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Gilead Sciences (NASDAQ:GILD)

Q4 2013 Earnings Conference Call

February 4, 2014, 4:30 p.m. ET


Patrick O'Brien – Vice President, Investor Relations

John Martin – Chairman and CEO

John Milligan - President and COO

Norbert Bischofberger – EVP, Research and Development and Chief Scientific Officer

Kevin Young – EVP, Commercial Operations

Robin Washington – SVP and CFO


Geoff Meacham - JPMorgan

Mark Schoenebaum - ISI Group

Michael Yee - RBC Capital Markets

Brian Abrahams - Wells Fargo

Geoffrey Porges - Sanford C. Bernstein

Rachel McMinn - Bank of America Merrill Lynch

Matt Roden - UBS

Yaron Werber - Citi

Brian Skorney - Robert W. Baird

Robyn Karnauskas - Deutsche Bank

Ian Somaiya - Nomura Securities

Phil Nadeau - Cowen & Company

John Sonnier - William Blair

Josh Schimmer - Piper Jaffray

Terence Flynn - Goldman Sachs


Ladies and gentlemen, thank you for standing by and welcome to the Gilead Sciences fourth quarter 2013 earnings conference call. [Operator instructions.] I would now like to turn the call over to Patrick O'Brien, vice president of investor relations. Please go ahead.

Patrick O’Brien

Thank you, operator, and good afternoon, everyone. We issued a press release this afternoon providing earnings results for the fourth quarter, which is available on our website where you can also find detailed slides that support today's call.

For our prepared remarks and Q&A, I'm joined by our Chairman and Chief Executive Officer, John Martin; our President and Chief Operating Officer, John Milligan; our Executive Vice President of Research and Development, Norbert Bischofberger; our Executive Vice President of Commercial Operations, Kevin Young; and our Chief Financial Officer, Robin Washington.

Before we begin our formal remarks, we want to remind you that we will be making forward-looking statements, including plans and expectations, with respect to our product candidates and financial projections, all of which involve certain assumptions, risks and uncertainties that are beyond our control and could cause our 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 statement made during this call.

We will also be using non-GAAP financial measures to help you understand our underlying business performance. The GAAP to non-GAAP reconciliations are provided in our press release as well as on our website.

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

John Martin

Thanks, Patrick, and thank you all for joining us today. 2013 was a very productive year on multiple fronts. Aided by strong scientific data and excellent commercial support, our marketed products achieved record product sales of $10.8 billion, an increase of 15% year over year. And Kevin will further elaborate on our commercial performance.

The research and development organization was also extremely productive, executing on a record number of clinical studies across all therapeutic areas, as well as submitting marketing authorization applications in both hepatitis C and oncology.

The central fourth quarter highlight was that the U.S. FDA approved Sovaldi, a once-daily oral nucleotide analogue for the treatment of chronic hepatitis B as a component of a combination antiviral regimen. This was followed in January by European Commission approval, and Sovaldi has been launched in the U.K., Germany, and France.

In December, top line data from three Phase III studies on the the the ledipasvir/sofosbuvir fixed-dose combination for release. These studies, ION1, ION2, and ION3, evaluate if the fixed-dose in genotype 1 affected cirrhotic and noncirrhotic, treatment naïve and treatment experienced patients, both with and without ribavirin for a duration of 8, 12, or 24 weeks. The response rates in the 8- and 12-week arms evaluating the once-daily combination of ledipasvir and sofosbuvir without ribavirin ranged from 93.6% to 97.75.

Based on these exciting data, the FDA and the European Marketing Authorization [unintelligible] application will be filed this quarter. FDA previously assigned breakthrough designation to this combination, and the European Medicines Agency, EMA, has accepted Gilead’s request for accelerated assessment, a destination that is granted to new therapies and medicines of major public health interest. Accelerated assessment could shorten the EMA’s review time of ledipasvir/sofosbuvir by two months.

Turning now to HIV, we received European Commission Approvals for Stribild Tybost, a pharmacokinetic enhancer that boosts blood levels of certain HIV medicines, and Vitekta, an integrase inhibitor for the treatment of HIV 1 infection in adults.

Last quarter, enrollment was completed in two Phase III studies for the single tablet regimen of elvitegravir/cobicistat/emtricitabine and TAF, abbreviated ECF TAF, in treatment naïve patients. These studies will [unintelligible] in the fourth quarter of 2014.

In addition, this tablet is being evaluated in a number of other studies, including treatment experienced patients, patients switched to ECF TAF, patients with mild to moderate renal impairment, as well as adolescents. We currently anticipate filing this broad package for U.S. and European approval of ECF TAF in the first quarter of 2015 for naïve, experienced, and switching indications.

In September an NDA was submitted for idelalisib, a targeted oral inhibitor of PI3K delta for the treatment of relapsed refractory iNHL. This application was assigned a standard review with a PDUFA date of September 11. This was followed in September by the filing of a second NDA with the FDA for CLL. The FDA granted idelalisib a breakthrough therapy destination for relapsed CLL patients.

This designation was based on data from a prespecified interim analysis performed by an external data monitoring committee showing a highly statistically significant effect on the primary endpoint of progression free survival. Just yesterday, we were informed that FDA has granted this application priority review with a PDUFA date of August 6, 2014. European MAA filings for idelalisib and iNHL and CLL were submitted in October.

Overall, 2013 was a very exciting year with significant milestones achieved across the entire organization, for which I’d like to thank all our employees for their dedication and hard work. As we look ahead, 2014 will also be a busy year with numerous upcoming milestones. In liver disease, we expect to file our first-ever regulatory submissions in Japan for sofosbuvir plus ribavirin in genotype 2 infected patients and ledipasvir/sofosbuvir fixed dose combination in genotype 1 infected patients.

We anticipate having numerous presentations on liver disease programs at EASL in April, in London, including data on the ledipasvir/sofosbuvir Phase III studies. We also anticipate the first product approval and launch in oncology for idelalisib in iNHL and CLL. In addition, we have a record number of clinical studies ongoing and planned across all therapeutic areas, as our pipeline continues to expand.

As you know, Kevin Young has announced his plans to retire and transition to a senior advisor role. For the past nine years, Kevin has successfully led our global commercial organization during a time of significant change, complexity, and extraordinary growth.

Those who’ve had the opportunity to work with Kevin have seen firsthand his passion and commitment to Gilead and to our employees and the value he places on doing what’s right and in the best interests of patients. His leadership and drive will be missed. Please join me in thanking Kevin for his many contributions and wishing him well in the next chapter of his life.

As always, we look forward to sharing our progress with you as the year progresses. I would now like to turn the call over to Kevin Young.

Kevin Young

Thank you, John. Good afternoon, everyone. 2013 was an outstanding year for Gilead Sciences. Total worldwide net product revenues closed in on the $11 billion mark. Antiviral sales exceeded $9 billion. We also believe for the first time Complera, Stribild, and Letairis achieved sales of over $500 million. And, our cardiopulmonary franchise topped $1 billion in 2013.

Looking to more detail around fourth quarter results, I would first like to concentrate on the U.S. Total U.S. sales for the quarter were a record $1.94 billion, a growth of 29% over the fourth quarter of 2012. Antiviral and cardiopulmonary franchises posted very impressive year over year growth of 31% and 23% respectively. Excluding Sovaldi sales, the antiviral franchise grew 20% year on year.

In HIV, underlying demand in the quarter was very healthy, thanks to the growth of our new single tablet regimens, Stribild and Complera. Over and above this reassuring picture, revenue did exceed demand by about $130 million to $150 million, due to an increase in year-end inventory levels.

I’d like to break down the inventory increase into its component parts. First, we had a repeat of what we saw a year ago in Q4 2012, where there was a significant amount of strategic purchasing by small wholesalers and large retail chains in advance of January price increases.

Second, inventory at the big three wholesalers finished above established ranges due to the timing of year-end. Normalization of inventory will likely take place during Q1 2014, and thus could have some impact on quarterly results.

As I mentioned earlier, we continue to see strong uptake of Stribild and Complera. Seven of 10 naïve HIV patients start on Gilead STR, and as of the third quarter 2013, Stribild was the largest STR, with 3 of 10 [stops]. Stribild is also the number one HIV therapy in HIV patients who switch regimens, and as you know, Stribild is now a DHHS preferred regimen, an important endorsement that strengthens its profile further.

The performance or Complera was almost as impressive as Stribild. Sales in the U.S. alone exceeded $500 million for the year. It remains the number two regimen in naïve HIV patients, the number two regimen in patients who are switched, and the number two in all HIV treated patients.

One important change to the Complera label came in December, with a broadening beyond the naïve setting to include patients who are biologically suppressed on stable PI continuing regimens.

Turning to Europe, we are very pleased with the fourth quarter year over year sales growth of 9% excluding foreign exchange. Eviplera has for the first time become the most prescribed regimen for naïve HIV patients, and continues to expand its lead over Atripla as the most switched to regimen in the big 5 EU markets.

Eviplera is now a preferred regimen in the EACS guidelines and all five major EU national guidelines. Furthermore, in December, European regulatory authorities extended the Eviplera label, removing the limitations of use in treatment naïve patients.

We are also very excited about the early uptick of Stribild, where we have launched in 14 countries across Europe. Performance in the U.K. and Germany is roughly double that of Eviplera at the same timepoint. A recent change in the British HIV guidelines designated Stribild as the preferred regimen. This coincided with NHS England reimbursement.

We now have over 60 centers in the U.K. ordering Stribild, including all major London HIV clinics. And just a month ago, Stribild was launched in Spain, the second largest European HIV market. We hope to have reimbursement in France by the end of the first quarter and Italy by midyear.

Turning to hepatitis C, as John alluded to earlier, this is a transformational moment for HCV patients who have lived with this disease for many years and have so few options for a cure. Even though it is early days, we are extremely pleased with the U.S. launch of Sovaldi. Sales in December totaled $136 million.

A little over half of these are attributable to the initial [unintelligible] inventory supplied to the big three wholesalers, which approached nearly $70 million. We also received a one-off order for $15 million for a clinical trial. The balance of the revenue, approximately $50 million, was driven by patient demand.

Sovaldi prescribing has been broad-based, both across physician groups and patient genotypes. Hepatologists, gastroenterologists, IMs, and infectious disease specialists have all begun using Sovaldi. Our U.S. field forces, therapeutic specialists, medical scientists, and national account managers were sized, resourced, and trained to attain broad market coverage. And as we sense from prelaunch research, physicians who have stopped using the protease inhibitors, plus pegylated interferon, reengaged in HCV treatment using Sovaldi.

Our first qualitative snapshot survey [unintelligible] at the beginning of the year has given us a feel for the type of patient receiving Sovaldi. The genotype distribution is very much in line with the U.S. HCV population, with approximately 70% usage in genotype 1. By far the most popular treatment regimen for the genotype 1 patient is as you would expect, the NEUTRINO approach of Sovaldi in combination with pegylated interferon and ribavirin for 12 weeks. We also see that some GT1 patients have been given a combination of Sovaldi plus simeprevir.

On the payer front, it typically takes between 3 and 6 months for a full formulary listing. However, almost without exception, prescriptions are being approved by commercial plans. The typical tiering of an innovative new specialist drug is being applied to Sovaldi, namely [CF3], with a prior authorization.

We expect the same type of timelines for coverage across the various federal payer segments and encouragingly, we have already seen some uptake by state Medicaid plans as well as DOD Tricare.

Our U.S. patient assistance program for Sovaldi, Support Path, has been very active since launch. This program helps patients navigate benefits coverage, as well as provide assistance where allowed with copays and foundation grants. We anticipate that 30% to 50% of commercial patients will utilize our copay assistance program.

Outside the U.S., we were very pleased with the European Commission approval of Sovaldi on Friday, January 17. Bottles of Sovaldi began shipping immediately on Monday morning, and we have so far fulfilled orders in the U.K., Germany, France, Austria, Sweden, and Finland. Full pricing will not be completed in some countries for up to a year. Health economic dossiers have now been filed with all major reimbursement agencies, and we are very hopeful that Sovaldi will be given high ratings to support rapid public coverage.

On an interim basis, we are exploring special national mechanisms that allow purchase and prescribing in defined [unintelligible] populations. As a reminder, we began selling in France in October, under an approved temporary authorization for use, or ATU program, in patients pre- and post-liver transplant and patients with advanced liver disease who have failed other HCV treatments. Sales under this program for 2013 were $3 million.

Finally, I’d like to briefly mention our [unintelligible] activities. We have begun to build out our sales and marketing organization for idelalisib in line with projected regulatory timelines. In the U.S., we have hired all of our regional managers and will have the therapeutic specialist team in place and trained by the middle of the year. All individuals have strong backgrounds in oncology and hematology. A very similar process will be followed in Europe, with particular emphasis on Germany, France, and the U.K.

In closing, I have never seen Gilead so strong and so ready to face the challenges and capture the opportunities of the new year. I will now turn the call over to Robin.

Robin Washington

Thanks, Kevin, and good afternoon everyone. Earlier today, we were pleased to report strong fourth quarter and full year 2013 results that were in line with our revised guidance. Our strong commercial execution across all therapeutic areas resulted in fourth quarter total revenues of over $3 billion, up 21% year over year and 12% sequentially.

As previously mentioned, strong wholesaler and subwholesaler purchases in anticipation of January 1 price increases may result in an inventory drawdown by wholesalers and subwholesalers in the first quarter of 2014, similar to the first quarter of 2013.

Fourth quarter non-GAAP diluted EPS was $0.55 per share, compared to $0.50 a share the same period last year. Turning to the balance sheet, during 2013, we achieved our target net debt to EBITDA of 1.5x, and we resumed the repurchases under our share repurchase program, which were $582 million for the full year.

Focused efforts on collections and increased government funding to hospitals in southern Europe allowed us to reduce our European DSO to levels not seen in over two years. Finally, I would like to cover our full year 2014 non-GAAP financial guidance, summarized on slide 45 in the earnings presentation available on our corporate website.

We expect product sales from our core business, excluding Sovaldi, to be in the range of $11.3 billion to $11.5 billion, an increase of 6% to 8% over 2013. This range is due to anticipated price decreases in certain European territories and the impact of generic [unintelligible] now available in Canada and Europe.

Our non-GAAP product gross margin is expected to be in the range of 75% to 77%. We expect our non-GAAP R&D expenses to be in the range of $2.2 billion to $2.3 billion as we continue to invest in our product pipeline.

And we expect our non-GAAP SG&A expenses to be in the range of $2.1 billion to $2.2 billion, which assumes the continued buildout and expansion of our commercial infrastructure in Europe and Asia to support Sovaldi and increased marketing and sales efforts related to the launch of our first oncology product, idelalisib, in the U.S. and Europe.

For the full year, our non-GAAP effective tax rate is expected to be in the range of 28% to 29%. As Congress has not extended the federal R&D tax credit for 2014, we have excluded the credit from our guidance. Please note that last year’s effective tax rate included an R&D tax credit for 2013 and the retroactive impact for 2012 in the first quarter.

We are anticipating the full year diluted EPS impact of acquisition related restructuring and stock based compensation expenses to be in the range of $0.63 to $0.66 per share. This range includes the full year effect of the amortization of in-process R&D related to Sovaldi.

At this point, full year sales of Sovaldi are difficult to estimate and are not included in net product sales guidance. With that said, we are conscious of the potential magnitude of Sovaldi’s impact on certain areas of our guidance and wanted to provide you with the following metrics.

In 2014 only, we estimate that our non-GAAP product gross margin will increase by approximately 0.75% to 1% for every $1 billion of Sovaldi sales and our non-GAAP effective tax rate will decrease by approximately 0.75% to 1% for every $1 billion in Sovaldi sales.

In closing, we are pleased with our 2013 accomplishments across the organization. Based on the groundwork we have laid, we believe 2014 will be another outstanding year for Gilead and look forward to sharing updates on our progress and future successes with you.

We would now like to open the call for questions. Operator?

Question-and-Answer Session


[Operator instructions.] Your first question comes from the line of Geoff Meacham with JPMorgan.

Geoff Meacham - JPMorgan

Kevin, I want to get your early marketing experience with Sovaldi in the U.S. beyond your earlier comments, just with respect to treatment experience versus naïve, and then genotype 3 use, and if you’ve heard of any secondary warehousing occurring in the U.S. And maybe the sum total of this, if you can contrast that with what you’ve seen in France, just given your longer experience there too.

Kevin Young

In terms of the U.S., I referred to some market research that we did in January. Going back to the launch, we did expect that people might hold off in the genotype 1 because of the Christmas period. In this research, it does seem now that the use of Sovaldi is very much reflecting the spectrum of patients that you have in the U.S. So about 70% in genotype 1.

We have seen some use in genotype 2 and 3. Three was about 12% in this very small survey. Genotype 2 was about 17%. Again, I must stress this is very low numbers. It was a survey done in people who were beginning to use Sovaldi. So it’s very representative, and I think that’s very reassuring that we’re seeing that.

Our sense is that physicians are calling in their advanced patients, because of course they need to be treated, so our sense is that they’re sort of clearing patients that they may have had waiting, and that may well continue during the first quarter.

In terms of France, our prescribing right now is according to the definition of the temporary authorization for use, the ATU. Because what happened in January is that the French government said that the ATU parameters must now still apply until there is full reimbursement of the product in France.

So we’ve had extremely good response. As soon as we switched to the use of our public Sovaldi, we had an immediate order from the public hospitals around Paris. Nineteen of our top 20 centers in France have prescribed Sovaldi. But the majority of the patients treated have been the [F3s] and the [F4s]. And that’s not surprising, because patients with advanced disease, with no alternative, are as per the ATU guidance. So that’s probably not surprising. And I’ll just throw in this one, that in Germany kind of like the U.S., our sense is that it’s sort of prescribing according to the distribution of genotypes.

We’re not aware at all of any sort or form of secondary warehousing of patients. Right now I think physicians, whether it be the U.S. or Europe, are totally energized about the availability of Sovaldi. So no sense whatsoever that they may be holding back patients for all-oral.


Your next question comes from the line of Mark Schoenebaum with ISI Group.

Mark Schoenebaum - ISI Group

I was just wondering how you’re preparing for the 2029 Sovaldi patent cliff. [laughter] Just kidding. Can I just expand on that last question? I know that you’re not giving Sovaldi guidance this year. Obviously I respect that, and get why, because of all the unknowns. But it was interesting, in your response to Jeff’s question, that you haven’t seen any secondary warehousing. Is it your current expectation that we’re not likely to see a decline in U.S. demand for Sovaldi any time before the combination pill G1 launch, presumably in Q4, if you’re willing? And then just a clarification on the tax rate, that’s $1 billion of sales no matter where they occur geographically, correct, that would have the impact on tax rate and gross margin?

Kevin Young

It really is still incredibly early days. We’ve only just got through our first full month, and what we call the first [unintelligible] month of launch, clearly the holiday period. So I think it’s so difficult to say what’s going to happen in the transition period between Sovaldi and Sovaldi ledipasvir.

First, we don’t know what ultimately the timelines are going to be for launch of our new single tablets. So I just don’t think we know, and I think we need to get through the first quarter into the second quarter, of course, to know what might be the timelines for launch, before we can have any feel for that. So I really don’t have any of the color.

I would just reemphasize that the energy is extremely high, and that’s not just in the major liver disease centers. We’re getting good response from the gastroenterologists. We’re having prescribing from internal medicine physicians, and we’re seeing a little prescribing from the infectious disease physicians.

Robin Washington

And the second part of your question was, I believe, the guidance we provided around whether the impact on our tax rate applied to global Sovaldi sales. The answer is it does, and please remember that as we guided, that only relates to 2014.


Your next question comes from the line of Michael Yee with RBC Capital Markets.

Michael Yee - RBC Capital Markets

My question is on your end user customers. What percentage do you think are private pay versus Medicaid versus other buckets? And the follow-on to that is sort of when does the VA come on in prisons? What kind of customers are you seeing now and going through the first half of the year, etc.?

Kevin Young

By far the vast majority is the private pay right now. We are actually having some initial formulary listing from state Medicaids like New Jersey/New York, which is quite encouraging. We shouldn’t forget that all Medicaids have often some form of interim coverage just like the private plans. So we’re going to be exploring all of those across the country. We’ve had a couple of [unintelligible] cover and list Sovaldi. That’s not with any additional discounts, that’s purely the Medicaid pricing. But I have to say that the majority of patients right now are coming from the private managed care sector.


Your next question comes from the line of Brian Abrahams of Wells Fargo.

Brian Abrahams - Wells Fargo

I was wondering if you could talk a little bit about what you’re seeing into the first quarter. And obviously the prescription data clearly is showing an uptick. You talked about early January being sort of the real launch, where you’re going to retail more aggressively and engage with payers. So sort of wondering what kind of follow through you’re seeing, and also what the impact of the recent AASLD guidelines might be on treatment patterns, treatment practice, and uptake patterns.

Kevin Young

It’s so hard, Brian. It’s so early. It is obvious that the major liver centers are treating the sicker patients. I mean, that’s not only intuitive but it’s common sense that you’d want to be trying to cure patients who are really, really advanced. And the hepatologists knew about this drug. The hepatology centers take the sicker patients. So they have patients lined up. We even know some centers that were even checking on the insurance qualifications of those patients so they could very quickly receive drug.

I think it’s important, though, to say that we’ve got a lot of people to talk to about Sovaldi, particularly in the GI community, that really weren’t that familiar with the protease inhibitors and weren’t warehousing patients. And we’re introducing, I think, a very novel therapy, and they’re very interested in this, and as I mentioned, I think we’re getting people to reengage and think about treating HCV, whereas in past years they certainly asking for the patient to wait.

The AASLD guidelines are very, very positive. I couldn’t tell you that I’ve seen an actual specific impact, but as an umbrella endorsement of Sovaldi and indeed to stop using the prior therapies is very strong.

I’d also like to mention that we have seen, after only 10 days after approval, a very similar change in Germany, and we do know that the opinion leaders in the U.K. are considering some form of consensus guidelines with the introduction of Sovaldi. So very positive.


Your next question comes from the line of Geoff Porges with Sanford Bernstein.

Geoffrey Porges - Sanford C. Bernstein

Unfortunately, my question is about the SG&A guidance, which is a significant step up, I think, from certainly what we were expecting, but also a big step up from 2013. I’m just wondering if you could talk a little bit more about that guidance, specifically does it fully account for the expense for the launch of idelalisib, the fixed dose combination, and whatever else you might incur? And is there any contingency in the SG&A that would go up if you sell more Sovaldi over the year? And equally, looking ahead, is this the big step here in SG&A given the late stage pipeline, or should we anticipate similar increases in the next couple of years?

Robin Washington

I’m going to somewhat go in a little different order. Relative to the contingency, I think we really stepped back and looked at SG&A to be all-encompassing. So irrespective of the size of sales, I think we’ve got that all included relative to the guidance that we’ve given you.

In terms of the overall component, it does include all the sales and marketing expenses for the Sovaldi launch in the U.S., Europe, Canada, and Australia. Keep in mind this isn’t only for the ramp that continues in some of those countries, but it’s a full year effect of the ramp that we had in 2013.

It does also include the buildout, as Kevin talked about in the script, for a launch of idelalisib in both the U.S. and the EU. And it also includes a ramp for new markets, most specifically Japan, but there’s also a small amount of money in there for some other emerging markets that we are considering in 2014.

So that’s the biggest component, over 50% of the increase. If you think about just our traditional SG&A, external legal is increasing significantly as we have to continue to defend our patents. The excise tax is retroactive, so it does not include Sovaldi sales, because it’s based on 2013 revenues, but there is a significant step up in that, as you saw in our slide deck, with guidance of about $150 million to $170 million for that as well.

And I think just given the overall growth of the company, I mean, we’ve increased employees a thousand fold this past year, so there are some just overall increases relative to our infrastructure and SG&A that we had to consider given our growth.

Kevin Young

I’d just add that, as a reminder, Japan, we’re going to launch as Gilead, so we’re going to be starting a full [unintelligible] course, and that will take place in the second half of the year, ready for a first half 2015 launch. So that is a new component for us at Gilead.


Your next question comes from the line of Rachel McMinn with Bank of America Merrill Lynch.

Rachel McMinn - Bank of America Merrill Lynch

Just to follow up on the HCV copay, and taxes, I guess I’m a little bit confused if 30% to 50% of your Sovaldi patients are going to be utilizing the copay assistance program, how does that not impact SG&A? Or how are you thinking about that? And then Robin, I was intrigued by your comment about the tax improvement only applying to 2014. Can you give us a better sense of what are the dynamics in 2015 and beyond that would make that number higher or lower as we think about our models?

Robin Washington

Relative to the copay, as I said, to the extent that that copay program or the support launch, as Kevin described, it is inclusive of those copays in SG&A guidance. So it’s sales, it’s marketing, and it’s any type of programs that we would put in place. There are also specific foundation grants that we’ve given to help with patients getting access to Sovaldi. You saw an increase in Q4 and some of that continues into 2014.

So relative to the tax rate, I’ve said all along that commercialization of Sovaldi worldwide would lower our tax rate, and that’s based on where the patient population of Sovaldi is. More ex-U.S. will overall allow us to continue to reduce that rate. And we also did some supply chain restructuring that allowed us to take advantage of that tax rate reduction even sooner.

We don’t give long term tax rate guidance, but I’d expect to see the tax rate overall to continue to decline as the level of Sovaldi revenue continues to increase.


Your next question comes from the line of Matt Roden with UBS.

Matt Roden - UBS

First of all, in terms of demand in the fourth quarter, can you tell me if I’m doing the math right, that if you add $136 million on the quarter, $15 million was a one-timer, $70 million was inventory, so does that mean that demand is roughly $50 million? Is that the right way to think about it?

And then related, I get a lot of questions on the sustainability of the hep C market. I was just wondering if you could talk about, to the extent that you can, how you model hep C over the longer term. You said you see this as a relatively long-lived opportunity, and that’s a point of view that we’ve seen shared by other management teams as well.

Just want to get your sense for the key swing factors in your model that are most impactful to sustained demand, whether it’s diagnosis and linkage to care, capacity to treat, need to treat, geographic expansion, etc. And then lastly, and related, how you see [unintelligible] market wide pricing over the long term in the market.

Kevin Young

Your math is about right. Bear in mind that the $70 million that we put out there, we felt was appropriate for the December period and the type of usage. I think it’s important to point out that as we go into January, February, and first quarter, that actual purchase will be for demand, but will be ticking up inventory levels. You know, major wholesalers start to adjust their inventory levels according to demand. So we’ll see as we go into first/second quarter that the actual purchase will be reflective of both dynamics. But your $50 million number, we think, is about right.

In terms of sustainability, we’ve said, I think, on a number of occasions at Gilead, that we see this as a long term opportunity for the company and for our products in hepatitis C. Yes, people are clearly waiting for Sovaldi, there will be, undoubtedly, physicians and hospitals excited about having an all-oral. But we’re going to be doing a lot as we come out of 2014 to 2015 around patient education, particularly for the patients who are currently diagnosed but are really not doing anything about their disease.

And I think you’re going to see, as we move through 2014, some very innovative advertising from Gilead that will start to raise awareness that there are good alternatives now for hepatitis C, and you should be seeking a conversation with your physician.

And then you mentioned the geographic rollout, we think there are great opportunities in Europe. Undoubtedly, that’s led by France, but we see initial excitement and quite significant early uptake in Germany. And then we’ll have some European markets come on later. We do think this drug is really appropriate for the elderly, treatment experienced and treatment intolerant Japanese patients.

And then we’ve got a great team here who’ve got a lot of experience in other countries like Latin America, Brazil, where actually we’re putting some of our own people in there for the first time, and we think that’s going to be helpful for the more difficult and challenging pricing and reimbursement [unintelligible] you have in these countries.

But I think on all of those levels, we have a longer life cycle for our hepatitis C products than perhaps people are giving credit for.


Your next question comes from the line of Yaron Werber of Citi.

Yaron Werber - Citi

Robin, you mentioned, or I think Kevin mentioned, that prior authorizations are one of the tier 3 requirements. But this is essentially a first line product, recommended to be a first line product, so I’m just confused a little bit about the requirement for prior authorizations. What can they possibly require?

And then secondly, just for Kevin, help us think, how do we think about that EUR56,000 price under ATU? Historically, that’s been a good benchmark, but how to think about the European pricing. Is that how we should think about it now that it’s approved?

Kevin Young

I probably should take the first question as well. Right now, because managed care are using kind of an interim coverage, you get this tier 3 plus a prior authorization. When they go for full formulary listing, it could well move to tier 2. But there will always be a prior authorization. Every hepatitis C drug has had a PA, and I think we absolutely believe that, whether it’s Sovaldi or Sovaldi ledipasvir, or [unintelligible], for that matter, a PA will always be there.

And it’s really just a checkpoint that the drug is being used according to the label. It is no further restriction than that. So it’s just that the right type of patient, the right genotype, according to the label, is being prescribed by a physician.

Let me transition to European pricing. So you mentioned the French ATU price. So you are correct, that’s EUR56,000, or by today’s FX, about $76,000. And I’ve said before that that’s really a very individual price point, because it’s a very restricted use in patients that really have no alternatives, whether they are HCV or HCV with a liver transplant.

I would like to talk a little bit about the rest of the pricing for Europe. We have now listed our price in the U.K. The price in the U.K. is almost UK35,000, so that’s about $57,000. And I think, as a benchmark for the majority of Europe, that would be a good price point for you going forward. So I’ll say that again. About UK35,000, this is the 12-week course of treatment, or about $57,000.

And I also mentioned the German pricing. The German pricing is almost EUR49,000, or $66,000. So Germany typically is a little bit higher. And my final comment on European pricing is just to say that these are significant differences to the telaprevir pricing. And the [unintelligible] that we’ve taken for Sovaldi, we believe, is very justified according to cost effectiveness data, and the premium is very comparable to the premium that we took on Sovaldi versus the original price of telaprevir in the United States.


Your next question comes from the line of Brian Skorney of R.W. Baird.

Brian Skorney - Robert W. Baird

I know we’ve talked a little bit about the potential competition we’re going to see in the full AbbVie Phase III results right now. And I’m just wondering if we could kind of get some top level thoughts on how you see competition emerging between you guys. Would you favor a position where AbbVie can have some reasonable market share without getting into a price competition? Or do you think given the benefits of sofosbuvir and your regimen that it’s a moot point and that at any price you think the regimen’s just so much better that it will all just stand on its own?

Kevin Young

I’ll answer, and then maybe Norbert has one or two on the scientific front. I think what you are referring to is, my apologies, somewhat artificial. I don’t think Gilead thinks that way. I don’t think really any pharmaceutical company in terms of somehow being super clever about segmentation and one company gets one part and one company gets another. We present the profile of Sovaldi. We obviously present according to the label, and all of the data within the label, and I think ultimately the physician and the payer make the choice.

We believe that the Sovaldi data and the Sovaldi ledipasvir data is very, very strong, and our profile will give it a preeminent physician, not only in the minds of the physicians, but in the minds of the payer. So you know, I think the market ultimately makes decisions and ultimately prescribes and uptakes the product according to the scientific profile. And we certainly, as you heard from John Martin, without ribavirin for our combination, have a very, very strong profile in genotype 1.

Norbert Bischofberger

And Brian, just to add to that, if you do comparisons of any study, you will come to the conclusion that ribavirin really doesn’t make any difference anywhere, in any of our arms, in any of our subpopulations. So our recommendation, and of course this has to be reviewed and agreed on by regulators, will be that anybody, whether treatment naïve and [unintelligible], and will get eight weeks of the fixed dose combination that [unintelligible], and everybody else will get 12 weeks. So it’s a very simple algorithm, and there’s nothing else required, no response to any therapy, etc.


Your next question comes from the line of Ian Somaiya from Nomura Securities.

Ian Somaiya - Nomura Securities

Just one for Robin. As it relates to your gross margin guidance, if we think about this maybe a little bit differently down the road, just let me know if this is an appropriate way to think about the gross margins. As [unintelligible] goes generic in 2017, should these corporate gross margins go back to a level prior to the [unintelligible] launch of ribavirin in the mid-eighties, and then we layer on top of that a roughly 100 basis point improvement in margins for every $1 billion in [ATV] sales? Is that a good way to think about it?

And then just a slightly different question, maybe for Norbert, is there any more clinical work, do you think, that needs to be done to differentiate your hepatitis C combination versus, not versus AbbVie, where we think the comparisons are sort of obvious, but versus some of the newer competitors? Maybe Merck is an example.

Robin Washington

To answer the first part of your question, you are speaking about it directionally the right way, but recall that our arrangement with BMS is that once efavirenz goes generic that there is a step down royalty that we’ll need to pay to BMS. So it won’t happen immediately upon going generic.

Also, keep in mind, if you think about our core business, excluding Sovaldi, as we continue to have more usage of Stribild and Complera/Eviplera, that will also have overall product gross margin impact. Hence you saw even in our guidance for 2014 we saw some of that shift start to occur. On top of that is the incremental product gross margin impact related to Sovaldi that we’d expect to see as that product becomes a larger component of our revenue stream.

Norbert Bischofberger

Thanks for asking an R&D question. I thought I was going to escape this call without having been asked one single question. So thank you very much. As you know, we have now succeeded with our ledipasvir/sofosbuvir fixed dose combination to actually incredibly shorten treatment duration to 8 weeks and 12 weeks and Sovaldi treatment experience with response rates that go up to 95% or higher.

But we’re not stopping there. This is, of course, for genotype 1. We have another fixed dose combination in development, 5816 combined with sofosbuvir. You will see some of those early data at EASL, and we’re still waiting for the treatment experienced cirrhotic genotype 3 cohort to make a decision or to feel really comfortable going into Phase III.

And then finally, as you know, we have efforts underway to shorten the treatment duration even further, to six weeks, by adding a third drug. So you know, all of those things are ongoing, and I think we will be competitive with our, you know, you can’t really do much more than having one single pill, once daily. Very safe, very well tolerated tablet, given for eight weeks and achieving response rates of 95%.


Your next question comes from the line of Phil Nadeau of Cowen & Company.

Phil Nadeau - Cowen & Company

Kevin, maybe if I could direct one last question to you that’s on payers kind of more broadly than just what you’re seeing today. There’s been a lot of news in the press this morning about payers restricting access, either pressure and price through formulary placement, or exclusion, or maybe putting up some sort of barriers before patients can have therapy, like [unintelligible] or something like that. Can you discuss your discussions with payers? Do you think at some point they’ll push back on Sovaldi as sales get too big? And do you think they even have a general appreciation of how big Sovaldi sales could be this year, next year, in order to prepare?

Kevin Young

I think there’s a great awareness. I think we always knew that when we did our research, even a year ago, with payers. Hepatitis C was very high on their radar, as it is with oncology products and RA products and some others. I think if you present value to them - and we shouldn’t forget, we are presenting a cure - it’s very compelling. And we’re curing somebody in 12 weeks, as Norbert said, in eight weeks in the future, and I think that is a very compelling proposition.

You know, already into the launch of Sovaldi, we have had some plans come to us who are traditionally quite difficult to get listings. In fact, we’ve had one of them place orders outside their formulary. So I always come back to the area which is it’s the profile of the product. The need in the patient is very clear, and we’ve got a well tolerated, highly effective cure that physicians and patients want. The payer will always look at this and we’ll have discussions with the payer. But I think this is transformational medicine, and the payer will have a role, but I think the adoption of HCV products is here for a long time to come.


Your next question comes from the line of John Sonnier with William Blair.

John Sonnier - William Blair

You spoke a bit to the broad market access approach of your HCV commercial organization, and as the launch gains steam, I suspect that becomes increasingly relevant. But I’m curious, in the early stages, to get your perspective on what attitudes are towards screening among the different specialties. And as screening starts, I think we’ll get a better picture of true prevalence. And I guess the parallel question is how confident are you that the current U.S. epidemiology is actually correct?

Kevin Young

I don’t think managed care and the payer are thinking too much about the movement in U.S. guidelines on the Baby Boomers. And to be honest with you, John, right now our concentration of efforts at Gilead is very much presenting the products. But as we get into 2014, and I referred earlier to some new educational campaigns that we want to have by the middle of the year, we’re certainly going to be addressing the diagnosed population, that 1.7 million - that’s the first area, I think, that could be mobilized - and then move into the larger 4 million population.

We have seen some state activities. There’s been a lot of change in New York, that a test must be offered to a Baby Boomer when they present in a clinical setting. We are aware that that’s been discussed also in Florida. We’ll certainly be using our government affairs organization to continue that around the country.

I think it’s always the case around screening that you need the products to treat the disease once it’s been identified. And now we have that with Sovaldi, and it will become even stronger with our combination, and that encourages people. So I think we’re going to see more of that. I think ourselves and competitors will be raising the awareness more and more. So I do think there is a great deal of potential in this market.


Your next question comes from the line of Josh Schimmer with Piper Jaffray.

Josh Schimmer - Piper Jaffray

Essentially a bit of an extension off of Phil’s question. Since we seem to be in uncharted territory for the launch we’re seeing with Sovaldi, are there any theoretical caps or limits regarding the speed or extent of uptake of a new multimillion dollar franchise in the U.S. or a point at which various payer systems strain under the pressures of the added costs? And if so, where might those limits or caps be?

Kevin Young

Wow, that is an incredible question, Josh. I think you’re right. We just don’t quite know yet. I think those caps and possibly sort of bumpers might be more prevalent in Europe. It does take European governments more time to expand budgets. So it may well be more prevalent there. But we have seen increases, even as a result of the protease inhibitors, in some markets like Spain and Italy. But I think, because it’s national health funding across Europe, that might be more brought into more question.

I think we just don’t know, and this drug is really very special, and very transformative. So this is not extending life by a few months, this is probably one of the greatest breakthroughs to cure people and get rid of a very serious virus. So I think time will tell.


Mr. O’Brien, we have time for one final question, and it comes from the line of Terence Flynn with Goldman Sachs.

Terence Flynn - Goldman Sachs

Just two quick ones for me. The first is I noticed you had some new data in your slides on the number of patients in the U.S. and Europe under care. I was wondering specifically on the U.S. number, if that includes or excludes the patients in the VA, so that about 200,000? And then on the capital allocation side, Robin, maybe you could just provide us with your perspective on the share repurchases in 2014 and anything beyond that.

Kevin Young

Yes, it does include the VA population. So again, I just want to say that these are estimates. We’re using the company Ipsos. That’s the company that we’ve used for a long time on HIV. But the sampling is much smaller than we currently have in HIV. You know, in HIV it took us about 10 years to get the type of sophistication from the Ipsos data. It’s going to take us a few years to get more accuracy with hepatitis C. So I would just put a caveat and perhaps a [unintelligible] warning around this data, but it’s the best we’ve got. I think it’s representative of where the U.S. today, and you’ll see that we’ve also included that number for the European big five markets as well.

Robin Washington

Relative to capital allocation, in the earnings deck, on slide 61, we kind of outlined our share repurchase by quarter for 2013. In Q4, we kind of went back to our goal of offsetting dilution, and you can expect that to continue in 2014. Relative to long term capital structure, I’d say we remain fairly consistent: [unintelligible] our pipeline, looking at various assets that may make sense and then returning cash to shareholders. Right now via share repurchases, but as we said, we may consider other vehicles over time. But other than that, I’d say it’s business as usual as to how we’re thinking about utilization of cash [unintelligible].


This concludes the question and answer portion of our call. I would now like to turn the call back over to Mr. O’Brien for closing remarks.

Patrick O’Brien

Thank you, operator, and thank you all for joining us today. We appreciate your interest in Gilead and the team here look forward to providing updates on future progress. Thanks again.

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