional day to do.

[Andrew Cheng, MD, PhD, Gilead Sciences, Inc.]

Perfect. That's a good point, John, for example, for our European patients we will freeze the cells and send them in, so it's not our practice in the United States but it is certainly possible and we have quite a bit of experience doing that.

I think you said something about payment on-demand, I just want to reiterate that we take on the cells, we manufacture them and we only charge the patient if that patient gets those cells. So if something happens in the interim, for example, the patient expires then there is no charge to the family.

[Operator]

Thank you. And our next question comes from Cory Kasimov of JPMorgan. Your line is now open.

[Cory W. Kasimov, JPMorgan Securities LLC]

Hey, good afternoon, guys. Thanks for taking my question, let me also add my congratulations to John on a great run. You'll definitely be missed.

Want to follow up on the CAR T front, although it's obviously very early in the launch. Curious about any comments or color you can provide in terms of safety, CRS or neurotox rates that you're seeing in kind of the real-world experience relative to what you saw in the clinical trials. And I'm curious more specifically on whether in the commercial setting these rates have changed at all or been appreciably different for patients based on the receipt of bridging chemotherapy.

[John G. McHutchison, AO, MD, Gilead Sciences, Inc.]

Cory, it's John McHutchison and we actually have scientific advisory board here, all of our Kite development docs were here and we were talking about this and I actually asked them this specific question as to whether they're seeing anything different with the commercial products and so forth and there isn't a difference.

[Operator]

Thank you. And our next question comes from Katherine Xu of William Blair & Company. Your line is now open.

[Yu Katherine Xu, William Blair & Co. LLC]

Hi, good afternoon. And John, my congratulations to you as well for great achievements at Gilead and also all the best to you on the next phase of career/life.

I have a very quick question on the HCV side. So the international sales have been growing. I just want to understand where that growth has come from and how the launch in China is going. And also on the HBV front, B as in boy, what is Gilead's grand strategy there? Thank you.

[Robin L. Washington, Gilead Sciences, Inc.]

So maybe, Katherine, I'll take the HCV question. Yeah. You know, we're excited. Epclusa was recently approved in China. I think it's still very early days there, but we're excited about the possibilities outside of Europe and the U.S. We've got also international sales in Japan, Canada, Australia, as well as several countries in Asia and while there are quarterly fluctuations from country to country, I think overall we continue to establish ourselves in those markets, similar to what we have done in the U.S. and Europe.

So as you can see, overall we're on track with our guidance, more stability and predictability, and I think with Epclusa, right, which is the only pan-genotypic pan type (01:00:05) product single-tablet regimen out there, I think we're well poised with our portfolio of products to be successful globally with our HCV franchise.

[John G. McHutchison, AO, MD, Gilead Sciences, Inc.]

Yeah. Katherine, it's John again, and just to follow up from Robin, before I answer the hepatitis B strategy question, Epclusa is the simplest regimen to use. It's one duration, as Robin said. You don't need a liver biopsy, you don't need a genotype. So in terms of all the products out there, it's far simpler. And the efficacy is the same as some of the others, as you know. So there's no compromise there.

In terms of the grand strategy for hepatitis B, I think it's similar to your notes. We want to be able to attack multiple different mechanisms of viral replication, and we want to be able to augment HBV specific immunity. We have two new programs in the clinic. One is the TLR8 molecule. And the other one is our capsid, also that's in early stages in the clinic.

We have now SB92 – Spring Bank 9200 collaboration in two Phase 2 trials, one with tenofovir and one with TAF. We have many free clinical programs looking at other mechanisms of action also in both of those axises. And of course we have Vemlidy, which is approved and doesn't have any issues with bone or kidneys, as you know, in more than 50 countries.

So it's one of our largest internal research programs and we're passionate about trying to create a finite cure for many people, the many millions of people with hepatitis B around the world.

[Operator]

Thank you. And our final question comes from the line of Ying Huang of Bank of America Merrill Lynch. Your line is now open.

[Ying Huang, Bank of America Merrill Lynch]

Hi. Thanks for taking my questions. One for maybe Robin. You actually saw a very decent increase in Q2 revenue compared to 1Q, but you did not increase the guidance for the total product sales for the whole year. I want to drill down more on why that is.

And then secondly, and maybe for John McHutchison, you mentioned that the filing of FDA application for filgotinib had to wait until you finish the safety study in the UC trial which won't complete enrollment until first half 2019. Does that mean we have to wait until at least second half of next year before you can file for NDA for filgotinib? Thank you.

[Robin L. Washington, Gilead Sciences, Inc.]

Sure, Ying. So I'll start. Again, as I mentioned on the call, I think our HIV franchise is firing on all cylinders. It's positioned extremely well to deliver on long-term growth. And when I think about guidance, again, we reiterated our guidance and feel very comfortable with it. But as I mentioned on the call, we do anticipate second half dynamics to be slightly different. So there's nothing new about those dynamics, but we did want to ensure that, you know, that you understood for modeling purposes kind of some of those components.

And then, as I said for HIV in the U.S., we may have payer mix shift more to what normally occurs. But other than that, things are very good there. We do have the patent for Letairis in the U.S. which expires at the end of July, so we do anticipate some impact from generics for that product in the U.S.

Turning to Europe, generics are available, and we do expect them to become available in a few additional countries. And we have the normal third quarter seasonality in Europe related to summer holidays, and that impacts both our HIV as well as our HCV franchise. And we also have the slow, steady decline of HCV patient starts. So I do want to emphasize that we expect our U.S. HIV prescription growth and revenue growth on a year-on-year basis that continue to be very, very healthy and robust, but we're reiterating our guidance because all those factors that we talked about at the beginning of the year still remain.

[John G. McHutchison, AO, MD, Gilead Sciences, Inc.]

Ying, for the second part of the question in terms of the filgotinib filing time, obviously we'll file as expeditiously as we can. But just let me make three points. First of all, we need safety and efficacy data from three randomized Phase 3 trials and that has to be supportive.

Secondly, we need, and as I said today on the prepared comments, we need an adequate safety database in terms of exposure at each stage both for a predetermined range of time. And thirdly, we need to submit data from the male safety study, which is enrolling. And, you know, these are tough studies to do. You've got to have men with ulcerative colitis and they have to be on the drug for six months and have multiple sperm collections. So we're doing everything we can to enhance enrollment and we will announce the details when it's appropriate in terms of the filing time.

[Operator]

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Sung Lee for any closing remarks.

[Sung Lee, Gilead Sciences, Inc.]

Thank you, Candice, 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.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.