Highlights From GILD's Q4 Conference Call: Q4 Crossed $2 Billion Mark for First Time in Company History

January 27, 2010 12:53 PM EST

Gilead Sciences (NASDAQ: GILD) reports Q4 EPS of $0.93, 8 cents better than the analyst estimate of $0.85. Revenue for the quarter was $2.03 billion, which compares to the estimate of $1.93 billion. Shares are up 6.80% today.

Highlights From GILD's Q4 Conference Call:

• (CEO) Total revenues for Q4 crossed the $2 billion mark for the first time in our history, and we completed the year having generated over $7 billion in total revenue.
  
• This growth was chiefly driven by the continued momentum of our antiviral franchise, with record revenues of $1.6 billion and $5.8 billion for the quarter and year respectively.
  
• Importantly, we generated operating cash flow of $955 million for the quarter and $3 billion for the year.
  
• Cayston, our product for the treatment of infections due to Pseudomonas aerunginosa in patients with cystic fibrosis was reviewed by the FDA's Anti-Infective Drugs Advisory Committee back in December. The panel recommended 15-to-2 that the safety and efficacy data generated from the two pivotal trials support approval of the drug, and unanimously voted that we have determined a right dose, 75 milligrams given three times daily, for this indication. We await the PDUFA date of February 13 and are hopeful that the FDA will follow the recommendation of the Advisory Committee.
  
• In preparation for 2010, we completed a thorough review of our pipeline portfolio, which now includes the cardiovascular metabolic programs brought to us through the acquisition of CV Therapeutics in April of 2009. We are very enthusiastic about the early stage work that is being done by our R&D team, and now feel that we have both the commercial presence and R&D capabilities that will establish us as an important company in the specialty cardiovascular space.
  
• While we were disappointed that the second Phase III study of darusentan did not meet its primary endpoint, we quickly and decisively came to the conclusion that this program should be discontinued, allowing us to redeploy our efforts and the funds that were earmarked to support this program to other more promising albeit earlier programs underway.
  
• The extension of the Ryan White Treatment Act, adopted at the end of October, will provide $2.3 billion in funding in fiscal 2010, with annual increases through fiscal 2013, and will help to ensure that patients in the U.S. who are diagnosed, brought into care and prescribed therapy do not face any financial barriers in obtaining access to treatment.
  
• The Treatment Act also establishes, for the first time, a national goal for administering five million HIV tests each year. On December 1, World AIDS Day, the U.S. Department of Health And Human Services released the revised treatment guidelines that now recommend all patients whose CD4 cell count fall below 500 copies/mL should start antiretroviral therapy.
  
• We announced in November an agreement with GSK (NYSE: GSK) to commercialize Viread for the treatment of HBV in adults in five countries in Asia. This is a part of the world where HBV has taken the greatest toll with a prevalence greater than 8% in most countries. Under the agreement, Gilead will retain exclusive rights for commercialization of Viread for HBV in Hong Kong, Singapore, South Korea and Taiwan. And in China, Glaxo will have the exclusive commercialization rights and registration responsibilities for Viread for hepatitis B virus. Each company will pay royalties to the other on sales of
  the product in their respective Asian territories.
  
• (CFO) Total revenues, which include product sales and royalty, contract and other revenues were two billion, a 42% increase year-over-year. For the full year, total revenues were seven billion, up 31% over 2008, driven primarily by the continued strong growth in our antiviral franchise.
  
• Our net income for the fourth quarter was 802 million, or $0.87 per share. For the full year, our net income was 2.6 billion, or $2.82 per share. Our non-GAAP net income for the fourth quarter was 864 million, or $0.93 per share, representing a year-over-year increase in net income and EPS of 46% and 49% respectively.
  
• For the full year, our non-GAAP EPS was $3.06 per share, a 40% increase over our 2008 non-GAAP EPS of $2.19 per share.
  
• Product sales for the quarter were 1.8 billion. Antiviral product sales grew to 1.6 billion, up 27% year-over-year and 10% sequentially.
  
• Atripla contributed 698 million to our antiviral product sales, representing the first quarter that Atripla sales were higher than Truvada sales. Atripla sales increased 50% year-over-year and 15% sequentially resulting from the continued uptake of the products in the U.S. and Europe. The efavirenz
  portion of Atripla, which is purchased from BMS at its estimated market price and reflected in cost of goods sold, was approximately 264 million.
  
• Truvada sales contributed 671 million to our antiviral product sales, up 19% year-over-year and 8% sequentially, due primarily to sales volume growth in both the U.S. and Europe.
  
• Viread sales were 178 million, representing an increase of 10% year-over-year and 5% sequentially, driven primarily by sales volume growth of Viread and the treatment of patients with HBV infection in the U.S. and Europe.
  
• Rapira sales were 52 million, an increase of 44% year-over-year and 9% sequentially, driven primarily by sales volume growth in the U.S.
  
• Ranexa sales were 46 million, representing a decrease of 6% sequentially. Finally, sales of other products were 159 million, representing a decrease of 2% year-over-year and an increase of 2% sequentially.
  
• Our royalty, contract and other revenues for the fourth quarter were 228 million, an increase of 188 million year-over-year, and an increase of 76 million sequentially. Both the year-over-year and sequential increases were primarily driven by increased Tamiflu sales related to pandemic planning initiatives worldwide.
  
• Royalties received from Roche for Tamiflu sales, and recognized in our revenues in the fourth quarter, were 194 million.
  
• Product gross margin was 75% for the fourth quarter, compared to 77.4% for the same quarter of last year and 76.5% for the third quarter of 2009. The year-over-year and sequential decreases were due primarily to the higher proportion of Atripla sales, which include the efavirenz component at zero gross margin.
  
• Operating margin was 56.4% for the fourth quarter, compared to 52.5% for the same quarter last year and 53.9% for third quarter 2009. Our year-over-year and sequential operating margins were favorably impacted by the increase in Tamiflu royalties, as I discussed earlier.
  
• We continue to see improvements relative to 2008 in our core operating margin, which excludes Tamiflu and efavirenz.
  
• R&D expenses were 211 million for the quarter, an increase of 14% on a year-over-year basis and a decrease of 13% sequentially.
  
• Our effective tax rate for the full year of 2009 was 25%, which was lower than our 2008 effective tax rate of 26.3%. Our effective tax rate for Q4 of 2009 was 24.6%.
  
• We incurred approximately 52 million in pre-tax restructuring expenses in 2009, with 19 million incurred during the fourth quarter. We expect to incur additional restructuring expenses of approximately 20 million through 2010.
  
• We generated 955 million in operating cash flow during the quarter, and paid off the remaining 200 million of the credit facility that we accessed in the second quarter.
  
• We also repurchased 5.3 million shares of our common stock at a cost of 242 million, fully utilizing the remaining funds under the three billion share repurchase program authorized by our Board in October 2007.
  
• Our product sales guidance for the full year 2010 is a range of 7.6 to 7.7 billion, which reflects a 17 to 19% increase over 2009 product sales.
  
• Our non-GAAP product gross margin guidance for the full year 2010 is a range of 75 to 77%. For expenses, we expect non-GAAP R&D expense for the full year 2010 to be in the range of 850 to 870 million.
  
• Our effective tax rate guidance for the full year 2010 is expected to be in the range of 25 to 26%, assuming the federal research tax credit is extended.
  
• And finally, we are anticipating the full year 2010 diluted EPS impact of acquisition, restructuring and stock based compensation related expenses to be at a range of 27 to $0.30 per share.
  
• For Q4, total U.S. antiviral product sales were a healthy 889 million. This result was led by our HIV products, with Atripla contributing 466 million, up 32% year-over-year; and Truvada with 318 million, up 25% year-over-year.
  
• Absolute inventory levels for Q4 stayed relatively flat compared to Q3 across our three major U.S. wholesalers, which account for over 80% of our U.S. product sales.
  
• In Q3 of 2009, the numbers of patients treated with antiretroviral therapy grew by 4%, on a moving annual total basis, to approximately 578,000 patients.
  
• Atripla, the most prescribed regimen in HIV, had 189,000 patients on therapy, or one-third of all treated patients, and captured approximately 53% of treatment-nave patients. Importantly, safety and efficacy data from Study 073 were recently added to the Atripla label, which will allow us to actively promote the switching of patients to Atripla.
  
• This remains an important contributor to future growth, as there are over 100,000 patients in the U.S. still on either Combivir or Epzicom at the end of the third quarter 2009.
  
• Truvada continue to add patients with 212,000 on therapy, or 37% of all treated patients, clearly maintaining its position as the backbone of choice for antiretroviral therapy in the U.S. Total Truvada, or Atripla together with Truvada, continued to account for approximately 85% of patients new to therapy, and were the components of all of the top-six prescribed regimens in HIV.
  
• Approximately 23% of patients receiving Atripla converted from Truvada plus Sustiva in the third quarter of 2009, while 33% were switches from other regimens and 44% were nave to therapy. Total Truvada increased its share to approximately 76% of treatment-nave patients, up from approximately 71% in the fourth quarter of 2008, while Kivexa's share dropped to 10% in the fourth quarter 2009, down from 14% in the fourth quarter of 2008.
  
• Total U.S. sales for Ranexa during the fourth quarter were $46 million. This figure does not include any bulk tablet sales to Menarini, our licensee for Ranexa in Europe.
  
• In addition, the Phase III study of Letairis for the treatment of IPF is approximately 25% enrolled, with about 200 study sites in 17 countries. And we're targeting to complete enrollment of 600 patients in this study by the end of this year. This is an event-driven study with time to progression or death as the primary endpoint.
  
• And in parallel, we're continuing our 9190 Phase II study in 250 HCV infected patients, looking at 12 and 24-week SVR data which we will have later this year, to see if GS 9190 has the profile that would allow it to be further developed in combination with pegylated interferon and ribavirin.
  
• Beyond HIV, we have a broad and deep pipeline of product candidates in liver, respiratory and cardiovascular and metabolic diseases that will support our growth into the future. We look forward to sharing with you our progress on various product candidates.
  
• In summary, as we enter 2010, the hard work and diligent focus that we have maintained at our core for so many years have positioned us extremely well for the future growth of the company.
  
• We concluded 2009 with nearly $6.5 billion in product sales, including two products with sales of approximately $2.4 billion each, and a very healthy cash position of about $3.9 billion.
  
• (Q&A) Wanted to ask you about the fourth quarter HIV trends. Kevin, you said inventories were basically flat sequentially. But I'm wondering if you can give us some color here about the sequential step up from 3Q to 4Q. Is it treatment guidelines, is it new IMAs that may have impacted the channel? Just help us out with a little bit of the fourth quarter demand.(A)Sure, Geoff. First, I just want to reiterate that it was a very good quarter from the point of view of prescription growth and that's the background to our optimism in our guidance for 2010. Let me specifically talk about Q3 going into Q4. There is really three considerations there, Geoff. The first one is going back to the third quarter. If you remember, there was about a four-day drawdown of inventories in the third quarter, which we talked about in our earnings call. So that has the effect of essentially bringing down Q3 and, therefore, Q4 on Q3 has that relative uplift. Specifically around Q4, there's two effects to talk about. First of all is pricing. For Q4, we had the full effect - so the full three months of the price increase that we took in July on Truvada, which obviously affected Atripla. With our previous inventory management agreements, it allowed one month of buy-in at the previous price of our products. So essentially you only get a two-month effect in the following quarter. And then the subsequent quarter, in our case the fourth quarter, you get the full three-month effect. So that's the first thing to mention. But the second area is the most important area, and that is the non-retail. We did see continued strong demand from our non-retail area. That's primarily the ADAP programs, and that is very much around Florida and Texas. When we look at the information provided from Florida and Texas, and this is public information, we can see quite significant rises in ADAP patients that these two programs are covering. And in addition to that, it's important to point out that for Texas, they had the restatement of about $20 million of funding that was held back in 2008 because of Hurricane Ike, that's been reinstated in 2009. And they're obviously spending a lot of that money on antiretroviral therapies. So that has given some uplift to their purchasing in the fourth quarter.
  
• I've got to ask you about R&D. I was just looking at your R&D guidance, it's obviously way below where most of the sell-side - at least just modeling, it looks to me like it implies something like 10 to 11% of revenue for 2010 versus, I think, most of us are thinking 12 to 13%. Does this represent, A, what went - why the slower growth than we were thinking? And B, is this the way we should think about modeling the company long-term or is it too early to make that call? Thanks a lot for taking my questions.(A)Hi, Mark. It's Robin. I'll start off and maybe Norbert can chime in. I think there is a couple of things. We do see overall growth in our R&D activity, but if you'll recall, we talked about the darusentan trial being canceled. So from a run rate standpoint, that was a reduction which, as mentioned, we hope to find new alternatives to invest going forward. Also, we get a full year impact of the synergies that result from us consolidating CV Therapeutics as well as our own cardiovascular activities. And lastly, if you'll recall, we had about 52 million related to Bibotec in Q3 of 2009. We have only estimated about 25 million relative to reimbursements to J&J going into 2010 at this point.(A)Yes, Mark, just I would like to add another maybe philosophical comment. We look at R&D spending as very disciplined and judicious use of resources, both financial and human, and we will allocate it to programs that are very, very successful and are worth the investment in terms of expected return.
  
• I might sneak in a second as well. I'm curious, John, your last closing remarks about your use of cash. Is there any potential that you're considering a dividend? And as a corollary question is, where should we think about strategically Gilead focusing? Are you going to continue to add to your cardiovascular products or are you considering adding new verticals? Thanks.(A)So Rachel, yes, the question is use of capital. As we have been describing it to folks, we are going through - and of course as you grow as a company, you go through a natural evaluation program. And we have had a number of groups ask us whether we would consider a dividend, and some have thought it would be a good idea for Gilead to consider a dividend. So at that request, and as you would always do with your company, with your Board of Directors, you go through the various scenarios for the future and you evaluate how you can invest in the company. So how you can grow organically R&D, how you can bring in-licensed compounds to build the company, and as you know, how you can acquire to build the company. So that's
  part of the evaluation. You look at stock buybacks, which are an important consideration to return shareholder value. And then it's often true that companies at some point start to pay a dividend. So what we're communicating right now is that we're continuing to evaluate those various scenarios for now and for the future. I mean as you know, it's a long-term planning process for us and we go through these scenarios at various times. So as we and the Board importantly come to conclusions on what we should do in various areas, we'll communicate those as we can, or as we should, I should say.
  And then finally your question was, would we look at different areas? Our first and foremost opportunities are with our existing pipeline. So we'll continue to evaluate in-licensing opportunities to augment the different areas that we have, including cardiovascular disease where I think we have a good deal of expertise and some good opportunities. And then your last point was, would you continue to look at other verticals? I would say, in this business, there is always a chance that groups would do
  something that's opportunistic that might fall into a different product category, but it should have the same characteristics of the current products we have. So you can never rule that out because there is things that become available during the course of the year, and you have to use your team to evaluate things when they come up because they go away very quickly otherwise.

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