Gilead Sciences, Inc. (NASDAQ:GILD)
Piper Jaffray 28th Annual Healthcare Conference
November 29, 2016 8:00 AM ET
John Milligan - Chief Executive Officer
Robin Washington - Chief Financial Officer
Joshua Schimmer - Piper Jaffray
All right. We are ready to get started. Welcome to everyone. I am Joshua Schimmer from the Piper Jaffray Biotechnology team. It is a real treat to welcome from Gilead, John Milligan, Chief Executive Officer and Robin Washington, Chief Financial Officer. Thank you so much for joining us.
It’s been quite a year. It got a little bit more interesting recently I guess, with perhaps an uncertain political outlook for the drug reimbursement world. We’ve got FX factors swirling. We are not quite sure what’s going to happen in Italy. So, sort of incremental to what’s going on with the base business, these new factors to consider. Maybe you can give us a sense of how you are navigating through some of this uncertainty. At some point, we are going to have to think about guidance for 2017 and how might these limit your ability to kind of see into next year and beyond?
Yes, first of all, Josh, thanks for having us here. Thanks for leaping in with the big question about the political environment we are in. You know, Josh, we’ve been doing this a long time. In fact, every time a new administration comes to town, we have lived through many of them now, in fact, Gilead was founded when Reagan was President. So we have had a lot of opportunity to live through change and I think a business like Gilead is well adapted to react quickly.
You’ve seen that in a number of scenarios when we launched an HCV, as we’ve adapted the environment in HIV, we navigate very well across a lot of different parts of the world. In the United States, we are very careful to have friends on both sides of the aisle, so no matter who is in power, we have opportunities to push forward our agendas.
Similarly in Europe, we have very good relationships with the folks in the different health ministers. I had, in fact, met with six different European health ministers so far this year to talk about the value of what we bring and to talk about the environment that they are facing as well. So I do think it’s a very uncertain environment, but one that you have to go out and address proactively and that’s in fact what we’ve been doing over the course of this year.
So, with regardless of what we are talking about in terms of guidance, there are a lot of different factors out there. We could have a change in healthcare policy in the United States next year. Seems likely, but we have no idea what that will look like. We could have more instability in Europe, but again, we don’t know what that will look like either, Brexit threw us for a loop this year as the English system kind of closed down in terms of rewarding new innovation.
We’ve now seen in the last week more and more things being approved by NICE that will probably get reimbursed by NHS in London. So we are preparing for next year to take advantage of more stability in the British system.
With regard to FX, strong dollar is not as good for us as it is for people in the Europe, but again that’s something that we have lived through in the past and we have an advantage of, then our expenses are less in Europe than we have a 33% of our employees are outside of the United States. So that helps us as well. So these are just different things that we are used to navigating and we’ll continue to do so next year.
As we kind try to see - kind of take the snapshot in time when we get to the end of the year and not make assumptions about what policies might change and as they do deal with it at the time?
Yes, I think every year there are things that can happen that you can’t predict and I think we’ll have a certain set of assumptions going forward as Robin and the teams sit down with us and give their recommendations for what we think the year is going to look like. And I think we will make the assumption that 2017 with regard to patients and how they achieve their healthcare is probably stable. I don’t think you could disrupt it from where it is now without massively, without causing a massive amount of unhappiness across the US population.
Everybody signed up were now ready to get into the new plans if there any for next year. And so I think, if you are going to unwind healthcare, it has to be a couple of year process of getting things ready to transition people to something new and I just don’t see how it’s could happen in 2017.
I guess, and you say you have good relationships on both sides of the aisle, I think maybe what’s more visible is when those relationships aren’t strong and the question is about pricing of HEP-C drugs and patient access kind of bubble up to the surface. Maybe you can provide some contrast to what we see with the commentary about the good relationships and how they may ultimately aid the franchisees going forward?
So there is a number of folks who are quite concerned about the pricing of pharmaceuticals and they are going to continue to put forward that agenda. That’s true, it will be true in the future as well. We have our opinion about where the pricing and value equation lies. We talk frequently about list price which is higher, much higher in this case of an HCV than with the actual price paid by any segment of the healthcare system.
That story of course rarely gets written. The story that came out two years ago gets rehashed about every two months by the same people who keep throwing it out there and throwing it out there. So we are out this week talking to a number of people here in New York. We will be part of the panel and forums later week, what we’ll talk about the value that we bring. We are consistently trying to get the story out.
I think if I were to fault Gilead, we were a little more quiet in the early time than normal with the viewpoint of the story we’ll eventually stop and in fact it didn’t and part of it was the impact of on the budgets and part of it is we’ve launched into the first year that the ACA programs were in place and those have been largely mispriced and so they was already this underlying disruption that we had launched into that was worst than we had anticipated.
And the drug was really good. It helped a lot of people lot more than predicted and that put a strain on budgets which created more of the problem that you saw in the press which alleged for under pressure. The good news is, this is not a chronic disease, the bad news for you guys are predicting is this is not a chronic disease.
But we are able to cure people and now the savings is starting to accrue in a number of systems. I’ve had a meeting with the Health Minister of Portugal and they estimate they are going to save over time about $400 million by trying to cure all the population in Portugal which is small about 7,000 people, but it’s a very good investment from their perspective because of the diminution of other healthcare costs and so we’ll start to see that in the United States as well.
Do you feel like, your outlook for HEP-C is improving in terms of visibility? I know a lot of investors are very concerned of – we don’t know what next quarter is going to be, let alone next year or two years from now and that’s a pretty significant overhang in, I guess, from the sentiment. So where are we now and Gilead kind of getting a handle on the outlook?
Well, I can’t tell you much more, really anything more than we’ve talked about on the last quarterly call, which is to say that this year has been very interesting to watch in terms of patients and it’s very unlike as I mentioned chronic disease is. For the chronic disease you have a certain number of patients. You can make assumptions which over time you can get really good at in terms of how long they’ll stay on therapy and approximately how many new people will come to therapy each quarter.
In this business, we have to – just the only variable to a number of people coming into care and so that’s it’s a single variable and it’s shifted quite a bit over time as sicker patients came in early, less sick patients are coming in now, this is talking about the private segment that we sell into, because those patients are less sick there are more barriers to getting prior authorization on those patients than the sicker patients. And few of them are making it through than ever before.
So, while there is access across all fibrosis scores, that doesn’t mean there are other underlying barriers that make it very difficult for people to get reimbursed to their prescription. We’ve also seen a change – a shift in patients as more patients came into the VA this year, based on some price concessions that were made by us and others to help our best and then of course we are now starting to see Medicaid ramp up.
So, the flow of patients and the mixture of patients has been different each and every quarter of this year so far. The VA was only on for half the quarter in Q1. They came on in full in Q2, but we saw the private segment come down a little bit. In Q3, we launched our newest product Epclusa, which is a two drug combination that’s very useful in genotype 3 and 2 and we saw a spike in patients who had genotype 2 and genotype 3 that quarter versus the earlier quarters which were more genotype 1 patients.
But every quarters had a different dynamic. Each quarters have between 50,000 and 60,000 patients come into for treatment, but the mix has been quite different and we are trying to figure out, Josh, how to predict, what will that future mix looks like in a more stable environment. Now 2017, I don’t see anything disruptive though that prices have been negotiated with the plans.
We are very confident that we have a very stable price environment right now. But we don’t know what the patient flow is across those three important segments are going to look like for next year and that’s been challenging. We have noticed in the private sector, particularly this is slight month-over-month decrease of patients. It’s very minimal, but it is a trend line going down that we are watching to see does that stabilize, or I should say, when will it stabilize or it will have to at some point and then be more predictable going forward and so far we haven’t seen that.
So if I may, there is a difference between running the business and managing the business. So I think investors are really struggling with when do we get some growth on the bottom-line? When do we stop this kind of, slow erosion which in part is reflected by the multiple and how do you – in addition to running the business, kind of watching these parameters play out, how do you manage the business, so that investors soon or rather than later can get comfortable that there is a growth future at some point around the corner?
That’s a very interesting perspective on running versus managing. I don’t know that we’ve ever run the business where we sat back and watched anything, Josh. If you go out and have a comfort about Gilead, you are constantly managing everything. And so as we think about what we need to do as organization is just that, how can we get a more – how can get a more consistent flow of patients into these different segments and those are things that we are actively working on.
What I can tell you is it’s been a difficult challenge for this year to effect that. So, you can see that we have two different kinds of advertising campaigns on television right now. One is a branded campaign around Harvoni and soon Epclusa. The other is an unbranded campaign talking about awareness, trying to remind it such as the baby boomers that they are at risk, especially if they’ve been to the military, such as they’ve had any sort of medical procedures prior to the time we could screen the blood supply even dental procedures where put people high at risk.
So there is a good reason to get screened and an opportunity to be cured. So we are actively managing that piece of the business. We are doing the same throughout Europe. We are doing the same through Japan. But this is unlike any other market where a lot of patients need the drug very early on and then it gets back to a smaller number of patients and we’ve seen the same pattern at every country that we’ve launched into. So this is just a fact of the kind of market that we’ve got into.
On the other hand, what we are doing is now encouraging people to focus on the other part of the business that’s growing which is our HIV business which is a very strong and growing business for our HIV franchise and we think it will be a very strong franchise for at least the next decade based on the launch of TAF and the success we are already having in every country that we’ve launched it to.
So we do have a very strong business. And the last quarter was the first quarter where again our non-HCV business was bigger than our HCV business and so we are getting back to our fundamentals. So, HCV is a little bit unpredictable and a more challenging. Great efficient business with really good cash flow for us. So it’s a very strong business underlying, even though it’s a little bit uncertain because of the HCV decline.
So how should we think about bictegravir, the once-a-day integrase inhibitor now either changing the near-term growth of the HIV franchise or is it more of the long-term franchise expansion strategy or a little bit of both?
That’s both. There is a great deal of enthusiasm within Gilead for bictegravir. We haven’t brought much of the data out yet. There has been a little controversy around that. I don’t mind that. We think that this is a combination, bictegravir plus TAF tenofovir alafenamide plus FTC gives a patient and a doctor everything you could want with very little drawback to it. So it’s a really important combination for the future.
The integrase class, bictegravir as an integrase become the most popular and most prescribed class of third agent with Gilead dolutegravir and the dolutegravir – I’m sorry – dolutegravir becoming the preferred agents. Those are often paired with TAF which has been launching very well in this combination pill called GENVOYA, which has had the fastest launch of any HIV product.
So we are just about a year out from the launch of GENVOYA and it is now eclipsed where ATRIPLA was in its first full year on the market and that by the way was the fastest growing product ever in the history of HIV. So, we’ve done remarkable work to grow that part of the business. I think you recall that managing the business when we went out and really have made this happen.
Getting into guidelines across the world, talking about the benefits tons and tons of scientific data that we’ve been able to rollout showing the TAF in fact has better properties than tenofovir DF. So it’s really been an important rollout of this product. And so I think this helps us in the short-term and this is really important for the long-term. It’s hard for me to see how one pill once a day will get better than bictegravir TAF and FTC.
So we do get a lot of questions about competitive two-drug single-tablet regimen which, I get somehow if a patient would care whether do a single one-tablet once-a-day high two or three components. But what are your views about efforts to move away from NRTI backbone?
This has been the backbone for over 20 years now, right. So, the two NRTIs has been very, very consistent and very, very good performers. And the concerns in the early days are still the concerns it should be here today. We use two few agents with a population that have start – we will start to see lots of resistance.
Resistance was a really big challenging problem and a major concern going back 20 years and because the regimens have become so good and so forgiving, patients no longer have the kinds of failure rates as they used to. They stay on their primary drug much longer when they switch. They have fewer failure so they stay to long periods of time. So it’s a removed drug as to sort of invite that kind of problem.
Let’s not forget that most of the patients that we are talking about today lead very chaotic lives, is those usually young men, usually in men who have sex with men and usually in the inner cities. There are quite a number of rural populations as well, but it’s mostly in the cities still, mostly in the south these days. So these people lead very chaotic lives and to give them a regimen that is fragile, I think is a really bad idea. And so from our perspective having all three medications gives you that forgiveness that you may not get with the two drug combination. Let’s not forget why the competition has gone through a two drug combination. And so they know that one of theirs is a big liability both in the short-term and the long-term and in head-to-head studies, historically it’s always been the weakest link and at the back of their. And so they are now removing it and hoping it will still be good enough, because it’s the only way they can get rid of that liability.
So this is a big gamble on their part. If they are right and it works well enough in enough patient population, they may have a competitive regimen with us. From a patient’s perspective, you are right, one pill versus one pill it won’t be any different to them. From, but if they gamble and they are wrong of course, then that leaves the market to us.
I assume there is a difference in Europe, your own expectation between a clinical trial setting and a real world.
That’s what we’ve seen in all these different areas. I mean, this is what payers are asking for what is the real world experience of your medication. In a very controlled environment, with very compliant patients who get daily reminders that by via text to take their pills you might do okay. If you go into a setting where people are missing pills, don’t come home for the week and those sorts of things, this is where the longer half lies the longer-acting drugs have proven to be still valuable that people can miss and not be penalized by having resistant buyers. I mean, there is a ton of work on the pharmacokinetics on that and the interactions over the year and this kind of does all that research just hoping for that outcome.
So, I’d probably didn’t do a good job explaining what I meant by managing versus running and so…
Maybe I misunderstood.
No, I mean, I think we all trust that Gilead on every franchise, every business unit is executing the utmost, but then there is the higher level strategy of capital allocation, M&A, share repurchase, margin, improving the R&D productivity et cetera, that I guess, that’s kind of what I was asking. I think what investors who recognized that HEP-C is going to be what HEP-C is and now you’ll do your best there and as can be done. What about managing that business more broadly Gilead overall business to deliver will get us to a point of bottom-line stability and growth. So that which presumably will increase the multiples substantially.
Yes we - so we’ve been thinking a lot of different approaches to try to broaden where we are versus our anti-viral franchise. The two – the three large viral diseases, HIV, Hepatitis-C and Hepatitis-B, we have products on the market including TAF for HCV. We would like to see that grow HCV has been an undertreated disease historically. People are reluctant to go on life-long therapy even though it’s quite good and even where generics occur they are reluctant to go on therapies.
So we are trying to change that equation to come up with products which could perhaps produce a finite treatment period, I mean a function of cure. But we have a long way to go in that area. I think TAF will be an important drug for people who need therapy and it’s improving that life time therapy does provide a benefit to patients. So where are the next growth opportunities?
As we have been thinking a number of different – we call it, mostly inexpensive looks at different kinds of kinase inhibitors to see if we could have an impact on certain diseases. And some have not worked. I think the momelotinib result was a little bit mixed, which is unfortunate.
I thought the theory of why it would be an important benefit for patients with patients with myelofibrosis was valid. And just we’ve missed on one of our secondary parameters and that may limit our ability to get – either get it approved or to sell it if it is approved. We’ve had some successes, if you looked at 4997, this is a drug that hits at ASK-1.
So that’s a kinase that sits upstream of P-38 in the inflammatory cascade. This is a very specific inhibitor. One of the most specifics we’ve seen in the kinome projects we’ve been involved in and it has a very pronounced anti-fibrotic effect, it did so in animals alone and in combination with other products that we are now developing.
And so we think we have the beginning of a very important NASH franchise. We saw reversal of fibrosis at the highest dose and it was a dose-dependent reversal fibrosis. We also saw inverse correlation to progression to cirrhosis which was lowest on the highest dose and lowest on the placebo arm which arguably was the simtuzumab arm.
All the secondary and backup parameters, and Josh, if we really dig into this data, we are seeing really interesting effect, positive effect for patients who are being treated with severe NASH. That has given us the confidence that we have a very much a game-changing kind of drug in a new product category where patients currently aren’t treated by anything other than diet and exercise, which is highly ineffective, because people cannot do that given their lives.
And so we think we have a really important drug to go out and treat patients with F3 and F4 fibrosis. F4 is probably the most important category, because it’s the one that you are most likely to get reimbursed at a good price and the one where the mortality data are most clear. Patients with NASH and F4 fibrosis has a median life expectancy of five years.
So we can show very pronounced impact and so we are going to run the study in F4 fibrosis and a study in F3 fibrosis and with the dose differences. So those are two separate studies trying to determine how we can best impact this disease. So, I think that’s a very important growth driver for us.
And then the second area is, we are trying to look at different ways to do combination kinase inhibitors for chemotherapies to address a number of important diseases in the hematological and potentially solid tumors. So by this time next year, we will have completed a very specific dose ranging study, very small numbers of patients looking for different doses and different combinations of our BTK inhibitor, our SYK inhibitor, PH Kinase delta inhibitor and something called the BET inhibitor to see if we can come up with a combination.
So, let me just kind of jump in, because that message is clearly not resonated with investors. And so – are they just wrong, right, by your R&D engine is robust despite a number of setbacks this year and it’s just a matter of, hey, keep trying, take these small steps forward and you can get there or is there something that investors are seeing that needs to be addressed?
Well, every investor has a different viewpoint. I’ll say that as I sit through these meetings it’s very clear. There are certain investors who are clamoring for something to be done very, very soon. We need something now. Right, there isn’t another launch coming out in the near term that is going to satisfy people who want additional growth items. We – the ASK inhibitor or number of these things, these are several years out and so there is some truth to that.
And so, a lot of folks have suggested that we go out and prices be down, we’ll just go out and buy whatever we want to buy. I, having lived through years have got getting beat up for mergers where people were questioning what our IRR could possibly be, in fact, they’ve all turned out very, very well. It is a different world than I am used to in that respect.
I think we are going to be disciplined and thoughtful and where we are going to stick with our plan rather than jump around of going after very specific areas where we can provide the data, the scientists and the selling power to make things happen rather than jump into category-after-category which often look good on spreadsheets, but are in fact quite difficult to manage.
What does it mean to be disciplined when with M&A? I think many of us look at the pipeline and the R&D spend and wonder whether the same discipline is being applied to some of these programs and candidates as the same discipline that you are clearly taking on, on M&A candidates and how do you judge if the price is too high? What does that mean?
Could you ever get your money back? Some of these deals that I’ve seen I don’t think that would be true. So you have to believe that there is something else that you can do with that they are some other catalysts that you can have. And so, we’ve looked at a lot of things and chose them not to participate or we are not the winner at the end of the day. Those things happen in this field especially in competitive areas that we are in.
We are not looking at the internal candidates. If I was ever going to fault a program which perhaps simtuzumab, where I think we got out a little ahead of ourselves and invested more than we should that we always get out if the drug works. So when I think about discipline, can we run short studies where we can identify whether if something works or doesn’t work before we go in and spend a lot of money on.
So, you can do a whole series of short studies, learn quickly and then move into the Phase 2, or hopefully Phase 3 very quickly, much like we did with the ASK inhibitor. Quick 24 week study, we got enough data and enough patients, so that we could make a good judgment and to go into Phase 3 which I think a high probability that that drug will work. So, I and when I am thinking about discipline, I am thinking about that.
Maybe you can talk a little bit about what limitations are maybe to capital allocation? And whether trap cash ex-US limits your ability to either repurchase shares, raise more debt, or enact larger scale M&A. Is there just a natural gating effect just based on the structure if it’s done so?
I’ll take that one Josh. I don’t think there is any natural gating effect that has limited. I think it really is, as John outlined, continuing to work through our portfolio. We have been involved in the M&A process. It’s really valued from a capital allocation or flexibility. And as you well know, we’ve been very aggressive with repurchasing shares over the years.
We’ve also provided a dividend and that’s been that we are committed to growing longer term. We have onshore cash and ability to do that. And we’ve also ensured that we’ve got stellar debt credit rating. So, there are no limits relative to our – I mean, there is always limits, but, there is not, we have the wherewithal to raise the necessary debt if we find the right deals that complement our portfolio.
And so, from our perspective, just ensuring that overall capital allocation flexibility remains aligned with our balance of managing our internal portfolio with the need to supplement and it’s just something that we are always focused on doing at. And I would say, we think we are managing that and feel very comfortable with our ability to look forward the strategies from the company’s perspective.
Okay, I think – I think we are out of time. I probably had a few more minutes left to go. But I am sorry. We are getting the wave down. So, I am sorry, we don’t have time for audience Q&A. But thank you so much for taking the time and…
Thanks for having us, Josh.
Looking forward to 2017.
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