Gilead Sciences Inc

NASDAQ:GILD

Earnings Call Analysis

Gilead's Q3 Solid with Strong Growth Areas

In the quarter, Gilead discontinued the magrolimab ENHANCE programs due to futility, but other key trials including HIV prevention and a first-in-class ulcerative colitis treatment continue as planned, expecting to begin Phase 2 by year's end. Total product sales remained flat at $7 billion, as growth in oncology and HIV offset declining HCV sales. Year-to-date base business revenue is up 10%, and full-year sales guidance has increased to between $26.7 billion and $26.9 billion, indicating a 7% to 8% growth. Non-GAAP earnings per share projections rose to $6.65 to $6.85, buoyed by robust sales and lower-than-anticipated taxes, despite increased R&D investments.

Resilient Performance in Oncology and Cell Therapy Despite COVID Variability

The company demonstrated a robust performance in oncology with a 33% year-over-year increase to $769 million in sales. This reflects a solid annual run rate exceeding $3 billion. The spotlight was on Veklury, one of the company's key offerings, which continues to hold its place as the standard care for patients hospitalized with COVID-19 despite fluctuations in the pandemic's landscape.

Global Strength in Cell Therapy Sales and Manufacturing Capabilities

Cell therapy sales surged to $486 million, marking a 22% year-over-year climb, with particularly robust demand outside the U.S. Yescarta and Tecartus, two flagship cell therapy products, recorded impressive sales growth due to increased demand, both domestically and internationally. This strong clinical data coupled with significant untapped market potential and pioneering manufacturing efficiencies underline the company's commitment to expanding its reach and delivering potentially curative therapies more rapidly.

Diversifying Clinical Pipeline with Promising Outlook for Trodelvy in Lung Cancer

Trodelvy has shown promise in non-small cell lung cancer, demonstrating strong potential as a treatment option. Coupled with this, the company's diverse clinical pipeline features 60 ongoing programs, which include 10 clinical projects related to the long-acting capsid inhibitor lenacapavir, positioning the company for transformative advancements in HIV treatment and prevention.

Upbeat Revenue Guidance and Robust Earnings Outlook

Product sales for the year are expected to range between $26.7 billion and $26.9 billion, marking an upward revision from previous estimates. Full-year Veklury sales are projected at approximately $1.9 billion. The continued investment in R&D has resulted in an expected annual increase of about 15%. Moreover, the non-GAAP diluted EPS forecast has been positively adjusted to $6.65 to $6.85 per share, indicating healthy earnings amidst strategic commercial and clinical investments.

Investor Returns and Debt Management Alongside Strategic Preparations for 2024

The company has been proactive in rewarding its shareholders, returning $1.3 billion through dividends and share repurchases in the third quarter and addressing its debt profile. With considerable investment funneled into research and development, the stage is being set for a data-rich 2024, teasing a plethora of upcoming updates and potential regulatory filings. This forward-looking approach underscores the firm's objectives for a robust performance next year.

Focused Investment and Optimized Expense Structure in Advance of 2024

By concentrating on strategic R&D initiatives through 2023, the company is now positioned to transition into 2024 with a suite of potential program data readouts. There is palpable anticipation for these updates that could serve as significant growth catalysts—the result of diligent planning and optimizing the business model for what may prove to be a transformative year ahead.

Earnings Call Transcript 2023-Q3

[Operator]

Hello, everyone, and welcome to the Third Quarter 2023 Gilead Sciences Earnings Conference Call. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions]

I will now hand over to your host, Jacquie Ross, Vice President of Investor Relations to begin. Jacquie, please go ahead.

[Jacquie Ross, executive]

Thank you, and good afternoon, everyone.

Just after market close today, we issued a press release with earnings results for the third quarter of 2023. The press release, slides and supplementary data are available on the Investors section of our website at gilead.com.

The speakers on today's call will be our Chairman and Chief Executive Officer, Daniel O'Day; our Chief Commercial Officer, Johanna Mercier; our Chief Medical Officer, Merdad Parsey; and our Chief Financial Officer, Andrew Dickinson. After that, we'll open the call to Q&A where the team will be joined by Cindy Perettie, the Executive Vice President of Kite.

Before we get started, let me remind you that we will be making forward-looking statements, including those related to Gilead's business, financial condition and results of operations, plans and expectations with respect to products, product candidates, corporate strategy, business and operations, financial projections and the use of capital and 2023 financial guidance, all of which involve certain assumptions, risks and uncertainties that are beyond our control and could cause actual results to differ materially from these statements. A description of these risks can be found in the earnings press release and our latest SEC disclosure documents. All forward-looking statements are based on information currently available to Gilead, and Gilead assumes no obligation to update any such forward-looking statements.

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, in our supplementary data sheet as well as on the Gilead website.

With that, I'll turn the call over to Dan.

[Daniel O'Day, executive]

Thank you, Jacquie, and good afternoon, everyone.

I'm pleased to share that Gilead teams have delivered another strong quarter that rounds out 2 years of continuous growth for our base business. Our track record of commercial execution continued in the third quarter with our base business up 5% compared to the third quarter of 2022 and up 10% year-over-year for the first 9 months of 2023.

In the third quarter, our growth was driven by our leading therapies across Virology and Oncology. Biktarvy had another very strong quarter, up 12% from the same quarter in 2022 and contributing to 9% growth overall in HIV in the first 9 months of 2023. Oncology is also driving growth and was up 33% in the third quarter compared to last year. Revenue is now annualizing at more than $3 billion with growing adoption of Trodelvy, the only approved TROP-2-directed ADC and our industry-leading cell therapies.

This was also another very good quarter for clinical execution as we continued to advance our 60 clinical programs across virology, oncology and inflammation. Some of the highlights for the quarter included the European Commission approval of Trodelvy for pretreated hormone receptor positive HER2-negative metastatic breast cancer, allowing us to extend Trodelvy's reach to many more patients globally. The first data for Trodelvy in combination with pembro for first-line metastatic non-small cell lung cancer presented at World Lung. Our Phase II EVOKE-02 trial showed a strong objective response rate in the PD-L1 high cohort, which supports proof-of-concept for our ongoing Phase III EVOKE-03 trial.

Important new data at ESMO for Trodelvy's Phase II TROPiCS-03 basket trial in our small cell lung cancer and head and neck squamous cell carcinoma cohorts. All of these milestones reinforce our conviction in Trodelvy as our cornerstone oncology asset with pan tumor potential.

Staying with oncology. Today, we presented positive data from our Phase II EDGE-Gastric trial in partnership with Arcus, which further establishes proof of concept for the ongoing Phase III STAR-221 trial in first-line metastatic upper GI cancers.

Additionally, we're encouraged by the continued strong data emerging from the ongoing Phase I study of CART-ddBCMA in multiple myeloma. Together with our partner, Arcellx, we look forward to providing even more data during next month's ASH conference.

The clinical momentum continues in virology. In HIV treatment, we reviewed promising data from the Phase I study of GS-1720 or once-weekly long-acting oral integration inhibitor to be combined with lenacapavir and Phase II ARTISTRY-I trial evaluating a once-daily oral lenacapavir and bictegravir combination. We expect to share the data with you at a medical conference in early 2024.

In HIV prevention, we completed enrollment ahead of schedule in our Phase III PURPOSE-I trial, investigating once every 6-month lenacapavir subcutaneous injection and announced plans to initiate the Phase II PURPOSE 5 trial in 2024 to support access in Europe. In COVID-19, we completed enrollment in our Phase III OAKTREE trial evaluating obeldesivir in standard-risk nonhospitalized COVID-19 patients. We look forward to providing an update early next year.

Veklury remains an important therapeutic option for hospitalized patients with COVID-19. We recently received approvals from both the FDA and the European Commission to extend use of Veklury in patients with mild to severe hepatic impairment. Looking at our pipeline overall, our aggregate progress in 2023 is such that we have already completed most of the milestone events as shown on Slide 6. Our clinical pipeline now includes 27 programs in Phase II and 19 in Phase III. We are looking forward to a busy period of updates from many of these studies in 2024 including those evaluating lenacapavir, Trodelvy and obeldesivir.

In summary, it's been another strong quarter of commercial and clinical execution, resulting in an important progress for Gilead and the people and communities we aim to serve.

With that, I'll hand the call over to Johanna to cover our commercial results. Johanna?

[Johanna Mercier, executive]

Thanks, Dan, and good afternoon, everyone.

I'm pleased to share the details of another strong quarter for Gilead and would like to thank the teams that have delivered 10% growth in our base business in the first 9 months of 2023.

Our third quarter results represent the eighth consecutive quarter of year-over-year growth in our base business, illustrated strong commercial execution and revenue growth as our virology and oncology products impact more patient lives. In the third quarter of 2023, total product sales, excluding Veklury, were up 5% to $6.4 billion as shown on Slide 8, with notable growth in our oncology and HIV businesses partially offset by lower HCV sales.

Total product sales including Veklury, were $7 billion with a solid base business performance contributing $305 million of growth offset as we expected by lower Veklury sales compared to the same quarter last year.

Moving to HIV on Slide 9. The treatment market continued to grow in line with our expectations of 2% to 3% annually. And as we've discussed previously, the favorable pricing dynamics in recent quarters have begun to normalize, with HIV sales growth more closely mirroring market and demand growth. This was evident in the third quarter where HIV sales were up 4% year-over-year to $4.7 billion, driven by higher treatment and prevention demand and higher channel inventory, partially offset by lower average realized price due to a shift in channel mix. Sequentially, sales were up 1%. Looking to the full year, we continue to expect HIV product sales to grow slightly more than the 5% reported in 2022.

Turning to Slide 10. Third quarter Biktarvy sales were $3.1 billion, up 12% year-over-year, driven by higher demand as well as higher channel inventory. Sequentially, sales were up 4%. Once again, Biktarvy gained market share up over 2% year-over-year in the U.S. to over 47% share in the third quarter. Thanks to its robust clinical profile, Biktarvy remains the #1 prescribed regimen for new starts and #1 in treatment switches across most major markets, including the U.S.

Descovy sales in the third quarter were $511 million, up 2% year-over-year, with strong year-over-year growth in demand for Descovy for PrEP, offset by less favorable pricing dynamics to ensure broad access ahead of the potential launch of lenacapavir as early as late 2025. The U.S. PrEP market grew about 15% year-over-year and Descovy for PrEP continues to maintain more than 40% market share due to its strong clinical profile and despite the availability of other regimens, including generics.

Moving to the liver disease portfolio on Slide 11. Sales were down 10% year-over-year to $706 million, primarily due to the resolution of a rebate claim in HCV recognized in the third quarter of 2022 as well as other pricing dynamics. From a demand perspective, HCV new starts increased compared to the third quarter of 2022 in both the U.S. and Europe, driven by our continued efforts to link HCV patients to care. Given the curative nature of our treatment, we expect HCV new starts to trend down over time, but are pleased that we are maintaining 50% to 60% market share in the U.S. and Europe and that our liver portfolio more broadly has stabilized from a revenue perspective.

On to Slide 12, Veklury sales continue to be highly variable and declined 31% year-over-year in the third quarter to $636 million. On a quarter-over-quarter basis, sales were up 149%, driven by an uptick in hospitalizations during the third quarter. And over the last few weeks, we have seen a slowdown in COVID-related hospitalization. Veklury's strong clinical profile continues to be recognized, most recently by the FDA and the European Commission for use in patients with mild to severe hepatic impairment. While the COVID environment remains ever-changing, Veklury's performance in the third quarter further reinforces its established role as a key part of the standard of care for patients hospitalized with COVID-19.

Moving to Slide 13. Our oncology business achieved another strong quarter, with sales up 33% year-over-year to $769 million, representing an annual run rate that now exceeds $3 billion. With clear momentum and a solid infrastructure in place, in addition to our compelling clinical pipeline, we look forward to providing more patients with potentially new and effective options.

Looking at Trodelvy on Slide 14. Sales were up 58% year-over-year and 9% sequentially to $283 million. As a reminder, Trodelvy is the only approved HER2-directed antibody drug conjugate. And to date, we have delivered this therapy to more than 20,000 patients, reinforcing the clinically meaningful benefit Trodelvy can provide across multiple tumor types.

Trodelvy remains the leading regimen in second-line metastatic triple-negative breast cancer across both the U.S. and Europe. In pretreated HR-positive, HER2-negative metastatic breast cancer, Trodelvy is showing particular strength in the IHC-0 setting and as a later line treatment in the HER2 low setting consistent with expectations. Altogether, these dynamics reflect the notable work the team has done to raise awareness in both indications as well as the strength of Trodelvy's clinical profile.

Turning to Slide 15, and on behalf of Cindy and the Kite team. Cell therapy sales in the third quarter were $486 million, up 22% year-over-year and 4% quarter-over-quarter, reflecting strong demand with particular strength outside the U.S. in the third quarter. Yescarta sales grew 23% year-over-year to $391 million, primarily driven by strong growth ex U.S. in second and third-line relapsed or refractory large B-cell lymphoma. Tecartus sales were $96 million, up 18% year-over-year, reflecting increased demand in both the U.S. and Europe for relapsed or refractory mantle cell lymphoma as well as adult acute lymphoblastic leukemia.

Given the strong clinical data, it's surprising that only about 10% of eligible second-line large B-cell lymphoma patients in the U.S. are treated with the Cell therapy, and it is clear that there is still a significant opportunity to drive adoption. As cell therapies are offered and delivered to more and more patients, we are confident that Kite remains well positioned to benefit from this expansion with its differentiated overall survival data for Yescarta and industry-leading manufacturing capabilities.

We understand the importance of delivering these potentially curative medicines as quickly as possible to patients with severe and challenging diseases. And to that end, we continue to identify opportunities to bring our therapies to patients faster and are actively working on initiatives to shorten even further our industry-leading 16-day medium turnaround time in the U.S.

Wrapping up the third quarter, I'd like to recognize the strong execution of commercial teams and our cross functional partners across Gilead and Kite. Thanks to their efforts, our therapies are positively impacting more and more people, driven by growing market share and expanding reach as we bring our therapies to new geographies around the world.

And with that, I will hand the call over to Merdad for an update on our pipeline.

[Merdad Parsey, executive]

Thank you, Johanna.

The clinical highlight of our third quarter was the release of our promising Phase II data for Trodelvy in combination with pembrolizumab in first-line metastatic non-small cell lung cancer, highlighting Trodelvy's potential to bring a much-needed treatment alternative for patients. More broadly, we continue to progress our increasingly diverse pipeline of 60 ongoing clinical programs, spanning virology, oncology and inflammation.

Starting with our virology programs on Slide 17. We have 10 clinical programs with our long-acting capsid inhibitor, lenacapavir including 2 Phase III studies underway in PrEP. I'm pleased to share that we have completed enrollment earlier than anticipated for our Phase III PURPOSE-I trial, evaluating lenacapavir for prevention in adolescent girls and young women. Our Phase III PURPOSE-II trial in cis-man and transwomen and men and non-binary people continues to enroll well, and we could have an opportunity to share data from one or both PURPOSE trials in late 2024 ahead of schedule. We are targeting our first approval for lenacapavir in prevention in late 2025 potentially making lenacapavir the first 6 monthly dosing regimen available for PrEP.

Turning to treatment. We continue to make strong progress on evaluating 9 candidate partners for lenacapavir. Of the remaining candidates, 6 are already in Phase 1 or 2. We expect to share updates on at least 4 of these in 2024, including data from our Phase I trial of GS-1720, our once-weekly long-acting oral integrase inhibitor to be combined with lenacapavir. And from our Phase II ARTISTRY-I trial, evaluating a once-daily oral combination of lenacapavir and bictegravir for biologically suppressed treatment-experienced people living with HIV. We plan to share results from both trials at a conference in early 2024, and we look forward to advancing these programs into the next phase of development. We're also pleased to share the enrollment for our Phase II program evaluating our lenacapavir+bNAbs combination dosed every 6 months is progressing very well and is another program we expect to update you on next year.

Putting this all together, our data continues to support our confidence that lenacapavir has the potential to transform HIV treatment and prevention globally.

Turning to oncology on Slide 18. To date, Trodelvy has been delivered to more than 20,000 patients across 3 approved indications since our launch 3 years ago. Trodelvy remains the first and only marketed TROP-2 antibody-drug conjugate to achieve meaningful overall survival benefit in 2 of its indications. With that said, we're seeing both growing real-world evidence and clinical trial data supporting not only the approach we're taking for Trodelvy's clinical developments across tumor types, but also Trodelvy's unique ADC construct. In particular, Trodelvy is the only ADC to have a high 78 drug-to-antibody ratio that is able to deliver a highly potent SN38 payload directly into the tumor microenvironment through its hydrolyzable linker.

As a result, in our studies to date, Trodelvy has shown a potentially differentiated safety profile with regards to ILD and stomatitis. We look forward to sharing more emerging Trodelvy data in 2024 as we continue to expand Trodelvy across tumor types and lines of therapy.

Our comprehensive clinical development program for Trodelvy consists of more than 30 active or planned clinical trials across 8 tumor types. In 2023, we've shared several data sets demonstrating clear signals of activity for Trodelvy across several indications. For example, in the ASCO meeting, this past June, we presented data for Trodelvy that demonstrated encouraging preliminary ORR and PFS data in relapsed or refractory endometrial cancer patients in the Phase II TROPiCS-03 basket trial.

More recently, at the ESMO meeting, we presented additional early data from TROPiCS-03, showing promising ORR in both relapsed or refractory head and neck squamous cell carcinoma and previously treated extensive-stage small cell lung cancer.

We reported strong data from EVOKE-02 at World Lung in September shown on Slide 19, establishing clear proof of concept for Trodelvy plus pembro in first-line metastatic non-small cell lung cancer. In the PD-L1 high cohort, Trodelvy plus pembro demonstrated an ORR of 69%, including unconfirmed responses. This compares favorably to the historical pembro monotherapy benchmark with response rates of 45% and 39% in KEYNOTE-024 and KEYNOTE-042, respectively. As a reminder, we are currently enrolling patients with first-line PD-L1-high metastatic non-small cell lung cancer in our registrational Phase III EVOKE-03 study. Preliminary data from the PD-L1 TPS less than 50% cohort has also been encouraging, demonstrating an ORR of 44%, similar to previous trials that evaluated pembro plus chemotherapy.

These results inform our plans to expand into broader first-line non-small cell lung cancer patient populations across all PD-L1 expression levels. We're looking forward to sharing further analysis from EVOKE-02 that will highlight the efficacy of Trodelvy and pembro across both squamous and non-squamous histologies in first-line metastatic non-small cell lung cancer patients.

Moving to our TIGIT program on Slide 20, an initial update of 1 arm of the Phase II EDGE-Gastric study was presented in an ASCO plenary session earlier today. The study found that the addition of dom and zim to a FOLFOX chemo regimen showed an encouraging 77% 6-month PFS and 59% ORR, including unconfirmed responses in first-line metastatic upper GI cancer. In patients with PD-L1 high tumors, the ORR was an impressive 80% and the 6-month PFS was 93%. We're pleased to see that dom and zim added to the standard of care was generally well tolerated with an adverse event profile similar to anti-PD-1 plus FOLFOX.

These results increase our confidence in the ongoing registrational Phase III STAR-221 trial in the similar first-line gastric gastroesophageal junction and esophageal adenocarcinoma population and our broader anti-TIGIT program. Although anti-TIGIT will not work in every tumor type, we're excited to see that dom has shown encouraging efficacy and tolerability in the tumor types we have advanced into Phase III studies including first-line non-small cell lung cancer and upper GI cancer.

Turning to cell therapy on Slide 21. We are continuing to work to expand the benefits of cell therapy to even more patients with 8 ongoing trials in earlier lines, new indications or new settings. We also have an extensive early-stage pipeline where we are exploring allogeneic CARTs, including healthy donor and iPSC-derived cell therapies as well as natural killer and invariant natural killer T cell therapies.

Beyond therapies, we continue to invest in manufacturing innovation to maintain our position as the world's leading cell therapy manufacturer and drive more rapid treatment for patients. We will continue to explore emerging disease areas in cell therapy, where we have the potential to apply our expertise to the treatment of difficult diseases. This includes multiple myeloma where we are pleased that the Phase II IMAGINE-1 trial, CART-ddBCMA has resumed enrollment, and we share in our services confidence in the therapeutic profile of CART-ddBCMA to be able to deliver benefit to patients.

To that end, the data unveiled in last week's abstract release of the upcoming American Society of Hematology meeting further reinforce CART-ddBCMA's robust efficacy and safety profile where a 22 months follow-up in the ongoing Phase I trial, 2/3 of patients continue to respond and median survival has not yet been reached. We look forward to additional data and even longer median follow-up next month. In the meantime, we are further strengthening the body of clinical evidence highlighting the long-term durability and survival benefits of both Yescarta and Tecartus at the ASH meeting in December.

Finally, and before I hand over to Andy, the team's progress on key 2023 clinical milestones is shown on Slide 22. As is expected with a diverse and large clinical portfolio, not all our programs will benefit patients the way we hope they will. And the ENHANCE and ENHANCE-2 programs evaluating magrolimab have both been discontinued based on futility analysis. The ENHANCE-3 study remains under partial clinical hold in frontline, unfit AML, and we continue to evaluate the progress of this and other Phase II solid tumor trials for magrolimab.

With regards to some of the remaining milestones for 2023, as referenced previously, we look forward to sharing data from ARTISTRY-I at a medical conference in 2024. For our HIV prevention studies, we continue to expect to have our first patient in for the PURPOSE-III and PURPOSE-IV clinical trials by the end of this year. Additionally, we remain on track to initiate our Phase II PALEKONA trial evaluating our potential first-in-class TPL-2 inhibitor for ulcerative colitis later this year. Our TPL-2 inhibitor represents one of our many oral agents for inflammation.

Looking beyond 2023, we will share our target 2024 milestones in due course, but it's already clear that it will be a rich year for data updates for Gilead, including potential updates or regulatory filings for obeldesivir, lenacapavir, Trodelvy and CART-ddBCMA.

With that, I'll hand the call over to Andy. Andy?

[Andrew Dickinson, executive]

Thank you, Merdad, and good afternoon, everyone.

We had another solid quarter, as shown on Slide 24, with total product sales, excluding Veklury, up 5% year-over-year, driven by growth across oncology and HIV, partially offset by lower HCV sales.

Total product sales were $7 billion, flat year-over-year with lower Veklury sales offsetting more than $300 million of growth in our base business. Our non-GAAP results are shown on Slide 25. Product gross margin was 86%, down 85 basis points from last year. R&D was $1.5 billion, up 24% year-over-year, reflecting ongoing clinical trial activities. Third quarter R&D expenses also reflected some sizable wind-down costs related to the discontinuation of 2 Phase III magrolimab ENHANCE studies and faster-than-anticipated enrollment in our Phase III PURPOSE-I and Oaktree studies both of which have recently completed enrollment and could accelerate timelines for data readouts in due course.

Acquired IP R&D was $91 million, reflecting the Tentarix collaboration announced in August, in addition to other payments associated with ongoing partnerships. SG&A was $1.3 billion, up 7% year-over-year, primarily driven by increased commercial investments, namely in oncology.

Moving to tax. Our effective tax rate in the third quarter was 7%, primarily reflecting a decrease in tax reserves as a result of reaching an agreement with a tax authority on certain tax position. Excluding this settlement, our non-GAAP effective tax rate would have been approximately 16%. Our non-GAAP diluted earnings per share were $2.29 compared to $1.90 for the same period last year. This was primarily driven by growth in our base business, lower tax and lower acquired IP R&D expenses compared to the third quarter of 2022, partially offset by lower Veklury sales and higher R&D and commercial investments.

Moving to Slide 26. Year-to-date base business revenue has grown 10% year-over-year, highlighting strong performance across virology and oncology. From an OpEx perspective, the investment we have made this year in R&D is notable with a robust and diverse clinical pipeline and with our commercial sales and marketing organization scaled to meet growing demand for our on-market oncology portfolio, we continue to expect a moderation of expense growth in 2024 and beyond.

Moving to Slide 27. We are updating many of our guidance ranges to reflect our year-to-date performance and our expectations for the rest of the year. Total product sales is now expected to be in the range of $26.7 billion to $26.9 billion, up from $26.3 billion to $26.7 billion previously. We are increasing total product sales, excluding Veklury at the midpoint. We now expect the range to be between $24.8 billion to $25 billion, up from $24.6 billion to $25 billion previously. This range represents growth of 7% to 8% for our base business year-over-year and an increase of $650 million at the midpoint from the initial guidance we issued in February.

On Veklury, based on our results year-to-date, we now expect full year Veklury sales of approximately $1.9 billion. As always, this remains highly variable and correlated with COVID-related hospitalization.

Moving to the rest of the P&L. We continue to expect non-GAAP gross margin to be approximately 86%. On R&D, reflecting the accelerated enrollments and magrolimab discontinuation expenses, our full year non-GAAP R&D expense is now expected to grow approximately 15% in 2023 compared to 2022. Excluding these items, our full year R&D expense is consistent with our prior guidance in the low double digits.

Reflecting the Tentarix collaboration closed in the third quarter as well as previously committed acquired IP R&D amounts and known milestone payments from existing collaborations, we now expect non-GAAP acquired IP R&D of approximately $1 billion in 2023. Similar to prior quarters, we will update expected acquired IP R&D expenses if they are incurred during the fourth quarter.

We continue to expect non-GAAP SG&A expenses to increase by a high single-digit percentage compared to 2022. As a reminder, this includes a onetime legal settlement accrual of $525 million in the second quarter. Excluding this, we continue to expect non-GAAP SG&A expense for 2023 to be down a low single-digit percentage compared to 2022.

Non-GAAP operating income is expected to be $10.5 billion to $10.8 billion as compared to $10.4 billion to $10.9 billion previously, driven by higher R&D expenses, offset by higher product sales. Given certain onetime tax benefits in 2023, we now expect our non-GAAP effective tax rate to be approximately 16% for the full year. Altogether, we now expect our non-GAAP diluted EPS to be between $6.65 and $6.85 per share as compared to $6.45 and $6.80 per share previously.

As shown on Slide 28, the chart highlights the continued strength of our business with higher total product sales guidance flowing into the bottom line, which, together with a lower expected tax rate, more than offset the higher R&D expenses in the third quarter. On a GAAP basis, our diluted EPS is expected to be in the range of $4.55 and $4.75 per share.

Moving to Slide 29. Our capital allocation priorities remain focused and unchanged. In the third quarter, we returned $1.3 billion to shareholders through our dividend and repurchase of shares totaling $3.7 billion year-to-date. In the third quarter, we repaid $2.25 billion of senior notes and issued $2 billion in senior notes maturing in 2033 and 2053.

Overall, the third quarter was another solid quarter of commercial and clinical execution in an extremely strong 2023 for Gilead so far. Our planning for 2024 is well underway and we've taken steps in the third quarter to continue to evolve our business model and expense structure to set us up for strong execution next year. 2023 has been a year of considerable investment, notably in R&D, and we are excited to finally be at the point where many of our key programs will start reading out data. With that in mind, we are preparing for a catalyst-rich 2024, and we look forward to sharing more early next year.

With that, I'll invite the operator to open the Q&A.

[Operator]

[Operator Instructions] Our first question today goes to Geoff Meacham of Bank of America.

[Geoffrey Meacham, analyst]

I guess this is for maybe Johanna or for Merdad. Just on lenacapavir, your competitor highlighted some of the derm pot. I wanted to get your perspective on what you've seen in clinical studies really as well as the early commercial experience. I wasn't sure if you guys view that as a nonissue or something to navigate as you develop lenacapavir for PrEP or various doublets in HIV treatment?

[Merdad Parsey, executive]

Sure. Jeff, this is Merdad. Thanks for the question. I would say that our ddI profile has been pretty well characterized and is in our label and laid out, as you noted, lenacapavir is metabolized by CYP3A and like many other drugs in the class. And we -- that's been available on the label for quite some time. We don't anticipate any changes to our programs based on that. There are no adaptations that we are making in our clinical development program based on that. As you know, we're well on our way in our PURPOSE-I and II. Lenacapavir PrEP studies and have the approval in highly treatment-experienced people and have not made any modifications based on any ddI concerns in those trials. And I'd encourage folks to take a look at the label. You can see what's laid out fairly clearly there.

[Johanna Mercier, executive]

Yes. And maybe just to add to what Merdad said. So we launched some lenacapavir for heavily treatment experienced earlier this year. As per Merdad's comments, the label has no contraindication specific to what you were referring to opioids or ED drugs, and the launch so far is well underway and access is increasing every day across the U.S. but also other markets, including Japan and Europe. And we're excited to have an option for these patients that unfortunately have really no other option at this point in time. So a very small market opportunity today with the potential for lenacapavir for PrEP as early as late '25. So very excited as we continue our plan for that.

[Operator]

Our next question goes to Michael Yee of Jefferies.

[Michael Yee, analyst]

Great. I appreciate the question. Maybe for Merdad, coming away from ESMO and some of the recent conferences, obviously, a ton of TROP-2 data. And there's a lot of talk around the benefit, particularly in lung for non-squamous versus squamous and some of your competitors have modified their studies to be more focused on non-squamous. Can you maybe just talk about how you see the benefits here in the different populations and whether you would consider emphasizing or modifying to be in non-squamous as well to improve probability of success?

[Merdad Parsey, executive]

Thanks, Michael, for the question.

Yes. Look, we had a really interesting ESMO, I think, for all concerned. And I think something that we've been saying for quite some time is that not all TROP-2 ADCs are equivalent, right? It's really important to note that there are differences between Trodelvy and the other TROP-2 ADCs in all 3 components. The affinity of the antibody is to orders of magnitudes better. We have a different linker and we have a different payload. That has played out in many ways along the safety spectrum where we have different adverse event profiles of the 2 drugs that have clearly emerged and it's possible now that we're starting to see divergence on the efficacy side as well.

Recall that we have shared our EVOKE-02 data, which comprise both squam and non-squamous patients. We have enrolled both squamous and non-squamous patients in our trials. And as one would expect, we do stratify those patients in our -- in the studies, and we'll continue to do so. We're very confident in our approach and with what we've seen so far and really look forward to being able to share more data from EVOKE-01 next year.

[Operator]

Our next question goes to Daina Graybosch of Leerink Partners.

[Daina Graybosch, analyst]

A question about Kite. I wonder if you can talk through the specific barriers that are limiting uptake of CART in the second-line large B cell lymphoma indication? And what do you think will be required to upshift the earlier line demand for cell therapy in large B-cell lymphoma and maybe even in multiple myeloma as well?

[Cindy Perettie, executive]

Thank you very much for the question, Daina. I think some of the specific barriers that we're observing are more in the U.S. So I might first talk about what we're observing in Europe where we have socialized medicine, we're seeing uptake as soon as we are granted access and reimbursement, and it goes very quickly into the system because it's a non-fragmented health care system.

In the U.S., things look a little bit different given the fragmentation of the health care system. So the barriers that we're observing in the U.S. are really our ability to treat patients where they are, so moving into community oncology. Today, 80% of oncology patients are seen in the community, most of our authorized treatment centers exist in large academic hospitals. And so what we're doing for the future and what we think is going to be very important is that we're able to have authorized treatment centers in the community closer to patients. So that's one important piece. And we continue to open up new treatment centers in the United States. And in fact, this year, we should end with somewhere around 140 treatment centers in the U.S., and that will continue to grow in 2024.

I think the second piece for barriers is converting stem cell transplant, so physicians who are transplanting patients, they will have a better outcome via the data if they have CART, and so we're working with transplanters on education and really making sure those patients have access to CART in the earlier lines. I think those are 2 of the larger barriers that we're observing today.

And the last piece I would say is the excitement with multiple myeloma therapies coming forward. You can imagine the ATCs now are seeing both lymphoma patients as well as multiple myeloma patients, and that's causing a crunch within those authorized treatment centers. And that's why it's important in the academic medical centers that we're able to expand the number of beds and secondly, open new authorized treatment centers that can serve both lymphoma and multiple myeloma.

[Operator]

Our next question goes to Chris Schott of JPMorgan.

[Christopher Schott, analyst]

Can you just elaborate a little bit more on HIV channel mix dynamics this quarter and how you're thinking about that for 4Q and beyond? I know channel has been a bit of a tailwind over the past year to -- it seems like we're now maybe starting to see some headwinds, at least sequentially. And I just was wondering how you think about that progressing from here?

[Johanna Mercier, executive]

Sure, Chris. Thanks for the question.

So you're right, right. As expected, we've seen some of those favorable pricing dynamics that we've seen in the last couple of quarters, including in 2022, due to the channel mix kind of begin to normalize. And you should expect to see kind of the same play from Q3 into Q4. One of the reasons for that had to do with some of the channel -- specifically around the channel mix to what you referenced, having to do with some of our government channels being less utilized, where we have higher rebates, and therefore, we had pricing variability. We believe a lot of that has due to stabilization post COVID around employment rates, inflation, et cetera. So we had a benefit that we saw over that, probably, I would say, 4 to 6 quarters or so. And as we kind of shared with you in Q2, we are seeing that normalize out for the second half of this year. And I think you should expect that not only for the next quarter, but then as we go into 2024.

The -- and therefore, because of all that, we believe that our HIV sales growth is closely mirroring now more of the market and the demand growth where we're seeing real strength both from a market standpoint, in treatment and prevention. We're seeing about 2 to 3 points growth in the market when you look at retail and non-retail market, and then, of course, 15% growth in the prep market. And then from a demand standpoint, I think, obviously, with Biktarvy growing at 12 points year-on-year and Descovy continuing to hold on to a very strong share over 40% or so in a competitive market with generics and of course, new formulations. So more to come as we go into Q4, but hopefully that gives you better picture some of the mix of channels.

[Operator]

Our next question goes to Tim Anderson of Wolfe Research.

[Adam Jolly, analyst]

This is Adam on for Tim Anderson at Wolfe Research. Also on TROP-2, just in light of competitor data, can you provide some more color on just latest thoughts on the competitive dynamics within the class? For example, if AstraZeneca get the label for HR-positive breast cancer in the second line, and Trodelvy only has a label for the third line, will that displace Trodelvy?

[Johanna Mercier, executive]

Good question, Adam. So I'm assuming you're referring to some of the data we saw at ESMO with Dato-DXd. We don't believe there is a material impact for now anyway or even in the future for Trodelvy. And the reason for that really has to do with the data itself and the lines of therapy, to your point, I think we've proven very clearly with Trodelvy in second-line TNBC and beyond around the overall survival data that we've shown. And then, of course, showing OS, again, and HR-positive, HER2 negative, although in later lines. I think what we're seeing today in the marketplace is -- not only are we the leaders in TNBC, we're also leading from an IHC-0 population. And then, of course, looking at sequencing of ADCs post-Enhertu as expected in the HR-positive HER2-negative population. So quite pleased with our positioning, and we don't believe the data that we've seen thus far is going to have the direct impact there.

[Merdad Parsey, executive]

Yes, I would just add that we continue to expand our programs and continue to want to generate additional data for Trodelvy. So we are very comfortable with where we are. And I think our ability to interact with our caregivers and patients now having been on the market for quite some time and it's really helping us make sure that we get Trodelvy to as many patients who could benefit from it as possible.

[Operator]

Our next question goes to Salveen Richter of Goldman Sachs.

[Salveen Richter, analyst]

Just a question here on the pipeline, just given 2 data releases that came out. So on the TIGIT gastric data that was presented today, how do we think -- or how do you think about the terms -- had the opportunity, the competitiveness versus standard of care combos and next steps? And then with regard to the multiple myeloma for Arcellx that was presented, it's looking to -- it looks to be tracking a CARVYKTI profile in relapsed/refractory multiple myeloma. Could you just walk us through next steps path to market competitive positioning here?

[Merdad Parsey, executive]

Sure. Maybe I'll start with TIGIT, and I'll hand it off to Cindy for the multiple myeloma discussion. Yes, I think -- look, we find the data that we presented today at the ASCO plenary to really be promising for continued momentum for TIGIT. The data from an ORR standpoint, and I think importantly, the landmark PFS analysis are very promising. It's early data. It's single-arm data, and I think those are all caveats that are appropriate when looking at these. But when you think about the context around what the standard of care, PFS and OSR, we think there's certainly promising signals that we could do better than that.

So obviously, what we need to do next is allow these data to mature in ARC-21. And then, of course, we have the 221 study that is our Phase III study where we will be comparing to standard of care in a randomized Phase III trial. We think the data shown today really will help us with momentum in accruing that trial and hopefully demonstrating the promise of TIGIT added on to standard of care -- a standard of care like regimen with zim and FOLFOX, we were excited about that Phase III outcome. And it really gives us the opportunity to be, we think, ahead on that indication compared to the competition in TIGIT.

And Cindy, do you want to...

[Cindy Perettie, executive]

Yes. Happy to. Thank you.

So this is early days, obviously, for the ddBCMA molecule. We have 38 patients worth of data. If I compare it to CARVYKTI, it's the population looks more like the LEGEND-2 population. We have a 34% extramedullary disease, which is a high-risk prognosis patients. And if you look at the LEGEND-2 data, they had 30%. Our overall response rate to date in those 38 patients at 22 months is 100%. And in the LEGEND-2 data is 88% to 25 months. So I do think there is a potential to differentiate on efficacy.

We're seeing a differentiation as it relates to the safety profile around the Parkinson's syndrome. We are not observing that in any of our patients to date. Obviously, we're going to continue to watch that as we enroll the IMAGINE-1 study and move into our next studies as well. Multiple myeloma is a large market. There is enough room in multiple myeloma to have multiple competitors but we also feel like we will have a differentiated molecule with Arcellx. So we're looking forward to generating more data and talking to folks about it at ASH.

[Operator]

Our next question goes to Tyler Van Buren of TD Cowen.

[Tyler Van Buren, analyst]

I have another question actually on the myeloma program. So assuming that Arcellx CART-ddBCMA data continue to look great at ASH and the IMAGINE-1 trial that's later next year leads to approval. How prepared have you guys gotten on the manufacturing front in the past year? And do you expect the launch to have a similar trajectory to Yescarta in terms of supply or be significantly better?

[Cindy Perettie, executive]

See, there's a number of things that we have learned over the course of the years with Yescarta and around manufacturing, all of which we're applying that knowledge to the manufacturing of the ddBCMA CART. So we plan to launch that out of our facilities at Kite and expect to have a strong launch. Again, we will be applying Yescarta learnings. So our goal is to be significantly better than we were at the launch of Yescarta.

[Operator]

Our next question goes to Brian Abrahams of RBC Capital Markets.

[Brian Abrahams, analyst]

It seems like the long-acting HIV combos are moving ahead really well. I was wondering if you could talk a little bit more about the strategic role that the lenacapavir, bictegravir daily oral or the weekly 17, 20 based combo could play in the HIV competitive landscape? Do you think this could move beyond treatment experienced patients on complex regimen into the earlier lines?

[Merdad Parsey, executive]

Sure. Maybe, Johanna, do you want to talk about bict lena, and I'll do the weekly?

[Johanna Mercier, executive]

Sure. Thanks for the question, Brian. I think the way we're looking at lenacapavir bictegravir in the virologically suppressed really has to do with -- we set the standard of care with Biktarvy and the opportunity now is to ensure that if, for some reason, there was a reason to switch Biktarvy from a tolerability profile or anything else that they have an option to go to that has a really interesting combination, right? When you think about a capsid inhibitor as well as an integrase inhibitor. So for us, it's really about the optionality for patients and making sure that this could offer something a little bit different in the daily oral market. And I do think that this will also be a longer-term strategy for us as we think about beyond Biktarvy's LOE in 2033. So I would go there. And on the weekly, just to start, and then I'll kick it over to Merdad to share with you our plans there.

On the weekly oral, it's clear from the patient research that we've done in treatment that we really do see benefit not only the daily oral market, but also in the oral weekly or even potentially even a little bit longer as we think about what patients are asking for today. So as much as we're very interested in the long acting that are every 3 months or every 6 months, we are also making sure that we meet the needs of patients and their request as they're looking at for some really don't like any injectables or subcu and really looking at that weekly oral as potentially extending a little bit the time they don't think about the fact that they have HIV.

[Merdad Parsey, executive]

Yes, just minor things to add. I would say we have been focusing our development on what people living with HIV and people who are looking for PrEP options are -- have told us that they're interested in. And that's longer-acting oral options and injectable options that are every 3 months, every 6 months, and that's what we've been focusing our development program on. And we want to make sure that we provide that optionality to different folks.

The other thing about the bict lena, remember is, remember that lena is a new class of antiretroviral and that provides caregivers the option to leverage that new class for the appropriate people living with HIV. So our goal as the leader in HIV is to continue to provide as many of the relevant options to people living with HIV and people looking for prevention options as we think are going to be reasonable and valuable. And remember that we think the weekly oral is important enough that we have 2 programs. So you mentioned 1720. Remember, we also have the program with islatravir and lenacapavir. So we're very happy with the progress we've made, as you noted and really on track to provide better options.

[Operator]

Our next question go to Terence Flynn of Morgan Stanley.

[Terence Flynn, analyst]

I was just wondering if you can provide any preliminary thoughts on 2024 spend or margins, Andy?

[Andrew Dickinson, executive]

Terence, thanks for the question. Happy to take that.

Obviously, in late January or early February, as we customarily do, we'll provide very specific guidance in 2024. What we've said, and I would continue to reiterate is that, as you've seen, our expenses increase over the last couple of years as our portfolio has increased. And again, from our perspective, a very necessary, an appropriate increase as we developed a -- what we feel is one of the best and broadest pipelines in the industry, both in virology, oncology across cell therapy, and at Gilead, we're finally at the level where we're spending on par with our peers, especially on the R&D side. You saw that in the third quarter. So as you think about expenses going forward, we expect that you will see more moderate growth in expenses over time. We're doing a lot to manage our expenses, as you heard on the last couple of quarters.

Maybe the best evidence of that, Terence, is if you look at our first quarter R&D expenses, our third quarter R&D expenses are essentially flat. So you saw a little bit of a step down from the first quarter, in the second quarter and the third quarter were flat. So you already see that we're kind of, as we said, we're approaching kind of the peak spend, recognizing that we have 60 different clinical programs. If I remember correctly, we have 27 programs in Phase II, 19 programs in Phase III. That is very different than the Gilead of prior years that you remember and it's part of what makes us so excited about where we're going as a company.

And the final thing I'd say is you're already seeing the benefits of those investments and the commercial performance that we've talked about for the last 2 years. So we expect that you'll continue to see those benefits in our commercial performance across the entire business, and you're going to see a moderation of expense growth. And again, we'll provide much more specific detail early next year and look forward to talking about this further.

[Operator]

Our next question goes to Evan Seigerman of BMO Capital Markets.

[Evan Seigerman, analyst]

One on kind of capital allocation as a function of competitiveness in your respective markets. For example, you have a great moat in virology. How do you think about investment there, say, versus oncology where it's a more competitive marketplace and where we're seeing incremental kind of benefit over time? Maybe some thoughts there.

[Andrew Dickinson, executive]

Evan, it's Andy. I'll start and others may want to jump in as well. Look, I mean, what we've said historically and I'd reiterate is we're always going to follow the science. So we are completely committed to virology, not just HIV, but virology broadly. You see that, for instance, with our progress with obeldesivir as well as other programs. We've also said in virology that a lot of what happens in virology happens in our internal research and that there's a less -- there are less opportunities externally to invest in. That doesn't mean that we won't continue to look for them. And we're going to continue to invest in oncology. We have a much larger oncology organization today. We've increased our internal research and development, and we're still very focused as the third pillar on inflammation. So I would remind people that we have a number of early inflammation programs, including a number in Phase II that we're excited about, Merdad highlighted the 222 program in his remarks earlier. But that's just one of the programs that we expect to build out over time.

So we'll follow the science. We're going to apply capital to each of those areas. If you look back, our capital investment has risen and fallen over time in each of those areas as we've looked at different opportunities. And of course, we're going to continue to invest in cell therapy as part of oncology and more broadly, I should have highlighted that earlier. So the short summary is we'll follow the science, but all of the areas will receive additional capital over time.

Merdad, do you want to add anything to that?

[Merdad Parsey, executive]

I would just add that our goal has been to diversify the portfolio. We remain committed and think one of our key competitive advantages is our track record and strength in virology. And we -- I would agree with you, Evan, and that's critical to our continued success and growth. And we also believe that having more diversity in our portfolio, whether it's oncology or inflammation is going to be really important to our long-term future. So we are -- our capital allocation will happen on where the best data are, and we make those trade-offs virtually every day.

[Operator]

Our final question goes to Joe Catanzaro of Piper Sandler.

[Joseph Catanzaro, analyst]

I actually had one on Trodelvy within bladder cancer, and I appreciate this is a smaller proportion of Trodelvy sales. But I just wanted to ask about the potential impact of PADCEV EV-302 data it and moving into the front line and what you could potentially see there with Trodelvy, both maybe in the near term and longer term?

[Johanna Mercier, executive]

So maybe I'll start and then throw to Merdad from a clinical standpoint, what we're thinking. From a commercial standpoint, with the data that we saw, I think the standard of care is going to change in first line, clearly with that data. And we see that as a potential opportunity to actually move up Trodelvy in lines of therapy. So right now in the U.S., we do have accelerated approval in the U.S., and we're seeing about 15%, 16% share in bladder cancer, but later lines of therapy. So third line plus. I think with the opportunity to have PADCEV kind of move up in the first-line setting with pembro, I think it will be interesting to see how Trodelvy kind of moves up as we've seen a lot of sequencing from ADCs here as well. So that's in the here and now.

And maybe, Merdad, do you want to comment on the clinical?

[Merdad Parsey, executive]

Yes. Look, I think it's great news for patients with the data that's come out, and we think it does change the paradigm for bladder cancer. I think the other thing I would add to what Johanna said is that we're looking with interest. We don't have data on sequencing, but we're certainly hearing about sequencing. And there were data that were shown in ESMO around combining PADCEV and Trodelvy, where the tolerability profile looked good and the responses look good. It's a small study, but we think there continues to be opportunity there for us. And having this clarity will help us design where we're going to go from here after our confirmatory trial in second line completes.

[Operator]

Thank you. That's all the questions that we have time for today. I will now hand back to Dan for any closing comments.

[Daniel O'Day, executive]

Well, I just want to thank the team here and all of you for joining. And just maybe end with this reflection, which is, at Gilead, I don't think we could be more excited about as we wrap up 2023 and head into 2024, about the evolution of our commercial and clinical execution. In particular, 2024 will be a year that's full of key clinical catalysts across our portfolio. And that's really been a culmination over the past several years of investing in a robust and diversified portfolio, many of which were Phase II studies that led to Phase III studies, that we'll be reading out over the course of not only next year but the years to come. We'll provide more details on all of our 2024 clinical milestones early next year. But in the meantime, maybe just a couple to highlight in a busy year.

Obviously, on Trodelvy, where the clinical data increasingly highlight that all Trop-2 ADCs are not alike. We'll be rolling out data across a variety of disease states in oncology, and we're excited to share data on lung cancer in the first half of 2024. And then maybe to highlight one other one, lenacapavir will have a rich year of data on the treatment combination candidates. And we continue to target being first to market with our 6-month long-acting preps starting with readouts next year on our Phase III trials and a commercial launch as early as late 2025.

With that, as always, feel free to reach out to the IR team here at Gilead if you have any questions or feedback for our team and we look forward to updating you again early in the New Year. Thank you for joining.

[Operator]

Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.