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

Good morning, everyone. I'm Brian Abrahams, senior biotech analyst at RBC Capital Markets. Very pleased to have our next presenting company, Gilead, represented by their CFO, Andy Dickinson. Andy, thanks so much for joining us.

Thanks, Brian. I appreciate you having us. Happy to be here.

Absolutely. Our pleasure. So maybe just kicking things off, coming off of a seasonally soft first quarter, with COVID exacerbating some of the usual dynamics. How are you -- what's the outlook for the rest of the year? How are you expecting things to progress? And what are you seeing that gives you confidence in a bounce-back?

Yes. That's a great question. One, as you can imagine, we've spent a lot of time with shareholders talking about. Look, the first quarter is always the most challenging quarter for us and other large commercial companies, as you know. It's always the Q4 to Q1 stocking dynamic, and you're also dealing with the payer issues [indiscernible], et cetera. And this year, it was exacerbated by the pandemic, as you mentioned. So it was a solid first quarter for us. It was -- the mix was a little bit different than we would have guessed going into the quarter, as we mentioned on the call, but it was -- it's actually a really good start to the year. The -- we always see acceleration in the commercial business throughout the year. We expect that the same thing will be true here despite the pandemic. So as you know, we updated our guidance to indicate that we expect a more gradual return to normal this year, and that really means 2 things. For our base business, we expect to see continued momentum. We are already seeing that in the second quarter. So I'd say, Brian, if you take our HIV business, for instance, we're seeing improvements on both the PrEP side and the treatment side, yet it's still slower than we would have expected at the beginning of the year, but it's moving in the right direction. So more to come on our second quarter call, obviously, in 1.5 months or so. But we're -- things are moving in the right direction. We expect that we'll see continued momentum throughout the year. Again, it's a dynamic situation, as we've said, for the last year. We don't expect significant changes given where the United States, in particular, is going, which is a huge part of our business, even though we're a global company. But if there is the possibility that we'll see some unforeseen changes, either way, frankly, things are moving in the right direction. And then on remdesivir Veklury, there continues to be a need. And the product continues to do really well. It's become standard of care for patients that are hospitalized. We're seeing increased usage outside of the United States as well. And so to the extent that the pandemic continues to have an impact on our base business, it's largely offset by the fact that Veklury is providing a significant benefit for patients, and we'll see sales and cash flow from that. So overall, we feel really good about where we are, and we're encouraged by the signs that we're seeing recently.

Great. And then speaking of the base business and the HIV franchise in particular, where do you see the additional growth opportunities there, particularly for Biktarvy? You had a huge launch. You've captured a lot of share. But prescriptions are starting to level off a bit, some of the smaller players like Dovato are growing. What do the market dynamics look like there in HIV overall and then in terms of market share for your particular products? And are you expecting that to evolve over the course of this year into next as COVID likely remains?

Yes. I mean what -- we do expect to see improvements in the HIV market. So the key, and again, let's divide it into PrEP, the pre-exposure prophylaxis as well as the treatment market. So in PrEP, the big change, obviously, is the Truvada patent cliff, as we've discussed. So Descovy continues to do incredibly well. We've held share. We did have to make price concessions as Johanna Mercier, our Chief Commercial Officer, discussed on our quarterly call in order to maintain access, which is critical for patients and for the franchise. We don't think you'll see that same dynamic to the same extent in subsequent quarters and years, but it was an important transition for us, and the product continues to do really well. For PrEP, PrEP was a significant source of growth over the last 4 years for us in HIV. And obviously, the next big step function change in PrEP is the potential launch of lenacapavir as a long-acting agent every 3 months or every 6 months subcu, hopefully in 2024 or 2025. So that will be the next major source of growth in PrEP. The overall HIV treatment market, unfortunately, continues to grow. So despite the fact that -- and what we've seen over the last couple of quarters and with the pandemic, Brian is that -- in particular in the first quarter is really a macro pharmaceutical market impact or macro HIV impact, not an impact specific to our business or competition. So the market continues to grow, and we have 80% -- we're historically at 80% of the market in the U.S. I think today, we're north of 75% with it, which is a result of the generic launches of Truvada and Atripla recently in the United States. And outside of the United States, we have very significant market share as well, not the same as the U.S. There's still room for us to grow. And again, as you know, with Biktarvy, which is the gold standard for treatment, Biktarvy -- 50% of new starts are in Biktarvy, 50% of patients that are switching are put on Biktarvy. Today, we think we can improve that, especially outside of the United States over time and also in the United States. So we're really -- we are growing our share. Biktarvy is growing. Biktarvy grew 5% share points -- 5 share points in the U.S. year-over-year, 2% quarter-over-quarter from Q4 to Q1. So Biktarvy continues to grow. We expect that Biktarvy will largely offset the patent cliff in the U.S. So when you think about the financial impact of the patent cliff, the Truvada and Atripla patent cliff in the U.S. that will impact our year-over-year results this entire year, the Biktarvy growth should largely offset that, and then we continue to grow. So overall, the picture looks really bright. And the same thing is true even beyond '25 and '26, you have the Descovy patent cliff. We think of the growth in our long-acting franchise that should be coming into the market at that point, both in PrEP and treatment, will offset the patent cliff from Descovy in '25 and '26.

Got it. I'd love to expand on the latter point a little bit in terms of growth goals, maybe bigger picture. And as I think you sort of alluded to, you guys have obviously done a great job navigating LOEs through the HIV life cycle, remdesivir, the oncology business build-out. As the pandemic recedes and remdesivir potentially declines, we will likely see a near- to medium-term impact on EPS. And there is the potential for another step-down due to the LOEs just a few years from now in 2025, though it sounds like some of the HIV life cycle strategy will be able to offset that largely. I guess how are you thinking bigger picture about positioning the business through this? Is your goal consistent earnings growth and smoothing that out, mitigating these step-downs and just ensuring solid cost savings, titrating OpEx to maintain a smoother earnings curve growing through them? What's sort of the ultimate bigger-picture goal for growth of the business and how you're hoping to achieve it?

Yes. It's a really good question, Brian. I think it's all of those things. And I think we've already done what we need to do to grow through these patent cliffs. And again, the patent cliffs that we have are fundamentally different than the patent cliffs that other companies have. This is not a REVLIMID franchise going away, I'll use as an example, right? I mean -- and we're fortunate in what the management team over time has done to build a thoughtful franchise where we're constantly raising the bar and out-innovating ourselves. And we don't see that changing, right, with what we have in development. So yes, we have a Truvada and Atripla patent cliff this year, but people can see what we did to overcome it when we had the Truvada patent cliff in Europe a couple years ago, what we're doing in the U.S. as we grow through it. And the same thing we expect will be true in '25 and '26. We are focused on disciplined cost management, expense management, which I think you're starting to see play out. We've increased our R&D spending over the last 3 years which we needed to do. And we're now at a point where we think that we're at a reasonable run rate that will at times increase, at times decrease, but we like where we are. So Brian, we think that we see our revenues growing over the short, medium and long term. And when we say that, that doesn't mean there won't be periods like this year where you have a relatively modest patent cliff that you're growing through and that you have a year where there's a step-down and then you grow through it. But over the longer period, when you look at longer periods, whether it's 3-, 5- or 10-year periods, we expect to grow the company based on what we've already put together. And that includes the HIV business. We expect that the HIV business will continue to grow. And again, it becomes a very different business as you transition to the long-acting therapies, and we have additional patent cliffs in the mid-2030s with Biktarvy, et cetera. So between now and then, we feel great about where we are. And then on -- the Merck deal is an incredibly important deal for us as well as what we're doing internally in our long-acting therapies to really sustain the HIV franchise for a much longer period than I think people are giving us credit for in our valuation. As far as earnings growth, the way that I would think about it is as we grow the top line, you should expect outsized growth in the bottom line, right, which we've said consistently. So we have a lot of leverage in our business model. We're a relatively small company. We have very strong gross margins, very strong operating margins. And as long as we maintain expense discipline as we grow the top line, we grow a lot with the bottom line at a faster rate, and that's the expectation. So the last thing I'd say, Brian, is I think people -- remdesivir, as in Veklury is a fantastic drug, it's providing a huge benefit for patients and cash flow for us. What we've guided the market and shareholders to think about is really think about our growth and our EPS growth as base business growth, right? Remdesivir is a bonus. It's the cherry on top of the sundae, so to speak. But focus on the base business. So when we talk about our expectations for growth, we're talking about the base business. And then the last thing I'd say, Brian, is we've always said and continue to believe that Veklury is going to have a longer tail than people expect. It's very hard for us to predict. It's very hard for you and shareholders to predict. We had a really strong first quarter. Sales still correlate to hospitalizations, which are thankfully declining in the U.S. As I said, usage has increased a little bit outside of the U.S. and Europe and Asia. The clinical data continues to get better and better as you look at larger studies, you'll see additional data published in the coming year. So our sense is that, unfortunately, in parts of the world, including in the U.S., you're going to have -- this will be an ongoing endemic, as people say, and we expect to have Veklury sales at least in 2022 and likely beyond, but more to come on that. Brian, did that touch base on all the different pieces of the question that you wanted to dig into?

Yes, absolutely. And yes, sorry for the multipart question there, but that definitely covered it in detail. And maybe speaking of remdesivir, I guess where are you with respect -- I'm curious to learn a little bit more about what you see as the future for that product beyond 2021 and beyond sort of just maybe the lingering pandemic in the outyears. I guess where are you with respect to inhaled and oral formulations there as well as derivatives of remdesivir? What kind of role could that play either for future pandemics or for controlling outbreaks and perhaps stockpiling ahead of those in the future?

Yes. I'll start with the oral, even though it's an earlier stage than the inhaled, but I think that's a bigger piece of the picture over the long run from our perspective. It's hard to tell. But we're making progress in advancing preclinically oral prodrugs of remdesivir. We also have always had and continue to have a research effort looking at broad-acting nucs that could be used against coronaviruses that have broad utility. So -- but we're making progress, I think. We're hopeful that later this year, we would have an oral enter the clinic and start studies. So I kind of rank it into 2 things. And again, I will come back to be inhaled. But I think that in '21 and '22, it's really the IV formulation that's going to continue to be the standard of care for patients, unless something changes in the market with some of the oral drugs that are -- the antivirals that are in development. Like our expectation is that remdesivir -- the data is fantastic. Physicians are comfortable using it. They now know what to do, they know what to combine it with and it's the standard of care, and we expect that to continue and probably to grow and as physicians, especially outside the U.S., become comfortable with it. Beyond '22, hopefully, it's an oral formulation. So more to come on that, but -- and we'll update shareholders in the market as we make progress. But again, preclinically, we're making progress. We have a couple of product candidates that look interesting to us, that have potential to move into the clinic. So more to come later this year. And then on the inhaled formulation, we have the existing IV formulation that we could use in a nebulizer. As you know, we're doing studies. We'll have some data in the middle of this year. Unclear where we go from there. Obviously, Merdad and his team need to look at the data to decide where we go. I think the oral, for obvious reasons, is really the most important opportunity for patients and for us and our shareholders over the longer run. So if we see an opportunity to do something with the inhaled formulation that's going to benefit patients, of course, we'll pursue that. But when you think about the longer-term picture here, I'd say there's 2 big points. One, this probably has a longer tail than people believe and are giving us credit for. And we understand that it's a little bit of a show-me story and it's dynamic. And secondly, the oral formulation is probably -- or one of the oral formulations will likely be kind of where this franchise transitions over time.

Got it. That's really helpful. And then you mentioned the long-acting HIV program a couple of times and lenacapavir. You talked about it for PrEP, where, of course, it would be a standalone. What about the collaboration? How is the early progress -- collaborative progress been alongside Merck in the lena/islat deal? And how much progress have you made on a long-acting subcu combo product that could potentially be used in treatment? And also, are there other HIV life cycle strategies that you guys are pursuing in addition to that?

Yes, absolutely. So look, the collaboration with Merck is off to a great start. I mean Merck is a fantastic company, and they have exceptionally bright scientists and formulation experts as do we. And the teams are working really well together. It's not trivial to combine these drugs. I think it's straightforward for KOLs and for scientists. This is kind of -- people have described it as a no-brainer to combine these 2 drugs as a potential best-in-class treatment option, both with the once-weekly oral formulation as well as subcu formulations for treatment. The oral, again, it's not trivial, but it's more straightforward than the subcu given our historic expertise and Merck. So we're off to a good start, and we said when we announced the deal that we expect to be in the clinic later this year, and that hasn't changed. Since we announced the Merck deal, we actually have completed another business development transaction that we haven't -- we didn't disclose publicly and don't intend to, but that relates to it that may help us on the subcu formulation of islatravir. So we already, as everyone knows, have a subcu formulation of lenacapavir. We need to work on the subcu formulation of islatravir with Merck. They're leading a lot of that work together with our team. And so more to come on that. That is going to take longer, as we've said, but the teams are working hard. It's a huge priority for both companies, and we're really excited about the collaboration. For both companies, the collaboration, it makes a ton of sense, first and foremost, because this is great for patients, right? This is going to get a therapy or maybe multiple therapies that are Biktarvy-like in their potential or even greater, the patients that need them with the potential to substantially increase adherence and, as a result, efficacy over time. So we're really excited about it. And the deal structure is unique in that both companies, Brian, as you know, can continue to pursue independently all the other programs they're pursuing. So we have greater than 10 preclinical long-acting programs. Merck has a number of them. We did grant each other cross-licenses in the deal to the every 2-week oral integrase inhibitors that we are both working on, which is kind of a unique part of the deal structure because we are both doing it. We thought it would improve the probability of success [ to be ] granted cross-licenses. We'll see where that goes. Beyond that, the -- and we can use our oral integrase inhibitor to partner with anything. They just have an option to use it as well, and we have an option to theirs. But beyond that, we each will continue to pursue our independent programs just like Gilead has in the past or Merck has in the past. So I think this is a win-win for patients, a win-win for both the companies. This is a -- it's a really exciting deal and I think fundamentally transforms how people should think about our HIV business and the terminal value in our HIV business over time.

Great. Andy, I'd love to shift gears and talk a little bit about the emerging oncology business. With respect to Trodelvy, you recently upsized the TROPiCS-02 study. I'd love if you can talk to us through what gives you the most confidence in the outcome of that study. What's the ultimate market expansion opportunity you see there if it's positive and successful in HR-positive patients? And then would love to hear your comments on some of the recent data just presented from a competitor in triple-negative breast cancer with a similar ADC target just a week or 2 ago and how that influences how you think about the development strategy and Trodelvy's long-term competitive positioning.

Sure. All right. So we'll go through all 3 of those. You may have to remind me. But this is -- I mean, it's an important topic, and we're spending a lot of time talking about it, as you can imagine. So when we did the deal with Immunomedics, we had a very clear view of the overall opportunity, including hormone receptor-positive breast cancer and lung cancer and other indications. So just to put it in context, Brian, remind people that we're off to a great start, right? Now we have full approval in triple-negative breast cancer. The label is broader than we and the market expected, so second-line plus metastatic triple-negative breast cancer. And we received accelerated approval in the U.S. for bladder cancer, both of which I think are better outcomes than the market expected and exceeded even our base case, even though we are cautiously optimistic about both. So we're off to a great start. On the hormone receptor-positive study on the TROPiCS study, this is something we spent a huge amount of time looking at diligence and debating with the Immunomedics team and our internal and external experts. We did increase the size of the study, as everyone knows, meaningfully, not because we had any concerns on the powering or the size for the PFS end point, but rather because it wasn't properly sized for the OS end point, which is going to be really important at the end of the day as well. So as you know, we increased the size -- the trial size from just over 400 patients to 520 or 525 patients. And it didn't really push out the trial date by much. And we'll have the data by the end of this year. There was a couple of months difference. And we got rid of the overall response rate interim look which would take some of the statistical alpha. It's a big market opportunity. So to be clear to your question, the hormone receptor-positive market is larger -- significantly larger than the triple-negative market, even with our broader label. So the broader label took us to a much larger segment potentially of the triple-negative breast cancer market, which is great, and it's really encouraging for us. And you should see that play through in the commercial story over the next 1.5 years as we continue to build in the launch. Hormone receptor-positive market is substantially larger and patients tend to be on treatment longer, both of which had a substantial impact on the revenue curve, as you know. It's not the only way to win. I think the key is that our view on the likelihood of success, which is reasonably high when we did the deal, hasn't changed a bit since we did the deal. We looked carefully at the basket study in this group. We also looked carefully at all the patients in the ASCENT data cohort that before their tumors mutated to become triple-negative or hormone receptor-positive, and nothing's changed. So I know there's been a debate lately on the prior CDK4/6 use, which we can talk about. Those are small basket studies, we wouldn't read too much into it. And again, they weren't randomized, so remind people that the TROPiCS study, not only is larger, but it's randomized. So all the patients that either go to the treatment arm or in the chemotherapy arm will have received prior CDK4/6 use. We don't see any biological rationale for prior CDK4/6 use to impact the efficacy of Trodelvy, and we think we have the right powering assumptions in the study. So we remain very confident. But again, I'd step back and highlight for people, there's lots of different ways for us to create a very sizable franchise with Trodelvy in lots of different solid tumor types and different lines of therapy and in different combinations. And we're building out our clinical development plans, both internally and with partners. We're really excited about where that's going. And then I think the last question was on the competition, Brian. Again, in diligence, we also look -- this is all as expected. We looked at it -- very closely at the competition. We are well aware of the Daiichi program with AstraZeneca, a Trop-2 ADC that has a different linker and a different payload. So it's a very different construct, which gives it a different side effect profile. And frankly, all of the recent data just underscores our enthusiasm for Trodelvy and what we're doing. So I think that when you look at what Daiichi has done in lung cancer and in breast cancer, and if they move into others, it just reinforces that Trop-2 is a great target, that there's room for competition here. We have fundamentally different constructs with different side effect profiles, and we really like where we are. We will have been in the breast cancer market for a substantial period of time before that molecule potentially is approved as a competitor. And the same thing is true with the bladder cancer market. We've looked very carefully at the data that was available on Seattle Genetics' Padcev which is also a strong molecule. It has very good data, and we knew exactly what we were getting into. And we believe that there is room for more than one ADC. And they have -- similar story. They have different side effect profiles. Some patients will get Trodelvy before Padcev. We believe some will get -- or maybe a majority or more will get Padcev before Trodelvy, but we'll see where it goes. Either way, we like the positioning and the outcomes that they [ pioneered, exceeding ] even our base case assumptions, which is great.

That's great. In the last minute or 2 that we have left, would love to touch on your overall business development strategy. You recently did a large acquisition, of course, in Immunomedics. But you've also done smaller deals along the way since then, like MYR. I'm curious what areas, sizes, stages you guys are most focused on for external BD? And I guess, to what degree might that be influenced by, I guess, potentially increased stringency from the FTC, the changes we're seeing in external asset prices or even expectations for drug pricing reform?

Yes. There's a lot there, too. Look, I think that the key is that, again, people should step back. We did 5 major transactions last year and another 20 important partnerships, 20-plus partnerships. When I say last year, maybe in the last 18-plus months. So when you think about starting with Forty Seven and then the Arcus partnership, Immunomedics, MYR and Merck, those have fundamentally, in our mind, reshaped Gilead. So the key there, Brian, is we have a lot to digest and to operationalize and execute on. And that's the primary focus. We are really excited about some of the other deals that we've done, including the Tizona and Pionyr deals or the licensing the CCR8 antibody from Jounce, for instance. Those are just some examples. There's many others. We did a Gritstone deal in HIV recently. So the focus is very squarely on, first and foremost, executing on what we've already pulled into the portfolio and continuing to build out our oncology franchise. We're continuing to hire people and build that out, all of which is reflected in our expense guidance for the year. We will continue to do deals, but they will be ordinary course partnering deals and maybe smaller acquisitions. I think it's unlikely -- we'll always think of things and we have an obligation to shareholders to explore what's available. But it's unlikely that we would do any medium or large acquisitions. We just have a lot on our plate and the bar is very high for us now. And then in terms of areas, most of what we do in virology will be done in-house, although lately, we've done a number of deals with Merck and MYR and Gritstone that we're really excited about. But with what we're doing internally and what we've already done in virology, you may see less in that area for the next year or 2 and more in oncology and inflammation. Inflammation is a longer-term story for us with the setbacks with filgotinib. We'll be moving towards building that out over time. We have some interesting early-stage clinical assets as does Galapagos, but we'll be focusing there, but we're not in a rush to go out and buy a company in the inflammation space, to be clear.

Got it. Before I let you go, just maybe one more quick question. Anything that we didn't touch on in your internal pipeline that you guys are particularly excited about that we should keep an eye out for?

Well, I think there's a lot that we're excited about. And I view our entire pipeline as a call option for investors today, Brian. I think that our HIV franchise alone is undervalued and underappreciated and the rest of what we're doing. So I look at things like in oncology, we have a FLT3 agonist, which is different. Remember, most people look at FLT3 antagonists in hematological cancers. We have a FLT3 agonist that's being studied in solid tumors that will have some -- I think we have abstracts that are being released later today for ASCO that we'll have some data on the FLT3 agonist. We also have the alpha 4 beta 7, oral alpha 4 beta 7 that's going to be moving into the clinic similar to the Morphic program that we're really excited about. So those are just 2 of many programs that I would highlight that I think people will start to appreciate as we move them into the clinic.

Great. Well, unfortunately, we're out of time. But Andy, that was really terrific. Great to hear the latest updates. Obviously, a busy time, so we appreciate you taking the time out to update us, and look forward to seeing you soon.

Likewise. Thanks, Brian. I appreciate you having us.

Absolutely. Take care.

Thank you.