Analyst Conference Summary

biotechnology

conference date: February 4, 2020 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2019 (fourth quarter, Q4 2019)

Forward-looking statements

Overview: Good quarter, continued major differences between GAAP and non-GAAP results.

Basic data (GAAP):

Revenue was $5.88 billion, up 5% sequentially from $5.60 billion and up 1% from $5.80 billion in the year-earlier quarter.

Net income was $2.70 billion, up sequentially from negative $1.17 billion and way up from $0.0 billion year-earlier.

Earnings per share (EPS, diluted) were $2.12, up sequentially from negative $0.92 and up from $0.00 in the year-earlier quarter.

Guidance:

For the full year 2020 expects revenue between $21.8 billion and $22.2 billion. Gaap diluted EPS $5.15 to $5.55. Non-GAAP diluted EPS $6.05 to $6.45. In 2020 will not exclude stock-based compesation from non-GAAP numbers. Expects the usual Q4 to Q1 seasonal revenue decline.

Conference Highlights:

Daniel O'Day, CEO, said "Strong quarter and solid year, driven by the HIV franchise. Made changes positioning ourselves for success." Core business remains strong, with record HIV revenue. Descovy for prep launch going well. Capsid inhibitor likely to be the basis for future therapy. HCV business doing well despite generic introductions. Four medicines included in China reimbursement list in Q4. 14 late stage studies underway. Filed for Filgotinib for rheumatoid arthritis; preparing for launch. Galapagos partnership and pipeline promises to drive future growth. KITE X19 cell therapy now under review.

Working to see if Remdesivir, an investigational agent, could help patients with the new coronaviris. Earnings in the quarter were hurt by write downs for HCV product raw materials in cost of goods sold, due to lower expected demand.

Generic versions of Letairis were introduced in the 2nd quarter 2019, so sales continue to decline. Ranexa sales are also declining.

The dividend will be increased to $0.68 per share will be paid on March 30, 2020 to shareholders of record on March 13, 2020.

Filgotinib monotherapy for rheumatoid arthritis has had positive data and submissions were made to regulators. Making global launch preparations for 2020. Could have 5 new indication launches over next few years.

Biktarvy continues to grow revenue in Europe, helping to drive up y/y HIV product sales. Market is consolidating around Biktarvy for new and switched patients.

Non-GAAP numbers: Net income was $1.65 billion, down 16% sequentially from $2.22 billion and down 12% from $1.87 billion year-earlier. Non-GAAP EPS was $1.30, down 26% sequentially from $1.75 and down 10% from $1.44 year-earlier.

Product sales were $5.80 billion, up 5% sequentially from $5.52 billion and up 2% from $5.68 billion in the year-earlier quarter. $4.5 billion U.S. product sales. $0.84 billion European sales. Rest of world $440 million.

Royalty, contract and other revenue was $83 million, down sequentially from $88 million, and down from $114 million year-earlier.

Cash and equivalents ended at $25.8 billion, down sequentially from $31.5 billion. $2.6 billion cash flow from operations. $na million was used to repurchase shares. $na million paid in dividends. $na billion was used to repay debt. Long term liabilities were $29.2 billion. $na billion was used for the Galapagos deal. [Only stated full year 2019 numbers]

Numerous other studies are underway or planned; see Gilead pipeline.

Cost of goods sold was $1.68 billion. Research and development expense was $1.90 billion. Selling, general and administrative expense was $1.20 billion. Income from operations was negative $1.09 billion. Interest expense $243 million. Other income was $1.05 billion. Income tax provision was $788 million.

Full year 2019 revenue was $22.45 billion, up % from $22.13 billion in 2018. GAAP net income $5.39 billion, EPS $4.22. Non-GAAP net income $8.47, EPS $6.63.

Q&A summary:

2020 guidance, why no growth? Our base HIV business continues to grow. Cardio-pulmonary and Truvada generic competition affects guidance. It is a year to invest on the commercial side, especially for Filgotinib. We are also investing in the pipeline. We aim to build a growth profile, we are investing in that.

Mid stage portfolio, external opportunities? We have 40 clinical stage programs, which we think is underappreciated by investors. Capsid and next generation viral therapies are a priority. Inflammatory portfolio has great potential. Fibrotic diseases require the right level of investment. We are also aiming to build our oncology expertise and portfolio. We have to focus our investments within these areas to balance risk and opportunity.

Descovy and Prep? 27% share at end of year. Prevention market may be 10 times as large as ten treatment market. 20% to 25% of volume are physicians who never previously prescribed an HIV agent. There may be some payer-side resistance, since Truvada is losing its patent. We hope for 40% to 45% conversion by October 2020.

JAK competition? The environment is going to be very competitive. We will sell on clinical data of Filgotinib. We have high hopes for our commercial sales time. Launch could be in the first half of 2020.

Business development urgency? We have a good team that is ready to move fast. But disciplined, appropriate risks.

We believe our current pipeline is underappreciated by investors.

The HIV capsid inhibitor could be used for prevention or therapy, and likely would be in combinations. It may only need to be taken every 6 months, which would appeal to prevention patients. We believe a long-acting agent would help bring in those who should be on therapy but are not.

HCV revenue is declining but still substantial. Decline is mainly fro pricing, will continue but at a slower rate.

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