Gilead Sciences Inc

NASDAQ:GILD

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Gilead Sciences Fourth Quarter 2018 Earnings Conference Call. My name is Jonathan. I will be your conference operator today. At this time, all participants are in a 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, Vice President of Investor Relations]

Thank you, Jonathan, and good afternoon, everyone. Just after market closed today, we issued a press release with earnings results for the fourth quarter 2018. The press release and detailed slides are available on the Investor Relations section of the Gilead website.

The speakers on today’s call will be: Robin Washington, Executive Vice President and Chief Financial Officer; Laura Hamill, Executive Vice President, Worldwide Commercial Operations; and John McHutchison, Chief Scientific Officer and Head of Research and Development; also in the room is Gregg Alton, Interim CEO and Chief Patient Officer.

Before we begin with our prepared comments, let me remind you that we will be making forward-looking statements, including plans and expectations with respect to products, product candidates, financial projections and the use of capital, all of which involve certain assumptions, risks and uncertainties that are beyond our control and could cause actual results to differ materially from these statements. A description of these risks can be found in our latest SEC disclosure documents and recent press releases.

In addition, Gilead does not undertake any obligation to update any forward-looking statements made during this call. Non-GAAP financial measures will be used to help you understand the Company’s underlying business performance. The GAAP to non-GAAP reconciliations are provided in the earnings press release as well as on the Gilead website.

I will now turn the call over to Robin.

[Robin Washington]

Thank you, Sung, and good afternoon, everyone. We are pleased to share our financial results for the fourth quarter and full year 2018 and provide 2019 guidance. I will first review financials followed by comments from Laura and John. 2018 was a year filled with accomplishments where we met our financial and operational goals. Beginning with our HIV franchise, we extended our leadership position and grew the business to an all-time high in product revenue.

We continue to execute and maximize our opportunity in HCV and initiated a plan to launch authorized generics this year, which should keep us very competitive in a durable long-term market. In cell therapy, we made tremendous progress in the number of centers authorized, and saw the steady and measured adoption of Yescarta in the U.S. and the approval of Yescarta in Europe. We advanced our pipeline and finished the year with a strong balance sheet that will enable us to continue to execute on M&A and partnerships to drive future growth.

Turning to the financials. Total revenues for the fourth quarter were $5.8 billion, with non-GAAP earnings of $1.44. This compares to revenue of $5.9 billion with non-GAAP earnings of $1.78 per share for the same period last year. For the full year 2018, total revenues were $22.1 billion, down 15% year-over-year. Non-GAAP diluted earnings were $6.67 per share for the year, down from $8.84 per share for the full year 2017.

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

Now turning to our product sales. Product sales for the fourth quarter were $5.7 billion, up 4% sequentially and down 3% year-over-year. For the full year, product sales were $21.7 billion, down 16% year-over-year driven by lower HCV sales. In the U.S., product sales for the quarter were $4.5 billion, up 8% sequentially and 8% year-over-year. This marks the first quarter in several years where U.S. product sales grew year-over-year as the revenue growth of our HIV franchise more than offset the market dynamics of our HCV franchise.

While demand, particularly for Biktarvy and Truvada for prep, was a driver of sequential growth, the quarter also benefited from seasonal inventory purchases and a favorable payer mix. These two factors contributed an estimated incremental $250 million to the sequential performance. In Europe, product sales for the quarter were $813 million, down 7% sequentially and 29% year-over-year. The sequential and year-over-year declines were anticipated and included the full quarter impact and launch of generic HIV products in certain markets, as well as an accounting adjustment related to statutory revenue call back reserves.

Now turning to the expenses for the full year 2018. Non-GAAP cost of goods sold were $300.6 billion, up 5% compared to $3.4 billion in 2017. The increase was caused by a $410 million reserve on unfavorable $0.31 EPS impact, primarily for excess Harvoni inventory due to a shift in demand to Epclusa.

Non-GAAP R&D expenses were $3.5 billion and non-GAAP SG&A expenses were $3.6 billion, both expense categories increased by 7% compared to the same period last year, primarily due to a full year of investments to support the growth of our business following the acquisition of Kite. Our non-GAAP effective tax rate for the full year 2018 decreased to 19.8% compared to 24.5% in the same period last year, primarily due to reduction of the U.S. corporate tax rate as a result of tax reform, and the favorable impact of a tax settlement.

Turning to the balance sheet. We generated $8.4 billion in cash from operations for the full year 2018, and $2.3 billion for the quarter. We ended the year with $31.5 billion in cash and cash equivalents. During 2018, we repaid $6.3 billion of debt, the majority of which was related to our acquisition of Kite, and paid cash dividends of $3 billion. In 2018, we repurchased 40 million shares for $2.9 billion. In Q4, we made opportunistically purchases of approximately 14 million shares for $962 million, resulting in a reduction of diluted shares outstanding at year-end.

Earlier today, we announced an 11% increase in our quarterly dividend from $0.57 to $0.63 per share, which will become effective in the first quarter of 2019. This represents the fourth consecutive year of double-digit increases to the dividend and underscores our confidence in the strength of the business and future cash flows. In 2019, our capital allocation priorities will remain the same with a focus on M&A and partnerships to augment our pipeline, followed by dividends and share repurchases.

Before I provide details for our full year 2019 guidance, I would like to highlight aspects of 2018 performance as illustrated on Slide 20, which will impact the anticipated level of product revenue growth in 2019 relative to 2018. In October, during our Q3 earnings announcement, we increased our 2018 full year product revenue guidance due to two unanticipated events. Our second half 2018 revenues did not reflect the entry of a generic version of Letairis in the U.S., as expected when we issued our original guidance at the beginning of 2018.

Secondly, we saw the entry of generic versions of our HIV products occurred later in certain ex-U.S. countries than we had originally expected. It is important to keep these events in mind as our 2019 revenue performance unfold as they will have an impact on the level of product revenue growth in the year.

Turning to guidance. Our 2019 non-GAAP financial guidance is summarized on Slides 19 through 23 in the earnings presentation available on our corporate website. Product sales are expected to be in the range of $21.3 billion to $21.8 billion. This guidance is subject to a number of uncertainties, including slower than anticipated growth in our HIV franchise in larger than anticipated shifting payer mix to more highly discounted payer segment such as PHS, SSS, Medicaid and the VA.

Lower than expected market share and greater price erosion resulting from the sale of generic versions of TDF, the fixed dose combination of FTC, TDF and the fixed dose combination of FTC, TDF, efavirenz. The accuracy of our assumptions about HCV market share, the accuracy of our estimates for HCV patients starts in 2019, unanticipated pricing pressures from payers and competitors, as well as volatility in foreign currency exchange rates, which could be plus or minus $300 million for each 10% change relative to our assumptions.

Non-GAAP product gross margins are expected to be in the range of 85% to 87%. We expect our non-GAAP R&D expenses to be in the range of $3.6 billion to $3.8 billion. Non-GAAP SG&A expenses are expected to be in the range of $3.9 billion to $4.1 billion, and include investments to prepare for commercial launches in NASH and inflammation. For the full year, our non-GAAP effective tax rate is expected to be in the range of 20% to 21%.

We anticipate the full year diluted EPS impact of acquisition-related stock-based compensation and other expenses to be in the range of $1.40 to $1.50 per share. As we look towards Q1 2019, we anticipate total Gilead product sales will decline sequentially by a percentage similar to what we’ve seen over the past two years, which was in the range of 12% to 14%, primarily driven by the U.S. seasonal inventory patterns and buying patterns of public payers that negatively impact payer mix.

Also a factor into the Q1 sequential decline as a step-down in price for our HCV drugs sold into U.S. Medicare. Despite this anticipated sequential decline in total product sales in Q1, I want to underscore our confidence in the health of our worldwide HIV business, from which we expect double-digit year-on-year growth again in 2019.

I would now turn the call over to Laura.

[Laura Hamill]

Thank you, Robin. Good afternoon, everyone. I will provide an update on our commercial performance during the fourth quarter, and here are some highlights from markets around the world. Beginning with HIV, we achieved an all-time high in quarterly revenues. This speaks to the appeal of our Descovy-based regimen led by Biktarvy, the growing use of Truvada for PrEP and our ability to execute commercially.

In the U.S., total HIV revenue was $3.4 billion in the fourth quarter, up 30% year-over-year and 13% quarter-over-quarter. Year-over-year growth was driven by a 13% increase to prescription and also benefited from an inventory purchases and favorable payer mix mentioned earlier by Robin. We continue to see strong adoption of Descovy-based regimens, which accounted for 77% of Gilead’s total U.S. HIV prescription volume as we ended the fourth quarter.

This is a remarkable achievement considering the first Descovy-based regimen was introduced just three years ago. Through its first 11 months, Biktarvy remains the best HIV launch of all time in the U.S. as measured by total prescriptions on a launch-aligned basis. During the fourth quarter, Biktarvy generated $551 million in revenue in the U.S. and is the number one prescribed regimen for both treatment-naïve and switch patients. Approximately 80% of Biktarvy’s U.S. prescriptions came from switches, 25% of these switches from dolutegravir and another 25% coming from Genvoya. This is a testament to the profile of Biktarvy, its strong efficacy and no identified cases of treatment emergent resistance at week 96 in our Phase 3 studies.

Biktarvy provides the renal and bone safety advantages offered by Descovy backbone with minimal drug to drug interactions. These are important considerations for an aging HIV population and for younger patients on lifelong treatment.

Moving to prevention. Truvada for PrEP continues to grow as we invest in the U.S. to raise awareness among at-risk individuals and treating physicians. We estimate that approximately 202,000 people were taking Truvada for PrEP at the end of the fourth quarter in 2008. We initiated two direct consumer campaigns in mid-2008, and have dedicated team of therapeutic specialist focused on Truvada for PrEP. Additionally, we have a number of commercial programs aimed at helping populations, disproportionately impacted by HIV, where utilization of Truvada for PrEP is low. While these investments has helped increase awareness, there is still so much more we can do. The CDC estimates that 1.1 million people in the U.S. could benefit from PrEP.

Now turning to Europe. Total HIV revenue was $511 million in the fourth quarter, down 21% year-over-year and down 13% quarter-over-quarter. This decline was driven by the expected availability of generics across all major EU countries. During 2018, we experienced slower erosion of the HIV franchise due to later generic entry in a few countries, while at the same time, we saw rapid uptake of our Descovy-based products, which accounted for more than 80% of our total HIV revenue in Europe for the fourth quarter.

We are encouraged by the strong uptake of Biktarvy in Germany and in France. In Germany, Biktarvy was number one prescribed regimen for both treatment-naïve and switch patients during the fourth quarter. And in France, just six weeks after launch, Biktarvy was among the top five regiments for switch patients. We anticipate by mid-year, Biktarvy will also launch in Spain, Italy and the UK. Once Biktarvy is broadly reimbursed and entrenched in the market, we believe our European HIV business will stabilize and return to growth.

Now, turning to HCV. Product sales for the fourth quarter were $738 million, down 51% year-over-year and 18% quarter-over-quarter, in line with the guidance we provided in 2018. As previously announced, authorized generic version of Epclusa and Harvoni have become available in the U.S. this quarter through Asegua Therapeutics LLC, a separate subsidiary. We expect to see a positive impact on sharing Medicaid markets during the second half of 2019. Over the long-term, we anticipate the adoption of these authorized generics will allow us to be more competitive in a rapidly growing Medicaid segment.

In 2018, we launched a new direct-to-consumer campaign highlighting Epclusa as a pan-genotypic, pan-fibrotic single-tablet regimen. Epclusa has the right profile to address the broadest population in HCV. As a leading liver company, we remain fully committed to serving patients with HCV, contributing to the elimination of the disease and competing with a great deal of confidence based on the profiles of our HCV products.

Turning to Yescarta. We are building on the momentum generated by the two year real world data presented at the American Society of Hematology Annual Meeting. This year, we expect to steadily and measurably progress in the U.S. and in Europe and potentially see a doubling of our revenue for Yescarta Carta, as centers gain experience and community oncologist become increasingly aware of this life saving therapy. We now have 68 centers in the U.S. certified to provide treatment with Yescarta.

In Europe, we are encouraged by the early stages of our launch. We have treated commercial patients in the UK and in Germany and we have activated sites in France. In total, we have authorized 12 centers and look forward to additional centers coming online this quarter. We are pleased with the engagement of countries across EU markets, wanting to rapidly offer Yescarta.

Finally, our U.S. cardiopulmonary team continues to deliver impressive results. Letairis and Ranexa revenue totaled $431 million for the quarter. We did not see any generic competition for Letairis in the fourth quarter. We currently anticipate the entry of generics in the second quarter of 2019. We began the year from a position of strength. I would like to thank the teams around the world for their incredible efforts. With a continued focus on our outstanding portfolio of products and operational excellence, we are confident in our ability to deliver on our 2019 goals.

Now, I will turn the call over to John.

[John McHutchison]

Thank you, Laura, and thank you everyone for joining us today. As you know, this is a very exciting time for Gilead’s R&D organization. We anticipate readouts from five Phase 3 clinical trials in the first half of this year. I will talk briefly about those studies, provide an update on our cell therapy and oncology programs and then close with some thoughts on 2019.

We expect upcoming readouts of STELLAR 3 and STELLAR 4, our ongoing Phase 3 trials, evaluating selonsertib, an ASK1 inhibitor in patients with advanced fibrosis, future NASH. It’s supported by the data, we expect to file for regulatory approvals in the second half of this year. In addition, we continue to advance multiple other investigational compounds in NASH as both single agents and as combination therapies.

We anticipate ATLAS, our Phase 2b study of various two-drug combinations or regimens in patients with NASH and advanced fibrosis to readout in the fourth quarter. As we continue to do to build our pipeline in NASH, I would like to highlight tow other recent preclinical agreement. Last month, we announced the collaboration and license agreement with Wuhan to co-develop novel treatments for patients with advanced fibrosis, future NASH that will complement our other internal programs. In December, we also entered into another collaboration with Scholar Rock to discover and develop highly specific inhibitors of TGFβ activation. We will work with Scholar Rock to investigate this novel approach directed towards one of the core pathways driving fibrotic diseases including NASH and diabetic kidney disease.

Now turning to inflammation. This quarter, we expect results from FINCH 1 and FINCH 3, two Phase 3 studies of our selective JAK1 inhibitor full governed in rheumatoid arthritis. As you may recall, last year we announced from FINCH 2, the first of our Phase 3 study to readout. Those results demonstrated that they’ll get in a bit all primary and secondary efficacy endpoints and it difficult to treat group of patients. Now as supported by data, we expect to be able to then progress the filgotinib rheumatoid arthritis indication filings for regulatory approvals globally.

In the U.S., our ability to file the NDA is the dependent on data from the MANTA study, a safety study in men with ulcerative colitis. This was requested by the FDA and is designed to address non-clinical findings observed in preclinical animal studies. The FDA recently allowed us to expand the inclusion criteria, which is enabled us to enhance enrollment. We will continue to evaluate our progress and options to advance timelines. Once we have the Phase 3 data from 3 FINCH studies in hand, we will initiate and request further interactions with the FDA and other regulatory groups worldwide. We will then be able to provide greater clarity as to filing timelines in the U.S.

Moving to HIV. In the coming months, we anticipate the results from the DISCOVER trial, a Phase 3, randomized, double-blind study of more than 5,000 people, evaluating whether Descovy is as safe and as effective as Truvada at reducing the risk of HIV infection, when used as PrEP or pre-exposure prophylaxis. The trial speaks to our ongoing commitment to people at risk of HIV infection and those living with HIV, where our goal is to continue to lead and drive innovation across the spectrum of care from prevention to treatment to hopefully one-day a cure.

And finally, I’d like to make a few comments on cell therapy. Our investment in cell therapy is and always has been an investment in the future. Similar to what we’ve done in other areas, historically, we are committed to leading with cutting edge science that one-day creates a path to a cure.

Last December, the American Society of Hematology annual meeting, we presented a number of significant updates. The two-year safety and efficacy ZUMA-1 data presented at the meeting and simultaneously published in Lancet oncology, showed an unprecedented plateau in duration of response and overall survival in patients with refractory large B-cell lymphoma. After a single infusion of Yescarta with a minimum follow-up of two years, more than half of the patients were still alive and nearly 40% of patients had an ongoing response.

The two-year point is a major milestone for Yescarta. This is the longest duration of follow-up of any registrational clinical cell therapy study, and the results set the bar, reinforcing our leadership in cell therapy. Also at the ASH meeting, there were numerous presentations highlighting real world Yescarta data from centers outside of the clinical trial setting. It was encouraging to see similar 30-day efficacy and safety data in this setting, despite sicker patients compared with ZUMA-1 as well as the consistent manufacturing performance and product turnaround time.

Finally for Yescarta, we are moving forward in earlier lines of therapy in large B-cell lymphoma and several new indications for other B-cell malignancies, as part of our broader registrational plan. This year, we will also continue several studies aimed and investigating strategies to further improve the safety and the efficacy of Yescarta.

More broadly now in cell therapy, we’re advancing an allogeneic platform to IND this year. Progressing different cell therapy approaches in multiple solid tumors with next generation technologies and leveraging our best-in-class cell therapy manufacturing. We will also continue to pursue scientific collaborations that will help us achieve these goals when they make sense.

With regard to our other oncology programs, during the fourth quarter, we announced a global collaboration with Tango Therapeutics to discover, develop, and commercialize a pipeline of innovative, targeted immuno-oncology treatments for patients with cancer. Our collaboration will combine Tango’s CRISPR based discovery technology alongside Gilead’s drug discovery and development capabilities.

We also recently entered into a partnership with Agenus, focused on the development and commercialization of up to five novel immuno-oncology therapies, three of which are expected to be in the clinic in 2019. We believe these novel approaches can augment the impressive benefits that have been seen with checkpoint inhibition in a variety of cancers.

Last quarter, we disclose an initial patent outlining some of our exciting preclinical work related to our small molecule PD-L1 program. To that end, we have now initiated a Phase 1 study of GS-4224 in healthy volunteers. I’m confident we will continue to make significant progress in 2019. I want to close by highlighting several key areas for Gilead this year. We are focused on returning to growth in terms of product sales and confident this can be achieved with our operational excellence, a strong in growing HIV franchise, and stabilizing hepatitis C market.

As I’ve just shared on the R&D side, we continue to make excellent progress with our pipeline and we’re looking forward to the readouts of the five Phase 3 studies as I described today. With regard to cell therapy, we will maintain our position of leadership as we continue to reach more patients with Yescarta and advance the next generations of cell therapy. And finally, we are in a position of financial strength, which gives us the flexibility to execute on M&A and partnerships to augment our pipeline.

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

In closing, I would like to thank our 11,000 employees around the world. It’s your commitment and dedication that have made us successful and will continue to make us successful in 2019 and into the future.

So let’s now open the call for questions. Operator?

[Operator]

Thank you. [Operator Instructions] And our first question comes from the line of Geoff Meacham from Barclays. Your question, please.

[Geoff Meacham, Barclays]

Good afternoon guys, thanks so much for the question. John, I want to continue to the thought on BG and looking at the step-up in 2018 that you guys had. It’s mostly on early to mid-stage assets. So the question is, one, does this change Gilead’s appetite for later stage deals? And two, what’s the appetite for an expansion beyond your core therapeutic areas? And I realize the answers like to change after Dan gives a more detailed review of the business. Thanks.

[Robin Washington]

Hi Geoff. It’s Robin, why don’t I start. I’d say again, the high bar and criteria for us when it comes to M&A or scientific differentiation, I think you’re right to state that we’re primarily focused on our existing therapeutic areas. While these have been small deals, I think we’ve continued to look for deals with commercial assets as well as later stage pipeline deals as well. But they happen when they happen. So as you can see, we’ve been very active. We’ve been even more active at the second half of the year and we’ll continue to focus in this area as Dan joins us.

[John McHutchison]

And Geoff, it’s John and I’ll just add onto what Robin has said. Also, we have looked at many other things as well over the last year and we’ll continue to do so. And it is driven by the science and it is driven by the opportunity and the importance and the impact that we’ll have on certain diseases. So we will look at life and earlier stage opportunities as they come forward, but as Robin said, the late-stage opportunities are few and far between.

[Geoff Meacham, Barclays]

Thank you, guys.

[Operator]

Thank you. Our next question comes from the line of Michael Yee from Jefferies. Your question, please.

[Michael Yee, Jefferies]

Thanks for the question. I guess my question is, although Dan hasn’t come onboard yet, I mean, what do you think and investors should anticipate or should expect through the course of the year, is that him just trying to get onboard familiar with everything and that could take a year? Do you think that he void or management and the board anticipate urgency to put the balance sheet to work? When yes, what should investors expect through 2019 as it relates to Dan coming onboard? Thanks.

[Gregg Alton]

Sure, this is Gregg Alton, I’ll take this question. I think it’s neither of the scenarios that you laid out there. I think that Dan will come onboard March 1, as you know. I think he will be patient. He’s going to take his time to get to know the company, spend more time with the management team, fits in our strategy. Certainly, he will – then I think he’ll put his own mark on what – where he wants to take the company. I wouldn’t expect it to take up a year, but I think he will be patient and I think he’s going to be thoughtful and make sure that he’s really understanding what we’re doing.

[Michael Yee, Jefferies]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Brian Abrahams from RBC Capital Markets. Your question, please.

[Brian Abrahams, RBC Capital Markets]

Hi. Thanks very much for taking my question and congrats on the quarter. How should we be thinking about your 2019 guidance for HIV with respect to contribution from volume versus price? And then along those lines for the longer term, there’s been some discussion around CMS practices shifting for protected classes. Can you talk a little bit about the impact that you foresee elements like formulary management or prior authorizations potentially having on clinical practice in HIV and on potential future revenues for the franchise? Thanks.

[Robin Washington]

Hi, Brian. It’s Robin. Maybe I’ll take the first part of your question. And then turn it over to Gregg. So thank you for calling out both those parameters. I mean, keep in mind that volume is a major driver of growth for our business and that will be the case in 2019. For our HIV business, we have taken price increases in the U.S. in the past, but keep in mind that the net effect of them has been limited because the majority of our volume goes through public channels. For instance, ADAP has not had a price increase in since 2008. And that’s part of our U.S. business.

In Europe, as you know, we actually take price decreases. So the net result on a worldwide basis is really a low single-digit price benefit when we think about any price increases. For this year, as you can – appreciate due to competitive reasons, we’re not going to mention, if we aren’t taking price increases at this point in time. Recall back mid-year, we announce no price increases for six months, but any thinking that we do have around price increases as currently reflected in our guidance. And I’d say that, we’ve aware and continue to be aware of the climate out there and we’ve always had a very sensible approach to how we think about pricing.

[Gregg Alton]

And so if I can just jump in on the second part of the question relating to the proposal by CMS on the protected classes, as you’re all aware of Gilead has been on the forefront of innovation in HIV for 30 years now. Bringing our products for treatment and prevention that improved potency, safety, tolerability, simplicity and the protected classes has been a very important component to ensure that patients have access to that and then physicians are free to prescribe what’s best for their patients. And the reason for the protected classes, as many of you know is, these are disease or six disease areas where the products really are not interchangeable and they really need to be the right patient – right for the patients. This is allowed patients, individuals to do very well with HIV, but also allows us to have a very good public health response to HIV on reducing new infections.

We believe that any challenges to the protected class, particularly the prior authorization or step therapy would be a significant step backwards in these efforts. We also share this with a lot of the other therapeutic areas that are impacted by the protected classes. So we are in constant discusses with them. This is the number one public policy initiative by Gilead is ensuring that people understand the importance of protected classes. We’re very engaged with the administration at CMS, HHS, as well as the Senate and Congress. So we are ensuring that we’re very vocal. There were also very closely tied with the patient groups and the physician groups, who care very much about this issue.

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

[Operator]

Thank you. Our next question comes from the line of Geoffrey Porges from Leerink. Your question, please.

[Geoffrey Porges, Leerink]

Thank you very much for taking the question and for the information provided in the call. Robin, could you talk us through the increase in SG&A specifically? It’s about a 10% increase compared to where you are this year. It’s about $500 million above what the rate was expecting. Could you talk us through where the incremental $500 million is going and what’s the total possible with – presume you went through everything else you were spending on previously and couldn’t find any way to reduce in other areas. Thanks.

[Robin Washington]

Yes. Thanks for the question, Geoff. Let me first talk about the sequential increase that was driven by a one-time grant. So I wouldn’t take Q4 and assume that’s the run rate, right? I mean, during the second half of the year to your specific question, we have included incremental expenses focused on our new emerging therapeutic area launches, in particular, NASH and inflammation.

We’ve also included some incremental expense to our cell therapy ramp. As you know, we’re continuing to build outside of the U.S. in that area as well. So those are some of the primary drivers. The kind of the smaller drivers include just some geographic expansion. If you saw from our guidance, we’re expected to have HIV revenue in Japan next year, so there’s some investment that we’re waiting there. We also continued to get products approved in China, so that’s an area of focus.

So yes, there is a second half ramp in our expenses to support those very new launchers. I would say, Geoff, to your point, have we thought about trade-offs? Yes, we have. I would say, particularly, for NASH, we haven’t maybe work and can comment on this as well, we do believe continuing to stay focused on our hep C franchise in a much more competitive environment is the way to go. So there are some incremental expenses that we hadn’t initially thought about associated with NASH, but we’ve appropriately included in our guidance.

[Laura Hamill]

Yes, thanks, Robin just first half covering it. For HCV, we believe not only from a field force perspective that we wanted be fully focused around the world, but also in terms of reaching consumers in the United States as a very strong focus. And external and outside of the United States, there is a number of initiatives to really help with elimination in conjunction with the government, and we’re committed to that. So I think that’s really what we were contemplating with positive where we have an opportunity to join forces, we believe that we should keep those separate and continue to focus on them as individual very important products uniquely.

[Operator]

Thank you. Our next question comes from the line of Matthew Harrison from Morgan Stanley. Your question please.

[Matthew Harrison, Morgan Stanley]

Great. Good afternoon. Thanks for taking the question. John, I have one for you, specifically on the NASH study. Can you talk a little bit about how you tower those studies? I know you’ve talked in the past that 20% delta is clinically meaningful, I wonder if you could comment if you achieved the delta below that? If the studies could still be statistically successful and how you might look at the result like that? Thanks.

[John McHutchison]

Thank you, Matthew. We’re excited about the NASH readouts from STELLAR 3 and STELLAR 4. We have 1,600 patients with bridging fibrosis or cirrhosis. So those results due to imminently readout this quarter, so we are looking for the – to answer your question, we are looking for a significant increase over placebo response rate, which we believe we can calculate accurately from our previous trials, and we believe that we would like to show a 10% to 15% increase or a doubling of response rates over placebo, to have a meaningful effect in a group of people that have a high likelihood of disease progressing to transplant, et cetera.

So without getting into all the details about the numbers, this would be our first step forward for patients with advanced fibrosis towards NASH, and a meaningful improvement if we could allow one in five of them to prevent progression of the disease to transplant the compensation, et cetera, we believe that will be meaningful clinically, statistically and otherwise.

[Operator]

Thank you. Our next question comes from the line of Robyn Karnauskas from Citi. Your question please.

[Robyn Karnauskas, Citi]

Hi guys, thanks for the question and congratulations on all the progress. My question is on PrEP. Can you talk about 200,000 on PrEP and by our math that could be around $2 billion worth of sales coming from PrEP I don’t know the trade, but my question is more about their data other thing this could be a 1 million to 2 million, 3 million people that ideally could benefit from PrEP. How are you thinking about getting that – getting Descovy enhance of those people? What is the argument you would make to make sure those patients go on PrEP?

And do you think – my question is more about a lot of people are young, so how are you going to make that argument and where do you think PrEP could go and what’s going to benefit from DTG, very long question, sorry.

[Laura Hamill]

Yes. So how about if I take the conversion question and on the clinical study, I’m going to leave that up to John. So this is Laura. Thank you, Robyn for the question. So as it relates to PrEP, as I mentioned earlier, I mean, the United States has 1.1 million people that the CDC estimates that could benefit from PrEP. And we really believe there’s a lot more to do. There’s a lot of populations that are affected that just don’t have the awareness that they really need to protect themselves.

So not only do we have a dedicated field force, but we have a lot of community individuals that have come from non-profits that are very much committed to helping these communities, and we are leading into these communities to try to raise awareness. In addition, we’ve actually put a significant amount of additional funding behind both Biktarvy and Truvada for PrEP in 2019, because we believe that’s very important thing to do.

Now to answer your question about the conversion from TDF based regimen to TAF based regimen or Descovy-based regimen. Obviously, the clinical trial results I’ll let John talk to. But what I would say is when we look at the treatment market, as I mentioned in the U.S., we’re at 77% of prescription, total prescription, now in Descovy-based backbone and in Europe, we’re at 80%. And we believe that the benefits that accrue to a patient for HIV are the same benefits that we need to have for a patient at risk that its being treated for PrEP.

Some of the duration of therapy is longer than we would – you may anticipate, so these otherwise, healthy individuals want to have a normal, healthy life and the Descovy-based regimen really lens splints for that to be a great treatment option. Then turn over to John on the study.

[John McHutchison]

So Robyn, the safety advantages of taking a test-phase backbone has this been the case and seen in the conversion rates for the HIV-infected individual will apply equally to the at-risk individual who’s taking medication for PrEP. So we’ll be able to show in the study with over 5,000 patients that they are differences, I presume, in terms of safety, kidney and bone. And because of the young age and the longevity in terms of taking medicines to prevent HIV infection, the same principles apply suggested somebody who is infected already.

So another way of saying what Laura has already said, and hopefully, the study will lead this down. The answers to that question, we are creating that in the coming month.

[Operator]

Thank you. Our next comes from the line of Alethia Young from Cantor Fitzgerald. Your question please.

[Alethia Young, Cantor Fitzgerald]

Hey guys, thank for taking my question. I was just asking about the MANTA study, I just want to clarify maybe one thing. Is that may for like a label or is it really need actually for at the filing package. And then just can you update with a little bit more precision on how does initiative that played out at the enrollment timeline? Thanks.

[John McHutchison]

Thanks, Alethia, and thank you for your question on MANTA. Before I go into at an answer that, so let me further I really do appreciate everybody’s interest in the program. It’s a somewhat different situation than we found ourselves in before and the day that we generating in the Phase 3 trials will provide me with a lot more, and our team, with a lot more details that will allow us to be able to answer your questions with greater clarity regarding the timelines.

So we have had a pickup in enrollment, Alethia, since we’ve made the modifications to the programs. And as I said today really, I think we don’t need it for labeling necessary, but it would give clarity as to whether there’s any risk associated with male infertility and so forth because it’s a male safety study. So it’s not required, but it’s, obviously, advantageous for us to have it in all of those respects.

As I said to you, this is an issue that we – we’re really addressing an FDA issue of a non-clinical filing that we observed in the preclinical animal studies. We’ve seen a pickup in enrollment, I don’t want to get into specifics about the numbers, but there has been a significant pickup in enrollment. And I’ll keep watching, and we will keep watching that process very carefully to advance our timeline.

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

[Operator]

Thank you. Our next question comes from the line of Umer Raffat from Evercore ISI. Your question, please.

[Umer Raffat, Evercore ISI]

Hi, thank you so much for taking my question. I have one for Robin and one quick clarification on something John said. So Robin, there was an expectation among investors based on a lot of the comments you shared and the rest of the management shared at the January conference that 2018 was a trough and 2019 should be a growth year in product sales. But judging by guidance, at least, it doesn’t quite look like that. Can you please go over that? And also particularly curious about Hep C because it looks like versus 4Q run rate, there isn’t a whole lot erosion modeled into it? And John, just to clarify, something you mentioned about NASH earlier, is there a hierarchal analysis for the low-dose versus high-dose in the readout or is the p-value being split? Thank you very much.

[Robin Washington]

So, Umer, let me start with your question on guidance. And so I just want to reiterate, as I’ve said, your conference, we are very focused on returning the growth in 2019, and really believe that’s achievable if you look at the strength of our HIV franchise. As I said we expect double-digit year-on-year growth, stabilizing trends in our HCV business, as well as the momentum of our cell therapy franchise where as you saw, we expected to practically double this year. I think the other thing we’ve tried to do is to be very transparent in our 2019 guidance of outlining those unplanned factors in 2018 that definitely will impact growth or the level of growth that we expect in 2019.

The other thing I want to point is just our philosophy around setting guidance at the beginning of the year. It remains pretty consistent with how we’ve done in prior years, and it includes all the uncertainties that you could expect that could impact our franchises. I mentioned several on the call and just take FX, that alone, volatility could have a, plus or minus, $300 million impact. So yes, the guidance, particularly, our first guidance of the year, that includes downside risk, and we’re going to monitor those and manage them throughout the year. But our conviction as well as our confidence around returning to net product revenue growth is very, very strong, and we’re going to look forward to updating you throughout the year as activities progress across our franchises.

[John McHutchison]

In regard to your second question, it’s John. We took two doses into the Phase 3 trials, a, because we had target engagement of both doses in terms of immunohistochemistry. We also allowed ourselves to have another chance in terms of the safety profile that might be potentially differentiated that lower or higher doses, those were the two reasons for taking two doses forward into Phase 3. And without getting into all the details of the statistical analysis plan, we will be able to compare both doses to placebo in terms of the primary endpoint.

[Operator]

Thank you. Our next question comes from the line of Cory Kasimov from JPMorgan. Your question, please.

[Cory Kasimov, JPMorgan]

Hey, good afternoon guys. Thank you for taking my question. Wanted to ask on the cell therapy side of things. Can you talk about the source of your confidence in the projected growth for Yescarta in 2019? I believe you said it’s up $200 million, given there’s only $6 million of sequential growth in 3Q and 4Q. And along these lines, I think you previously guided to having more centers online for the product. In Europe, by the end of 2018 and where you ended up. So how should we be thinking about kind of the cadence of opening centers into 2019 and how that plays into your guidance. Thanks.

[Laura Hamill]

Hi, this is Laura. Thanks for the question. I will say, that our launches of Yescarta really made excellence progress, both in the U.S. and in EU. As part of our guidance, we do expect the Yescarta revenue to nearly double, as you’d mention. So we feel we have very, very strong on momentum. We are seeing greater depth and breadth of treatment with Yescarta across the 68 certified sites in the U.S. So where we started off, there is a process of the institutional really figuring out how to operationalize treatment, and we had a very high amount in the – for top 20 academic institutions, we’re starting to see that spread further across the 68 institutions and also like I said, depth of patients going through.

In addition, as we mentioned, the data that was presented for the follow-up to the real-world evidence, I think really is providing that extra energy in the community about the importance of treating. Not only, obviously, the 68 sites, but what’s more important is that the community oncologists are referring these patients into the sites for treatments, and we do have full force focused on helping with that referral process. And you did ask us specifically about Europe. So we do have 12 sites in Europe that are actively engaged, and we will tell you that in terms of what we’re seeing in Germany. We’re very, very impressed with the results and we continue to have additional in the UK and we also have provided products and open up sites in France, and we will continue to expand throughout 2019 in the European markets.

[Operator]

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

[Phil Nadeau, Cowen and Company]

Good afternoon, thanks for taking my question. Question on the HIV franchise. I think in your prepared remarks, you mentioned that the use of TDF generic regimens is a risk to HIV pricing this year. And in fact, we have seen some payer programs to incentivize the use of those generic regimen. So just curious if you could maybe talk to a little bit more detail what you are seeing from payers? Any impact on pricing of the generic regimen’s, how it’s being used by physicians and should payers get more aggressive about recommending their use, how it gave encounter that. Thank you.

[Laura Hamill]

So this is Laura. Thank you for taking question. That was a pretty consistent question that we had at JPMorgan conference, too. And when we look at specifically, one particular payer that was emphasized, we really have not seen any major impact at all. As a matter of fact, when we look at the program, which was specifically, supporting Cimduo, we saw no more than 100 prescriptions generated during the 10 month period of time. And in addition to that, in December, United, basically said, there were two physicians saying, they were longer going to run the My Scripts program. So that’s – I think that was an effort that was tried to be, if patients would choose to switch back but we really did not see any impact.

[Operator]

Thank you. Our next question comes from the line of Salim Syed from Mizuho Securities. Your question, please.

[Salim Syed, Mizuho Securities]

Hi, guys . Thanks for taking the question. I just actually have two quick ones, if you don’t mind. The first is on HIV Japan. So if I recall at the end of last year, toward the end of last year, you guys bought back to HIV rights from Japan tobacco. I was wondering if you could just give us some color, how should we be modeling that opportunity coming out of Japan now that you are marketing that solo? And what should we be taking out of the royalty line, where I believe you previously booked the economics. And then the second question, just on your auto CD19 wondering if you guys view CD19 car and K cells therapy as complementary or competition to your allo T-cell therapy. Thank you.

[Robin Washington]

So maybe I’ll start with the HIV question. Thanks for a asking that. We’re really excited about the opportunity in Japan. It is included in our guidance. And to your point, in the past, we got between about $50 million and $60 million a year in Japan Tobacco royalties and that was in total revenue, not product revenue.

So net-net, this is a positive for us and that we’ll now see those revenues flow through net product revenue, but we’ll lose that royalty contract and other going forward. So again, I think very excited about gaining the commercial rights to the HIV products. And Laura, I don’t know if you want to expand a bit on the commercialization of that relationship at all.

[Laura Hamill]

Yes. So the teams have been actively working for a smooth transition for the HIV franchise. I think it’s not only the HIV franchise that exists most currently, but it’s really the opportunity this year 2019 to launch Biktarvy. So we’re really, really excited about that opportunity. And the teams, like I said, are working hard and we appreciate the great partnership with Japan Tobacco on kind of helping us with the conversion and building this franchise for us and helping us with a successful launch.

[John McHutchison]

In terms of the question Salim, related to the allogeneic program. As I said on the call, we are very pleased to announce that we hope to have our IND for our allogeneic CD19 program this year. And we will engineer certain factors into that program. One of which we’ve already announced that we’ll be HLA high related that will have an effect on NK cells that will – we hope, an advantage in terms of persistence of those cell – persistence or the manipulated or engineered CAR T cell. So it’s an early field, more to be seen, lots of different approaches. We are pleased with our progress so far.

[Operator]

Thank you. Our next question comes from the line of Terence Flynn from Goldman Sachs. Your question please.

[Terence Flynn, Goldman Sachs]

Hi. Thanks for taking the question. Maybe just on selonsertib. I was just wondering if you can confirm if you’d be able to file on only one positive Phase 3 trial or if you need both of those trials to file. And then we’d love your thoughts on how you see this market playing out over the near and longer-term under a positive outcome for the STELLAR studies. Importantly, what are the key inputs on pricing? Do you need the event-free survival data to really drive the value proposition or do you think just the histology data’s enough? Thanks.

[John McHutchison]

Thanks, Terence. Look, we would like both studies to be positive. They imminently going to be available in the next quarter or few months as well. If one was positive and one was negative as you outlined, we’d have to have a discussion with the regulators. And that would be something that we would discuss analyzing data in that situation. Look, in terms of pricing and moving forward, I’ll hand those aspects onto Laura.

[Laura Hamill]

Yes. Thanks, John. Thank you. So obviously it’s too early to really comment on our pricing strategy, but of course we modeled scenarios. I will say that the medical affairs team has done a lot of work from a health economics perspective. We’re quite familiar with the overall cost of an F3, F4 patients. These patients are extremely expensive to the system, so having that real world data, which shows us how expensive and unfortunately how many patients when they get to that level really are in pretty dire need. We can take that information coupled with what John produces from a clinical perspective and be able to utilize that for our discussion.

[John McHutchison]

Terence, just to add. It is Subpart H approval. So once we have the histological endpoint of week 48, that would then allow approval of the drug that would be linked to the five year follow-up to show the improvement in clinical benefit as well over time.

[Operator]

Thank you. Our next question comes from the line of Ying Huang from Bank of America Merrill Lynch. Your question please.

[Ying Huang, Bank of America Merrill Lynch]

Hi. Thanks for the questions. So maybe first for Robin. In your assumptions for the incremental SG&A for 2019 in PrEP for the launch for filgotinib and NASH, I assume that will probably mostly occur in the second half. And if NASH unfortunately fails, does that mean SG&A would actually be lower than expected. And then secondly on the assumption for the HIV launch in your guidance, does that assume incremental more switches from dolutegravir-containing regimens or not in 2019. Thank you.

[Robin Washington]

Sure, Ying. So first to talk about SG&A, as I mentioned earlier, yes it is the ramp in SG&A is more second half 2019. Don’t use Q4, 2018 as your baseline. Yes, it’s an unfortunate, yes. And for some reason we would not launch our SG&A expenses would go down and that is hopefully not what happens. This is one place where as a CFO, I hope we’ll spend every single dollar that we have allocated. I’ll also add that, again, because of the health of our HIV franchise, I didn’t mention earlier, but there is a component of incremental investment we’re making there as well. But to your question, if NASH did not launch, you would have lower expenses. If you think about $100 million for us in terms of SG&A spend or expenses in general, it’s about $0.06 a share.

[Gregg Alton]

And then there is a question on the HIV launch assumptions and in terms of a competitor. I think Ying, it’s safe to say we’re not going to get into our detailed assumptions of our guidance. But we fully anticipate Biktarvy will go on to be the best selling single tablet regimen.

[Operator]

Thank you. Our next question comes from the line of Carter Gould from UBS. Your question please.

[Carter Gould, UBS]

Thanks guys. Just wanted to dig in a little bit deeper to the EU dynamics in HIV. You obviously highlighted a couple country’s total launch with Biktarvy, but you were a little bit more, I guess a pick on around if that business will sort of stabilize this year and/or return to growth, or is that really something we should be looking to 2024? Any color there would be appreciated. Thank you.

[Robin Washington]

Okay. Hi, Carter. This is Robin, maybe I’ll start and if Laura has any color. Yes, I would say in 2019 we actually don’t expect U.S. HIV revenues to grow. But we’ll have the full year impact of genericization and as Laura talked about, we’ll continue to see that ramp of our Descovy-based products. So keep in mind over the next two years we’ll be launching Biktarvy throughout Europe.

So the one component of that quarter sequential decline that we saw was a one-time adjustment we had to make relative to prior periods where certain Southern European countries reach a cap in terms of spending on pharmaceutical products. And then they do what’s called clawback, we get kind of an additional tax. There has been a lot of changes in governments -- and we did make an additional adjustment. And if you take that out, I’d say the sequential declines are more consistent of what we’ve seen in the past. But beyond 2019, again, Laura talked about the great uptake of Descovy and with Biktarvy, we do expect overtime in 2020 or 2021 return to grow for EU HIV.

[Laura Hamill]

Yes. So I’ll just add a little bit. I think Robin covered it very well. In terms of launches, we’ve definitely been able to with Biktarvy launch, like I said, just some – the very end of the year, some of the big countries, but we have a launch is going on all through 2019 for Biktarvy. There will still be erosion of generics occurring through 2019. So we had in 2018, we’ll see it happen through 2019. But we believe, we’re going to have some erosion. But the conversion of the Descovy-based regimen being at 80%, those three variables, we believe that we will be able to move through 2019 and then continue to grow from that base.

[Operator]

Thank you. This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to management for any further remarks.

[Sung Lee, Vice President of Investor Relations]

Thank you, Jonathan, and thank you all for joining us today. We appreciate your continued interest in Gilead. And the team here looks forward to providing you with updates on our future progress.

[Operator]

Thank you. Ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.