Sung Lee - Vice President Investor Relations Robin L. Washington - Chief Financial Officer & Executive Vice President Kevin B. Young - Chief Operating Officer John F. Milligan - President and Chief Executive Officer Norbert W. Bischofberger - Executive Vice President, Research and Development and Chief Scientific Officer.

Geoff Meacham - Barclays Capital, Inc. Geoffrey C. Porges - Leerink Partners LLC Regina Grebla - Evercore Group LLC Michael Yee - RBC Capital Markets LLC Matthew K. Harrison - Morgan Stanley & Co. LLC Brian Abrahams - Jefferies LLC Cory W. Kasimov - JPMorgan Securities LLC Phil Nadeau - Cowen & Co. LLC Robyn Karnauskas - Citigroup Global Markets, Inc.

(Broker) Ying Huang - Bank of America Merrill Lynch M. Ian Somaiya - BMO Capital Markets (United States) Alethia Young - Credit Suisse Securities (USA) LLC (Broker) Terence Flynn - Goldman Sachs & Co..

Ladies and gentlemen, thank you for standing by and welcome to the Gilead Sciences second quarter 2016 earnings conference call. My name is Candace, and I'll be your operator today. At this time, all participants are in a listen-only mode. And as a reminder, this call is being recorded.

I would now like to turn the call over to Sung Lee, Vice President Investor Relations..

Great, thank you, Candace, and good afternoon, everyone. Just after market close today, a press release was issued with earnings results for the second quarter 2016. The press release and detailed slides are available on the Investor Relations section of the Gilead website.

Joining today's call will be John Milligan, President and Chief Executive Officer; Robin Washington, Executive Vice President and Chief Financial Officer; Kevin Young, Chief Operating Officer; and Norbert Bischofberger, Executive Vice President of Research and Development and Chief Scientific Officer.

Before we begin formal remarks, let me remind you that we will be making forward-looking statements, including plans and expectations with respect to products, product candidates, financial projections and the use of capital, 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 latest SEC disclosures documents and recent press releases. In addition, Gilead does not undertake any obligation to update any forward-looking statements made during this call. 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 as well as on the Gilead website. I will now turn the call over to Robin..

Thanks, Sung, and good afternoon, everyone. We are pleased to share results for the second quarter of 2016. I'll first review our financials and Kevin and John will then make a few comments. Total revenues for the second quarter was $7.8 billion with non-GAAP diluted earnings per share of $3.08.

This compares to revenues of $8.2 billion and non-GAAP earnings per share of $3.15 for the same period last year. Product sales for the second quarter were $7.7 billion, down 6% year over year and flat sequentially. The year-over-year decline was driven by lower HCV sales, partially offset by increased sales in HIV and other therapeutic areas.

Sequentially, we saw an increase in HIV, U.S. HCV and other products that were offset by a decline in HCV sales in Japan and Europe. Turning to the U.S., product sales for the second quarter were $4.9 billion, down 12% year over year.

HCV product sales were $2.3 billion, down 33% year over year, driven by lower revenues per patient as a result of increased rebates and discounts due primarily to payer mix and lower patient starts for Harvoni as the initial group of warehouse patients was treated in 2015.

Sequentially, our HCV product sales were up 13%, driven by a $270 million adjustment to our HCV sales returns reserves rate and the initial inventory build for Epclusa. Strong uptake of our TAF-based regimens drove 23% year-over-year and a 11% sequential growth of our HIV product sales.

The quarterly revenues of $2.2 billion were also positively impacted by the upward trajectory of Truvada use for PrEP.

Turning to Europe, product sales for the second quarter were $1.6 billion, down 18% year over year, primarily driven by lower HCV patient starts and a higher proportion of patient starts from countries that have a lower net average price.

Sequentially, sales in Europe were flat, excluding the impact of currency movements with HIV sales growth offset by lower HCV sales.

In Japan, product sales for the second quarter were $619 million, down 43% sequentially as a result of lower patient starts on Harvoni and the full quarter effect of the mandatory price reductions for both Sovaldi and Harvoni, which were discussed during our last call.

Moving to gross margin, our non-GAAP product gross margin for the second quarter of 2016 was 92% and benefited from the reversal of a $200 million litigation charge recorded in the first quarter of 2016 following a favorable decision in the Merck case.

Now turning to expenses, non-GAAP R&D expenses were $1 billion for the second quarter, up 48% compared to the same period last year, primarily due to the purchase of a U.S. Food and Drug Administration priority review voucher and the progression of clinical studies.

Non-GAAP SG&A expenses for the second quarter were up 10%, compared to the same period last year, primarily due to higher costs to support new product launches and our geographic expansion.

From a balance sheet perspective, during the second quarter, we generated cash flow from operations of $4.9 billion and ended the quarter with $24.6 billion in cash and investments.

While our cash flows will remain strong in the second half of the year, we anticipate a sequential decrease in Q3 2016 due to required cash payments related to accrued government rebates in the U.S. and abroad as well as milestone payments associated with our R&D pipeline progression.

We continue to return capital to our shareholders through dividends and share repurchases. During the second quarter, we repurchased 10.5 million shares for $1 billion under the $12 billion 2016 share repurchase program.

And we received an additional 8.1 million shares in April 2016 from the final settlement of the accelerated share repurchase program announced in February 2016. The total share repurchases in the first half of the year were 98.2 million at a cost of $9 billion.

As previously communicated, we anticipated share repurchases in the second half of 2016 to be lower than the first half of 2016 as we focus our capital allocation on advancing our R&D opportunities. Finally, we are updating full-year 2016 guidance, which is outlined on slide 21. The changes are as follows.

We are lowering net product sales guidance to a range of $29.5 billion to $30.5 billion. While we are seeing continued strength in non-HCV product sales, given the current trends in payer and patient flow dynamics for HCV, our updated models suggest net product sales will range from being slightly above to slightly below $30 billion for the year.

As such, we believe it is prudent to update our full-year 2016 guidance. The factors contributing to this conclusion include lower HCV revenue per patient as a result of a mix shift towards more heavily discounted payer segment in the U.S. and continues with a lower net average price in Europe, a trend toward slowing patient starts in the U.S.

commercial segment and some earlier launch markets of Europe, a continued gradual trend towards shorter duration and loss of some market share to competition.

This guidance is subject to a number of uncertainties, including potential changes in the global macroeconomic environment, adoption of additional pricing measures to reduce HCV spending, volatility in foreign currency exchange rates, inaccuracy in our HCV patient start estimates, additional competitive launches in HCV, an increase in discounts, chargebacks and rebates due to ongoing commercial payer contract negotiations and a larger-than-anticipated shift in payer mix to more highly discounted payer segments such as PHS, FFS, Medicaid and the VA.

We are increasing our R&D expense guidance to a range of $3.6 billion to $3.8 billion driven by acquisition-related expenses for Nimbus Apollo, Inc. and the purchase of a U.S. Food and Drug Administration priority review voucher, slightly offset by lower-than-anticipated clinical trial expenses.

We are lowering SG&A expense guidance to a range of $3.1 billion to $3.3 billion, primarily driven by the favorable one-time adjustment to the expected invoice from the IRS for the branded prescription drug fee, which lowered Q1 2016 SG&A expense.

Diluted EPS impact of acquisition-related upfront collaboration, stock-based compensation, and other expenses increases to a new range of $1.47 to $1.53 as a result of our recent M&A activity. All other components of our 2016 guidance remain unchanged. I would like to now turn the call over to Kevin..

first, the decline in genotype 1 new patient starts following the Q1 2016 peak when a very large number of individuals with advanced disease initiated therapy; and second, the full three-month effect of a mandatory price reduction previously described on last quarter's call.

Finally, for HCV, Epclusa was recently approved in the U.S., the EU, and Canada. These approvals are true milestones in patient care since Epclusa is the first pan-genotypic once-daily single-tablet option. Epclusa will be an important treatment option in the U.S. as an estimated 20% to 25% of HCV patients have genotype 2 and genotype 3.

And equally across Europe, there are some countries that have up to 30% of patients with genotype 3 alone. In concluding my remarks on hepatitis C, I will return to my earlier comments. Gilead is proud to be part of a fundamental disease paradigm shift, delivering disease cures to virtually all patients treated.

That's why we developed Sovaldi, Harvoni, and Epclusa and have a third single-tablet regimen in clinical testing. Whilst the pace of new patient treatments may slow in coming years and quantifying that pace is incredibly hard, there is still an opportunity to identify and cure many HCV-infected people around the globe.

Moving to HIV, we are pleased with the launch of our TAF-based products in the U.S. and in the European markets, where we have already achieved reimbursement. In the U.S., total HIV and other antiviral revenue was $2.2 billion, up 11% sequentially, and Genvoya revenue nearly doubled in Q2 versus Q1.

The product represents the most successful HIV launch since the introduction of Atipla, the first single-tablet regimen, a decade ago. After its first six months of availability, Genvoya is already the most prescribed regimen for both treatment naïve and switch patients. Seventy-eight percent of all Genvoya prescriptions have come from switches.

Half of the switches have come from Stribild. And importantly, 10% of switches have come from non-Gilead therapies. Among all patients who switch, we have seen an increase in our ability to retain patients on a Gilead product. While still in the early stages of the Odefsey and Descovy launches, we are seeing similar patient dynamics to Genvoya.

Over 90% of all Odefsey and Descovy prescriptions have come from switches, and 6% and 11% of switches respectively have come from non-Gilead therapies. Finally, in the U.S., I would like to highlight the growing use of Truvada for PrEP.

We estimate somewhere in the order of 60,000 patients to 70,000 patients were using Truvada for PrEP in the second quarter. This number accounts for approximately one-third of Truvada demand. This is encouraging, as we know Truvada has an important role to play as part of comprehensive HIV prevention for many at-risk individuals.

Turning to Europe, total HIV and other antiviral revenue was $755 million, up 5% sequentially, driven by the launches of Genvoya and Descovy. Genvoya has gained pricing approval in 11 countries and is now the market leader in Germany for both treatment-naïve and switch patients after only six months of availability.

We anticipate additional launches in France, Italy and the UK in the second half of the year. Genvoya is a preferred regimen in several HIV treatment guidelines, including Italy where it was added before pricing and reimbursement. Preferred listings are anticipated in other EU guidelines later this year and into 2017.

EACS guidelines are expected to be updated following the HIV Glasgow 2016 Conference in October. Finally, I would like to briefly update you on the outstanding performance of the Gilead U.S. cardiovascular team. Letairis and Ranexa together generated $356 million in revenue during the quarter, representing a 12% year-over-year increase.

Today, over 0.25 million people in the United States regularly receive Ranexa and Letairis remains the overall ERA market leader in PAH. In closing, Gilead achieved a great deal across our operations during the quarter and I am confident that we will continue to make significant progress in the second half of 2016.

I would now like to turn the call over to John..

Thanks, Kevin. Before I get started, I just wanted to say it's great to have you back on the Gilead team full time as our new Chief Operating Officer. Today, in addition to the remarks of Robin and Kevin regarding the quarter, I'd like to make a few comments of my own.

Over the last 2.5 years, we made great progress in helping provide access to Sovaldi and Harvoni for HCV patients. Throughout the world more than one million HCV sufferers have now been treated with nearly half of those coming from the U.S.

The launch of these drugs were unprecedented in our industry and patients are treated at a much faster initial rate than we, or anyone else, thought possible. Looking back, we can now say that in every country the peak number of patients treated was achieved within two quarters or three quarters of the launch of Harvoni.

And that peak number is far higher than what had ever been achieved before about three times that seen with the launch of the HCV protease inhibitors in 2011. As we've reached the midpoint of the year, we now see the market maturing to a slower rate of treatment for HCV-infected individuals.

And as we think about this more normal pace of patient starts, there are a few things to keep in mind. As Kevin mentioned, there are three million people who are infected in the U.S. and slightly more than half of those have been diagnosed. Many of these diagnosed patients have less advanced liver disease upon reentering care.

For example, in the United States, in the second quarter this year, we estimated that only 13% of patients starting treatment had F4 fibrosis scores compared with more than 21% the year prior to that. With less severely ill patients, there's less urgency to immediately treat patients and this may explain the slower rate of treatment versus last year.

However, we do believe these patients will eventually benefit from treatment and this means the flow of patients will continue for many years to come. There's also an opportunity to diagnose patients and bring them into care. As Kevin mentioned, we estimated that about 280,000 HCV patients were diagnosed in the U.S.

within the last two years, considering the value and importance of the U.S. CDC and CMS recommendations for HCV testing.

So while there has been a slowing of treatment compared with the rush of patients when Sovaldi and Harvoni were first approved, the HCV market is attractive over the longer term, providing good revenues, strong cash flow and earnings per share on top of our base business of chronic therapies.

Because of this, our focus on improving care for HCV-infected individuals has not wavered. Beyond the recent approvals of Epclusa, we are actively working on a third single-tablet regimen that combines the two active ingredients in Epclusa with a third investigational compound, voxilaprevir.

This combination known as SOF/VEL/VOX is being evaluated in four Phase 3 clinical trials among patients who have previously failed direct-acting antiviral treatments. It's also being studied for its potential to offer an eight-week treatment duration for treatment-naïve patients of all genotypes.

We expect to have top line data available for SOF/VEL/VOX by the end of the year. We're making tremendous headway in HIV as well both with our portfolio of newer products and our pipeline. We've had several key approvals with Descovy approved in the U.S. and Europe last quarter and Odefsey approved in Europe earlier this month.

It's clear these medications offer a significant advance for patients, and that advance has been recognized now by multiple professional and public health groups, including the International Antiviral Society of the U.S.A and the Department of Health and Human Services, both of which released updated guidelines supporting the use of TAF-based regimens for initial HIV therapy.

We continue to generate clinical data that support the favorable scientific and medical profile of our TAF-based products. Last week we announced the results of two Phase 3b switch studies evaluating Odefsey in virologically-suppressed adults, switching from Complera or ATRIPLA.

Odefsey achieved similar rates of virological suppression as the TDF-based regimen. These studies reinforce the efficacy of Odefsey as of the renal and bone safety advantages that we plan to present full data sets later this year.

Last month we presented the first human data of bictegravir, our investigational un-boosted integration inhibitor at the American Society for Microbiology.

Data from four preclinical and Phase 1 studies examined the antiviral potency, resistance profile, pharmacokinetics and safety of bictegravir, providing the rationale to further evaluate the compound. Bictegravir, as part of a single-tablet regimen in combination with TAF and emtricitabine is currently in Phase 3 trials.

Enrollment of more than 2,300 patients across four registrational studies was completed earlier this month. The 48-week endpoints for these studies will be reached in the second quarter of next year; and if the data play out as we hope, NDA and MAA filings could occur in the third quarter of 2017.

With the approval and rapid adoption of our TAF-based regimens and exciting new STR in Phase 3 development and an active HIV research pipeline, I'm confident that we will be able to extend our leadership position in the HIV market and broaden our ability to help even more patients around the world.

Outside of our work in antivirals, Gilead has focused on solving some of the biggest health challenges today. Several important data sets that are anticipated in the second half of this year may help us to find a strategy and pathway forward for tackling these challenges.

In our NASH program, where we have four active clinical programs, we'll have data from the Phase 2 studies of GS-4997, our ASK-1 inhibitor, and simtuzumab, our monochromal antibody and sLOXL2.

The Phase 2 study of simtuzumab for primary sclerosing cholangitis will also conclude, and we'll also have data from the Phase 2 studies of GS-4997 in diabetic nephropathy and pulmonary arterial hypertension, or PAH. And finally, we expect data from two Phase 3 studies for myelofibrosis before the end of the year.

If these data are positive, these studies will form the basis for an NDA filing in the first quarter of 2017. These are important milestones and represent a great deal of work across the organization to enroll and advance these studies and analyze complex data sets as they become available.

Gilead continues to innovate at every level in every part of the organization. Next month, we will publish our first corporate social responsibility report that looks at access, sustainability, grant-making and other positive contributions to the communities we serve and I urge you to read it.

I'm proud of the work that's being led by our employees and extend my many thanks to them for all the ways they're making a difference around the world. Thank you, and let's now open up the call for questions.

Operator?.

Thank you. And our first question comes from the line of Geoff Meacham of Barclays. Your line is now open..

Afternoon, guys. Thanks for taking the question. And, Kevin, good to have you back on the call and in the seat, of course. So I want to dig into your comments and also John's comments on the hep C new starts.

And, I guess, I'm curious here, because you have better F0-F1 access, you have positive impact theoretically from the CDC guidelines and very low penetration in markets such as the prison population.

I'm just curious why – could you put your finger on maybe one or two things that you feel like could ultimately become a growth driver to give us back to better sequential growth? I'm just trying to figure out what the tipping point is on some of these different volume drivers. Thanks..

Hey, Geoff, nice to hear your voice as well. Thank you for the comments. I'm not at all pessimistic about the long-term prospects for hepatitis C. In fact, I'm rather optimistic. I think what we have seen 2014/2015 is an enormous group of the less well patients treated particularly by specialist hepatitis C treaters. It's really quite amazing.

I think this quarter, and we've highlighted perhaps going forward, is really a sort of a payer mix situation that we've got. The VA has definitely increased in terms of its contribution to the 59,000 total HCV starts, which, of course, was an increase on quarter one.

So a lot of VA patients are coming through, and the VA is very, very motivated to try to essentially eradicate the virus from that population. I think, yes, we did see pickup in two of the large payers that came onstream with open fibrosis scores from the beginning of the year, but we did see some downtick in other commercial payers.

So net-net, it was slightly a decrease in overall commercial patients.

What I feel about the long term and as we go into years further forward and we hit an equilibrium of patients is all around what I mentioned and John mentioned around diagnoses, there's been a considerable pickup in the number of HCV tests 2014 and 2015, about a 65% increase in the number of HCV tests, 280,000 in that two-year period were HCV RNA positive.

So, as John said, they will eventually work their way through to treatment. There's still over a quarter of the population being diagnosed is at a fall, so there's still a lot of sickness out there in patients.

So whilst the healthcare system here and in some of the European markets have done heroic things in treating patients in the last two years, I still think with 1.5 million diagnosed patients in the United States, that we are going to see a continued healthy flow of patients that can benefit from our products..

Okay, thanks, Kevin..

Thank you. And our next question comes from Geoffrey Porges of Leerink. Your line is now open..

Thanks very much. So, Kevin, welcome back, and very good to hear you. So following up on this somewhat vexing issue of the HCV outlook, historically, in this category after each market has peaked, it's begun a steady slow, sometimes slow anyway, decline.

We certainly saw a rapid decline after the protease inhibitors, more slow decline after we went to ribavirin and with the introduction of pegylated interferon.

Are you suggesting to us that you think that there is a stable outlook for the HCV revenue on a market-by-market basis from these levels? Or are you suggesting that we should see more like an orderly and steady decline? And could you particularly comment about Europe where I think it was surprising to see patient numbers in the big early markets roll over so quickly, particularly, Germany and Japan.

Is that a one-time step-down? Or are we going to continue at or below this level going forward?.

Thanks for the question, Geoff. I think it is encouraging that our patient starts in the U.S. and Europe have been reasonably steady over the past three quarters. Japan's a different story and I can certainly at some point comment on that this afternoon.

I think from my perspective and Robin, Norbert, John around the table here, I think it's more of the latter comment that there will continue to be a gradual decline in new patient starts, but an equilibrium will be eventually hit. Quite the timing of that, Geoff, it's really, really, really hard to peg.

I've just got to believe that with the amount of testing, with the amount of diagnoses, with the CDC guidelines, Gilead itself in Q3 – Q4 of this year are going to do some more educational programs around the need to test and treat that we will eventually hit an equilibrium. In terms of Europe, Italy and Spain are very steady.

I should tell you that in Italy, there are still 200,000 quite sick individuals, people to be treated and they're in treated care. And the Italian government do want to go ahead and try and mobilize providers to do that treating, so still an enormous number in Italy. I think the markets that are more akin to the U.S.

like first and foremost, Germany and to a slight lesser extent France, are starting to see that turnover of patients. We've got full access in terms of fibrosis score in Germany. And we're hoping, as I said, that we get broader access in France. The UK is a different situation now. It's largely due to payer restrictions.

But again, still an enthusiasm to treat, but one or two of those markets there is some maturing going on..

Very good, thanks very much..

Thank you. And our next question comes from Mark Schoenebaum of Evercore ISI. Your line is now open..

Hi, good afternoon. Thank you for taking my call. This is Regina Grebla in for Mark. I actually wanted to change topics and shift to hepatitis B. On your Q1 call, you mentioned your hep B program included a vaccine, a TLR-7 agonist, and two other internal preclinical candidates.

When will we see any data on the internal candidates? And also you mentioned taking a look at external opportunities for hepatitis B. Is hep B still a potential area of interest for acquisition? Thank you..

And so, Regina, you asked a question about what our pipeline is for hepatitis B. So we have, as you know, two compounds that are currently in clinical development. One is an active vaccine, GS-4779, a collaboration with GlobeImmune. That's currently in the later stages of being evaluated in non-suppressed hep B patients.

The suppressed hep B patients, those data had been released maybe a year ago. They did not show any activity. So we don't have high hopes that this compound will work. Then the TLR-7 agonist is just finishing the first cohort, which is in suppressed patients. And we are currently initiating – the second cohort is ongoing.

We hope that we'll have the presentation of the first cohort ready by ASLD. Hopefully, we'll reach the abstract deadline. Then you said that – you asked a question about we have two other compounds in development. You know what we're pursuing – maybe I should answer this more generally. So we're pursuing three approaches to hepatitis B cure.

The one is adding another different mechanism to the nucleotides because there's the observation that despite being undetectable with hepatitis B therapies like Viread or TAF, there was always a little bit of virus left, HBV, if you look at very sensitive PCR methods.

So by adding another mechanism to it, we could completely suppress virus replication down to zero, would that lead to an eventual cure or hepatitis S conversion. The second thing we're pursuing is immune therapy, so that belongs to vaccine and to TLR-7 that I've talked about already.

And we have a TLR-8 agonist currently that is working its way towards an IND. And the third possibility that's the most hopeful but also the one that's least scientifically proven is going directly after cccDNA. And that's really too early to talk about at this point. It's still in the research stages..

Thank you. And our next question comes from Michael Yee of RBC Capital Markets. Your line is now open..

Hey, guys. Thanks for the question. You talked a lot about volume and demand in the different buckets. But can you talk about the payer mix shift? Specifically, I wanted to ask on Medicaid. Can you just help us out with what percent of sales Medicaid is, and what is going on in that bucket? I presume it's a state-by-state negotiation.

Can you talk about what's going on there? Is there a state-by-state negotiation you have to go through? Is that pretty much done? Walk us through that bucket and what percent of hep C that is in the USA so we can understand them. Thank you so much.

Hi, Michael. It's Kevin. Thank you for the question. I'd prefer not to break out specifically the percentage of the public payers in terms of Medicaid. As I said, all our public payers lumped together for the quarter were about 45%. That's an increase from the previous quarter. But as I said, that's all driven by VA.

We've seen very little change really in the scale and size of our Medicaid business. I think it would be true to say that Medicaid's – the states are slowly, progressively opening up. Forty percent of Medicaid patients come from the five largest states. Two of those, New York and Florida, now have no fibrosis score.

So as states do progressively consider opening up, they typically come to us for a contract. We think about those contracts very carefully. Depending on the size of Medicaid, we obviously put our submission in.

Realistically, I think we may win, we hope, the majority of those, but there may be occasions when occasionally a Medicaid state goes to the competition..

Okay, thank you..

Thank you. And our next question comes from Matthew Harrison of Morgan Stanley. Your line is now open.

Great, thanks so much for taking the question. Robin, if you could, address the $279 million one-time swing. We obviously saw a swing in the first quarter and then a swing this quarter again.

Can you just give us some insight into what's going on with those changes in chargebacks and if we should continue to expect to see some of those numbers? And then just separately on PrEP, any plans to get a TAF-based regimen approved for PrEP? Thanks.

Sure, I'll take the first part and then Norbert will take the second. Matt, first of all, there are two separate things that we're talking about here, Q2 versus Q1. First, let me address Q2.

We did have a sales return reserve adjustment, really related to the fact that as we introduced our new hep C product, we're required to go out and get an external proxy related to sales return reserves. And just recently, just this past quarter we closed several of the lots related to our product regimes, and no further returns are expected.

So that gives us a triggering event by which we can look at returns versus how we had been accruing. The other key thing about the timing of this related to this accrues a lot. So as we bring on a new product, we want to rebase their level of returns that we're expecting to see. So that's really the adjustment there.

For the most part, you can see – it's one-time in nature. We may have small adjustments going forward. But as long as returns continue where they are then that $279 million is kind of a one-time event. Last quarter, we had a different issue and that related to rebate claims for hepatitis C.

And as I said on the call last time, we always have a situation, where we're constantly showing up claims around HCV rebate, because we get those claims one to two quarters in arrear. This quarter was a bit different than last quarters that we saw a modernization of the level of those claims relative to the prior quarter.

So it didn't reverse the other way, it was just a slowing of what we saw in Q1. So we're – for lack of a better word, we're a little bit more caught up relative to returns this quarter than we were at the end of Q1. So two different items, but we called out the $279 million because that was the one-time event.

So we wanted to ensure that you understood relative to the future projection of HCV sales..

Thanks for clarification..

Hi, Matt, your question about F/TAF for PrEP, so we and also the outside medical community believes that obviously Descovy or F/TAF would have advantages in terms of use for PrEP versus Truvada for all the obvious data that were published already. And also, we have data non-human – in animal models that showed that has the same efficacy.

The thing we're debating internally and also we have had early discussions with FDA is what clinical study would need to be done that leads to approval. It would have to be in almost all likelihood a comparative study and then the secret is what would be the sample size and what would be the powering.

And that's currently a discussion we're having with FDA. We hope we can come to some conclusion within the next month or so and then let you know..

Great, thank you..

Thank you. Our next question comes from Brian Abrahams with Jefferies. Your line is now open..

Hi. Thanks for taking my question. And, Kevin, good to hear your voice again.

With the list pricing and label established for Epclusa, just wondering what's the right way to think about Epclusa's potential impact on the genotype 2/3 franchise, particularly, with respect to the net price per patient, treatment duration relative to Sovaldi and just how we should be thinking about the overall market dynamics there? And just wondering if you could also quantify the inventory build this quarter there.

Thanks..

Yeah, great question, Brian. Nice to hear your voice as well. Brian, the majority of the revenues in the second quarter, which is right at the end. The majority of that was inventory that Robin called out. So we've really only just begun the introduction, both the promotion and the education around Epclusa.

I'm really pleased that the response has been excellent. And our advisory boards and our speaker programs have been good acceptance. Whilst we have obviously a pan-genotypic label, I think the reality is that physicians are very, very comfortable, as are payers, with Harvoni for genotype 1. Obviously, there's a mix of 12-week treatments and eight-week.

Just for your information, the eight-week course of Harvoni is now 45% of patients treated in the United States. So I think people are just really comfortable with the clinical effect and the value proposition of Harvoni in GT 1. That all means that the slot that people see Epclusa is in the genotype 2 and genotype 3 patient.

As I highlighted, it's something like in the order of 20% to 25% of patients in the United States. I think the obvious advantage both clinically and from a payer point of view is you really do have a 12-week single-tablet regimen. You don't have to extend the treatment duration. You don't have to use ribavirin.

There was quite a number of patients treated with Sovaldi/daclatasvir, certainly in United States. So really somewhat it takes away that regimen and is an excellent slot. So we've had very good reception to Epclusa. It's extremely early days. It will take us three months to six months to get payer approval.

Physicians can apply based on medical need and we know they're doing that. So just very early days and weeks. It seems to have found a very nice entry point..

Thanks..

Thank you. And our next question comes from the line of Cory Kasimov of JPMorgan. Your line is now open..

Hey. Good afternoon, guys. Thank you for taking my question. I have a bigger picture question for you.

Really, just following the latest management shuffle back in 2Q, I'm wondering if these changes portend any material shift or consideration of a shift in – I guess your commercial or pricing strategy really the overall strategy for the businesses or any of the key businesses? And is this playing into the bump in anticipated R&D with the associated downtick in SG&A as illustrated by your updated guidance? Thanks..

I think there were a couple of questions. So it's John Milligan. So in terms of – let me get to the last bit. You said there was a bump in R&D. That is true relating somewhat to our acquisition of Nimbus.

So there were charges associated with that and are also charges associated – I should say, expenses associated with the purchase of an FDA priority review voucher. So we're very pleased to get that on board. And we'll look forward to explaining when we're going to use that.

Above and beyond that, actually, R&D expenses were slightly down what we – beneath what we had forecasted, because we continue to hold the cost centers accountable and continue to drive good value through our clinical teams in getting studies done at a cost-effective way. So in terms of that, there's no difference.

The SG&A line came down a little bit, because of some one-time charges that were lower than we – I'm sorry – the IRS charges was lower than we anticipated. So kind of what we would expect.

In terms of signaling about pricing or changes in management about structures, I don't really think there's anything to signal there in terms of our pricing strategy. We're highly competitive. We think we have a very good differentiated product.

And we'll continue to do the best for the company and for patients by coming to the right level of price and access..

Yeah. And I would just add, Cory, that the Gilead way is always to lead with the science around our product. Nothing's changed in my eyes as I've come back into the company. We lead with science. That's what you do in specialist markets. It is a reality that there's more contracting. I think we've got a phenomenal team working on this.

I met with them two weeks ago. And I think they're highly professional. And we always lead with value. That's the key thing. We think we've got tremendous products that either control disease or cure disease and they add terrific value. And that's the course we're going to stay..

Okay, thank you..

Thank you. And our next question comes from Phil Nadeau of Cowen. Your line is now open..

Good evening. Thanks for taking my question. And, Kevin, it's great to have you back. I have a question on capital allocation. In prepared remarks, I think you mentioned in regards to cash flows being lower in the second half of the year that part of that was investment in R&D.

And as you just discussed, that R&D expenses aren't really changing that much in the guidance. So kind of curious whether you have on your list of things to do in the second half of the year more deals, whether M&A or in-licensing, and maybe you could give us some thoughts on how aggressive you're likely to be in those areas..

So, Phil, I'll start. I think relative to the cash flow, what I was messaging was really just related to the dynamics of payment, right. So we have accrued rebates and other things that kind of cause volatility to quarterly cash flow. So overall, our cash flows remain strong, but we definitely expect a sequential decrease in cash flow second half.

Relative to our overall capital allocation, it's no different than what we've been messaging; again, more focused on our BD opportunity. But I'll let John speak a little bit more and just again, focus on that. And that additional focus has meant we're somewhat less focused on share repurchases in the second half of the year..

And just to follow up on what Robin said, Phil, we were very aggressive in the first quarter of this year. That's why we back off a little bit from where we are in the second half of the year. Mostly, you get the full-year effect or a greater effect of repurchasing the almost 100 million shares through Robin's program.

With regard to business development, obviously, we're a company that has been very open about being interested in doing more deals; especially, deals of a certain size where we think we can get some leverage and we can use our organization to effectively accelerate or expand indications.

We've done some good deals both with Galapagos and Nimbus recently. We are very interested in continuing that to add more things to our pipeline, especially, in the non-antiviral area where we continue to see growth and franchises.

It's our hope that as we exit this year, we'll have a better, more complete story of programs internally and externally that we can use to talk about why the long-term prospects for growth are as good as we believe they are. And that's what we'll be focused on..

Great, thanks for taking my questions..

Thank you. And our next question comes from Robyn Karnauskas of Citi. Your line is now open..

Hi, guys. Thanks for taking my question.

I guess, the question from me after hearing some of the comments about like thinking about volumes slowing or coming down and then thinking about gross to net changing over time is, how are you comfortable that you can provide guidance with these two variables? Do you have any bookends for how low we can go that gives you the comfort? And then, the question is, you affirmed guidance last quarter and lowered it this quarter.

What was the one thing you think that really changed your view over the last three months that led to that? Thanks..

I'll start and then hand the question to Robin. You know, Robyn, it's really hard. We've got markets in different stages of development whether it be U.S., parts of the U.S., different countries in Europe, and, obviously, interesting and profound dynamics in Japan. So that partly made up of patient flows and partly made up of sort of payer flow.

I think the big thing this quarter, from the point of view of the U.S., was very much a payer kind of mix with the large addition of patients from the VA. So I think in the last three months that was probably the biggest thing. We have not changed our prices in the U.S. Q2 versus Q1.

It was largely we're seeing dramatic, but incredibly successful program from VA..

Robyn, I'll add to that. I agree with Kevin. I think the heavier percentage of more discounted payers along with the fact that on the commercial side, we're seeing slight decreases in the U.S.

And Kevin mentioned earlier about what we're also seeing relative to the mix shift in countries in Europe less of Northern Europe, Germany, France, and more of Italy and Spain. The other part of your question is, as we said earlier throughout the call, this is a really difficult area to predict.

It's unlike any other – it's a curative market and it's very large relative to Gilead's total revenue. So it's a question we have in ourselves as we think in the outer years how can we continue or can we really guide around HCV revenues.

So we guided this year, but it's definitely something we're getting a lot of proxy as we think about the trends of HCV going forward and all the dynamics that we're trying to deal with it. It's very complex. So more to follow on that..

Great, thank you..

Thank you. And our next question comes from Ying Huang of Bank of America Merrill Lynch. Your line is now open..

Hi. Thanks for taking my question. I have a quick one on also the pricing environment.

So if you look at VA sector and also the commercial sector, what kind of impact are you seeing from competition, particularly in Merck's Zepatier, from the pricing perspective? And then quickly on R&D side, do you plan to develop a doublet maintenance regimen? For example, recently Tivicay plus Edurant, the combination showed actually good results in heavily pretreated patients in the conference.

Thank you..

So I'll take the first part in terms of pricing and competitive impact, very little in terms of our commercial payer areas because the contracts essentially were set up at the end of last year for the full year, so very little change in market share within the commercial payer segments.

We still have a very strong position in VA with Harvoni and Sovaldi, particularly Harvoni. I think probably where we're seeing increased competitive activity is in the Medicaid setting where, as I described earlier, some of the smaller states are requesting contracts as they open up access. So I think that's probably where we see the competition.

And again, because of our very strong value proposition, we hope we can be successful in the majority of those. But again, on occasions we may find that they go to the competition..

Ying, you asked a question about the pan-genotypic NS5A. So we're, of course, aware of the data that were presented at EASL. They looked fairly impressive. They had a number of genotypes with high SVR rates. However, what they're doing right now in Phase 3 is not looking at the eight-week treatment duration or genotypes in old patients.

I would like to contrast this with our own triple combination, SOF/VEL/VOX, that John Milligan mentioned. We are looking essentially at two patient populations. One patient population is experienced that had previously failed other DAAs that treatment duration is for 12 weeks.

And then we're looking at all genotypes, cirrhotic and non-cirrhotic patients, for eight-week treatment duration. And we have one study in particular that only looks at eight weeks of treatment duration in the most difficult to treat genotype 3 cirrhotic patients because that's still a population where SVR rates are still in the low 90%.

And if we could push that up into the high 90%, that would be a step forward. So I think if our Phase 3 program, the data supports our Phase 2 results, then we will be a step ahead of all the competition..

Thank you. And our next question comes from Ian Somaiya of BMO Capital Markets. Your line is now open..

Thanks for taking my questions. I just wanted to follow up on the triplet opportunity within hep C. Specifically, Norbert, just I don't know if you could describe the proportion of patients that have maybe failed in the first round of antivirals, whether it be doublet therapy or SOF alone.

So I don't know if there's a relevant pool that you can speak to. And then maybe it's more a question for Kevin.

Just how do we think about the triplet and its impact on margin price share?.

So, Ian, as you know, we are doing essentially four studies with the triplet, what we call the triplet SOF/VEL/VOX. Two of them are in treatment-experienced patients, and what we would aspire to is to have this compound be the universal salvage regimen.

Now, Kevin, maybe you could comment on what the proportion of patients is that would qualify with this. But something I can tell you, in Japan, there's a fairly large number of patients that have been treated with the Bristol-Myers GI NS5A regimen.

I think if I remember this correctly, they have SVR rates in the Phase 3 study of about 80% or thereabouts. And there are about 9,000 patients now that we heard of that are treatment-experienced that had failed. And those 9,000 patients would immediately be candidates for our own studies.

And I said, I want to say it again, the other two studies are eight weeks' treatment duration for all patients, all genotypes, cirrhotics and non-cirrhotics.

Kevin?.

It's a good question, Ian. We're waiting to see some of the obviously emerging clinical data. Right now, I think we've got a situation, certainly in the U.S. Japan with this resistant situation I think is perhaps quite unique in terms of the original use of the Bristol-Myers regimen.

But I think we've got patients being cured to an incredibly high level with Harvoni. And now we've got the right treatment, I think, in (1:06:11). So I think in the U.S., perhaps in Europe, it will be far more modest, the opportunity.

Having said that, it depends where we are with those products, our products with where the competition is, obviously what we decide to do in terms of the pricing strategy.

I think most importantly, from a company point of view, we think this is the right thing to do and probably the last step in the whole story around hepatitis C to help treatment-experienced or failure patients. So I think first and foremost, we think this is the right thing to do for patients in need..

Thank you. And our next question comes from Alethia Young of Credit Suisse. Your line is now open.

Hey, guys. Thanks for taking my question. Let me be the thousandth person, Kevin, to say welcome back and it's great to have you here, two questions in the same vein.

Just one on oncology, has this remained a focus for you guys as far as building assets there and building up that business as much as it was in the past when you talk about it? And secondarily, just, Norbert, with NASH, can you just talk about some of the data points coming up and like what's going on with the FXR program as well? Thanks..

So, Alethia, let me start off by firstly and then John Milligan will have to comment on it too. We are in oncology. We have now momelotinib at the end of the Phase 3 program. We should have data this year. If the data (1:07:30) application next year. We have the MMP9 in gastric cancer in Phase 3. We're looking at other solid tumors.

And we're now finally, after sorting out the dosing, starting the first study in combination of PI3K and with BTK in CML. So with regards to NASH, we have now very interesting four modalities or four mechanisms that we're evaluating in NASH. And at least with three of them, we know that they're doing what they're supposed to do pharmacologically.

We will have data this year on the ASK inhibitor that will include liver fat analyses along with histology. The FXR agonist is currently in a Phase 1/Phase 2a study. And by the way, we know about that compound already; that it has minimal systemic absorption, but there are systemic levels of FGF19.

That was always our idea to have a compound that acts in the GI that releases FGF19. The FGF19 has the efficacy. And by that rationale, we both get decidedly other FXR agonist path.

And then finally, we have – wait a moment, ASK inhibitor?.

ACC..

ACC inhibitor, the Nimbus compound. And we know those data were presented at EASL that it reduces de novo lipogenesis. So what we're going to do based on these data is firstly with ASK, we could go into Phase 3 next year and with the other compounds into Phase 2 with the FXR and the ACC inhibitor, or even this year.

John?.

I'd just follow up with Norbert's comment by saying, we are committed to oncology. We continue to be interested in assets, collaborations, and partnerships where we could enhance our ability to continue to sell these products.

But where we are seeing good progress, as Norbert mentioned, our BTK inhibitor, which is we're developing with our partner from ONO, is now making its way to the clinic. And we've overcome some formulation challenges to allow us to go ahead. So that will be very, very, I think, an interesting avenue for us to continue to explore..

Thank you. And our final question comes from Terence Flynn of Goldman Sachs. Your line is now open..

Hi. Thanks for taking the question. Just wondering, kind of, two-parter. The first is just any opportunity to broaden your prescriber base on hep C. Kevin, would love your thoughts on that. And the second question relates to Genvoya. Can you just give us what percentage of the switches were from Atripla? Thanks..

Hey, Terence. First of all, in terms of any feature rates of market, I did mention Australia earlier, and that's an incredible story of treating and curing patients and amazing commitment by the government there. We are seeing more patients treated in Brazil. It's a lower price market, but we have seeing more. We are just beginning our launch in Mexico.

So, yes, these are smaller markets. Typically, they are lower-priced. But those – if you like, those smaller ways are starting to work through. We are thinking carefully about China and how we launch there probably in a very modest, very focused way, very efficient way, should I say. So our expectations, I think, are very reasonable around China.

So the second question in terms of switch, about 18% of the switch patients is from ATRIPLA. So I hope that gives you the number..

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Mr. Lee for closing remarks..

Great, thank you, Candace, and thank you all for joining us today. We appreciate your continued interest in Gilead, and the team here looks forward to providing you with updates on our future progress..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Have a great day, everyone..