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

Thanks so much for joining us, everybody. Really pleased to be here hosting Gilead. Before we get started, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. I'm Terence Flynn, the U.S. biopharma analyst here at Morgan Stanley, and we're very pleased to have Dan O'Day with us. Dan is Chairman and CEO; and Andy Dickinson, who is the company's CFO. But thank you both for taking time out of your day to join us today.

Pleasure.

I thought maybe we'd start off high level. Obviously, diversification has been a key part of the Gilead story and part of your mandate, Dan as you came in as CEO. And so maybe give us an update on kind of the progress that you've made with the team in terms of diversifying the company away from HIV and also what's left to be done as you look out over the next several years here?

Yes. First of all, Terence, thanks for having us and for hosting the conference. I'm delighted to be here with Andy and we'll tag team on this, and thank you all for your interest in joining. Yes, I think we're -- I think we've made tremendous progress. If you ask me, if we would have been in this position when I took over 4.5 years ago, I would, I can't imagine, we'd be this far along. So we've just made -- and I think on 2 fronts, one on the commercial front, which I think is punctuated by 7 quarters of consecutive growth, really strong growth excluding Veklury. And then secondly, the organization that Andy and I and the team have built around execution of the portfolio and I think the metric on that is 21 Phase III trials, and I'll get into that a little bit But on the commercial front, I mean, it's largely in 2 different areas. One is virology continues to perform really, really well. I mean just using the last quarter, as an example, we had that 9% growth in our core HIV business, which is incredibly strong. Biktarvy is now a $10 billion asset in our portfolio. And that's juxtaposed with the progress we made in oncology. At the end of the day, very confident about our ability to meet our target of more than 1/3 of our revenue coming from our oncology business by 2030. And the reason for that is the following. I mean last year, we had around $2 billion in business on our oncology business. Through the first half of this year, we're now on the $3 billion run rate. Our cell therapy business is growing at 27%. Trodelvy is growing at 63%. So we've got great confidence around the commercial execution in our programs. And that's supplemented on the transformation side by the depth of that portfolio, those 21 Phase III trials are playing out and across our therapeutic areas. I mean for HIV, just to talk a little bit about it, we've got now more than 9 potential combinations with long-acting treatments. Importantly, I know we'll get back to this, but on the PrEP side with lenacapavir, we have 4 trials and those are going to be reading out. The 2 first trials will be reading out towards the end of next year, beginning of the following year with lenacapavir PrEP which we think will really transform the HIV PrEP market and eventually the treatment market. We've got COVID trials underway with remdesivir. This year has marked a third indication for Trodelvy in hormone-receptor-positive, HER2-negative. And we're coming fresh off -- in fact, I was just in Singapore at the World Lung Cancer Conference on the above 2 data where we saw some really promising data for Trodelvy in lung cancer, first-line lung cancer, where we have the ongoing work in second-line lung cancer. That combined with the fact that we more than doubled the portfolio with 64 programs across the entirety of the portfolio, but particularly in oncology, HIV cell therapy, which is growing really nicely strongly from a portfolio perspective. So I would say we are far from done. And again, and I would not be declaring that we're in any way in pause mode. We're going to continue to execute. And very importantly, we're going to continue to now -- because we've gone through a really important build over the past several years. The organization is a very different organization than it was, and we significantly increased our investment in R&D, for instance. But we're now at a phase where we are at a stage where we're investing, I think, appropriately overall in the range of where we want to be with R&D. So managing expenses, managing our ability to make sure we focus on the operating margin and also on our EPS is something that Andy and I are both very committed to on the course of this transformation journey over the next several years.

Okay. Great. I guess in terms of just on the BD front, maybe we'll segue there, Andy. And it sounds like we should expect more kind of partnerships, more collaborations, more kind of normal course type stuff as opposed to anything kind of mid-cap [indiscernible]?

Yes, I think that's exactly right. We've been consistent for the last couple of years, and we did what we needed to do to diversify the business to have the anchor asset in Trodelvy in oncology. Obviously, the cell therapy acquisition was incredibly important. And we have -- and you're seeing this in the business performance, as Dan highlighted, I mean we have above-median growth in our base business, which I think the market tends to under-appreciate today, given where Gilead was historically. So we have this incredible momentum in the base business. We have a very strong portfolio, as Dan highlighted, much broader. We're going to continue to build it out. But what you see over the next couple of years is more likely to be what you saw in 2022, what you've seen this year so far. A lot of important early-stage licensing deals, smaller acquisitions, I think our belief is that any healthy company will continue to look broadly at external assets and to bring in external assets. But our focus is really on late-stage preclinical, early-stage clinical assets. That's the part of our portfolio today that we'd like to build out further. Again, that will drive robust growth above and beyond where we are today.

We don't talk about it but Andy and the team have built up a really interesting early inflammation portfolio, too, both as in our own research and externally. And that's kind of the third leg of the transformation journey that will come in the 2030s, but we think -- we think in generation kind of in terms of how we're going to approach the portfolio and how we expand that out. And so that will continue to be [indiscernible].

Absolutely. I mean the other thing that's worth mentioning, when you look at oncology and you just step back in terms of -- and we hear this consistently from the outside advisers and KOLs. Broadly, I think people believe that there are 4 big areas of growth, and we are a potential to change patients' lives over the next decade or so. One is cell therapy, the other area is antibody-drug conjugates, in particular, the TROP-2, maybe the HER2 as well. TIGIT is another area and then some of the targeted oncology therapies. We are clearly today a leader in 3 of those 4, and we have some early-stage programs against targets like PRMT5 and KRAS G12D that we're excited about that should enter the clinic. So from an internal perspective, I think our belief is we very purposely and systematically look at where is the oncology world going, where is the immunology world going, to Dan's point, and then we slowly and kind of methodically build out a portfolio that we expect the Street to gain much greater appreciation for over the coming years, similar to what you saw in the Trodelvy EVOKE-02 data, which I think people are fully starting to appreciate now and will continue to appreciate over the coming weeks and months. So really good progress.

Great. Well, maybe I had a couple of follow-ups. I guess first is, Dan, on your comment on you are committed to EPS growth here. So maybe just help us think about the margin opportunity [indiscernible] you talked about kind of the top line growth objectives, but how do you think about kind of the margin trajectory from here when you think about commitment to that EPS growth?

Yes, I'll start, and then Andy can add a little color. I think at the macro level, we had underinvested, I think, on the R&D side for a long time at Gilead. So we had a lot of catching up to do over the past several years, and we did that both through capital allocation and M&A that we've talked a little bit about, but also in building the nature of our business internally. But now we're at a stage where we're roughly in the low 20% of R&D spend versus sales. And we think for a healthy company that's firmly focused on innovation, that's a good range to be in. So -- and we're also at a stage where we can expect to see -- again, we doubled the portfolio from probably 30 programs in the portfolio to 64. And it's not just about the numbers. I think also the quality, the nature of our portfolio, the risk/reward profile. And I think we're now going to be at more of a steady state where we'll start to see these 21 Phase III trials. So we're executing on that, which is pretty extraordinary when one thinks about what we've built up, particularly the new [indiscernible] in oncology, which are different than actually here on trials and virology, as all of you know. But now we'll see trials naturally as one would think in a more mature company relative to investment, trials rolling off and new trials starting. So you start to get much more of a steady state in the R&D. We've done the same thing in the commercial organization by building up in both cell therapy and outside of cell therapy, a strong commercial execution organization that will have leverage as we put new indications into that over the future. So I think that those are kind of key drivers, and we're very focused, Andy, leading in this on the G&A side to make sure that we're constantly looking at optimizing and bringing, if you like, Gilead into the forefront. In many ways, we can leapfrog because of the investments [indiscernible] investment we had in the past [indiscernible] but leapfrogging in terms of efficiency and being effective around G&A. So I mean, I'll let Andy comment on -- obviously, we're not guiding to particular EPS and sales lines.

We have -- I mean maybe to step back, we moved from this growth, where Dan highlighted that we underinvested significantly, I think, in R&D historically, you've known the company for a long time. We made up for a lot of that. We've almost doubled our spending overall, we needed to. Even with that, we have incredibly strong operating margins today. So we still have one of the top operating margin in the industry. And as Dan said, we're kind of moving from that growth and execution phase to what I would call an execution and optimization phase and there's a lot of room to optimize the business over the coming years. And you're going to see the switch from expenses, even though I mentioned earlier that the base business growth was incredibly strong over the last couple of years. It has been, and we don't expect that to change. The expense growth will moderate and that will cross over in the foreseeable future. So to Dan's point, we don't provide long-term guidance on this. But in the foreseeable future, you're going to see that expense growth crossover. It will be less than our -- what we expect to be our base business revenue growth and then you'll see the leverage in the model. We are still a very small company relative to many of our peers. We have less than 20,000 employees globally. We are agile and there's a lot of room in the model that when you drive the top line growth that we've seen and that we expect to kind of increase over time and the expense discipline, you're going to see a lot of that fall to the bottom line. Not that different than Gilead historically. It's just again, it was a very different business model. So we're getting to that point where we expect the crossover. And we have a lot of it -- back to your portfolio comment, we have an incredibly strong portfolio not only in oncology, but also in virology with areas like PrEP that should drive that outsized growth, all of which should fall to the bottom line here in the foreseeable future.

Okay. Okay. Great. The other kind of related question based on some of your comments, Dan, was obviously, we're going to enter a post IRA world back half of the decade. That does have implications for cancer drugs, I think most specifically small-molecule cancer drugs. So as you think about investing in innovation and this diversification to cancer. How does this new IRA world impact some of those decisions you're making in prioritizing spend? You mentioned inflammation is another area where probably it would be less of an impact. So maybe just speak through like what is Gilead as a company doing to navigate the post IRA world?

Yes. I think there's a lot yet to be understood about the post IRA world. So I think the 2 things that we do understand well in IRA are the inflation rebates and the Part D reform. Both of which, I think, are clearly manageable within our portfolio. And I believe they eventually help -- I mean they do help patients [indiscernible] cost. So we were really a proponent of things like the Part D reform. It's really the negotiation piece, which is obviously the piece that I think is damaging for the entire industry. When I put that towards the Gilead portfolio and make it specific for us, I think we're in a slightly different position than other companies. First of all, we don't have really any major patent expiries at all enterprises. It's a relatively useful portfolio when one looks at both the HIV side, and clearly, the oncology side because we just entered into this 4.5 years ago. So presently, I'm one that wants to make sure we wait and see a little bit about how this is going to play out in terms of the longer-term portfolio. We haven't made major shifts to our portfolio for the reasons I just mentioned, the usefulness of it and where we're going. I also believe that some common sense will come back into some of the IRA at some point in time. And we have to continue to do what's right for patients. So we want to leverage our small-molecule business. We want to continue to leverage all the innovation we have in all the modalities, cell therapy and also biologics. And we'll see where we go. But on the negotiation side, we're -- we don't expect any impact on our business for the next several years. We'll have to see how that impacts and would impact probably a small portion of our portfolio in that period of time. And you combine that with the growth drivers that Andy was talking about, let's just take the HIV business. We are confident that we'll be able to drive a CAGR -- positive CAGR well through the end of this decade and beyond with the introduction of first of all, Biktarvy continue to make progress as the standard of care and treatment. This is going to be continuing to do well in prevention, and then lenacapavir in all of its forms, opening up the prevention market, which today in the United States and probably still undercounted, is only around 20% penetrated. And the ability for long-acting, we think can more than -- at least more than double that market by the end of the decade. So we've got growth drivers that underlie this uncertainty, if you like, around the IRA. And then you put on top of that the oncology portfolio that really because it's so useful and will not be affected by the IRA. Don't get me wrong, I'll continue with my multiple hats to work with policymakers to take away as much as possible what I think are the perverse incentives in the IRA that are not good for patients and diseases. But I'm just speaking really about how it impacts Gilead.

Okay. Understood. Maybe going back to oncology, you mentioned you were in Singapore for World Lung Cancer Conference. So maybe just give us the highlights of the EVOKE-02 data and what that means for kind of next steps and how the paradigm could evolve herein first 9 months?

Yes. It's really exciting. And Andy started to tee it up in terms of what I also saw at World Lung, which is this concept in particular, in lung cancer of having the era of TROP-2 ADCs and TIGIT kind of coming together. Now the real highlight that World Lung was specifically related to TROP-2 ADCs. And for us, I think -- remember, now we've got 3 indications with Trodelvy, more than 20,000 patient experience with Trodelvy. And we're now taking that into new -- we're taking that up in lines of therapy in breast cancer and into new therapies like lung cancer. Look, I think the EVOKE-02 data was tremendous. It was really even beyond our expectations in terms of what we might see in early-stage data, and I think it speaks really well for the future of patients with lung cancer, what we might be able to do to help them. Specifically, what EVOKE-02 does is in our mind, it derisks the ongoing EVOKE-03 trial, which is now recruiting patients for PD-L1-high because of this 69% -- well, 2 major aspects of the EVOKE-02 data. One is the response rate, second is the durability and third is the tolerability profile. But as we looked and the thought leaders that I met with at Singapore, looked at the data, they saw that 69% overall response rate in the PD-L1-high compared to -- and the incorporate comparison here is really to look at KEYTRUDA monotherapy because that is the standard of care, which has a response rate of somewhere around 39% to 45%. So that's one piece of the puzzle. But we know that OS is what counts in lung cancer. So then you have to combine the durability where we're seeing patients go -- 88% of patients are still on therapy after 6 months, whereas we know, even in those patients, and it's less than the majority of patients that are treated with a chemo-combo in that frontline setting, really, 4 cycles is really the maximum that people can tolerate platinum. So if you combine the response rate with a longer durability, that's what gives us confidence in those curves being able to continue to separate and potentially, we think have great confidence around showing the OS and PFS data that [indiscernible] EVOKE-03. And then, of course, in the PD-L1-low population, that same durability is occurring as well. Combine that with the tolerability profile that has been manageable in breast cancer and bladder cancer, manageable toxicity effects like [indiscernible] associated with the beginning of injections and neutropenia that [indiscernible] I think in comparison to other TROP-2 ADCs, where there are other side effects like ILD and stomatitis, we feel like we're in a really good position with TROP-2 ADC as we go into both first- and second-line lung cancer. Combine that with the TIGIT data that we [indiscernible] and the opportunity to potentially look at seeing those curves continue to separate and we have ongoing trials there, I think it gives us optionality in our frontline setting, depending on how the data reads out from both an efficacy standpoint and a tolerability standpoint. So we're -- I was very encouraged by what I heard at World Lung from the thought leaders there on this data.

And I guess big picture, does this -- I mean in my view, this could become a more fragmented market. Again, you hear you think about biomarkers, et cetera. You already have PD-L1. Again, there's some talk from the Merck side more so looking at TROP-2 expression. So do you think that's the likely path we're going down? Or do you think it's going to be kind of best regimen, winner-take-all market in first-line lung like we have now with KEYTRUDA?

Well, I think it will remain to be seen. I mean it was interesting, every presentation that I saw at World Lung, we are -- the community is looking for biomarkers. So far, there's been no compelling evidence to suggest, particularly with TROP-2, which is more than 80% expressed in most tumor types by the way, not just lung cancer. That doesn't bode well necessarily, at least in our hands, with the data that we've seen so far to have a patient subset, particularly I think -- and one has to look not only at the class but also as your particular molecule because our molecule is different than other TROP-2 ADCs. It has a linker that's been purposely designed to kind of allow the target to effuse in the tumor microenvironment as well, which may mean that you need even less TROP-2 expression, you get a bit. So I think it would be great. I mean I come from a history of 30 years of looking for personalized medicine, and I'm a big believer in that. And I think what we're seeing so far in our TROP-2 and Trodelvy in our hands, is an all kind of medicine because of the way that's expressed. So we'll continue to look, not for [indiscernible], but I think largely in the first-line setting and the second-line setting in lung, we think at this stage, it's likely an all kind of strategy.

Okay. Great. Maybe one other related question along talking about TIGIT. Your former colleagues, they had some data that leaked out related to TIGIT. What are the implications of that data for your TIGIT program? And what does it mean in terms of how you think about your Phase III program there?

Yes, I'll start and Andy can add into this, but I'll just say, again, back to my experience at the World Lung, I think the interesting thing about the recent data from Roche, perhaps unintentionally available to everybody is that the curves continue to separate. There'll be a lot of debate around the statistical analysis and how -- what alpha was spent on the interim versus the end. But I think what everybody is encouraged by is the continued separation of the curves. And that -- and I'll speak more specifically to our ARC-7 data that is in our own hands, where we see a curve that has the potential to also just differentiate [indiscernible]. So I'll get Andy involve here [indiscernible].

[indiscernible] We believe based just on our ARC-7 data that we've demonstrated that TIGIT is active and additive to PD-1 therapy. The Roche data just further validates that from our perspective. The question that has to be answered that we think is fair, is the magnitude of the benefit. But you see a very clear benefit in our data, you see a clear benefit in their data, regardless of whether they hit statistical significance. That has more to do with the sizing and powering of the trial, how they use their statistical alpha. So we're moving full speed ahead with [indiscernible]. We have a tremendous amount of confidence. We've highlighted many times our TIGIT, Dan mentioned this earlier, it's a little bit different, especially in terms of the [indiscernible] TIGIT that we think helps certainly in the side-effect profile with injection site reactions. It also should -- there's the potential for the [indiscernible] in the periphery, which we think could be problematic from the side-effect profile. So we really like the program. We're very enthusiastic. And maybe when you fast forward, again, to your question in World Lung, there's a possibility where you have PD-1 plus TIGIT, PD-1 plus Trodelvy. There is also a possibility 5 years from now that the standard of care, at least in certain parts of the first-line non-small cell lung cancer is a triplet of Trodelvy plus our TIGIT plus PD-1. So we're pretty excited. I mean again, it's early days. There will be a lot of data that we and others are able to develop over the coming years. But again, our overall belief is that TIGIT is additive to PD-1, and this just further reinforces that.

[indiscernible] I think, really gives us -- we're the only company with those 2 molecules at an advanced stage where I think we can be able to learn from data, not only our data but competitive data and pivot our programs appropriately. So it gives us a lot of flexibility for sure.

The one we get on the commercial side is as we think about Roche, TIGIT, Merck, you guys, Merck is working on a co-formulation. You guys know this well from HIV. Does that represent a disadvantage in any way from a commercial perspective as you think about the future of the market, if there is, let's say, a biosimilar PD-1, but Merck has a co-formulation of a TIGIT and a PD-1. So how does that tie into what we're just talking about where you guys have lots of different pieces as well?

Yes, we don't see it as a disadvantage. I mean we follow closely what Merck and others are doing in the space. I think the world that we see down the road is that the PD-1 should be fungible at the end of the day. Obviously, we're doing study [indiscernible] studies are with [indiscernible] we're doing a lot of studies with pembro. Some of the -- one of the studies with Arcus has a pembro reference arm. But our vision of the future is that the PD-1s likely become fungible. And then you're really thinking about it kind of from a pricing perspective and a commercial perspective. But we don't believe that we're at a disadvantage by not co-formulating. In fact, it's probably the opposite in our mind that by having the best TIGIT that compare with any PD-1, we think we're going to be in a very strong position [indiscernible].

Yes. And maybe to Andy already mentioned this, but when it thinks about triplets, I think having the flexibility to adjust dose and schedule for different molecules, we think is a potential advantage.

Okay. Great. Maybe moving on to the cell therapy franchise, obviously, another important growth drivers as you talked about, Dan. As we look ahead here, maybe just give us an update on kind of key drivers. I'm sure second-line is one of those. And again, anything else as we think about the forward opportunity set here for second-line and [indiscernible] in general.

Yes. Look, I think it's -- we're -- Andy and I like to say we're in the first or second inning of cell therapy in hematology alone, let alone the other potential indications. But we're very excited about where we stand right now. We're able to fulfill on the manufacturing side, more than 95% of the patient need for patients. So I think we've got lots of capacity and lots of ability to follow this. We're at the beginning. So in the third-line setting, where arguably, every patient should be offered that, only about 30 patients are offered as of today and get to the stage to benefit from -- now after 5 years, 50% of patients are essentially in a relatively curative state. And we're just beginning probably 10% penetrated in the second-line setting. So like any new technology, a new therapy, you go back to transplant. Years ago, it does take some years to change the behaviors of physicians that are used to a particular modality. But the way we're increasing the authorized treatment centers in this country and around the world, working with community oncologists to get them to refer and really working the model out here in the United States so that the referrals can potentially be within these large community oncology networks is really important. Obviously, moving up in lines of therapy, expanding geographically in hematology. And then I think we're just beginning to kind of tap into the potential with our deal with [indiscernible], we'll be looking forward to getting into the BCMA multiple myeloma area in the next several years. And then beyond that, we think more broadly in terms of the role of CD19 mediated inflammatory diseases. And I think as a major player in cell therapy, we think there's a lot of opportunity, but there's also a responsibility to make sure that as these technologies advance, that we bring them on to, if you like, the platform and that's the concept. So it's not that we're going to do everything ourselves. We have a tremendous ecosystem of talented companies out there [indiscernible] working on different targets. They come to us. They want to talk to us about how can they get their systems on our platforms. And I think that's a really good position to be in that we can continue to evolve the science and all the potential benefits of cell therapy.

Is there enough capacity out there right now at centers? Or what is Gilead doing to try to help bolster capacity? Or is this more of a move to kind of like outpatient, what's ultimately [indiscernible].

I think both will be the case. I mean and you can put it here. But we are rapidly expanding our authorized treatment centers. We were at the end of last year around [indiscernible]. So we're expanding that. And more importantly, just the number of authorized treatment centers, it's making sure they're in the right places that can allow those community referrals to occur. But beyond that, of course, we're looking into expanding outpatient as people get more comfortable with this. And we want to make sure that in certain therapeutic areas where allogeneic will come the push and that we're in a position to do that. But the reality is the [indiscernible] we're now down to a stage where we really significantly reduced the vein-to-vein time in a very reliable way, as I said before, more than 95% of patients are fulfilled. So I think -- and the benefit, of course, of having autologous that's been demonstrated over the years too. Andy, do you want to add?

I'd just say financially, again, just to step back, we acquired Kite, whatever it was 6 years ago, our vision, and it still is today that cell therapy is going to be a major treatment modality that will develop over 20 or 30 years. We're always going to be slow and steady. So fast forward to where we are today, 6 years later, we have roughly, give or take, $2 billion in sales this year. We've become more efficient in terms of manufacturing and brought our cost of goods down substantially over the last 5 or 6 years. We're more efficient in manufacturing. We can manufacture quicker, that's still changing. But this is just the very beginning. So a $2 billion business, as Dan highlighted earlier, in the core markets where you're showing in DLBCL, take third line plus, 46% of the patients appear to be cured, still 5 years out or 6 years out. And there's still a massive number of patients. I think 15% of the patients over second and third line plus are getting cell therapy today. Fast-forward years now just in DLBCL and multiple myeloma, you can see the scale of the business that you can grow. It's like in my mind, Celgene like, right? And then you add on top of that immunology in terms of what that can do with some of the incredible data. So it's very early days, but we're really proud of where we are. We have a great team. We have a great set of products and a great pipeline, and it's just the beginning. I think again, we believe, like our broader oncology business, the world will come to appreciate the growth and the long-term potential of the business. more and more over the coming years. But it's really exciting to see where it's come so far.

So is that Celgene, I think, was doing $15 billion in myeloma revenue. So is that guidance...

[indiscernible] cell therapy. So we've said this -- I mean the cell therapy market overall is much, much larger than I think people appreciate. Even today, in fact, the cell therapy market from a dollar standpoint is bigger than people appreciate because unlike Kite, where you have a 96% success rate, many of the competitors have a much lower success rate in manufacturing, yet the products are used. They just don't get reimbursed for them. So I'm not going to provide long-term guidance, but rest assured, we see this at the very beginning. And for any large company operating in cell therapy, being substantially larger in terms of revenue than where we are today is reasonable from our perspective and frankly, expected. So more to come.

Great. Well, thank you so much both. We appreciate your time.

Thank you, Terence. Appreciate it.

Thank you.

Appreciate it.