Gilead Sciences, Inc. (NASDAQ:GILD)
Jefferies Healthcare Brokers Conference
June 10, 2016, 10:30 AM ET
Robin Washington - EVP & CFO
Sung Lee - Senior Director, IR
Amy Flood - VP, Public Affairs
Brian Abrahams - Jefferies LLC
Good morning, everyone. Thanks for joining us today. I am Brian Abrahams, one of the biotech analysts here at Jefferies.
We're extremely pleased to have our next presenting company here, Gilead represented by their CFO Robin Washington, Senior Director of IR Sung Lee and the VP of Public Affairs Amy Flood. Thanks again for joining us.
Thanks, Brian. Thanks for the invite and I know it's not entirely new but nice to see you here at Jefferies as well. So you and your team.
Q - Brian Abrahams
Okay. Thank you, Robin. So just starting off on a question I'm sure you've gotten frequently of late, but curious your updated thoughts on it. We've heard a lot of commentary out of the management team recently on pursuing important deals when it comes to business development.
I'm wondering how your approach to BD has evolved this year, especially now that you've started to get a better read on the trajectory and potential future cash flow generation of the existing antiviral franchises?
Yes, a great way to start. And I think you're right, BD is probably, other than HCV patients, probably one of the top questions that we answer and talk about with investors. I think it's very relevant now. I mean, I think the general dynamic in this space we start to see M&A activity accelerate. And I think Gilead not only this year but has continued to spend a significant amount of time and focus in that area.
So I would say we're very active which the register of that is not always necessarily deal done. I think deals looked at and flow have been very high for Gilead. You've heard both our new CEO John Milligan, as well as our Chief Scientific Officer Norbert talk a little bit about the amount of time they are spending looking at deals and that's fairly significant these days. We're also looking at bringing in additional resources, which I think we'll talk about later as it relates to that.
There are a lot of opportunities out there but at the same time I think for Gilead our focus primarily is on thinking about some of the key therapeutic areas that we've had inroads in.
If you think beyond antivirals, we've continued to focus another area of liver disease NASH. I think we feel very comfortable given the recent acquisitions in the pipeline we have. But that's an area that we probably have several best-in-class compounds that cover a bunch of different areas. So we feel good about where we are there.
I would say oncology is a key area of focus for us and one where admittedly we don't necessarily have the core compound or backbone that we have in other areas. And inflammation continues to be another area of focus for us as well.
I don't think any of this excludes other therapeutic areas. But I think in an ideal world the ability to focus in some of those areas where we have expertise and we see viable opportunities is the place where we're focused right now.
Makes sense. And then I guess there's two different potential approaches. There is the transformative versus the string of pearls approach. In NASH we've seen you string together a set of multiple assets together.
How do you weigh the potential for diversification and a set of combinable assets that could come with a string of pearls type of approach versus the potential for a cornerstone backbone type asset?
Well, if you're indirectly asking me would we love another Pharmasset I mean we would. But even that was somewhat of a quasi string of pearls in that we added it to an existing pipeline product to get to Harvoni.
But you know, we haven't - we don't have a set refined strategy but I would say based on what's out there today we probably are looking at multiple type of acquisitions over time. We can talk about size. I think for us we're open. We are fortunate enough to have a very healthy balance sheet as well as access to capital markets that allow us to pretty much do whatever we need to do.
I think one of the things you've heard us talk about relative to size is not necessarily wanting to acquire a large amount of people as opposed to size of deal in that we value our culture. It's very scientific focused, it's very agile.
And I think where we play best and what our core competencies lead us to is assets where we can further refine the scientific direction, focus on interactions with the FDA, as opposed to synergistic transactions where we're trying to right-size organizations. Those things can be done, but I think our focus is on the latter.
Got it. And then in terms of thinking about a timeframe, to what degree do you focus on the much longer-term, perhaps as you think about the long-term expiry of the HIV patents or potential diminishment of hep C patient flows versus something that could be accretive in the near term or add to the top line in the very near term?
I'd say the priority for us has always been differentiated scientific assets and molecules and the reality of it is in this space those things take time. That being said, if there is a deal out there that gives us that that also brings near term revenues, that's great. I think that would be additive.
So I don't necessarily want to rule anything out. There are some great assets out there that potentially have both that we're looking at. But I would probably focus more on the differentiated molecules that we can combine or would be additive. I mentioned that backbone nature of an oncology type of asset. That would be very intriguing for us.
And I think the business development space across the biotech, biopharma sector has been certainly more active this spring. How does that impact the way you guys approach things, the premiums you might be willing to pay versus I think the discipline that's been a hallmark of your approach in assessing and executing deals?
I would say our approach remains the same. We will continue to be disciplined. There are some deals that have recently been done that we've been made aware of and involved in the process and didn't necessarily see the value creation there.
That being said, as you saw with Pharmasset for that differentiated asset we have the capability and willingness to pay appropriately. And I think for those type of assets it will probably be a more competitive process and a lot of that dictates the pricing.
And how much debt would you potentially be willing to take on for a larger deal or how do you think about sort of leverage?
Yes, we have since 2010 focused a lot on our relationship with our rating agency and we have a lot of capacity, we also have a lot of cash. So our financial wherewithal, I don't see as a limitation at all.
I think we've proven with the Pharmasset acquisition and given the strong free cash flows today and in the future of our core antiviral franchises that we could lever up and pay down very quickly.
So that even after the optionality that we have from a financial wherewithal to acquire what we need to grow the company longer term.
Great. Maybe we could shift gears and talk about the hepatitis C franchise a bit. So coming out of the hepatitis C numbers that you reported in the first quarter, you've reiterated your full year guidance.
I'm wondering if you could talk a little bit about the inputs behind that and all the potential drivers they are expecting throughout the rest of this year that point you to the potential for strong full-year results from the franchise?
Sure. As you know, Brian, it's June and we're in our quiet period, so we'll have to provide more updates relative to our guidance during our Q2 call late July. But relative to our Q1 results, I'll say a few things and then maybe we can talk about some of those drivers going forward.
If you take our two core franchises, HIV and HCV, we were surprised to the upside relative to HIV and surprised somewhat to the downside relative to HCV. And I think relative to HCV obviously we had Merck enter the market and from a competitive standpoint there were a few areas where we saw increased discounting that was particularly in the VA which we mentioned and other select areas.
And at the same time I think on a positive note it was nothing like what we saw with the AbbVie Express Scripts entry back in January 2015. The biggest driver relative to our discounting in Q1 related to deals that we put in place back then around opening up access.
And I think that's a positive longer term because it bodes well that for the most part all commercial payers, with the exception of a few regional payers, now have access open for F0s through F4s when it comes to genotyping.
Now all that patient flow didn't necessarily materialize in Q1, even the VA purchases were kind of stepped up more to the second half. And I think what you'll hear us talk about not only Q2 but our going forward calls is what that means.
We don't anticipate that all that happens necessarily even in 2016, but we think we're well poised now relative to contracting and access to treat a lot more patients longer term in a more competitive environment.
I think one of the things that's clear to us not only here in the US but also overseas is ensuring that with this increased competitive environment that we think about for the long-term value of our franchise as well.
And as you think about that how do you balance the desire for share retention versus price maintenance?
I'd say very carefully. I think we've done some very unique things in Europe based on the prevalence where we've given discounts relative to volume. I was actually just in Europe on my way here and with some of the newer folks to our management team, Kevin Young and Marty.
And we spent a lot of time debating and talking about that. And I think here in the US, and particularly overseas, there have been deals that we've chosen not to participate in and where we've walked away.
And you see that reflected in our share, particularly overseas. And you may see some of that as we look at other populations within the US for treatment rates, particularly in some of the more heavily discounted segments.
And I'm thinking of Medicaid and particularly where you may not see share as high because we do think we have a differentiated product. We have a continuation of a pipeline there with SOF/VEL and then a follow-on triple combination that we value highly.
And maybe that's a good segue to SOF/VEL. I'm wondering if you could talk a little bit about what the potential gross prospects that SOF/VEL offers for the hep C franchise or whether it's more of a - I guess a defensive strategy to maintain your share in the genotype 2, 3 patients with the best-in-class regimen?
Yes. I mean, I think it's clearly innovative, particularly for that genotype 2, 3 population. There is still an area of unmet medical need and tremendous advancements in the hep C marketing. Clearly the FDA saw that which is what we got a priority review.
But we don't necessarily see a huge change in patient flow as a result of SOF/VEL. But I think the opportunity to continue to treat, particularly those harder to treat genotype 2, 3 patients.
I think the other key positioning for SOF/VEL is really that larger rest of world market or places where there's not as much of a focus on genotyping. It's not affordable or just not necessarily something that the payers or doctors want to focus on. So I think that's how we look at it.
I think Harvoni just given the strong profile, the usage and adoption rates, as well as remember the fact that it's of an eight-week duration versus SOF/VEL is a 12 both though that we'll probably still see a lot of Harvoni usage, particularly in genotype 1.
Okay. And then just going back to something you said earlier about expanded access which I know you've talked about on the first quarter call and the need for additional discounting.
What do you think the key drivers are going to be going forward to bring in those earlier patients who may not have had access over the past few years, the F0s, F1s, F2s, is it about increasing the diagnoses rates? Is it about educating physicians that these patients now can be reimbursed for treatment?
What are sort of the steps to getting to that point where you'll be getting the patient flow - more of the patient flow benefits in return for the discounting that you provided to the open access?
It's a good question and I wish I had a precise answer for you. But it's probably a combination of a lot of those things. First and foremost, I think getting to a steady state and a stability and predictability for the healthcare systems around the world is really important for patients and continuation of access.
And the reality of it is I don't think anyone, included us expected the level of that initial patient flow. We always said it was going to be like this and it kind of spiked up here really quickly. So ultimately that predictability is really important for the system to treat.
I do think as we've got beyond those patients that really didn't necessarily have alternatives prior to Harvoni and Sovaldi or didn't necessarily want to go through some of the side effects of some of the earlier treatments, the less sick patients and the doctors' cues are being rebuilt.
And I think as payers still look at pricing and look at this initial impact to the system and cure they want to be sure those patients are ready. And I do think that takes time. I think it takes time to profile these patients, to understand - this will always be a tightly managed market.
I think it's not only just about the US market, even ex-US some of the northern European countries are looking at access for everyone, others are not yet. So I think budgets drive a lot of that dynamic ex-US, particularly in southern Europe.
So I think it's just a matter of time and clearly we're focused on getting more patients into care as are others. And I think all that bodes well really for what all the work that's being done there's still a significant amount of patients that have been diagnosed, not even counting the undiagnosed to be treated. And I think that bodes really well for a long-term tale relative to the market. Have I missed anything in there, Sung?
Guideline changes as well, Brian. It's only been a few years since hepatitis C was elevated by the US Preventative Task Force Services, so that could take a while to play out.
Maybe we could shift gears and talk about margins. I'm curious how you think about the long-term margin structure of the company. I think over time one might expect we'd see some slowing in the hep C franchise potentially and of course, you will have some of the HIV patent cliffs in the out years.
How much flexibility do you foresee within your margin structure over the long term, do you strive to maintain about the same relative proportion of SG&A and R&D spend to revenues over the long-term, even if that means the potential for lower investments in those areas or is the idea to really maintain those at a fixed level and perhaps augment the relative R&D spend to revenues to be more in line with payers?
Yes, it's a good question and I always like to frame it kind of pre and post the hepatitis C franchise launch. We've always had very healthy margins, 50% plus as a company, and I think by far probably a hallmark relative to the biopharmaceutical space.
Clearly with the hepatitis C franchise we've been able to do a lot better than that and we've always tried to remain agile and nimble and focus a lot and be very cost conscious around expenses.
But we've never necessarily pegged SG&A and particularly R&D as a percentage of revenue. And as we - right after we acquired Pharmasset and we're investing in getting that product market you saw R&D as a percentage of revenue go up and as we - I actually harvested those revenues, you saw it start to go down.
And we like that optionality because at the end of the day we are a scientific company and we want to focus on doing the right thing. And that being said, we're not afraid to kill programs. We're not afraid to determine that something internal doesn't make the most sense and we need to go out and acquire, and we continue to do that.
I'd say our SG&A spend has always been very lean. Clearly we've invested in preparing for the launch of hep C and also in oncology and we want to maintain those. But I'd say longer term is that mix of HIV to HC revenues naturally happens, to your point it will, we're curing and with HIV we'll have some generic competition.
You may see it move more to prior levels. But at the end of the day with our balance sheet and I think with our aspirations and our focus on BD we'd expect to see those trends continue to go up over time as we commercialize our pipeline or future M&A that we may do.
Got it. And then speaking of the pipeline you talked at the beginning about external business development. But I'm curious as you think about your capital allocation towards the internal R&D programs, what are the areas that are receiving most attention in house these days that you guys are most focused on, is it NASH, is it hepatitis B, what areas sort of beyond hep C, HIV?
I would say from a hep C perspective you know R&D spend and particularly our research spend has waned over the last couple of years. We think we've done a lot there. Research hep B is probably our top focus right now, very early stage. I think you've heard Norbert and John talk about we're most excited about NASH, we do feel we've got all the assets we need and we think we're the leader relative to a NASH pipeline today.
Other opportunities for us relative to internal our inflammation franchise, I'll let Sung talk about some of the specifics there, but also oncology. I mean, I think both of them are opportunistic in where we see our spending continuing to increase. In 2016 we have had a fair amount of HIV spend relative to 9983, and we'll see that start to tail off.
And it's still been a very disciplined process for us, which allows us to - if you think about the collaborations with the Nimbus assets we acquired in collaboration with Galapagos those things do come into play as we think about total R&D spend as well.
Yes. And Brian, just on the inflammation side, we will be initiating Phase 3 studies in quarter three for RA and Crohn's disease and also a Phase 2 study in ulcerative colitis. So a lot of activity potentially happening in inflammation.
Great. And just we only have a few minutes left, I was wondering if you could maybe tell us a little bit about the recent management changes we've seen. Where does Marty Silverstein fit in given his background in reimbursement?
What does he mean for the potential, both I guess the hep C franchise and future areas that you might go into on the BD side? And what does Kevin Young's return mean for the commercial strategy of the company?
Right, I think both are really crucial. As you know John was announced as the new CEO last quarter and I think this really gives him the additional operational bench strength, as well as strategic focus that's necessary for Gilead going forward.
To your specific question about Marty, I think his background particularly as it comes to reimbursements, if you think about not only hep C, but some of the markets we talked about in inflammation and oncology clearly very competitive marketplaces where I think it's very evident to us that additional focus on managing our payer and contracting strategy is a really important thing to do.
Kevin never left the company, he was actually a senior advisor, but clearly he is been very involved in a lot of - all of our critical launches at Gilead, including our hep C franchise.
And took a little time to refresh himself. I think with him becoming the Chief Operating Officer that relinquishes some of that time for John to really focus on strategy and long-term direction of the company which is what we want our CEO doing.
I was just on the road with both of them in Europe and we've been involved in reviews across the business. And I think both are great adds and going to be very helpful to Gilead's future success.
And any strategic shifts you might expect with all the changes in management with John assuming the CEO role and with Kevin coming back to a full time role and operating role and with Marty coming in?
I wouldn't say, I mean, I think you've heard John say - you know this company has been very successful. John Martin is still available for consult as Executive Chair which is great for Gilead and great for John Milligan. He wants to continue to be a science based, focused company.
Our core values and our mission as a company and focus on patients won't change at all. And I think with John's John Milligan's always been very engaged in BD and will continue to do.
And I'm confident with him at the helm that we'll continue to grow the company and be very successful and continue with our mission for patients.
Great. Well with that I'd like to thank the Gilead team. Robin, Sung, Amy, thanks again. Thanks everyone for joining us.
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