Gilead Sciences, Inc. (GILD) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Gilead Sciences conference call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today to Douglas Maffei, Senior Director, Investor Relations. Thank you. Please go ahead.

Thank you, Dilem. We appreciate everyone joining us on short notice for today's call to discuss the exciting acquisition of Immunomedics announced earlier today. The speakers on today's call will be Daniel O'Day, Chairman and Chief Executive Officer; Merdad Parsey, Chief Medical Officer; Johanna Mercier, Chief Commercial Officer; and Andrew Dickinson, Chief Financial Officer. Before we begin, let me remind you that we will be making forward-looking statements that are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those referred to in any forward-looking statements. These risks and uncertainties are contained within our joint press release, presentation and latest SEC filings of each company. I will now turn the call over to Dan.

Well thank you, Doug, very much, and good afternoon, everyone. Really, thank you for joining the call, especially on a Sunday. We are -- I speak on behalf of the entire leadership team, we're very excited to share this news with you today. It really is a transformational acquisition that gives us tremendous potential to help patients with cancer and generate significant value. So on today's call, we wanted to articulate the why behind the acquisition for Gilead and provide, obviously, the opportunity for any questions that you may have. So I'll start out, and then I'll pass the baton over to Merdad to talk about the potential of Trodelvy. Johanna will then offer some insight from a commercial perspective. And then finally, Andy will speak to the structure and the financial terms of the transaction. So as all of you know, we set a strategic ambition at the start of this year to deliver more than 10 transformative medicines and therapies to patients in areas of high unmet medical need. And as part of those efforts, we've been building a robust and diverse oncology portfolio. In fact, we'd already completed 12 key deals in oncology in the last 2 years, including the acquisition of Forty Seven. Now upon closing our acquisition of Immunomedics, we are fast forwarding our plans to build a substantial oncology business with significant potential. I mean, really, the shape of the portfolio changes really significantly with this acquisition. Trodelvy has tremendous potential, and we saw some of that in the standout data for triple-negative breast cancer that led to the accelerated approval. This medicine is highly innovative. It's an antibody drug conjugate that has shown really demonstrable efficacy in an area of very high unmet medical need. In particular, the top line results that Immunomedics shared in July from its Phase III ASCENT study provided significant evidence of clinical benefits and confirmed findings from previous studies around the safety and efficacy of Trodelvy. Trodelvy met the primary end point of progression-free survival. Trodelvy also met the key secondary endpoints, including most notably, overall survival as well as objective response rate. I'll also highlight that we have reviewed significantly more clinical data on the product over the past several months that gives us greater confidence in the clinical benefit Trodelvy can provide. Some of that data you'll be seeing at the upcoming ESMO conference this coming weekend, and I know that Immunomedics looks forward to sharing that with you. On the commercial side, although the launch is still early, the response from physicians and patients have been very encouraging in triple-negative breast cancer. We expect increased uptake among this group of patients who are in dire need of new treatment options. While it has already begun to play an important role in triple-negative breast cancer today, we also recognize the promise that Trodelvy potentially offers from many other groups of patients. We'll work with Immunomedics to continue to explore its potential in earlier lines of therapy and in other solid tumors, both as a monotherapy and in combination. I mean it's really a pipeline and a product when we think about this from an oncology perspective. If we look at Trodelvy in the context of our overall oncology portfolio, after closing the transaction, we'll be adding a transformative cornerstone therapy that gives us an immediate presence in solid tumors. We are gaining the considerable talent and expertise that Immunomedics has in this field and a first-in-class marketed product. This accelerates our expansion into solid tumors and builds on our existing strengths in hematologic cancers through our combined Kite and Gilead pipeline. From a financial perspective, following the closing of the transaction, Trodelvy will immediately contribute revenue and will significantly enhance our growth prospects in the near term and longer term. We expect the acquisition to create significant value for our shareholders. The transaction reflects the potential value as well as the synergies it brings to our existing platform and our future pipeline. And finally, let me say that we're looking forward to welcoming the team from Immunomedics to the Gilead family. The kind of achievements that they have made with Trodelvy are only possible when you have really talented individuals in place with strong expertise and commitment. We feel very fortunate that we'll have the opportunity to benefit from their talent and expertise at Gilead as we continue to build a strong presence in oncology and work to make a positive impact on the treatment of cancer. Finally, I want to thank all the talented Gilead and Kite teams for their critical work on advancing our pipeline of medicines in oncology and in virology and inflammation. I'm proud of our momentum. I'm proud to be a part of the team, which I now look forward to building on with today's acquisition. So with that, let me turn the call over to Merdad. Over to you, Merdad.

Thanks, Dan. And I want to start by saying that I'm also -- it's been very impressive to see the growing body of data, both scientifically and clinically, supporting the use of Trodelvy. The Phase III data from ASCENT really reinforce the promise of Trodelvy's unique ADC technology and validates the promise of the Trop-2 targeting therapy. Clearly, this a groundbreaking medicine and, in particular, in an area of high unmet need that represents a new standard of care in this disease. And following this closely, it gives us the foundation we need to build a presence and a pipeline in solid tumor cancers. The importance of this agent is further reflected in its targeting of Trop-2, which has shown over expression in multiple tumor types, including non-small cell lung cancer, urothelial cancer, hormone receptor positive, HER2-negative breast cancer and others. Let me specifically pick up on one of the themes that Dan mentioned around unmet need. Despite available therapies, triple-negative breast cancer remains a difficult-to-treat tumor that disproportionately affects younger women and has poor outcome. The transformative nature of Trodelvy is reflected in the FDA accelerated approval based on the Phase I/II trial. And in that study, we saw an impressive 33% overall response rate compared to the standard of care chemotherapy response rates that were less than 20%. The confirmatory randomized Phase III ASCENT study in TNBC patients who were patients who had received 2 or more prior therapies for metastatic disease further demonstrated the benefit of the drug. In particular, it's notable that this study was stopped early due to the compelling efficacy seen with the progression-free survival signal of 5.8 months compared with the control arm of chemotherapy of 1.7 months. This had a p-value of less than 0.0001. Importantly, Trodelvy was generally well tolerated in this study with the most common adverse events being neutropenia and diarrhea. Additional data including the overall survival data that we've had the opportunity to review during our diligence will be available at ESMO this coming week. The data for Trodelvy suggests that it's a potentially transformative therapy in the treatment of triple-negative breast cancer. Importantly, upcoming clinical trials will also explore the potential benefit across a range of expanded tumor types in earlier lines of therapy. The potential breadth of Trodelvy in solid tumors is really a compelling prospect for us in terms of expanding the benefit to other patient groups. Importantly, this includes a pivotal Phase II study called TROPHY U-01 in patients with metastatic urothelial cancer following prior treatment with platinum-based chemotherapy. We look forward to multiple presentations at the upcoming ESMO Congress. And this will highlight some of this work as well as other work, exploring potential combinations with PARP inhibitors and checkpoint inhibitors. Let me hand off the call now to Johanna.

Thanks, Merdad. So I really echo the excitement around this acquisition as well especially from a patient need perspective. There is clearly a very significant unmet need for new treatment options in metastatic triple-negative breast cancer that improves survival for patients. Later line triple-negative breast cancer is currently primarily treated with conventional chemotherapies and outcomes are poor, as Merdad was mentioning. The remarkable top line results from the ASCENT study in third-line patients has understandably generated significant enthusiasm by both physicians and patients. Full results will be shared later this week at ESMO. And this enthusiasm should only continue. Trodelvy's strong efficacy profile has led to early adoption in both academic and community settings since its commercial launch in late April with $20 million net sales in the first 2 months of launch. This rapid launch uptake in a challenging environment of a pandemic speaks to the strong science and the flawless execution of the team. The field force has been very focused in its early efforts on the top 150 breast cancer accounts in the U.S., in which penetration has exceeded 80% and continues to grow. We really look forward to supporting and expanding the successful launch in triple-negative breast cancer, preparing for an imminent launch in Europe and maximizing Trodelvy's potential across multiple solid tumor types and establishing a global footprint. So with that, I'll turn it over to Andy for the quote.

Thank you, Johanna. I will briefly review the financial terms of the transaction, and then we will turn to questions. As indicated in our joint press release, Gilead and Immunomedics have entered into an agreement, pursuant to which Gilead will acquire Immunomedics for $88 per share for a total purchase price of approximately $21 billion. We expect to commence a tender offer to acquire all of the outstanding shares of Immunomedics' common stock in the next 2 weeks. The tender offer is not subject to a financing condition, and we expect to fund the acquisition with approximately $15 billion of existing cash and approximately $6 billion in newly issued debt. We expect to retain an investment-grade credit rating following the transaction. The transaction does not alter our stated capital allocation strategy, including our commitment to further develop our internal and external pipeline as well as our commitment to maintain and grow our dividend over time. Once completed, we expect that the acquisition will substantially accelerate our revenue growth through the mid-2030s. We also expect that the transaction will be neutral to accretive to our non-GAAP EPS in 2023 and significantly accretive thereafter. Finally, we plan to update our financial guidance after the closing, which we expect to occur in the fourth quarter, subject to regulatory approvals and customary closing conditions. We will now open the call to questions.

[Operator Instructions] Our first question comes from the line of Geoffrey Porges from SVB Leerink.

Congratulations on the transaction. A couple of questions for you, Andy. Andy, looks as though a consensus as for Trodelvy is heading towards $4 billion. What revenue do you think is a sort of good breakeven hurdle for the $21 billion purchase price? And then could you advise us on what sort of cost of capital you think is appropriate for a transaction such as this with an approved product in the current economic climate? Obviously, you have terrific access to the capital markets. And then lastly, Merdad, could you talk a little bit more about the combination opportunities? For example, the PD-1, are you going to study it with Zim, the PD-1 from Arcus? And then do you have plans to study it in combination with the CDK4/6? And then have you had any discussions about particular candidates?

Thanks, Geoff. As for the revenue opportunity, we agree that this is a very substantial opportunity across not only breast cancer but other solid tumor indications over time. We're not providing specific revenue guidance, as you would expect, but we see a very significant opportunity with a number of ways to win, as you heard from Dan earlier, and we're happy to talk about it in greater detail. On the cost of capital, we look at cost of capital in the same way as other companies of our size. We look -- in a transaction of this nature, we look at the transaction across a range of discount rates. We look at our cost of capital which hovers somewhere around 6% or below today. But our hurdle rate is higher than that, Geoff, even though we don't provide specific guidance. We also look at transactions, as you know, based on the target assets' weighted average cost of capital. And looking at it in any way, we get to a place on intrinsic value where we're very comfortable with this acquisition and believe that it will deliver substantial value for our shareholders over time. With that, maybe I'll hand it off to Merdad.

Yes, Geoffrey, thank you for the question. And you're right, I think we do believe that there's a lot of potential here for combination. And I would think about combinations very broadly here. Depending on the tumor type and the stage of therapy, I think it's important to note that, that would probably entail different sorts of combinations in those settings. Having said that, the data for combinations with checkpoint inhibitors as well as for PARP inhibitors are very interesting to us. And certainly, having Zim provides us a lot more flexibility in terms of designing studies to look at combinations across tumor types. So without a doubt, we'll be looking at that. Again, a lot of that is going to be driven by the tolerability profile of Trodelvy, and we think that really lends itself to those sorts of combinations, which is something we're excited about.

Our next question comes from Michael Yee from Jefferies.

Two questions. Can you maybe talk about your assumptions or thinking or confidence levels around the major indications that you ascribed in your thinking about the valuation in the $21 billion, breast, bladder, et cetera, et cetera? And then related to that, you made a comment about having seen additional data that The Street hasn't seen. So can you just talk to that, particularly as it relates to the HR+ Phase III breast cancer study and anything in the basket study?

Yes. Michael, why don't I start, and then I'll quickly turn it over to Merdad. But I think in terms of the assumptions around the major indications, and Merdad can color this a little bit, I think it also gets back to the previous question around the multiple opportunities to have benefit for patients and also for revenue and shareholders. Clearly, the near-term opportunities -- well the opportunity in our hands today is, of course, triple-negative breast cancer and the ability to move up in lines of therapy there. But then closely behind that is both bladder cancer data that you'll see at ESMO and then also the hormone receptor positive data that is underway right now. And then one step maybe slightly the next step from those 3 indications is lung cancer and then beyond. So I would just say that in terms of our assumption base, there's obviously lots of assumptions that you can get into by looking at the early data and try to project that to the later data, but we also know in oncology that particularly sometimes those play out and sometimes those don't play out. So I just want to make sure that you understand that we've looked at this in binary scenarios by indication as we looked at intrinsic value as well and obviously, moving up to earlier lines of therapy. I'll let Merdad speak a little bit more about -- you can fill in on the assumption side, if you like, Merdad, or also the additional data.

Yes, Michael, I think Dan pretty much said everything I was going to say. I think our -- obviously, triple-negative being -- with the accelerated approval is at the highest part of our confidence level. I think breast cancer, more broadly speaking, also, as you see the data, we're very excited about, and we think we have a -- it can really impact some patient care there. And so those are at our highest list. I think for the urothelial cancer as well we've seen really promising data. And as you get further down into like non-small cell, there's less data, of course, but we're impressed by all of it across the board, and we think there's promise there. I can't speak obviously to the embargo data that we'll show at ESMO this week. But I think as you see those data and you see the combination data as well, I think you'll start to see sort of where our excitement comes from in terms of building this -- the base for this molecule.

And Michael, not to be specific, but obviously, we've seen data beyond the data that will be presented at ESMO that may be presented at future conferences as well. And as you can imagine, we can't tip our hat to that at this stage. But we had a really good thorough look at this. It's important to note that we started this partnering process almost 6 months ago. And of course, we've developed a really nice relationship with Immunomedics over that period of time, and data has become available over the last 6 months that we've been able to be exposed to under due diligence and confidentiality, and that's only increased our enthusiasm around the potential here.

Our next question comes from the line of Evan Seigerman from Crédit Suisse.

Congrats on the transaction. So with this relatively large-scale transaction, Andy, could you kind of quantify how much more capacity you have for additional business development? And can you specify as to whether or not this was on your radar ahead or after the CRL for filgotinib? I'm just trying to get a sense as to how this fits in strategically.

Yes. Let me just take the second question while, Andy, you take the first. I think it's really important to note that there was no connection between this and the CRL with filgotinib. But let me first address the CRL with filgotinib by saying that clearly, as often happens, you see regulatory authorities in different countries taking different discussions on filgotinib and the CRL. And we're fully committed to continuing to explore and understand better the CRL with FDA and see where that leads us. But that has nothing to do, of course, with our desire to expand our transformational medicines, either continuing in inflammatory disorders or virology, neuro-oncology. So this was part of our broader objective to deliver more than 10 transformative medicines over the next 10 years. And we started, as I said, well before we actually knew the regulatory process with filgotinib. But we started the discussions -- well we knew of this agent, of course, quite long ago, and the discussion started, as I said, many months ago as well. Andy, over to you for the dev capacity.

Great. Evan, thanks for joining the call. Prior to the transaction, if you look at most analyst assumptions, which were generally consistent with our internal model, we had well over $40 billion of total firepower with the cash and the financing capacity that we had. So we're using a reasonable chunk of that here, but we have significant firepower going forward. I mean the other thing I would highlight is you don't do a $21 billion deal every year, right? So we absolutely have the capacity to continue to do ordinary course business development transactions, transactions similar to the Forty Seven transaction. We have plenty of cash to support and grow our dividend over time, which is really important to us as well. So we're very comfortable with where we are on a pro forma basis after closing of this transaction. Thank you.

Our next question comes from Robyn Karnauskas from Truist.

This is Nicole on for Robyn from Truist, and congrats on the deal as well. So on the slide deck on the guidance and the accretive impact, is this assuming filgotinib is factored in or without it? And I apologize if this was already mentioned.

Yes, the EPS -- being EPS neutral is looking at a pro forma basis with the impact of this, right? So it's separate and apart from filgotinib, which we'll provide updated thoughts on where we see filgotinib going in the coming months and quarters as we finish our discussions with our partner and with regulators. So on a stand-alone basis, as you fold this in, we expect this to be neutral to accretive in 2023 and significantly accretive thereafter.

Our next question comes from Alethia Young from Cantor Fitzgerald.

Congrats on the deal. I guess a question for me is, obviously, it's a pretty large-scale deal that we see in the history of Gilead. So I guess I'm just trying to understand, are you making a core investment in hematology/oncology? Sorry, my dog likes your deal, too. And how should we think about GILD 5 years from now?

Alethia, can you repeat the end of your question?

Just how should we be looking at GILD 5 years from now? As a hematology/oncology company with HIV or are you going to diversify beyond that, you think?

Okay. Look, I think the -- it's really important that you understand that we're following our strategy which has 2 elements to it as its core. Number one, we believe that we want to continue building on our scientific base we have in the area of virology and also inflammatory disorders and immunomodulatory disorders, and that lends itself to cancer and inflammation. And I think we'll follow the science. In other words, what's most important to us is that we can make a transformational difference to patients and that's really what we're driven by. So personally, I think the 3 pillars we have in our business, we're certainly not -- let me just say, we're certainly not done with HIV, right? I mean we have more to do there. We're excited about the capsid inhibitor. We have lots of research activities going on there in virology and beyond that. Of course, you've seen the benefit of that for emerging viruses with a medicine like remdesivir. Likewise, in inflammatory disorders, we have a large investment both in-house with our partners like Galapagos that we're firmly committed to. And then finally, now, this gives us a third leg in oncology and hematology. It'd be hard for me to imagine or to project in 5 years or 10 years the size of any one of those pillars because that will be driven by the uncertainties of science and how we're going after the unmet medical needs. But it's really important that you know that we're firmly committed to all 3 of those areas, which is why the previous question on acquisition capacity and our ability to continue to flush out those areas as the science evolves is important. We will remain focused on that and very importantly, bringing in the best talent from outside into our company to be able to make those decisions. And maybe I'll just finalize on that talent equation because in addition, of course, to great colleagues we have at Kite and Gilead in oncology, welcoming the Immunomedics talent to our family and the opportunity that Trodelvy brings, I think that also becomes the talent attraction and a talent magnet for people that want to really make a difference for cancer patients. They want to come to companies that have on-market products that are near term plus highly innovative things that are earlier term. And with this portfolio, I think that gives us a great human capital attraction as well but all 3 areas we need that human capital in.

Awesome. Congrats.

Thanks, Alethia.

Our next question comes from the line of Carter Gould from Barclays.

Congrats on the deal. I guess 2. I guess first off, could you just comment for, I guess, first, around sort of the level of comfort with the competitive environment and your internal assumptions around how you see that sort of playing out? Obviously, Immunomedics has the first mover -- you guys had the first-mover advantage, but there are competitors there. And then secondly, just now how you view sort of the split in terms of R&D focus between hem/onc and solid tumors and if this is closer to sort of your target balance? Any color there would be appreciated.

So maybe I'll start on the second question and turn the first question over to Merdad. And Merdad, you can also -- but I think on this balance between investment in hem/onc versus solid tumors, again, you should hear directly from Merdad on this, but I think the point is we'll follow the science. So I think wherever we think we can have the biggest impact on patients is where our investments will go. And Merdad is putting together a portfolio group and committee and decision-making process of Gilead that's complementary to the one at Kite that allows us to kind of make those investment decisions based upon data. And so I think it'd be hard to predict what the split will be between those 2. But of course, we've been heavier on the hematology side because of Kite and the recent acquisition of Forty Seven in terms of late stage. And now this kind of fast forwards it for solid tumors. So it certainly brings forward the immediate opportunity in a much bigger way for solid tumors, which we're excited about. Merdad?

Yes. The only thing I'd add to that is, I think to embellish on what Dan said, we're focused on making the impact and having an impact on patients. And rather than sort of saying we want a certain percent hem or a certain percent solid tumor, as Dan said, we'll follow the science and go after the place where we think we can have the biggest impact. So we don't have a quota we're trying to fill or anything like that. In terms of competition, I think it's safe to assume that in oncology, there is always competition. And we think about both the in-class and the broader competitive space within each of the therapeutic areas that we're interested in. Certainly, for the in-class competition, we're excited that we're out ahead, and we're further along and obviously approved with accelerated approval. I don't think we can be complacent about that, and we'll have to continue to explore the molecule as aggressively as possible to show the benefit of Trodelvy in various patient populations. And then more broadly in different tumor types, we -- I think what we can bring is an orthogonal approach to some of the other approaches people are taking in those tumors and hopefully add to them as we -- and hopefully move up in lines of therapy so that we can look at unique combinations, as we've mentioned, things like PARP inhibitors in some tumor types, maybe I/O in other tumor types. And I think that allows us to move up into earlier lines of therapy. So we'll be looking at that very broadly in order to maintain our competitive edge, both in class and outside of class.

Our next question comes from Phil Nadeau from Cowen and Company.

Let me add my congratulations on the deal. A couple of questions from me on the upcoming data events. So it sounds like you've been able to see and fully review the urothelial data that we're going to see next week at ESMO. I'm curious, what does your due diligence say about the ability of that single-arm Phase II to support an FDA filing and approval? And then second, there has been some controversy among Immunomedics investors about the timing of the interim analysis and the ER-positive HER2-negative breast cancer study? What does your diligence say about the timing of that analysis? And similarly, do you think that, that analysis will support an FDA filing?

Andy, you want me to take that or...

Sure. Yes.

Yes. Okay. Happy to take it. So we do think that, obviously, we're optimistic about the ability to file in triple-negative this year. When we look forward in triple-negative, we think that we'll be able to continue to expand in the EU. And then we are optimistic about our chances to be filing for urothelial, hopefully, for accelerated approval based on the data as we think about 2021 and beyond. After that, it obviously becomes a little bit more gray, but we do hope for -- as the data emerge, that we do see the possibility of multiple additional SBLAs coming up in the next few years.