Gilead Sciences, Inc. (NASDAQ:GILD) Q4 2022 Earnings Call Transcript

Gilead Sciences, Inc. (NASDAQ:GILD) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Good afternoon. Thank you for attending today’s Fourth Quarter and Full Year 2022 Gilead Sciences Earnings Conference Call. My name is Henna, and I will be your moderator for today’s call. I would now like to pass the conference over to our host, Jacquie Ross. Please go ahead.

Jacquie Ross: Thank you, operator, and good afternoon everyone. Just after market close today, we issued a press release with earnings results for the fourth quarter and full year 2022. The press release slides and supplementary data are available on the investors section of our website at gilead.com. The speakers on today’s call will be our Chairman and Chief Executive Officer, Daniel O’Day, our Chief Commercial Officer, Johanna Mercier, our Chief Medical Officer, Merdad Parsey, and our Chief Financial Officer, Andrew Dickinson. After that, we’ll open up the call to Q&A, where the team will be joined by Christi Shaw, the Chief Executive Officer of Kite. Before we get started, let me remind you that we will be making forward€looking statements, including those related to Gilead’s business, financial condition and results of operations; plans and expectations with respect to products, product candidates, corporate strategy, business and operations, financial projections and the use of capital; and 2023 financial guidance, all of which involve certain assumptions, risks and uncertainties that are beyond our control and could cause actual results to differ materially from these statements.

A description of these risks can be found in the earnings press release and our latest SEC disclosure documents. All forward€looking statements are based on information currently available to Gilead, and Gilead assumes no obligation to update any such forward€looking statements. Non€GAAP financial measures will be used to help you understand the Company’s underlying business performance. The GAAP to non€GAAP reconciliations are provided in the earnings press release, in our supplementary data sheet, as well as on the Gilead website. Now, I’ll turn the call over to Dan.

Daniel O’Day: Thank you Jacquie and good afternoon everyone. We had the opportunity to connect with many of you a few weeks ago in San Francisco. And I’m excited to be able to reconnect now to share our strong fourth quarter and full year results for 2022 in addition to our guidance for 2023. These show the tangible impact of our business transformation, notably the growth trajectory for HIV portfolio and our fast growing oncology business. The team will take you through our quarterly results in detail, but I am very pleased to highlight on Slide 4 the strongest full year growth in our base business since 2015 when growth was driven by the peak of HCV sales. Full year 2022 sales of Biktarvy grew 20% year-over-year to $10.4 billion exceeding $10 billion for the first time.

Excluding Biktarvy, our base business in 2022 grew 8% year-over-year and I’m pleased to share that our initial 2023 guidance points the base business growth between 4% and 6%. Andy will share our revenue guidance in detail but I do want to take this opportunity to recognize the Gilead team for the progress we made in returning to growth. Thanks to their commitment to improving the health of people and communities around the world, Gilead is now poised to extend its reach to more patients and more challenging disesases and conditions than ever before. Beyond our financial results, our clinical progress in 2022 reinforces how far we’ve come. At the end of the year Sunlenca received its first approval in the U.S. for heavily treatment-experienced adults with multi drug-resistant HIV infection.

This follows a European approval in the third quarter. Sunlenca is the first six monthly subcutaneous medicines to be approved and we believe it represents the most exciting innovation in HIV therapeutics in recent years, with significant potential across prevention and treatment. We look forward to partnering with the HIV community to increase awareness of Sunlenca and to advancing our portfolio of long acting options. We are anticipating in another potential approval any day now with the upcoming PDUFA date for Trodelvy in pre-treated HR-positive/HER2-negative metastatic breast cancer. We also expect to hear from European regulators later this year. In the meantime Trodelvy commercial momentum is building with full year 2022 sales growth of 79%.

In cell therapy, we continue to reinforce our leadership and to execute on plans to broaden availability, with Yescarta most recently approved in Japan for a second line relapsed refractory large B cell lymphoma. Merdad will take you through our pipeline updates and key milestones in a few moments. For now, I’ll simply note the significant expansion in our clinical programs, which are more than doubled in the last four years. We continue to add further programs including our new preclinical candidates to partner with lenacapavir for a long acting HIV treatment programs. The new Phase III OAK CRE study for a Novel Oral COVID-19 nucleoside, and the five Phase III trials that we expect to initiate this year. Before I hand over to Johanna, I want to briefly review the clinical goals we share with you a year ago.

The Gilead and Kite teams have done a terrific job in both delivering as plan and acting with agility in response to changing circumstances. We had an impressive year of discipline and determine execution in 2022 and fully expect to further strengthen our track record of execution in 2023 and beyond. With that, I’ll hand over to Johanna for a review of our fourth quarter and full year commercial performance. Johanna.

Johanna Mercier: Thanks, Dan. And good afternoon, everyone. Before discussing our commercial results, I want to acknowledge our Gilead team for delivering another outstanding quarter and closing out a very successful year. 2022 was an exceptional year for Gilead with our virology franchise well positioned to continue its leadership for years to come. And significant progress in executing our oncology strategy and bringing new medicines to improve the lives of more patients all around the world. Starting on Slide 7, we had a very strong quarter, delivering a total product sales excluding Veklury at $6.3 billion, up 9% year-over-year, or 12%, excluding the impact of FX, and the loss of exclusivity of Truvada and Atripla. With solid growth in each of our core franchises, and growth across all geographies, once again, led by HIV and oncology.

Quarter-over-quarter sales grew 5% driven by HIV, Trodelvy and cell therapy, partially offset by HCV. For the full year, total product sales, excluding Veklury were $23.1 billion up 8% year over year, or 11%, excluding the impact of FX and the Truvada Atripla LOE, driven by HIV and oncology. As expected, full year Veklury sales were down meaningfully in 2022 compared to 2021. That says Veklury’s performance has been more sustainable than we previously expected. And it’s clear that it continues to play an essential role for hospitalized patients treated for COVID-19. In 2022, Veklury delivered $3.9 billion, including $1 billion in the fourth quarter. Overall, full year total product sales of $27 billion was flat compared to 2021, as growth in our base business was offset by the decline in Veklury sales.

On Slide 8, HIV sales for the fourth quarter were $4.8 billion at 5% year-over-year, driven by higher demand as well as favorable pricing dynamics. This was offset in part by a smaller than usual inventory build in the fourth quarter, reflecting our early efforts on seasonal inventory management. Sequentially, HIV sales in the fourth quarter were up 6% primarily driven by favorable pricing and inventory dynamics as well as higher demand. For the full year, HIV sales of $17.2 billion were up 5% year-over-year due to higher demand primarily related to the continued strength of Biktarvy, in addition to channel mix, leading to higher average realized price. This was partially offset by inventory dynamics and FX. Overall, the HIV treatment market in the fourth quarter grew 1.5% year-over-year in the U.S. and over 2% in Europe.

On an annual basis, the market has grown in line with our expectations of 2% to 3%. Moving to Prevention, the U.S. PrEP market grew 18% year-over-year and 3% sequentially in the fourth quarter of 2022, reflecting growing awareness. Descovy sales for the fourth quarter were $537 million, up 13% year-over-year and 7% sequentially. Notably, despite generics and other entrants, demand for discovery for PrEP continues to increase up more than 20% for the full year, in addition to maintaining a stable market share of over 40%. With these trends and the PAC IP settlement last year, Descovy’s position in the growing PrEP market has only strengthened. Overall, this provides a strong foundation as we look to the potential launch of lenacapavir for PrEP as a true long acting every six months regimen in the middle part of the decade.

Moving to Biktarvy on Slide 9, sales for the quarter were $2.9 billion up 15% year-over-year, primarily driven by higher demand, as well as favorable pricing dynamics, offset in part by lower channel inventory. Quarter-over-quarter, sales were up 6% similarly driven by higher demand, as well as favorable pricing and inventory dynamics. In every quarter since our launch, we’ve seen Biktarvy continue to gain market share, and the fourth quarter was no exception, getting more than three percentage points in share year-over-year. This continued momentum is a testament to Biktarvy’s differentiated clinical profile, reinforced by the long term five-year data we presented last year. Notably in U.S., Europe and other major markets Biktarvy remains the number one regimen for new starts in addition to its number one position in treatments, which is across most of the major markets, including the U.S. At the end of 2022, there were almost 1 million people managing their HIV with Biktarvy worldwide.

Taken out together, this is led Biktarvy for the first time to achieve full year sales of over $10 billion in 2022. Looking ahead, we’re confident Biktarvy will remain the leading medicine for the treatment of HIV in U.S., Europe and other major markets for years to come. Now looking ahead for the first quarter of 2023 for HIV, a few points I just wanted to call out. First, with respect to pricing dynamics as we enter the New Year, we expect a typical first quarter reset in patient co-pay and deductibles. As always, these will have an unfavorable impact on average realized price in the first quarter. Second, a reminder that we’ve historically seen inventory build-up in Q4 that has led to notable drawdowns by wholesalers in Q1. While we’ve implemented new policies to better manage inventory dynamics from the fourth quarter into the first quarter, we continue to expect an inventory drawdown to occur in Q1, albeit at more modest levels compared to prior year.

So with this in mind, we expect HIV sales for the first quarter to decline by low teens sequentially from the fourth quarter. This compares to the 18% sequential decline we reported in the first quarter of 2022. For the full year 2023, I’d like to remind you that some of our HIV performance in 2022 was driven by shifts in channel mix that had a favorable impact on average realized price, contributing in part to the 5% year-over-year revenue growth we reported in 2022. We expect channel mix in 2023 to be relatively similar to last year, and therefore do not expect HIV growth to benefit from changes in average realized price like we saw in 2022. As a result, we continue to expect HIV to grow in 2023, albeit at a modestly lower growth rate than 2022.

As we think about the future of the HIV market, Gilead is well positioned to provide many people living with HIV and those at risk of HIV with multiple options for care. To that end, we’re excited about the recent approvals for Sunlenca in U.S. and Europe for heavily treatment experienced adults with multi drug resistant HIV infection. This first indication represents only 1% to 2% of people living with HIV. There’s a huge unmet medical need. These individuals have cycled through multiple antiretroviral regimen, and until now have had very few if any, effective options left available. Sunlenca is now approved in the U.S., U.K. and European markets and we’re working as quickly as possible with regulators and reimbursement bodies to make Sunlenca available in many more countries.

We believe that first launch of Sunlenca represents a key milestone for Gilead and looking forward in the treatment and potential prevention of HIV. With Sunlenca, a true long acting regimen is a reality as awareness and familiarity of Sunlenca every six months subcutaneous administration grow among health care providers, community groups and people living with and at risk of HIV, we believe Sunlenca is well positioned for the future. Turning to HCV on Slide 10, sales for the fourth quarter were $439 million up 12% year-over-year, reflecting timing of Department of Corrections or DOC purchases, and favorable pricing dynamics in the U.S. Quarter-over-quarter HCV sales were down 16% primarily due to resolution of a rebate claim in Europe in the third quarter of 2022 that did not repeat, as well as other pricing dynamics in the U.S. offset in part by timing of DOC purchases.

Going forward, we continue to expect new starts to decline, but are encouraged that our market share remains over 50% in both U.S. and Europe. Sales of HPV and HDD for the fourth quarter were $255 million as shown on slide 11. Sales were down 4% year-over-year and down 3% sequentially, primarily due to lower than ready demand and pricing dynamics outside of the U.S. Moving to Veklury on slide 12, sales the fourth quarter $1 billion with a full year totaling $3.9 billion. It’s clear that the pandemic has evolved Veklury’s role in the treatment of COVID-19 has remained unchanged as a key part of the standard-of-care for hospitalized patients. In fact, Veklury is still the only antiviral approved and it’s setting and in the U.S. Veklury continues to be used in over 50% of hospitalized patients who are being treated for COVID-19.

We’re excited to continue to work on our oral COVID-19 nucleoside which Merdad will discuss shortly. Moving to oncology, and beginning with Trodelvy on Slide 13. Sales of $195 million in the fourth quarter grew 65% year-over-year, and 8% sequentially. For the full year Trodelvy’s sales were $680 million up 79% year-over-year. As we continue to broaden access to Trodelvy around the world, we’re encouraged by the growing demand and existing market. Trodelvy is now reimbursed across the major European markets. And in the U.S. demand was up 13% quarter-over-quarter, a growth rate almost doubled from the prior quarter, reflecting the solid contribution of our expanded field force and growing awareness. We’re also excited by the expected decision from the FDA later this month, which could expand Trodelvy’s potentially clinically meaningful benefits into the pre-treated HR-positive/HER2-negative metastatic breast cancer setting.

We estimate this represents at least 6000 addressable patients in the U.S. and our U.S. field force has just wrapped up its launch meeting and is energized for the upcoming approval. The opportunity for Trodelvy to benefit patients with pre-treated HR-positive/HER2-negative metastatic disease is supported by the recent NCCN Category 1 preferred recommendation for Trodelvy based on the TROPiCS-02 data. Additionally, the European Medicines Agency recently validated our marketing authorization application for Trodelvy in HR-positive/HER2-negative and we look forward to a decision later this year. Now on to Slide 14 and on behalf of Christi and the Kite team Cell Therapy sales in the fourth quarter were $490 million up 75% year-over-year and 5% sequentially.

Full year Cell Therapy sales were $1.5 billion up 68% year-over-year. The growth in the fourth quarter and full year were driven by continued uptake of Yescarta in large B cell lymphoma, notably in the U.S. Growing physician familiarity with Yescarta data and Kite industry leading manufacturing continue to be key growth drivers. Yescarta sales was $337 million up 85% compared to the fourth quarter of 2021 and 6% sequentially. We’re pleased to see not only strong momentum and second line LBCL in the U.S., but also continued uptake in third line LBCL in both the U.S. and across European market. Yescarta sales were $82 million in the fourth quarter up 2% quarter-over-quarter with growing volume demand in both mantle cell lymphoma and adult acute lymphoblastic leukemia.

Year-over-year Yescarta sales were up 44%. We’re pleased to see the building momentum of CAR-T Cell Therapy as a treatment class with curative potential and Yescarta and Tecartus as the leading cell therapies of choice globally. More patients are getting access due to Kite’s industry leading reliable manufacturing capabilities and the team’s expanding footprint of authorized treatment centers around the world. And just last week, U.K’s National Institute for Health and Care Excellence or NICE, recommended Yescarta for routine use in third line large B cell lymphoma. This makes Yescarta the first party available for commissioning in England. Approvals and reimbursement into additional indications that are currently available in the U.S. and other markets is expected to continue over the next year.

Yescarta was recently approved for second-line LBCL in Japan, which has the potential to be the second largest cell therapy market outside of the U.S. And we look forward to the transfer of the marketing authorization to Gilead and Kite later this year. In the interim, other still early days, we’ll continue to work with our partner Daiichi Sankyo to make Yescarta available to approximately 7000 patients in the second line plus setting. Kite will begin manufacturing supplies for the Japanese market through our El Segundo, California, facility. And with that, I’ll hand the call over to Merdad for an update on our pipeline. Merdad?

Merdad Parsey: Thanks, Johanna. I’m pleased to be starting 2023 with all the momentum and 2022 behind us. The positive data readouts for Trodelvy and domvanalimab and the recent approvals for lenacapavir the team is really excited to progress our programs in 2023 and beyond. Starting with Brage on slide 16 and as I just mentioned, Lenacapavir received its first U.S. FDA approval for people living with multi drug resistant HIV in combination with other anti retrovirals. Marketed as Sunlenca, Lenacapavir is the first and only twice yearly subcutaneous HIV treatment, bringing much needed option for people living with multi-drug resistant HIV, that until now had limited alternatives. Combined with the approval from the European Commission, the FDA approval is an important validation, while we continue to progress our other Lenacapavir based treatment and prevention programs.

For HIV treatment, we currently have 10 partner agents for Lenacapavir in various stages of development, including two new integrase inhibitors or INSTI in the pre-IND space. We expect to share data this year from the Phase 1/b proof-of-concept study for Lenacapavir and two broadly neutralizing antibodies or bNAb directed at HIV. And in PrEP, our clinical development of Lenacapavir as a monotherapy for HIV prevention continues to progress with two trials underway, and two additional trials expected to achieve FPI in the second half of 2023. Moving to slide 17, we continue to progress our novel oral nucleoside for COVID-19 GS-5245. Treatments such as Gilead Veklury and vaccinations have improved the outlook for patients with COVID-19. But there’s still a significant need for effective and convenient oral treatment options.

We’ve been working with the FDA and other global regulators to launch a clinical development program that could enable global filings. We’ve initiated a Phase III Birch trial in high risk patients defined as unvaccinated patients with one or more risk factors, or vaccinated patients with two or more risk factors. The Phase III Oaktree trial will evaluate standard risk patients, which includes people aged 12 and older with no CDC defined risk factors. We expect this trial to enroll its first patients in the U.S. in the first quarter. And we’ll share progress when we can just depends in part on the prevalence of COVID-19 year study sites. Moving to oncology on slide 18, and starting with Trodelvy, we continue to build on the momentum of our TOPiCS-02 data.

And we announced the European Medicines agency’s validation of our marketing authorization application for pre-treated HR-positive/HER2-negative metastatic breast cancer in early January. As Johanna noted, we expect a regulatory decision of our sBLA in the U.S. later this month, and a decision Europe in the latter part of the year. Trodelvy has already changed the standard-of-care for many patients with metastatic TNBC and advanced bladder cancer. And we expect that these regulatory approvals will be an important step forward in bringing this potentially practice changing therapy to certain HR-positive/HER2-negative metastatic breast cancer patients. Moreover, recently presented data demonstrated Trodelvy’s PFS and OS benefit was consistent across a range of tumor Trop-2 expression levels.

This late breaking post-hoc analysis presented at the San Antonio Breast Cancer Symposium was consistent with Trodelvy’s data in metastatic triple-negative breast cancer, where baseline Trop-2 expression was not associated with treatment response. Moving on to slide 19, we were pleased to share data from the fourth interim analysis of the ARC-7 trial with our partner Arcus in December, as presented at the ASCO Plenary session. ARC-7 is a randomized Phase II proof-of-concept study that enrolled 150 patients, the largest dataset in anti-digit studies released today with more than 100 patients across the 2-DOM containing arms. We were pleased to see both DOM containing arms demonstrate clinically meaningful differentiation compared to ZIM monotherapy across all efficacy measures evaluated, clearly establishing that the addition of Domvanalimab improved the clinical responses to anti PD-1 therapy in this population.

We were also encouraged by the consistency of the safety data in the DOM containing treatment arms, which showed no unexpected safety signals. This is an on-going trial, and we look forward to sharing updated data at ASCO 2023. While these efficacy and safety data will mature over time, this fourth interim analysis fully supports our joint DOM’s in-clinical development program, and the importance of interrupting the TIGIT pathway. Based on the totality of the data seen today, we’re very confident that DOM with an Fc-silent design has the potential to be differentiated compared to other anti-TIGIT molecules in this space. The on-going Phase III trials of DOM added to anti PD-1 treatments in non-small cell lung cancer will provide the opportunity to confirm this activity.

We’re moving very quickly with our partners in both proof-of-concept studies, as well as late stage trials, including the 4 on-going Phase III trials. Moving to magrolimab, our anti-CD47 therapeutics on Slide 20, we have three on-going pivotal trials, and six proof-of-concept studies across six solid tumor indications. As we shared last month, the independent data monitoring committee met to review data from the first interim analysis from the enhanced study in first line high risk MDS. I’m pleased to share that there were no new safety signals, and the study continues unchanged. As a reminder, based on previous discussions with the FDA, we are now pursuing mature OS data for filing. The study is powered for the final OS analysis and Gilead remains blinded to the data to preserve study integrity.

We will update you again in the second half of 2023 after the second interim analysis, noting that these interim analyses are event driven so timing is provisional. Moving on to slide 21, and on behalf of Christi and the Kite team, I’m pleased to share details of another strong quarter of clinical progress in our cell therapy programs. At ASH, Kite had more than 25 data presentations, further demonstrating the transformative impact of cell therapies, including three year follow up data from ZUMA-5 showing that 52% of patients with indolent lymphomas treated with Yescarta continued to respond. Following the compelling ZUMA-12 data on Yescarta in frontline LBCL, shared at ASH in 2021, we expect to achieve FPI in our Phase III ZUMA-23 trial and Frontline high risk LBCL in the first half of the year.

We are also progressing our Phase II ZUMA-24 outpatient study in second line LBCL and look forward to sharing interim safety data in the first half of this year. While there’s still so much we can explore with the Yescarta and Tecartus, we are also building out the pipeline to ensure the Kite will extend its leadership into new indications and next generation cell therapy technologies. In December, we announced the strategic collaboration with Arcellx for the late-stage product candidate, CART-ddBCMA, which is currently being evaluated for the treatment of multiple myeloma. If approved, together with our industry leading manufacturing capabilities, we believe we can reliably and consistently deliver much needed therapy to patients. Additionally, we announced the pending acquisition of Tmunity Therapeutics, which adds an armored CAR T platform and rapid manufacturing technology to Kite.

The Arcellx transaction closed earlier this week and Tmunity is expected to close later this quarter. Both highlight Kite’s continued leadership in cell therapy, and our commitment to building a robust and exciting pipeline in cell therapies. Wrapping up on slide 22, we are sharing the key pipeline milestones that we expect in 2023 which as you can see, spans FPI, data readouts, updates and regulatory approvals across oncology and neurology. This highlights the progress that Gilead has made on its transformation journey with 59 clinical programs that are well diversified across indications in stage. As the clinical pipeline has grown, our focus on execution has intensified, and we look forward to updating you on our programs as we progress through 2023.

With that, I’ll hand the call over to Andy. Andy?

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Andrew Dickinson: Thank you, Merdad, and good afternoon, everyone. Gilead closed out the year with a strong fourth quarter, driven by Biktarvy, Veklury and oncology. For the full year, our sales, excluding Veklury, grew 8%, which is by far the strongest full year growth rate Gilead has reported since HCV sales peaked in 2015. Of note, and excluding the impact of the Atripla and Truvada LOEs, HIV grew 8% year-over-year, driven by continued strong performance of Biktarvy, which grew 20% from 2021 to $10.4 billion. Biktarvy continues to demonstrate strong potential for further growth in 2023 and beyond. Oncology full year revenues exceeded $2 billion for the first time and grew 71% from 2021. Moving to our quarterly results starting on Slide 24.

The fourth quarter demonstrated another strong performance across our business. Total product sales, excluding Veklury, grew 9% year-over-year despite an approximately $130 million headwind from FX. If we exclude FX in addition to the impact of HIV LOEs, total underlying sales growth for the fourth quarter was 12% compared with the prior year. Moving to Slide 25. Veklury was down as expected, year-over-year although it grew 8% on a sequential basis from the third quarter, highlighting that Veklury will continue to play an important role even as COVID-19 progresses into its endemic phase. Non-GAAP product gross margin was 86.8%, up more than 16 percentage points from last year, primarily due to a $1.25 billion charge related to a legal settlement recorded in COGS in the fourth quarter of 2021.

Non-GAAP R&D expenses for the fourth quarter 2022 were $1.5 billion compared to $1.3 billion in the same period in 2021. Higher R&D expenses were driven by timing of clinical investments, mainly in oncology in addition to the impact of inflation on expenses. Fourth quarter acquired IP R&D was $158 million, primarily reflecting the MacroGenics collaboration and the license amendment with Jounce. And lower than prior year due to the $625 million charge related to the exercise of opt-in rights for Arcus assets in the fourth quarter of 2021. Non-GAAP SG&A was $2 billion, up 23% year-over-year, primarily reflecting a charge of $406 million associated with the termination of the Trodelvy collaboration with Everest Medicines. This $406 million charge includes the $280 million that we agreed to pay Everest to acquire the development and commercial rights to Trodelvy in China and other Asian territories in addition to some other termination-related expenses.

Excluding this Everest impact, SG&A was down 2% year-over-year. Fourth quarter non-GAAP operating margin was 37%, down sequentially due to the factors referenced earlier, including the $406 million Everest charge and up year-over-year. Excluding the Everest charge, non-GAAP operating margin was 42%. Non-GAAP effective tax rate in the fourth quarter was 16.8%, lower than the prior year, driven by discrete tax charges recorded in the fourth quarter of 2021. Overall, our non-GAAP diluted earnings per share was $1.67 in the fourth quarter compared to $0.69 in the fourth quarter of 2021. Of note, the Everest contract termination impacted non-GAAP diluted EPS by $0.25 a share. This was not reflected in the guidance we shared back in October. Moving to the full year on Slide 26.

Total product sales were $27 billion. Excluding Veklury, total product sales were $23.1 billion, up 8% compared to 2021, primarily driven by Biktarvy and oncology. Excluding around $380 million of FX headwinds and the $350 million impact of the Truvada and Atripla LOEs, total product sales, excluding Veklury, were up 11% as compared to 2021. I touched on the main P&L impacts in the overview, but we’ll highlight on Slide 27 that our non-GAAP effective tax rate for 2022 was 19.3% and non-GAAP diluted EPS was $7.26 per share compared to $7.18 per share reported in 2021. I’ll move now to guidance on Slide 28. We recognize that the macro environment continues to be uncertain. Our initial 2023 guidance assumes an overall stable macro environment and relatively stable FX at current rates.

While inflation is expected to moderate, our 2023 guidance reflects a full year of higher expenses experienced in 2022 associated with inflation. With that in mind, we expect total product sales in the range of $26 billion to $26.5 billion. For total product sales, excluding Veklury, we expect sales in the range of $24 billion to $24.5 billion, representing growth of 4% to 6% for our base business year-over-year. And we expect Biktarvy sales of approximately $2 billion. As always, Biktarvy sales will continue to track hospitalization rates and will remain highly variable depending on the frequency and severity of surges. Notably, we have seen a decline in hospitalization rates in recent weeks, and we’ll continue to monitor the landscape carefully.

As a result and similar to last year, we will update you on our Biktarvy expectations on a quarterly basis. Moving to the rest of the P&L. We expect our non-GAAP product gross margin to be approximately 86%, just slightly below our 2022 results and primarily reflecting the growing contribution from oncology. For non-GAAP operating expenses, we expect R&D to increase by a high single-digit percentage compared to 2022 levels, reflecting our on-going investment in strategic areas of growth and an increase in activity from later-stage trials. As a reminder, we had 8 Phase III trials start in 2022, and we expect to have 23 active Phase III trials by the end of 2023. Looking ahead, we expect R&D growth to moderate although we will step up investments as needed to support promising programs based on clinical data.

Acquired IP R&D includes previously announced payments for our SELEX community and milestone payments for existing collaborations. Consistent with our approach in 2022, we will continue to share our expected acquired IP R&D expenses as we announced additional transactions. Finally, we expect SG&A to decrease by a low single-digit percentage compared to 2022. However, this is primarily due to some expenses reported in 2022 that we don’t expect to repeat in 2023. If we normalize the 2022 SG&A expense for these items, we expect full year 2023 SG&A expense to increase by a mid-single-digit percentage on a basis of approximately $5.1 billion in 2022. Altogether, we expect our non-GAAP operating income for 2023 to be $11 billion to $11.6 billion.

Our non-GAAP effective tax rate is expected to be approximately 20% again this year. And finally, we expect our non-GAAP diluted EPS to be between $6.60 and $7 for the full year and GAAP diluted EPS to be between $5.30 and $5.70 per share. Moving to capital allocation on Slide 29. Our priorities have not changed. In 2022, we returned over $5 billion to shareholders. This included dividend payments and $1.4 billion in share repurchases. Fourth quarter share repurchases were approximately $800 million. For 2023, we have announced today a 2.7% increase in our quarterly cash dividend to $0.75 per share and remain committed to growing our dividend over time in line with earnings growth. You can also expect to see continued judicious investments in our business, both internally and externally through select partnerships and business development transactions.

Finally, we will continue to use share repurchases to offset equity dilution as well as additional repurchases on an opportunistic basis. With that, I’ll invite the operator to open the call up for questions.

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Q&A Session

Operator: The first question comes from the line of Tyler Van Buren with Cowen. Please proceed.

Tyler Van Buren: Hey guys, thanks very much for the questions. It’s great to see yet another impressive quarter of performance from the core business. At the midpoint, guidance assumes 5% year-over-year growth for product sales, excluding Veklury, yet non-GAAP EPS guidance assumes a decline of 6%. So should we expect roughly flat earnings for the next 2 to 3 years as you continue to invest aggressively in the pipeline to set up earnings growth for the second half of the decade? Or is that too conservative? And what levers do you have to increase earnings in the near to midterm?

Andrew Dickinson: Hey Tyler, it’s Andy. Thanks for the question. We appreciate it. Look, what we’ve said and obviously, we don’t provide longer-term guidance, but I’ll reiterate that the — as you highlighted, the base business is performing very well. We had another good year with Veklury, but we expect, as you heard in our prepared comments that the COVID-19 market will continue to be dynamic. And again, this year, you saw — if you look at our EPS, the growth of the base business offset the decline in Veklury despite the increase in expenses. Going forward, again, a lot of our shareholders, as you know, focus on non-GAAP EPS, excluding Veklury, based on their assumptions. We expect using kind of that metric for our EPS to grow and for that growth to accelerate over the longer run as our products continue to deliver with additional commercial approvals, expanded indications, new products entering the market, etcetera.

So again, I think what you’re highlighting is the difficulty of looking through the impact of Veklury. When we look at the base business, we have a lot of confidence in terms of the health of the business and the growth it’s going to deliver over time, both on the top line and the bottom line.

Jacquie Ross: Hannah, may we have our next question please?

Operator: The next question comes from the line of Geoff Meacham with Bank of America. Please proceed.

Geoff Meacham: Afternoon guys. Thanks so much for the question. I will keep it just to one. When you look at lenacapavir in the U.S., just help us with maybe the expected kind of loss dynamics following the recent approval and just with consideration of the hurdles with regard to payer access. And obviously, you guys had a long history here, but wondering if the environment is different today versus sort of pre-pandemic. Thank you.

Johanna Mercier: Thanks Geoff for your question. It’s Johanna. I think that we’re super excited with Sunlenca approval. Do remember, though, it’s really for a very specific patient population for the heavily treatment experienced multi-drug resistant population. And so that’s about 1% to 2% of people living without HIV. That’s about 5,000 patients or so in the U.S. So just to give you a little bit of a perspective on it. The — that one piece of the puzzle so far, so we just launched. So it’s still early days. And we’re excited about it. And I think physicians’ response has been very strong as well. The — I think they really see the innovation of having something every 6 months coming in and also the promise of what it could mean in future with prevention indication as well as treatment combination.

So more to come on that one. I think it’s an incredible opportunity for us to gain awareness for Sunlenca. How to use it the reimbursement systems. And as to your point about pre-COVID to COVID, I think that actually, we’ve really normalized the market. I think we’re back on track, when it comes to HIV, both screening, diagnosis, etcetera, and treatment. So we do believe that, that’s probably not in play as we go forward in 2023. But again, small revenue, huge unmet medical need, and an incredible opportunity for patients to have something to ensure that they don’t proceed to more like Aids disease versus just saying HIV positive.

Jacquie Ross: Hannah, may we have our next question please?

Operator: Thank you. The next question is from Michael Yee at Jefferies. Please proceed.

Michael Yee: Hey thanks for the question. Maybe a question for Merdad. On Trop-2, the competitor AstraZeneca Daiichi continues to be quite bullish and actually as a Phase III lung cancer study readout and — the Street is quite bullish on Trop-2. Can you explain your thoughts around your differentiation? Appreciating your study readout, I think in 2024, and what we should appreciate as to how you will compete there or differentiate and maybe its safety, but maybe walk me through that and help us understand Trop-2 for versus your competitor? Thank you.

Merdad Parsey: Yes. Thanks, Michael. This is Merdad. You’re absolutely right. We do think that there are a couple of things that we think about when we think about differentiation. The first is that — we’ve now been on the market and have several approvals under our belt with Trodelvy. And I think that is an important factor for having now been on the market in important indications. To your point, with lung, we will be somewhat behind where our competition is we do think that the data will have to evolve for us and for them. And I think so far, we have been fortunate to not see ILD in our development program so far. And so we are going to continue advancing our program forward aggressively. We’ve had a lot of success so far — and I think our plan is to keep going ahead with the differentiated clinical development program so we can get into the broadest population as possible.

Operator: Thank you. The next question is from Do Kim with Piper Sandler. Please proceed.

Do Kim: Hi thanks for taking my question. And congrats on the quarter. Keeping it on Trodelvy. Merdad, I was hoping if you could provide a little more detail on 7 in pre-chemo HR-positive, HER2-negative breast cancer that you’re initiating later this year. Just what that study design would look like? And how did you come to conclude that this was the next best study for this population.

Merdad Parsey: Yes, hi thanks, that’s an excellent question. And I think we haven’t really talked about the design yet. In large part, we are working through both with investigators and regulators on what the best approach is going to be in that patient population. We do think that there is an important need in a large population there. And we want to make sure that we navigate that pathway carefully. So I think as we develop that program as a protocol gets developed, we’ll be able to share more detail over time.

Jacquie Ross: Hannah, may we have our next question, please?

Operator: Thank you. The next question comes from Colin Bristow with UBS. Please proceed.

Colin Bristow: Hey can you guys hear me?

Merdad Parsey: Yes.