Sung Lee - Gilead Sciences, Inc. Robin L. Washington - Gilead Sciences, Inc. Kevin B. Young - Gilead Sciences, Inc. John F. Milligan - Gilead Sciences, Inc. James R. Meyers - Gilead Sciences, Inc. Norbert W. Bischofberger - Gilead Sciences, Inc. Andrew Cheng - Gilead Sciences, Inc..

Geoffrey C. Meacham - Barclays Capital, Inc. Brian Abrahams - Jefferies LLC Robyn Karnauskas - Citigroup Global Markets, Inc. Geoffrey C. Porges - Leerink Partners LLC Mark J. Schoenebaum - Evercore ISI Matthew K. Harrison - Morgan Stanley & Co. LLC Michael Yee - RBC Capital Markets LLC Cory W.

Kasimov - JPMorgan Securities LLC Alethia Young - Credit Suisse Securities (USA) LLC Ying Huang - Bank of America Merrill Lynch Phil Nadeau - Cowen and Company, LLC Joshua E. Schimmer - Piper Jaffray & Co. Terence Flynn - Goldman Sachs & Co. M. Ian Somaiya - BMO Capital Markets (United States) Katherine Breedis - Stifel, Nicolaus & Co., Inc. Brian P.

Skorney - Robert W. Baird & Co., Inc. Jim Birchenough - Wells Fargo Securities LLC.

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

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

John Milligan, President and Chief Executive Officer; Robin Washington, Executive Vice President and Chief Financial Officer; and Kevin Young, Chief Operating Officer.

Also in the room with us for the Q&A session are Norbert Bischofberger, Executive Vice President of Research and Development and Chief Scientific Officer; and Jim Meyers, Executive Vice President, Worldwide Commercial Operations.

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 disclosure document 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..

the accuracy of our estimates of HCV patient starts in 2017; unanticipated pricing pressures from payers and competitors; lower than anticipated market share in HCV; slower than anticipated growth in our HIV franchise; an increase in discounts, chargebacks, and rebates due to ongoing contracts and future negotiations with commercial and government payers; a larger than anticipated shift in payer mix to more highly discounted payer segments such as PHS, FSS, Medicaid, and the VA; market share and price erosion caused by the introduction of generic versions of TDF and the fixed-dose combination of FTC/TDF outside the U.S.

later this year; an uncertain global macroeconomic environment; potential amendments to the Affordable Care Act or other government action that could have the effect of lowering prices or reducing the number of insured patients; as well as volatility in foreign currency exchange rates.

Slide 24 provides further information on Gilead's estimate of HCV total market patient starts across key commercial geographies, which is the primary factor used in developing our 2017 HCV product sales guidance. We expect our non-GAAP product gross margins to be in the range of 86% to 88%.

We expect our non-GAAP R&D expenses to be in the range of $3.1 billion to $3.4 billion. We expect our non-GAAP SG&A expenses to be in the range of $3.1 billion to $3.4 billion. For the full year, our non-GAAP effective tax rate is expected to be in the range of 25% to 28%.

We anticipate the full-year diluted EPS impact of acquisition-related, stock-based compensation, and other expenses to be in the range of $0.84 to $0.91 per share. I would like to now turn the call over to Kevin..

Thank you, Robin, and good afternoon everyone. Before beginning my comments on the quarter, I'd like to formally introduce our new Executive Vice President of Commercial Operations, Jim Meyers, who joins the earnings call team.

Jim has been at the company for 20 years and has been instrumental in building out the company's commercial operations in North America, including leading successful product launches across the company's portfolio of products.

I've personally worked with Jim for more than 10 years and can vouch for his unique insights into the complexities of the various markets and therapeutic areas for which we serve patients. Now I would like to provide an update on our commercial performance during the fourth quarter and share a few highlights from markets around the world.

Let me say from the outset that I see the very highest levels of operational excellence across Gilead, people every day supporting best-in-class products in viral, cardiovascular, and pulmonary diseases.

But as I will describe in some detail, there are very different external dynamics when comparing treatments for chronic diseases like HIV with treatments that can cure a disease like hepatitis C. Starting with HIV, without question, 2016 was one of our strongest years, led by the rapid adoption of TAF-based regimens.

In the U.S., total HIV and other antiviral revenue was $2.4 billion in the fourth quarter, up 20% year over year and down 6% sequentially. As a reminder, third quarter results benefited from a one-time favorable adjustment of $332 million to rebate reserves, primarily related to TDF-based regimens.

Excluding this one-time adjustment, there was a 7% sequential increase in the fourth quarter, driven by robust underlining growth and some inventory build consistent with prior years. Genvoya, our first TAF-based single-tablet regimen, surpassed $1 billion in revenue in its first year.

No other HIV product has achieved this level of success, and this performance is a testament to the clinical profile of TAF in combination with elvitegravir in one tablet. As highlighted on slide 33, Genvoya quickly became the most prescribed regimen across all U.S. treated HIV patient groups within nine months of launch.

At the end of 2016, TAF-based regimens made up 37% of Gilead's HIV prescription volume in the treatment market. This is remarkable considering that Genvoya was launched a little more than a year ago, and Odefsey and Descovy have been on the market for just nine months.

Most patients on these products switch from Gilead's older regimens due to the improved safety profile of TAF. Additionally, an estimated 10% of patient switches are coming from non-Gilead therapies, resulting in incremental growth for the franchise.

Turning to Europe, total HIV and other antiviral revenue was $705 million in the fourth quarter, down 6% year over year and down 3% sequentially. This was driven by negative foreign exchange and a full quarter impact of an imposed price reduction in France.

Strong uptake of Genvoya continues across launch markets in Europe, including Germany, Spain, and the UK. In Spain, Genvoya is the most prescribed regimen for switch patients and the second most prescribed regimen for treatment-naive patients. And just last week, I am delighted to say that Genvoya began its commercial introduction in France.

As many of you know, France is the largest developed HIV market outside the U.S. Finally, to complete the European major market picture, we hope to have Genvoya introduced in Italy by early quarter two. Turning to Descovy and Odefsey outside the U.S., we now have the products available in 13 and 11 countries respectively.

Additional launches are anticipated in 2017 as pricing and reimbursement discussions continue. Beyond TAF, there continues to be a strong uptake for the use of Truvada for pre-exposure prophylaxis, or PrEP. At the end of 2016, approximately 110,000 people in the U.S. were using Truvada for this indication.

When used in combination with other prevention strategies, Truvada for PrEP can have a meaningful impact on public health by helping to reduce HIV transmission rates. The majority of PrEP prescribing to date is concentrated in four cities where awareness is high, most notably San Francisco.

The city recently announced a reduction in HIV infection rates as a result of greater testing, the use of anti-retrovirals for treatment, and the adoption of PrEP.

There is an opportunity to replicate this success in other areas across the United States, and Gilead has been encouraged to play a more prominent role in PrEP education and has done so via the hiring of a field-based team.

We believe that Truvada for PrEP will continue to be an integral part of our growth in HIV in the U.S., as communities embrace the public health benefits of prevention. Before leaving HIV, one event that should be highlighted in 2017 is the loss of the tenofovir disoproxil fumarate exclusivity in some countries outside the U.S.

We have forecasted the financial impact of this event on our non-HCV sales guidance as shown in Slide 22 referred to earlier by Robin.

Nevertheless, we believe the rapid adoption of TAF for HIV treatment and the uptake in Truvada for PrEP in the United States underpin a strong Gilead growth trajectory some 15 years after the introduction of Viread in 2001.

Turning to HCV, in the U.S., total HCV revenue was $2 billion in the fourth quarter, down 15% year over year and down 1% sequentially. Total HCV treatment starts in the U.S. for the full year 2016 were an estimated 231,000, approximately 25,000 less patient starts than in 2015. There were a few one-time events that impacted this number in 2016.

Notably, one, the opening of access of two of the largest U.S. commercial payers which happened in quarter one. Two, the increase in the number of patients treated through the VA system, especially in quarter two. And three, the treatment of genotype 2 and genotype 3 warehouse patients following the approval of Epclusa in the second half of 2016.

Since we do not anticipate the same or similar factors repeating themselves this year, our expectation is that patient starts in 2017 will be lower than in 2016. Above and beyond the factors I just cited, the decline we expect is also due to a change in the profile of patients coming into treated care.

A greater number of patients have less advanced disease, and thus there is less urgency to begin using curative DAAs like Harvoni and Epclusa. In addition, an increasing percentage of untreated patients face circumstances that favor delay such as ongoing drug or alcohol use, co-morbidities or unstable living conditions.

Turning to Europe, total HCV revenue in the fourth quarter was $628 million, down 26% year over year and up 4% from the previous quarter. The sequential performance was primarily a reflection of the small bounce back in patient starts, following normal summer seasonality in markets like Spain and Italy.

Despite the year-end pickup, we expect patient starts to continue to decline in 2017. Countries like Germany, France and the UK are fast exhibiting the same characteristics as the U.S. Spain and Italy continued to experience budgetary constraints, and the treatment of F0 to F2 patients in these countries has been limited.

In Japan, product sales for the fourth quarter were $314 million, down 77% year over year, and down 31% sequentially due to the decline in patient starts and the entry of another company's product to the market.

Our local intelligence punched us some unique dynamics in Japan that are potentially behind the profound decline in patient starts relative to other countries. First, recall that approximately 40,000 patients were treated with another DAA regimen prior to the launch of Sovaldi, decreasing those who were very sick and warehoused.

Second, up to 40% of HCV infected patients in Japan are over 80 years old and often under the care of a general practitioner, not a specialist, who better understands the importance of treating patients regardless of age. Third, there is a lower awareness of hepatitis C and the fact that there is a cure among the general Japanese population.

Before leaving our HCV results, I'd like to return to my theme of earlier. This disease has unique dimensions, the most important of which is that it can be cured. And thanks to Harvoni, it can be cured in as little as eight weeks in a genotype 1 patient.

Whilst earlier HCV therapies had their limitations, you can still observe the dynamics that a cure has on patient starts following the introduction of a new class of medicines as shown in slide 37. As we look as best we can at the near-term horizon, we see 2017 total HCV patient starts declining relative to 2016 in all major markets.

By comparison, the U.S. numbers are still vastly higher relative to treatment levels before the advent of DAAs.

Gilead's role as market leader is to appropriately work with the various components of HCV care, providers, professional associations and infected individuals where allowed, to bring patients into specialists' care and successfully cure them of a destructive virus.

Moving on to hepatitis B, Vemlidy, our TAF-based therapy for the treatment of chronic hepatitis B was approved by the FDA in November, the Japanese Ministry of Health, Labor and Welfare in December and the European Commission last month. This is the first medication approved to treat chronic hepatitis B in nearly a decade.

While still very early, we are pleased with the uptake of Vemlidy in the U.S. Initial feedback from healthcare providers suggests that they strongly believe the long-term safety profile of Vemlidy represents an important new development for people living with chronic hepatitis B. Finally, as I highlighted last quarter, our U.S.

cardiovascular team continues to deliver impressive results. Letairis and Ranexa revenue totaled $436 million for the quarter and achieved nearly $1.5 billion for the year. I would now like to turn the call over to John.

John?.

patients who fail direct-acting antivirals. Gilead filed a new drug application for its single-table regimen of SOF/VEL/VOX in December and the FDA granted priority review status with a set target review date of August 8, 2017. A market authorization application in the EU was filed in January.

If approved, SOF/VEL/VOX would be the first STR for HCV patients who have failed prior treatments. Our NASH programs continue to advance. We believe that NASH is a growing unmet need around the world with data suggesting that perhaps 3 million people in the United States have advanced NASH with fibrosis.

We're committing significant R&D resources towards this public health problem. At AASLD in November, we presented positive Phase 2 data on selonsertib, showing both an improvement in fibrosis scores, and a decrease in progression of disease after only 24 weeks of treatment.

Selonsertib is a first-in-class ASK-1 inhibitor and we were pleased with the efficacy seen at a relatively low once-daily dose. Based on these promising results, we consulted with regulatory agencies and initiated two Phase 3 studies of selonsertib. One is in patients with F3, and one is in patients with F4 fibrosis scores.

Patients with F3 and F4 fibrosis have the greatest medical need, and impose the highest cost on the healthcare payers. In addition, patients with NASH and F4 fibrosis have a median life expectancy of only five years.

We're also continuing with two other promising agents for the treatment of NASH and other metabolic diseases, GS 0976, an ACC inhibitor, and GS 9674, an FXR agonist.

As these programs advance through this year, we may also begin to look at the combinations to determine if two mechanisms, one that hits the metabolic dysfunction of hepatocytes and one that reverses fibrosis, can improve efficacy with an acceptable safety profile.

In the area of inflammation, Phase 3 studies of Filgotinib in rheumatoid arthritis, ulcerative colitis and Crohn's disease are now underway and enrolling. Filgotinib has a very large safety database of more than 1,400 patient years, and has proven to be well tolerated.

With this once-daily dosing and safety profile, we'll continue to look at Filgotinib across a range of different inflammatory diseases where JAK1 activity is implicated, and we have plans to initiate up to six phase 2 studies during the year. 2017 marks Gilead's 30th anniversary.

Over the past three decades, Gilead's many innovative products have helped transform the HIV infection from a fatal and debilitating disease into a chronic manageable condition, giving individuals with HIV a chance to live out their lives. More than 10 million people are now receiving a Gilead-based HIV regimen every day.

We are proud of our ability to help HIV patients access their medications globally. In the U.S., for example, we've worked closely with public health systems to ensure access.

In fact, Gilead has frozen prices to the federal and state funded AIDS Drug Assistance Program since 2008, and state Medicaid programs pay less for Truvada today than at launch in 2004.

Gilead's commitment to these important safety net programs has allowed them to expand over the years, now providing coverage to slightly more than half the people living with HIV in the United States.

Over the last several months, I've had the opportunity to talk with public and health policy experts, healthcare providers and industry leaders about the various access that remains, and how we can collectively help address them.

We at Gilead will continue to seek solutions so that today's medicines can be accessed by all the people who need them, while supporting the innovative needs for fighting tomorrow's public health problem.

Finally, we will continue to maintain our strong operating and financial discipline and focus our efforts in 2017 on continuing to build out our pipeline, aggressively progressing internal programs and pursuing partnerships or acquisitions that are the right strategic fit with our company.

I'm confident in the future of Gilead, and I'm looking forward to sharing with you the many accomplishments across this organization in 2017. I would like to take this opportunity to thank our employees. It's because of your commitment and drive that we're able to help millions of people live healthier, more fulfilled lives. Thank you for your time.

And let's now open the call for questions.

Operator?.

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

Great, good afternoon, guys. Thanks for the question. So, John, when I look at the year on year trends on hep C over last year, they're obviously weaker as you progress through the year. What I find impressive though is your cash flow generation remains somewhat stable.

So I know on this call you'll get a number of deal questions, but I wanted to get a sense as to how much your cash flow informs the urgency for deals versus other metrics such as operational synergy or valuation. And then a real quick one for Kevin. Just wanted to know the payer attitudes towards PrEP in the U.S. and Europe and how they've changed.

Thanks, guys..

Hey Geoff, thanks for the question. If you think about the different models and we think about our budget for 2017, we still have a very impressive net income and operating margin and importantly cash flow out of it. In fact, it would rank at or above nearly every one of our comparable companies. So we still feel very good about the company.

We feel very good about our cash flow for the future. I think it's still for us a desire and a need to have a right strategic fit for the company. That is the driver for why and when we do any mergers or acquisitions or partnerships, much more so than the need for cash flow, because we feel very comfortable about where we are..

Hey, Geoff. It's Kevin. Let me take the PrEP. Thank you for asking it. I just want to repeat that we now have deployed a small but very focused PrEP team around the country. It's very much in urban areas. And we do hope that we can support PrEP education along the lines, as I said, of the likes of San Francisco.

Right now, there is fairly good payer coverage in the United States for PrEP. It's largely through the commercial payers, and they see the benefit. So largely the patient groups that are currently using PrEP have good coverage.

Obviously, we're going to take it into a wider audience, so we'll have to make sure that we get perhaps some of the public payers onboard with support for PrEP. Generally in Europe, it's government reimbursed. A year ago we had France give us coverage, and we have about 3,000 patients now on the medication in France.

And we're starting to see other governments come out. The UK came out with a statement fairly recently on providing support for PrEP. So we're seeing some momentum starting to build outside Europe.

The other thing I would just very quickly say about PrEP that we see as an important signal of adoption is that we're seeing more persistency of treatment for the PrEP patient. In other words, they are getting repeated bottles month after month, in some ways rather like an HIV patient.

So that's encouraging that it's starting to become established and routinely used for its preventative benefits in patients..

Okay. Thanks, guys..

Thank you. And our next question comes from the line of Brian Abrahams with Jefferies. Your line is now open..

Hi. Thanks for taking my question and I appreciate all the granularity around guidance, just a question on the hep C guidance. What's the right way to think about the potential decline in new patient starts in the U.S.

versus Europe that you might anticipate this year? And to what extent might new competitive entrants impact price or share this year even before the traditional annual renegotiation of formularies? Might we look for that to maybe contribute more beyond this year and into 2018?.

Brian, I'll probably ask Jim to help me a little bit with a very good question. You can see from slide 24, we deliberately broke out the U.S., the EU5, Japan. There are very similar dynamics going on here. In fact, if you look deeper into the EU5, again, irrespective of the type of healthcare system, there is this decline going on.

It is more profound in Japan, and I tried to describe that effect. So these are our best estimates, Brian. We've taken into account some of the trends we see through prescriptions. We've tried to listen to some of the public payers like the VA.

The VA don't publish their data on treatment starts, so we just really got to sense how they're doing in terms of moving through their patients. We obviously also take judgments on the opening of access from a Medicare/Medicaid point of view. It has been relatively slow.

We have blocked together the competition, the share, and the treatment generation, bearing in mind that slide 23, that is total around Europe, so it takes into account all competitive dynamics. But perhaps, Jim, you may have one or two questions on how we think about this..

I would just reiterate what Kevin said that the biggest impact of course is patient starts, and that's what we're seeing. It's across all of the different segments in the U.S. and really across all global markets. Whenever there's a competitive entrant, historically there has been some level of magnitude.

It varies by competition on both price and share. So that is factored in here. Again, there are multiple launches later this year. It's not just a competitor. We have a launch later this year. We don't expect formularies to change. That really happens with payers in the fourth quarter in the U.S.

But all of this is taken into account in that bucket that you see on slide 23. But again, I can't say enough how much the primary driver is the dynamic we're seeing in patient starts..

I'd also just add, Brian, we're still very, very confident in the profile of the two options that we have for hepatitis C. Harvoni is still a tremendous product. I would just add that it's about 50% now of the patients that are using eight weeks of Harvoni in genotype 1.

And as you've seen from the numbers, there's been tremendous uptake of Epclusa in the genotype 2 and 3 patients..

Very helpful, thanks..

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

Hi, guys. Thanks for taking my question and thank you for all the color on the guidance. It's really helpful. I guess I think the question that I think a lot of people will ask me is, you've bottle volume is declining aggressively this year.

And while you haven't given guidance beyond that, maybe help us think about, could this happen again next year? Is there anything that gives you comfort that we could see some stability in the patient volumes at least in the near term? Thanks..

Hi, Robyn. It's Kevin. Let me start, and maybe perhaps one or two of my colleagues might chip in here. This market's been full of surprises. It surprises on the way up, I think, Robyn, and it surprised us in some ways on these dynamics we see coming down the other side. So it's the kind of market that in some ways we take one year at a time.

We're almost learning as we're going along. And we have tried, particularly Jim and myself, but we've tried every way to look at this market. We have vast amounts of data, but what we're always doing is forecasting with no backbone of chronic patients. So it's all about how you just judge the starts.

So what we've got here in 2017 is really our very, very best estimates. We've put them out there, and it's difficult for us really to go beyond this coming year..

Robyn, I would say that our efforts and the efforts around us to try to open up access to the less severely ill patients will be instrumental in helping stabilize that, and that's one of our focuses for this year. In fact, even today we saw some potential opening at one of the big plans.

So all this could be very useful in terms of stabilizing that number, and that will be a big focus of the company this year..

And maybe one final comment, Robyn, just would be that's why we continue to invest in direct-to-patient initiatives and disease awareness campaigns, because even if it is a slightly different profile of patient that's coming into care, they're ultimately all going to need treatment, or the vast majority are.

So we need to continue to invest in that to ensure that there is a steady flow of patients for many years in the future..

As you say, Jim, it's a different patient presenting and it's a longer journey..

Great, thank you..

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

Thank you very much. Thanks for taking the question. My question is concerning the guidance. It looks as though, back of the envelope, you're guiding for operating margins to be down by 700 or 800 basis points and tax rate up by 600 or 700 basis points. And so we go back to the question about looking ahead.

First, if you do a deal, Robin, is there space in that R&D guidance for additional R&D investment in a deal, or would that be incremental to your current guidance? And then secondly, to the extent that there's variability principally around HCV, is that the basis for the trend in the tax rate guidance? And should we extrapolate that if we believe that the trend will continue, where might the tax rate guidance end up if you were straight HIV and the rest of the portfolio?.

Sure, Geoff. So thanks for the questions. I mean, to your first question regarding R&D expense, yes, there is opportunity to do some deal and add incremental R&D expense to get us back to levels commensurate with last year that we've thought about.

But more importantly than just the year, we've kind of thought about that relative to some of the actions we've looked at or thought about relative to our overall portfolio and our allocation across the various therapeutic areas that we support. So I'm not going sit here and guarantee that we wouldn't increase R&D expense.

We will to do the right thing and get new product in the acquisition market, but there is some opportunity there to absorb some of that. And relative to tax rate, yes, when we started with hep C, we kind of gave these ratios which don't necessarily work on the way down.

But I think one of the clear drivers with the delta in tax rate here is the fact that, as outlined in our guidance slide, a lot of the growth in HIV is coming from the U.S. So you're seeing more of our revenues be U.S.-driven which have a higher tax rate as well as less hep C, which again takes the tax rate up.

So it's a balance, again, highly dependent on patient starts which is the primary driver across things. So if you see more patient starts and higher hep C revenue, you'd see us on the lower end of tax guidance..

Okay, thank you very much for that color..

Sure..

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

Hey, guys. Thanks for take the question. Thanks to Sung for all the help my team while I was out. John, good to hear your voice. So let me ask you a deal question maybe a little different way, if you don't mind. And, John, this is a question I don't expect a yes or no. I expect you to just riff on it.

When you look at Gilead, can you take the revenue base in 2016 as a starting point? And do you believe that you could grow that revenue base by 2018 without an acquisition of external assets? And then the second part of that question is, your leverage ratio right now at least on 2016 according to your slide deck 1.4.

I know your EBITDA next year will be a little lower, so maybe that's 1.6 or something now. But any kind of thoughts, Robin or John, on like where that could go if you saw the right opportunity? Thanks a lot. I really appreciate it..

First of all, Mark, it's really nice to hear your voice and we're glad to have you back..

Thanks, John..

Maybe less there now that you've asked a hard question. As I understand it, what you're asking is if you take the, say, circa $30 billion we had in 2016, can we do an acquisition that would grow off of that basis..

No, could you grow the company without an acquisition?.

Oh, without an acquisition..

Was an acquisition a necessary requisite for revenue growth off 2016 levels over the next year or two?.

We don't have a lot of things launching over the next few years. If you think about it, we have bictegravir which will be filed later this year, launching into next year. We're very confident of our HIV franchise. That is going to be a good growth driver for us.

We are facing some headwinds in 2018 and beyond on other patent expiries we'll have, including the U.S. patent for TDF. We'll also have patents on Letairis and the following year Ranexa. So that puts some downward pressure on that non-HCV revenue base and so that makes it challenging for us to grow without some sort of acquisition in those area.

I'm not going to say exactly when that would pick up again.

It will depend a little bit on where HCV stabilizes and it will depend quite a bit on the uptake of bictegravir, which as we keep pointing out, we're very excited to be able to share the data with you and hopefully you'll share our enthusiasm for how this can transform the HIV market going forward..

Mark, I'll chime in on your debt to EBITDA question. I mean, I think we've been fairly thoughtful particularly dealing with the rating agencies and in thinking about debt levels that we feel very comfortable that we can support acquisitions and increase our debt to EBITDA.

Most importantly because given our cash flows, which we expect to continue for a very long time, we can easily delever over time with our existing therapeutic area franchises. And this is totally exclusive of any potential tax changes, or particularly if there were repatriation. That would make all that even simpler.

So we feel comfortable that from an asset standpoint that we could support any type of acquisition that we'd need to do to support Gilead's growth..

Thanks, Robin. Good to hear your voice, too..

Thank you..

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

Hey. Good afternoon, everybody. Thanks for taking the questions. I guess I wanted to ask relative to some of your projections for this year and relative to guidance, instead of talking about where you can see further compression but where you might be able to see some upside.

So I guess as you think about the projections you've made across HCV patient starts, how your HIV business performs or even some pipeline assets, where might you think about are sort of maybe potential upside SKUs in some of those projections? Thanks..

Hey, Matthew. Let me make a start and again, you'll get some other views from around the table. I do want to go back to HIV. It's going really, really well. I mean if you look at our results, year on year we were up 17% in HIV and other antivirals and adding nearly $2 billion of revenues to the company. Now a large part of that came from the U.S.

And as you see from slide 22, we are predicting anywhere between $0.9 billion and $1.2 billion of growth from the U.S. I don't know whether you picked up on my comment, but we already have 37% of treated HIV, Gilead-treated HIV patients on tap, which in a year is really a remarkable achievement.

And it's our intention that we continue that growth and that momentum for Genvoya. So I really want to emphasize that. Yes, we have an interesting dynamic, as John pointed out, in Europe coming up with the loss of the TDF patent in July. But I have to say that Europe is a kind of a mosaic of countries at different points in the TAF launch.

So we'll just have to see how that event comes through. Now in terms of HCV, we would like to see a lot more access in Medicaid states, but that has been slow. We would certainly like to see access way improving, which we think a lot of patients could be cured. And we talk a lot to our government affairs team about that.

Fibrosis scores are now in some ways opened in Europe. We still have some challenges around Southern Europe, Italy and Spain, but generally that's not a barrier. Geographically, I think we're doing well around the world. We are thinking about a small build-out in China for the private market, but that really would be a 2018 and beyond effect.

So what we have today, I think, is a really thriving HIV business. And as John has said, we are excited about bictegravir and we've got these interesting dynamics around HCV. And I concur entirely with Jim.

We're going to continue to support HCV with a great deal of enthusiasm because there are still a lot of affected patients, and we'd like to bring them into care. And we have such an efficient operating model that we can do that..

I would agree, Kevin. And just maybe one, to build on one thing you said around PrEP earlier. As Kevin had said, we already have 110,000 patients on PrEP. Nearly twice that many have ever been exposed, and again that's before what Kevin had mentioned, the deployment of a 40-person prevention specialist team.

And some very targeted direct-to-patient and direct-to-provider advertising that we're going to do. I think as Kevin had mentioned, the vast majority of PrEP prescribing right now is in four or five cities where the awareness is very high.

The area where HIV is, people are at highest risk of contracting HIV right now is in underserved, inner city areas. If you're an African-American MSM, your lifetime risk of HIV right now contracting it, is one in two.

So we're going to have people in areas like, in epicenters, New Orleans, Baltimore, DC, Newark, Oakland, areas that we haven't been before. But also doing that through targeted advertising, and particularly trying to get at populations that don't engage in healthcare.

So we'll be using social media and dating sites and Tumblr and Snapchat and things like that, that are much better, are much more I would say likely media to reach this type of population. So we are bullish on, particularly in the U.S., the potential upside of PrEP as well. And again, there was an earlier question about the payers.

I think the one thing that I believe payers are starting to see is if we can reduce the – if we can prevent HIV from occurring, ultimately that's going to bring down costs of treatment. And that's a lifetime cost of treatment. So again, that's one of the messages that we communicate as well when it comes to PrEP..

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

Hey, good afternoon. Thanks for the question. In regards to 2017 guidance, I think it was quite a surprise what the numbers were.

Is there some conservatism built in there? Is it kitchen sinking? Is it absolutely very realistically what you see? Maybe you could just characterize how you're thinking about it and whether you're trying to be conservative at all? And then when I think about the patient numbers that are implied in there, which I think is on slide 28 or so, is there a cadence to the new patient starts across the U.S.

dropping from 230,000 to 160,000? Is that steadily across the area – what is the one big thing I guess in 2017 that's different from 2016 as you built out that projection perhaps in your starts..

Hi, Mike. It's Robin. I'll start and then I'll have the commercial team chime in. I wouldn't say that our philosophy around guidance has changed year to year. And I think what we've tried to do is to be very transparent, but we're cognizant of the fact that given what you've heard in our commentary, that we expect HCV market patient starts to go down.

The reality of it is, is exactly how that will happen and when is still very difficult for us to really hone in on, hence the wide variability in our HCV guidance relative to our non-HCV guidance where we do have much more predictability given that it's a chronic market. So I wouldn't say there's over conservatism built in.

I mean, there's always some conservatism built into guidance but I wouldn't characterize the way we've guided here to be different than we have in the past..

Michael, just very quickly, I had a comment. Again, I said it earlier, we've used our best efforts. We've shared I think pretty much all our data that we have with you today. So we've really used our best efforts on trending, on the various payer buckets of patients.

I would highlight on the slide that we've supplied on patient starts, there is the call-out of the 20,000 patients that was the uplift in 2016. So in total it was 231,000 patients but there was an uplift of 20,000. So whilst 2017 seems a big step down, it's not as great when you take into account the uplift that took place in 2016..

Okay, thank you..

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

Hey. Good afternoon, guys. Thanks for taking my questions.

So heading into CROI, can you remind us the design of the B/F/TAF study versus your ongoing Phase 3, and maybe how we should be thinking about this update next week? In light of the decision to use a lower dose in Phase 3, I guess I'm wondering how much that impacts the read-through, if it does in any way. Thanks..

Thanks, Cory, for the question. I thought this earnings call might end without ever anybody asking me a question, so thanks for the question..

It's my pleasure..

So the design of the study was very similar to Phase 3. It's dolutegravir versus bictegravir given with F/TAF. And our Phase 3 study is the same design but using the single TAF/F regimen instead of the individual component. And then the dose that was actually used for bictegravir is it gives you the same exposure as the Phase 2 dose.

So the Phase 3 dose is the same exposure as the Phase 2 dose. There was some slight drug interaction when you co-formulated the bictegravir into a single TAF/F regimen..

That's helpful..

And of course, by the way, the other Phase 3 study, there are four Phase 3 studies. The other controlled Phase 3 study, a single TAF/F regimen versus single TAF/F regimen which is bictegravir F/TAF versus Triumeq. And then there are two switch studies..

Thank you, Norbert..

Okay..

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

Hey, guys. Thanks for taking my question. I guess maybe just going to HIV and talking a little bit about the dynamics that may change over Europe. I saw that you included it in the guidance. That was helpful.

But one, will the generic switches come from new starts or switches in HIV when you think about some of the markets in Europe? And then also, like should we expect the slope to be kind of the same, or will it kind of further go down as we move through the years, you think? Thanks..

Hey, Alethia. It's Kevin. Generally, and this is a general statement, switches are the dynamic part of HIV. It doesn't matter whether it's the U.S. or it's Europe. So generally, that's where the action is, if you like, in the HIV market.

I do want to repeat my comment of earlier, Alethia, that we've got different countries at different stages of the TAF rollout.

And that will have some impact on what happens if and when we see generics start to enter the various countries, because of course, whilst we aggregate for our results and aggregate for our comments, Europe is this whole, whole series of different countries. We're getting tremendous uptake of TAF in the early launch markets.

I think you can see the chart we put in of Germany, which is just absolutely tremendous. Descovy as well, by the way, even better than Genvoya, we have a lot of separate components in Germany. It just happens to be less of a STR market. So Germany's going great. Spain's going great.

I think Jim and I have very high hopes for TAF in France, which is just this past week. So I think you've got a little bit of a picture to paint, and we'll just have to see how that emerges around the event that we've highlighted and we've been realistic about that versus how TAF in its various forms is adopted..

I agree, Kevin. And I would just add, just having been over there, that we're not seeing any delay really in any of the reviews of TAF right now. And again, I think that's important. The generic impact will largely be limited to the compounds coming off patent.

So it will be Viread, which is little used, Truvada, which is in the early launch markets decreasingly used, and then ultimately Atripla. It will have less if any impact on Stribild and Complera and hardly any impact on the TAF products once they're listed.

So that's the whole key that Kevin said was we're at various stages of rollout, but once we get those products listed, it's a 2017 with dynamics moving in a couple different directions. But once we get beyond that and we have the full TAF launch, we see this as a very sustainable growth driver for the company..

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

Hi, thanks for taking my questions, a quick one for Robin. If I look at your midpoint for 2017 guidance for SG&A and R&D, SG&A is roughly flat, but R&D continues to go up. So 2017 is a year where your earnings will come down. I was wondering how much operating leverage you might have in terms of those items on P&L.

And then maybe for Kevin, on slide 23, if I take the midpoint of the $1.9 billion to $2.5 billion negative impact from increased competition, shorter duration and do the math, it's roughly 15% down from 2016 level, potentially for pricing. Is that the right way to think about how pricing would trend in 2017? Thanks..

So, Ying, it's Robin. I'll start with your first question. I think relative to the ranges, first just the one thing I want to mention on SG&A is it's going up primarily because of the Branded Prescription Drug Fee. And even with HCV revenues going down, we ended up with an IRS credit in 2016. So the comparator makes it look like it's going up.

Across the board, as I said and John mentioned, I think we remain operationally efficient and do have leverage. Obviously, our operating margins have been very high, driven by our revenue. But we never really grew our company to the rate that our revenues grew. So we do feel we have operational leverage.

And even if you look at some of the things we're investing in, in 2016 in SG&A and R&D, they were done by other things we've chosen not to invest in. So we'll continue to be able to currently make the necessary trade-offs, absent M&A, we think to remain efficient and focus on operational excellence..

Hey, Ying. It's Kevin. Just to address your second question, I really do hope we've been helpful with slide 23 to break out both the starts and three of the elements, which is pricing, market share, and duration. We won't go any further on the latter bucket. We believe we've really put our foot forward and tried to be helpful.

But please bear in mind that slide 23 is the whole world of Gilead. There's Europe in there. There's Japan in there. There's the U.S. in there. So it's a whole basket of multiple dynamics around competition and duration..

And maybe just one last thing is, keep in mind that Epclusa has only launched at this point in Germany. So this takes into account a competitive marketplace. Epclusa is going to, we expect reimbursement in the UK in the first half, the rest of the countries in the second half.

And it takes into account competitive dynamics, which are share and pricing around that..

Got it, thank you..

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

Hi, good afternoon. Thanks for taking my question, just a question on intermediate term competition. Two things that investors are debating is the impact of the doublets that are based on dolutegravir that we could see data from this year or early next as well as potentially the competition from AbbVie's new doublet regimen in HCV.

How is management looking at those two potential threats? Thanks..

Phil, so the first question about the doublet, keep in mind, what we haven't seen here is the efficacy of the doublet in a whole spectrum of HIV patient populations, particularly those with high viral load. Those have been excluded until now.

And until and unless we see that it is really useful across all viral load spectrum, it's really difficult to say what competition that will be. But having that said, if it is efficacious and if it is dissimilar to triple, single-tablet regimens, then it will be a competitor to ours..

Hey, Phil, in terms of hepatitis C, difficult to ever know what a competitor does. From what we can see of the data, it is a step up in terms of competition. But I'd like to just repeat what I said earlier. We have a heck of an offering in Harvoni and Epclusa.

We've maintained very, very healthy market shares to date, I think probably exceeding what many, many people thought we would do. So we'll continue to be very active and believe that we have the best options. The contracts for the U.S. are 12-month contracts for 2017, so it's probably largely or more a 2018 type of event..

Thank you. And our next question comes from the line of Josh Schimmer with Piper Jaffray. Your line is now open..

Hey, thanks for taking the question. I'm very into the growth question, but hopefully you can start to wind that down.

Roughly when do you expect to see at least stabilization of the bottom line? And if you can't answer that question, why do you think investors should have a favorable outlook for the company? And then on the PrEP franchise, can you elaborate on your plans or strategy to convert that to Descovy and how much you think you can convert? Thank you..

Hey, Josh. We're not hearing you too well. We had a little bit of interference, so we hope you've got the questions. So the PrEP, the PrEP, Descovy, Norbert, in terms – or Andrew in terms of the Phase 3 studies, perhaps you can give a comment on that and we'll come back to the other question..

Hi, Josh. It's Andrew Cheng speaking. And I would say that for our Phase 3 trial, right now it's ongoing. We're in the middle of enrollment. So it's very difficult to address how easy we would convert them without knowing the results, quite honestly..

And, Josh, in terms again, I think I'd come back to my earlier comments. We are taking one year at a time. I do hope, again, whilst you may not be satisfied with perhaps some numbers we've put out there, Josh, we really have put our best foot forward and given you all the data, virtually as much as we know.

So we're almost as intrigued by this market as you are, and we're doing our very best to try and model it. And by putting out the 2017 numbers, we hope that is helpful. 2018 will be what it will be when we get there..

Thank you..

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

Hi. Thanks for taking the question. Maybe just two part on hep C. So, Kevin, can you tell us what new diagnoses were in 2016 and then what you're assuming for 2017? And then Express recently published their annual drug trend report. They're projecting hep C spend declines over 30% in 2018 and 2019.

So maybe just help us think about, again, I know those aren't your numbers, but as we think about the out years, what could be some of the drivers going into those assumptions? Thank you..

Hey, Terence. I'll take the first part of your question. If you look at slide 41 in our deck, it has the new diagnoses out there for you. We don't right now have 2016. It's always basically a database that's one year in arrears. So we do the best we can. This is the most up-to-date data that we have and we've now given to you.

I would point out one thing on slide 43 and just like we're seeing healthier patients to be treated are being treated, you can see that there's basically less fibrosis in the presenting patients. So again around this theme of patients essentially coming forward who just don't quite have the urgency that had been previously.

Jim?.

Yeah, and then regarding ESI, I think it's probably a combination.

I can't speak directly for them, but what I would hypothesize would be, you're probably aware that they did add Harvoni to the national formulary, so they now have an eight-week option, which is one of the best ways to reduce costs in HCV that they didn't have when they had the Viekira Pak as their sole option.

So that's playing a role in what they're looking at over the next couple of years. But again, other than that, it's patient starts and their ability to project beyond 2017 is probably similar to ours. So it's challenging. And we're confident in 2017 and those are the drivers..

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

Thanks. Two questions. I'm not going pretend it's two parts. On bictegravir, just given the excitement related to the data and obviously the opportunity that you've spoken to before, just give us a sense for what impact it will have on the rest of your HIV portfolio.

And ultimately, should we expect you to regain some of the share that you've lost to the product offerings from ViiV? An unrelated question, but previously you've stated an unwillingness to compete on price in hep C.

Would product offerings being more similar? Is that still the company position?.

So, Ian, I'll take the HIV question first. Part of the success of bictegravir is based on the success of Genvoya. And this 37% already of treated patients is terrific. And that bodes very, very well for TAF bictegravir. So what we like about this is that we are building once again the HIV franchise for Gilead.

So we'll have a terrific Genvoya part of this and we believe we'll also have a terrific TAF bictegravir. So it's really I think operating on all fronts.

As you've seen from the comments I made on Genvoya, we're getting about 10% of our Genvoya business from patients who are not currently on a Gilead regimen and we would hope to maintain that, perhaps even do better, once we have the additional arm of bictegravir F/TAF coming to join Genvoya. So we think about, if you like, both fronts.

And Odefsey, Descovy also contributing to that but basically left hand/right hand Genvoya and bic F/TAF.

In terms of pricing?.

Competing on price..

Compete on price? Jim?.

I'm sorry. I didn't get the second part of the question..

The question was, he said, you typically don't compete on price, but this category has been unique in this industry and that competition has lowered prices. So in fact, we have been competing on price for a few years now.

So I don't see, I don't understand the question because that's been the nature of how we've been competing in these markets, especially with regard to both the public and private markets..

I guess the question was more specific to AbbVie's new product offering and potential for pricing to go down further.

Is there a willingness to sort of hold ground here? Or are you willing to compete on price if the price is going down?.

I'm not going to comment on that because I've been advised by counsel that we can't comment on future product launches and how we would react to them. So I can't say anything..

Okay. I appreciate that, John. Thanks..

Thank you. And our next question comes from the line of Katherine Breedis with Stifel. Your line is now open..

Great. Thank you very much for taking my question.

With HCV, would it possible to perhaps provide a little more granularity around the patient volume by payer mix in the U.S.? And along those lines, are we still tracking toward potentially reaching a point where the majority of VA patients with HCV will be treated by the third quarter of 2017? Thanks..

Great questions, Katherine, and I'll let Jim take the VA. Right now, in terms of payer mix, and it's been fairly steady for the last three quarters, about 45% of our HCV patients are coming from the public and about 55% from the commercial Medicare Part D. So that would be I think the rule of thumb.

Obviously, that moves around depending on the very thing that you've raised, which is the VA. And I'll let Jim comment on the VA..

Yeah, no, sure. I just would first say that no single entity has done a better job of identifying patients and getting them linked to care and treated than the VA and I think they're a model for the other sectors out there. They have treated a higher percentage of diagnosed patients than any other sector.

So they're actually ahead of the non-VA population. And we're seeing similar dynamics within the VA as we are outside of the VA and we do expect a lower rate of treatment because of that in 2017.

And because the VA is actually ahead of the non-VA population, we would expect that VA patient starts would represent a decreasing percentage of Gilead HCV patient starts in 2017 compared to what they've represented over the last several years. So again, the vast majority of diagnosed veterans are going to get treated.

I can't tag an exact date on that, but they're doing a great job and funding has not been an issue..

And maybe if I could ask a follow up. Is it tracking faster than we have seen? I mean, is it possible that that patient population will be treated earlier than the third quarter of 2017? Just to get a sense of the gating of the tails. That would be great. Thank you..

Katherine, if I could just jump in there. We have no real hard data from the VA. Our type of feel for the VA is through conversations. As Jim said, it's been very, very impressive. And you got to give the VA credit. So again, the slope, the times are very, very difficult for us to get specific on..

Right..

Let's go to the next question..

And our next question comes from the line of Brian Skorney with Robert Baird. Your line is now open..

Hey. Good afternoon, guys. Thanks for taking the question. I guess when I look at slide 22, and we're talking about non-HCV net product sales guidance, I'm just wondering, it looks like where you have bracketed off the ex-U.S. tenofovir patent expiration, it seems like that assumes the entire loss of ex U.S.

Viread sales to make that number despite it not expiring until July. So I'm just wondering, is there anything more we should be expecting in terms of the tenofovir patent expiration impacting other products that you're taking into account there? And where in this slide are you taking into account any ex-U.S.

HIV growth? Because it seems like there's only U.S. HIV there. Thanks..

Hey Brian. There is some very nice growth. Again, I direct you back to the slide on Genvoya, Descovy, Odefsey in Germany, which is those lines that I'm absolutely delighted with. And again, I repeat that our teams, whether it be here in the U.S. or around the globe, are really executing at a high level.

I would simply say that the block that you're looking at on slide 22 does include a mix of our TDF products. So it's Viread it is also Truvada, because I think as you might know, the FTC patent predates the TDF patent in Europe. So there is the potential for effect not only on pure Viread, but on Truvada..

And recall as well, it's a year in which we're going to have launches throughout the year of the TAF portfolio. So this is the combined picture of both growth and generic impact for 2017. Moving forward as we said, with the launch of the full TAF portfolio, including bicteg, we expect this to be a growth driver globally for us..

Okay, I guess what I'm really unclear on is where the ex-U.S..

Hey, Brian..

Yes..

We can follow up with you..

Okay. That would be great. Thank you..

Thanks..

Thank you. And we have time for one last question. Our question comes from Jim Birchenough from Wells Fargo. Your line is now open..

Yeah, hi guys. Thanks for fitting me in. I guess you're describing two very different businesses with the non-HCV sales growth and the declining HCV portfolio without a clear sense of where the bottom is there. So the question is, is there any thoughts of splitting those businesses? It's a question I've got. I've thought about it.

I'm wondering what the logical considerations would be against doing that? And then the second part would be assuming the business remains melded together, what commitment can you make to growing the overall business beyond 2017? I understand taking it a year at a time from a projections perspective, but I think investors would like some commitment to growth and to understand the initiatives you're going to take to do that..

Jim, the answer is no. We're not considering splitting up the company. And while it looks good in the world of Wall Street from a multiples perspective, I think it's an economically and financially a bad idea for the company. So we are committed to growing the company. We're committed to our field of NASH. We're committed to growing that HIV field.

And we are going to continue to accelerate our pipeline through acquisitions and whatnot over the course of the year. This is a challenging situation. I understand it. We understand it. And we're here somewhat reporting the news to you of what the world of HCV looks like as it's declining faster this year than we would have predicted last year.

And we're dealing with it through our strength of our balance sheet, through the cash flow we'll have at HCV, so that we can get the company back to growth. But at this point, I'm not going to give you a point in time when that's going to happen..

Great. Thanks for take the questions..

Thank you. And this concludes today's question-and-answer session. I would now like to turn the call back to Sung Lee for closing remarks..

Great. Thank you, Chelsea, 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. Everyone have a great day..