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

Geoffrey Meacham - Barclays Capital, Inc. Michael J. Yee - Jefferies LLC Brian Abrahams - RBC Capital Markets LLC Geoffrey C. Porges - Leerink Partners LLC Matthew K. Harrison - Morgan Stanley & Co. LLC Phil Nadeau - Cowen & Co. LLC Alethia Young - Credit Suisse Securities (USA) LLC Robyn Karnauskas - Citigroup Global Markets, Inc.

Terence Flynn - Goldman Sachs & Co. LLC Cory W. Kasimov - JPMorgan Securities LLC Andrew Peters - Deutsche Bank Securities, Inc. Umer Raffat - Evercore ISI Yu Katherine Xu - William Blair & Co. LLC Ying Huang - Bank of America Merrill Lynch.

Ladies and gentlemen, thank new for standing by, and welcome to the Gilead Sciences' Third Quarter 2017 Earnings Conference Call. My name is Karen, 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..

Thank you, Karen; and good afternoon, everyone. Just after market close today, we issued a press release with earnings results for the third quarter 2017. The press release and detailed slides are available on the Investor Relations section on the Gilead website.

The speakers on today's call will be John Milligan, President and Chief Executive Officer; Robin Washington, Executive Vice President and Chief Financial Officer; and Jim Meyers, Executive Vice President, Commercial Operations.

Also in the room with us for the Q&A session are Kevin Young, Chief Operating Officer; Norbert Bischofberger, Executive Vice President of Research and Development and Chief Scientific Officer; and Alessandro Riva, Executive Vice President, Oncology Therapeutics.

Before we begin with our prepared comments, 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 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 John..

Thank you, Sung. It's been an incredibly busy and exciting few months here at Gilead. In late August, we announced the planned acquisition of Kite. About five weeks later, we completed the transaction and Kite and Gilead began operating as one company.

Only 15 days after close, we received FDA approval for Yescarta, the first CAR-T therapy approved for the treatment of adult patients with relapsed or refractory large B-cell lymphoma after two or more lines of systemic therapy. Kite and Gilead employees are now working together to prepare for the first patients to enter Yescarta treatment.

Consistent with the requirement of the Yescarta REMS program, the Kite team has begun collaborating with academic cancer centers to finalize training and complete certification.

The first 13 centers are expected to be approved in about two weeks and each center will be able to accept patients for Yescarta treatment as soon as the approval is received. As those of you who followed Kite know, this will be a controlled launch to ensure patient safety.

CAR-T therapy is complicated and can sometimes be associated with severe side effects.

Even though the medical community has been learning over the course of the clinical trials how to more effectively manage adverse events, proper training and preparation for health care teams in oncology and transplantation centers is essential to help ensure the best outcome for CAR-T patients.

Yescarta is a transformational therapy for patients who have run out of options and who are waiting for new treatments that may help them with their fight against cancer. And we greatly appreciate the partnership and leadership of FDA to approve Yescarta ahead of the PDUFA date, helping ensure it reaches patients as quickly as possible.

Historically, only 7% of patients with refractory diffuse large B-cell lymphoma achieve a complete response, and patients on average shift six months when treated with the current standard of care. Yescarta serves the population who largely run out options and is essential to expedite access for those patients.

The approval of the Yescarta is supported by data from the ZUMA-1 pivotal trial. In this study, 72% of patients treated with a single infusion of Yescarta responded to therapy, including 51% of patients who had a complete response and the median duration of response had not yet been reached after median follow-up of 7.9 months.

Data from patients enrolled in the ZUMA-1 study who've had a minimum 12 months of follow-up will be presented at the American Society of Hematology meeting in December. Also at ASH, results will be presented from ZUMA-3, a Phase 1/2 study in adult patients with refractory or relapsed acute lymphoblastic leukemia.

Once the drug is approved, the work continues, of course. There are a number of studies of the Yescarta and other lymphomas in earlier lines of therapy that are planned or ongoing. Additionally, clinical studies of CD-19 CAR-Ts, or modified T-cell receptor T-cells are planned or ongoing in B-cell malignancies, leukemias, or solid tumors.

Beyond these studies, Gilead and Kite will continue to invest in research and development in order to bring forward future generations of CAR-Ts and TCRs with a goal of increasing short and long-term complete response rates and improving safety.

Gilead along with our new employees at Kite is proud to be part of the advancement of an innovative cellular therapy that is bringing hope and benefit to patients. I would like to take a moment to commend and congratulate Arie Belldegrun and the Kite team for what they have accomplished.

CAR-T is among the most significant breakthroughs in cancer treatment in decades. And I look forward to sharing more about our progress in the coming months. Moving to other therapeutic areas, we continue to make significant progress with our liver disease pipeline.

Last week researchers presented more than 40 abstracts, featuring a Gilead product or investigational compound at the Liver Meeting in Washington, D.C. including data on HCV, HBV, or NASH. During the late breaking abstract session, important Phase 2 data results for GS-0976, our investigational ACC inhibitor, were presented in patients with NASH.

The data demonstrated that GS-0976 led to significant reductions in measures of liver fat and certain biomarkers of liver fibrosis compared to placebo. This is the first randomized placebo-controlled Phase 2 study of an ACC inhibitor in NASH.

The study suggests that GS-0976 has a potential to play an important role in treating patients with the disease. We're also conducting Phase 2 combination studies of GS-0976 with Gilead's ASK-1 inhibitor, selonsertib, and the selective non-steroidal FXR agonist, GS-9674 in patients with NASH.

Depending on the outcomes of these trials, we may initiate larger Phase 2 combination studies next year.

Also at the Liver Meeting, researchers presented new data that demonstrate high cure rates in difficult to treat patients with Gilead's hepatitis C treatments and improved long-term bone and renal safety among patients with hepatitis B who are treated with Vemlidy, adding to the body of evidence supporting the safety and efficacy of Gilead's viral hepatitis therapies in diverse patient populations.

In September, we announced that Sovaldi received approval in China. The first approval for a product that Gilead will launch directly in that country. Approximately, 10 million people are estimated to be living with HCV in China, highlighting a tremendous need, the regulatory filings for Harvoni and Epclusa are planned in the near future.

We have begun hiring a team to support the launch of Sovaldi and future products with a focus on medical education and market access. Gilead's products serve important unmet needs in China, and in addition to the HCV products, we have filed the MAA for Vemlidy for HBV, and filings are planned for a number of our HIV products.

As you'll hear from Jim in a few minutes, our TAF-based regimens are performing extremely well.

In August, we announced that bictegravir, FTC/TAF, also known as B/F/TAF, our investigational fixed-dose combination of the integrase strand transfer inhibitor bictegravir and the Descovy background was accepted by FDA with prior review with a PDUFA date of February 12, 2018.

Reviews also are underway in Europe with regulatory action expected toward the middle of next year. Data from two Phase 3 studies of B/F/TAF, demonstrating non-inferiority to dolutegravir-based triple-therapy regimens were presented at the International AIDS Society Conference in Paris in July.

Earlier this month, we presented Phase 3 data on B/F/TAF, demonstrating non-inferiority when switching from a boosted Protease inhibitor-based regimen. These data suggest that B/F/TAF may be appropriate for a broad range of people living within HIV.

In conclusion, we're confident in the underlying strength of Gilead's business, driven by the successful execution of key product launches and advancement of various programs in HIV, liver disease, and now, cellar therapy, all of which positions us well for long-term success.

I will now turn the call over to Robin, who will review our financial performance for the quarter..

Thanks, John; and good afternoon, everyone. We are pleased to share our financial results for the third quarter of 2017. Total revenues for the third quarter were $6.5 billion with non-GAAP diluted earnings per share of $2.27. This compares to revenues of $7.5 billion and non-GAAP earnings per share of $2.75 for the same period last year.

Product sales for the third quarter were $6.4 billion, down 14% year-over-year and down 9% sequentially. As expected, we continue to see the impact of lower HCV patient start and the beginning effects of increased competition on our HCV franchise in the third quarter.

The declines in HCV revenue were partially offset by the strong uptake of our HIV portfolio, resulting in increased non-HCV revenues. Turning to the U.S. Product sales for the third quarter were $4.5 billion, down 10% year-over-year and 9% sequentially. HCV product sales were $1.4 billion, down 31% year-over-year and 26% sequentially.

The declines were primarily driven by lower patient starts and the effects of increased competition. Non-HCV product sales were $3.1 billion, up 4% year-over-year, and 2% sequentially, driven primarily by higher demand for our TAF-based regimens.

As a reminder, our prior-year third quarter revenues benefited from a favorable adjustment of $332 million to rebate reserve primarily related to our TDF-based regimens. Excluding this adjustment, our non-HCV revenues grew 16% year-over-year. Turning to Europe.

Product sales for the third quarter were $1.2 billion, down 15% year-over-year and 14% sequentially. The year-over-year decline was primarily due to competitive dynamics in HCV and the loss of exclusivity for Viread and Truvada as was expected.

The sequential decline was primarily due to the recognition of deferred revenue in the second quarter related to an HCV contract as well as lower total HCV market patient starts. Now, turning to expenses.

Non-GAAP R&D expenses were $745 million for the third quarter, down 24% compared to the same period last year due primarily to the 2016 impact of a $200 million milestone expense associated with Nimbus. Non-GAAP SG&A expenses for the third quarter were $806 million compared to $780 million in the prior year. Moving to the balance sheet.

During the third quarter, we generated cash flows from operations of $2.7 billion and ended the quarter with $41.4 billion in cash and investments, inclusive of $3 billion in cash raised for the Kite acquisition via a debt issuance of senior unsecured notes.

In October, we raised an additional $6 billion in term loans to fund a portion of the acquisition. We paid cash dividends of $682 million and repurchased 2 million shares of stock for $153 million in the third quarter.

Our capital allocation strategy remains unchanged and we will continue to prioritize the use of capital for investing in the long-term growth of our business. Finally, I would like to update our full-year 2017 guidance provided to you on July 26 and summarize on slide 21 in the earnings results presentation available on our corporate website.

We are increasing the lower end of our previous range of net product sales guidance. We now expect net product sales to be between $24.5 billion to $25.5 billion. Non-HCV net product sales are expected to be in the range of $16 billion to $16.5 billion. HCV net product sales are expected to be in the range of $8.5 billion to $9 billion.

We are decreasing the range for product gross margin to 86% to 87%. R&D expense is expected to be in the range of $3.3 billion to $3.4 billion. SG&A expense is expected to be in the range of $3.3 billion to $3.4 billion. We are decreasing the range for the effective tax rate to 25% to 27%.

This guidance is subject to a number of uncertainties which are highlighted on slide 21 in the earnings results presentation, including the accuracy of our estimates for HCV patient starts for the remainder of 2017, and lower-than-expected market share and greater price erosion in HIV as the result of the introduction of generic versions of TDF and the fixed-dose combination of FTC/TDF outside the U.S.

I will now turn the call over to Jim to discuss Gilead's commercial performance during the quarter..

All right. Well, thank you, Robin; and good afternoon, everyone. I'm pleased to provide an update on our commercial performance for the third quarter, starting with HIV. In the U.S., our HIV and HBV franchise delivered another very strong quarter, with revenues of $2.7 billion.

TAF-based regimens now account for 56% of Gilead's total HIV prescription volume, up from 39% as we entered 2017. This rapid migration to TAF-based regimens reflects widespread physician acceptance of the Descovy backbone.

Genvoya has been the most prescribed therapy across all categories, treatment-naïve, switch and total treated patients since the third quarter of 2016. In addition, Descovy is on track to surpass both Atripla and Truvada to become the second most successful HIV product launch in U.S. history behind only Genvoya.

We continue to see strong uptake of Truvada for PrEP. As we exited the third quarter, there were approximately 145,000 people in the U.S. taking Truvada for this indication, representing a five-fold increase since January 2015.

Even with this accelerated growth, however, the CDC estimates that there are still approximately 40,000 people infected each year. We have seen the impact of the use of Truvada for PrEP along with other prevention efforts on reducing new infections in certain communities in the U.S.

And in hopes of building on this success in other regions, Gilead launched two new targeted media campaigns during the quarter aimed at educating people in at-risk populations who currently have low awareness of HIV prevention and PrEP.

Turning to Europe, total HIV and HBV revenues were $716 million in the third quarter, down 2% year-over-year and down 2% sequentially. The quarter-on-quarter decrease was driven by the entries of generic TDF and TDF/FTC. Like in the U.S., strong uptake of our TAF-based regimens continues throughout Europe.

Genvoya is the most prescribed therapy for both treatment-naïve and switch patients across the top five European markets. Physician and patient preference for TAF-based regimens remains strong, resulting in a 25% sequential quarterly revenue growth for the TAF portfolio.

In early launch markets like Germany, TAF-based regimens already account for more than 75% of Gilead's total HIV prescription volume. In France, Europe's largest HIV market, twice as many patients are switching to Genvoya as to any other regimen.

And finally, in Italy, the uptake of both Descovy and Genvoya over the first four months of launch exceeded that of any prior HIV launch in the country. Turning to Hep C. Total HCV revenues in the U.S. were $1.4 billion in the third quarter, down 31% year-over-year and down 26% sequentially.

The quarter-on-quarter decrease was driven by declining HCV patient starts and the impact of increased competition. 39,000 patients began treatment on a Gilead regimen during the quarter, down 9% from the prior quarter, continuing the gradual decline in HCV patient starts that we've seen since the beginning of 2017. In July, we launched Odefsey.

The first single tablet regimen approved for the retreatment of adults with chronic HCV, fulfilling the unmet need for an effective regimen for patients who could not be cured with other therapies. For this small group of patients, Odefsey provides an important new treatment option. Turning to Europe.

We continue to see strong uptake of Epclusa, which is now the leading HCV regimen across the major European markets. We are also pleased to report that the European Commission granted marketing authorization for Odefsey in July with reimbursement already achieved in Germany.

And reimbursement is on track in other countries as payers acknowledge the unmet medical need. Overall, Gilead HCV patient starts in Europe were approximately 21,000 for the quarter.

Over the course of 2017, we have observed lower patient starts in some of our early launch markets, partially offset by the impact of broader patient access in countries like Italy and France. And earlier this month, Spain and Switzerland granted access – expanded access by removing fibrosis score restrictions.

Before moving away from HCV, I wanted to say a few words about the impact of new competition. As we have noted in the past, revenues in the HCV market are driven by four variables. Patient starts, net pricing, market share, and treatment duration.

While patient starts have exceeded our expectations in 2017, the arrival of new competition has further eroded Gilead's market share and net pricing, which is now similar across genotypes. Some of those changes can be seen in our third quarter results.

But the impact on pricing and market share will be more fully reflected beginning in the fourth quarter. Importantly, we have worked with payers to ensure the position in patient access to Harvoni and Epclusa in 2018 will remain similar to what we saw in 2017.

We believe that Gilead has the most comprehensive offering of treatments for patients with all types of HCV; importantly, backed by real-world cure rates comparable to clinical trial results. I'd like to close on the topic John began with. And that is last week's U.S. approval of Yescarta, which came in full six weeks ahead of the PDUFA day.

Upon approval, we immediately began work to certify 16 leading cancer centers in 13 states to administer Yescarta. Given the exciting promise of CAR-T therapy and patient need, our new colleagues are actively working to train more than 20 additional institutions with an eventual target of 70 to 90 centers across the U.S.

As we embark on this revolutionary new approach to treating cancer, our colleagues at Kite are working extensively with payers and institutions to educate them on CAR-T and Yescarta as well as collaborating with other key stakeholders to ensure understanding of the therapy's value and how to navigate the implementation and reimbursement processes.

In keeping with our long-standing commitment to help make Gilead therapies accessible to patients in need, we are pleased to have Kite Connect in place. This is a program developed by the Kite team that is customized to meet the unique needs of seriously ill cancer patients.

We look forward to updating you on the progress with the Yescarta launch in the coming months. In closing, I would like to take this opportunity to thank our employees for their commitment and dedication.

For the Gilead employees who continue to work hard to ensure patients have access to our life-saving medications and for our new colleagues at Kite who have been able to bring a breakthrough cancer treatment to patients with no other options. I would now like to open the call for your questions.

Operator?.

Thank you. Our first question comes from the line of Geoff Meacham with Barclays..

Hey, guys. Afternoon, and thanks for the question. Just to follow on some of the recent comments in your prepared remarks on Hep C. You guys have had some success last quarter and recently growing new starts. What's been this trend of late, especially now with the new product in the market from AbbVie.

And I know you don't want to go into too much detail, but maybe speak generally to the length of commercial and public contracts just thinking of the dynamics looking into next year and beyond. Thank you..

Sure. I think there were a couple of questions in here. Maybe I'll deal with the contracts, which you mentioned. So what happened really is what typically is a 12-month contractual cycle that we're used to, really became a 15-month contractual cycle just largely based upon the timing of the launch of the new competition.

So everything that we're working through right now in terms of finalizing the contractual process are contracts that will go through the balance of 2018..

Hey, Geoff, it's Kevin Young here. Let me add a little bit on the starts. The starts overall were down for the total HCV market down 51,000 for this quarter, the third quarter versus 53,000. And there was also some change as you would expect because there is a new entrant in our market share.

There was a tiny bit of pricing effect, but as Jim pointed out, that pricing and share effect will have a bigger impact in the fourth quarter and then rolling into 2018. I have to say I think we're still in a really strong position, as Jim pointed out for 2018.

We have really preserved the availability in our commercial payers and Part D for 2018 to use our options for Hepatitis C. So that's what we were really asked to do by our hepatologists and I think it gives them the option to use the best-in-class therapies, whatever the genotype.

So whilst we are seeing changes from competition, and that is somewhat inevitable, we still believe we're in a strong position with regards to our portfolio..

Okay. Thank you..

Thank you. And our next question comes from the line of Michael Yee with Jefferies..

Thanks for the question. Following along in Hep C, realizing that this is an issue, I think, people want to see stabilize out.

How are you thinking about the dynamics you mentioned as you go into 2018? And the step-down you could see in fourth quarter and then going into 2018? In other words, where do you think patient starts and market share start to stabilize out? Do you think you'll see that by the first half of 2018? How are you thinking about that so investors can get confident about the flattening out..

Hi, Mike. It's Robin. I'll take that. As you know, we updated guidance for 2017, but – and we're not going to use this call to really start to talk about 2018. I will go back to the overall factors that Jim mentioned. Clearly, looking at patient starts, net pricing, share and treatment duration.

To Jim's earlier comments, clearly pricing and contracting, we'll continue to work through and complete by the end of the year. But the impact of those other variables are things that we'll work into as we provide guidance to you for 2018 next February..

Okay. (28:04).

Let me just add a little bit to Robin's comments. I think I've said on the last call that in terms of patient volume, it was looking like between 185,000 and about 200,000. We would sense that it's tracking to the kind of higher end of that in terms of patient starts. What happens next year, as Robin says, remains to be seen.

The numbers that we have for Europe that we've put in our original guidance seem to be pretty solid and so do Japan. So the rates of treatment is still going on out there..

Okay. Let me just ask it this way then. If there's a new competitor coming on, but the contracts are basically stabilized, do you think the large step-down or drop is basically going to be seen this quarter and then should stabilize after? And in other words, we're going to see the drop here coming up and then, that's really the big change here..

Yeah. Michael, I would say that I think that in the fourth quarter you'll see more fully the impact of new competition on both price and share. We're not through with the contracting process. So again, I think that to Robin's point, we will issue guidance. We'll have a more complete picture of what 2018 looks like as we get closer to there.

I can just tell you that again, we hope to – we believe strongly we'll be able to maintain access for physicians and patients in 2018 similar to what we had in 2017. We have been able to maintain parity and preferred access with the major payers at least in the Medicare and commercial books of business with those that we've worked with so far.

Again, we also have maintained parity access in the VA. Where we will continue to remain disadvantaged is in the Medicaid segment, particularly the Medicaid Managed Care segment. But again, in those scenarios, we're mainly seeing Mavyret replace Zepatier.

But in the areas where we got the majority of our business and had the greatest access, we will remain either at parity and preferred access, and we are very confident in our ability, when all of this shakes out, to continue to remain market leader from a share perspective..

Thanks. Appreciate that..

Thank you. And our next question comes from the line of Brian Abrahams with RBC Capital Markets..

Hey, guys, thanks very much for taking my question. Maybe shifting gears away from Hep C. You recently present data for GS-0976 at the AASLD Conference. Was wondering if you could maybe give us a little bit more details in terms of your view of the benefit risk there and manageability of some of the lipid changes.

Where this mechanism could potentially fit into the paradigm relative to the other therapies in your portfolio? And the next steps of that asset? Thanks..

Yeah, Brian. It's Norbert. So thanks for that question. Yeah, we presented data – 12 weeks data by the way. We couldn't do a longer study, because we didn't have the supporting talks, (31:28) talks done. That's done now, of course. And the data showed that there was a good reduction in liver fat as measured by MRI.

There were also certain markers of fibrosis – biomarkers of fibrosis were down. Not all of them, but it looked then there was a dose response. So it was a very nicely behaved compound. And as John said in his prepared remarks, we will almost certainly start combination studies sometime next year.

Now, you mentioned one side effect that we did see that was clearly drug-related was triglyceride elevations. Now two comments to that. First of all, out of the 16, the large majority, 12, occurred in patients that already started with high triglycerides of 250 or higher.

Secondly, some of these triglyceride elevations were reduced to a lesser grade with continued dosing. So it seems to be an immediate effect. We think actually, by the way, mechanistic, it's a redistribution effect. You shut down lipid synthesis and then the triglycerides come by releasing VLDL from the liver. That's one hypothesis that we have.

In the future, how we're going to manage this is, first of all, with statins or fish oil, and number two, by excluding those patients that have high triglycerides at baseline. We think this is manageable. As I said, either with con-meds or with choosing the patients carefully, and over time, the triglycerides may go down to normal levels.

Again, we don't have data right now beyond 12 weeks. We will see that in the next study..

Thanks, Norbert..

Okay..

Thank you. And our next question comes from the line of Geoff Porges with Leerink..

Thanks very much. Norbert, I'll follow up with another question for you. It's concerning filgotinib, and I'm just wondering if you could give us a sense of the approximate cumulative exposure to the drug. And what number of VT events you've seen? I know the studies are blinded, but presumably you've been notified and you're watching for these events.

And then perhaps you could comment on whether you think that there is a class signal here or molecule-specific signals, or no signal..

Yeah, Geoff. Thanks for the question. So the one study that's published where they looked at background venothrombolic events in RA points to a number of six per 1,000 patient years. So it's very rare, but it does occur in inflammatory conditions.

Now, if you look across all the studies that have been published with JAK inhibitors, there's a pretty good variation. And while I don't – and by the way, we also believe that there is insufficient evidence that any of these JAK inhibitors that it's drug related. The numbers are just too small.

So we (34:46) 1,300 patient years' experience with filgotinib across all our clinical studies. And I don't want to tell you the number that we have in terms of these events. It's very small. But if you look at the rate per patient year exposures, we're at the very low end of what other companies have seen and what has been reported in the literature.

And the last thing I would like to add, Geoff, if you believe that these events are drug-related and if you believe that the mechanism has to do with JAK2 inhibition – and as I think I mentioned last time, there's a paper published that looked at a JAK2 knockout mouse, and those mice had higher platelet levels.

So it's entirely possible that somehow the venous – the thromboembolic events have to do with high platelet levels, then we should not have that effect, because number one, filgotinib doesn't inhibit JAK2. And number two, we actually see platelets going down in our studies. So this is the extent of my wisdom that I have on this subject..

Thanks, Norbert. I appreciate it..

Okay, Geoff. You're welcome..

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

Great. Thanks very much for taking the question. If I could ask something on Yescarta. I guess I was looking for some of your insight about some of the dynamics that could influence the launch.

And I guess two that come to mind for me are, one, can you talk a little bit about how the drug's going be paid for? Obviously, DRGs don't cover the total cost, especially for Medicare patients, and so how you think the financial impact to hospitals will play into the use.

And then, second, maybe you could comment on the impact of the other sort of clinical trials that are going on at these centers, which I'm sure are in high demand and how you think that could impact the launch. Thanks..

Sure. Well, I'll take the first part and then maybe some combination – yeah, Alessandro on the second. But let me step back for a minute and just remind that the payer mix for – we believe, and I think we feel fairly confident about this – will be about 50% to 60% commercial; the rest, largely Medicare; a little bit of Medicaid.

And remember, within Medicare, there's a portion that is DRG-related and a portion that isn't. All the discussions the Kite folks have had with payers to this point, both government and private payers have indicated that they believe that they will cover Yescarta beginning an approval while they update the medical policies and so forth.

Now, there's a difference between covering and reimbursement obviously. And reimbursement levels will vary by payer segment and also by the contractual agreements that exist between hospital and payers, which are independent of anything that we're involved with.

We do believe that over time that Medicare DRG segments will probably at most grow to approximate about a third of the payer mix.

They won't be close to that in the first year or so because, again, most of these centers are PPS exempt, meaning that they are not reimbursed based on DRGs and it's more about fee-for-service and more like a commercial-type reimbursement.

Even with that, these hospitals are well adept at using non-CAR-T DRGs until they actually have a CAR-T-specific DRG. And I think it's important to remember that what we're dealing with right now is not new. Every hospital-based product launched in the last 20 years has done so without a DRG at launch.

So it's not like they're having to figure this out for the first time. So there's experienced people in these cancer centers that do this for stem cell transplants, that do this for every product, hospital base that they've had come in.

And last thing I'll say and then turn it to Alessandro is just, one of the prerequisites of these cancer centers being certified to administer CAR-T was a determination that reimbursement would be sufficient to make this financially feasible for them based on their payer mix.

So we don't – obviously, we would love to have, and we will have, in a couple of years the CAR-T-specific DRG. We have NATAP and things we can do in the interim. But this is not novel ground and hospitals are very adept at using other DRGs and other codes to get sufficient reimbursement..

Yes. This is Alessandro. I'll elaborate that the dynamics, I think, will also change dramatically, because we are dealing with the lifesaving treatment. And we expect that Yescarta will become the standard-of-care for diffuse large B-cell lymphoma after oral therapy. So it is a transformative therapy.

And we think that the community, the physician, and the payers will work together towards making sure that the Yescarta is available to patients. So we have done the clinical trials in diffuse large B-cell lymphoma in around 15 centers mainly focusing in United States of America. Now we are expanding to most centers in the U.S. and also in Europe.

In terms of not only diffuse large B-cell lymphoma, but also our pivotal trials in other B-cell malignancies. So we are very confident that we will have the support from the community, from the regulators to implement this trial.

And we'll work together to make sure that we serve both the patient needs that are in relapsed-refractory diffuse large B-cell lymphoma, for whom Yescarta is indicated, and, of course, for patients that will be eligible for our clinical trials..

Hey, Matthew. It's Kevin. There's always a worry with the start of a new kind of market about will there be commercial patients versus clinical trials. I remember in the early days of RA that was always a worry. But my experience is that there's always a demand with high need patients, as Alessandro said, for treatment from an FDA-approved product.

And as Alessandro says, Kite have by far the biggest clinical trial base upon which to introduce Yescarta. So with 40 some centers that have actually had clinical experience that's a really strong base for the commercial introduction..

Perfect. Very helpful. Thanks..

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

Good afternoon. Thanks for taking my question. I did want to drill down on the HCV pricing a bit more with a two-part question.

The first is, does Gilead itself understand how the average revenue per patient will change quarter-over-quarter in Q4? Or is it somewhat of a fluid situation where you yourselves aren't entirely sure yet how price would change? Second, I was wondering if you could – if you do have somewhat of an understanding, could you give us some sense of a magnitude of the quarter-over-quarter change in average revenue per patient in Q4 over Q3? Is it like 5%, 10%? Whatever you can tell us would be appreciated..

Yes, no, I would say it's – again, as we mentioned, we're still in the process right now. We've made a lot of good progress, but it's not complete. So we're not in a position to speak about that right now.

But, again, what we can signal to you is that pricing in general is similar across genotypes and it has gravitated down towards 8-weak genotypes one pricing. And, again, you'll see that more fully reflected in the fourth quarter although as they said, the process of 2018 contracting is not fully complete during this quarter..

Hey, Phil, for this quarter, quarter three versus quarter two, it was by far driven by patient starts and share. It was a 4-point difference going from 80% to 76%. It was just a tad, it was just a little of pricing. But, as Jim says, that will become a bigger effect in Q4..

That's helpful. Thank you..

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

Hey, guys. Thanks for taking my question. It's probably for you, Norbert. Just wanted you to talk a little bit about the interim PSA (43:58) readout in GS-9674.

Just will we get efficacy general thoughts, and then, also, Norbert, just after some of the discussion in the community around FXRs with Ocaliva, I guess, I just wanted to get your general thoughts on some of the tolerability around liver and lipids and different things. Thanks..

Alethia, this question was about FXR or the ACC in it, or both?.

FXR..

The GS-9674. FXR..

Yeah, GS-9674..

FXR? Okay. No, so you will see – so we have a Phase 2 study kind of ending. We should have data fairly soon. That's going to be a 24-week study, by the way. And you will see data then presented probably at EASL. We haven't really decided yet where we're going to go with those. But what we have seen, it's well-thought.

There's no effect; it's well tolerated. We think – I think we have disclosed that it releases FGF19, that has been published. So the only question is, is the GI-generated FGF19 that then goes to deliver, is that enough to have the same efficacy as, for instance, in FXR agonist that actually gets physically to deliver.

That's the question we haven't answered yet. That will come with the Phase 2 study. So we hope we'll have some data on that. But FXR, clearly, it's a proven mechanism with OCA. The FLINT study was published a few years ago in NEJM. Again, the OCA has some drawbacks.

And we think with a gut-restricted FXR agonist that we have, we could probably potentially solve some of those downsides..

Thank you. And our next question comes from the line of Robyn Karnauskas with Citi..

Hi, guys. Thank you. I just want to follow up on one of the comments you made about, right, the hospitals that you're training believe that they're reimbursement – there's a valuable reimbursement environment for CAR-T. I just have a question around that.

So, I guess, the first is like are you incorporating any value-based pricing at these four pairs? Is that incorporated at all so we know how to model the price per patient? And the second is, tell me more about what that means for the hospital? Does that mean that they're going to be very comfortable, trying CAR-T and not worrying about reimbursement? Or do you think they'll still want to treat patients more fully just to get more comfortable with the reimbursement environment? Thanks..

Sure, Robyn. Thank you. Just touching on value-based pricing at first, we are in ongoing and active discussions with really all commercial and government payers, including CMS. And I can convey to you there are varying degrees of interest and ability to execute value-based contracts. It truly does vary by payer.

You may be aware there's a lot of operational complexities to this in addition to just government price barriers to implementing this across all payer segments. But we have communicated our openness to considering solutions – any and all solutions to improve patient access regardless of what they may be.

It may end up not being value-based pricing, it could be something different. But we're very open to it. There's a reason why to our knowledge, we don't – at least, historically, we haven't seen value-based pricing in oncology. It's not the easiest to execute under current regulations. But we're open to that.

I think that remember what I said that a lot – part of the certification process and the vetting process at these hospitals is, these are hospitals that are very used to having to do the same thing with stem cell transplants; understanding who's a commercial patient, who's a Medicare patient; where am I going to get reimbursed at this level; where am I going to get reimbursed at that level.

So they really are conducting the same type of calculus here. And one of the reasons why they end up coming onboard is they feel they can make this work for them..

Yeah. I think, Robyn, just for modeling purposes, I would just take out $3.73 (48:25) as the price per patient. I think that's probably a good way to think about it for you..

Great. That's actually really helpful. That's what I needed. Thanks..

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

Hi. Thanks for take the question. I was just wondering following the launch of bictegravir next year, obviously, in addition to the share capture from some other regimens.

Just wondering if you'd expect to see a meaningful step-up in the rate of conversion to TAF from your Viread regimens here? Or do you expect that the rate would actually continue as we've seen over the last few years? Thanks..

Yes. Maybe just a first comment, anyone jump in. It would be hard to see a more rapid conversion to TAF than we've seen in the two years since the – really less than two years since the launch of Genvoya. As we said, we're at 56%. We would anticipate that by considering the mid-February PDUFA date for B/F/TAF that we could be around two-third.

So that has exceeded our expectations. So there will be a – again, by 2020, we anticipate that the only folks still remaining on TDF will largely be Truvada for PrEP at that point. So there will already have been a significant conversion to TAF even before B/F/TAF launches.

What we – obviously, we see TAF as really the culmination, the first regimen really without trade-offs. And what we think we're going to see at that point and what I believe we'll see is a lot of conversion of not only business that isn't TAF yet, but business that is already TAF on to B/F/TAF.

Particularly, we have seen an uptick recently in the last quarter or so in patients starting on Descovy plus dolutegravir. And what physicians tell us is, is that in a lot of cases, this is in preparation for what they expect to do in the first quarter of next year.

It's very logical to them and to us, but more importantly to them, switch opportunity for them, to obviously get them on a single pill. So I'm not that surprised we're seeing an uptick in that and I think that bodes very well for B/F/TAF..

Yeah, Terence, I would just give a shout-out for how well our colleagues in Europe are doing. As Jim says, that's Genvoya. Terrific that already 75% of our HIV business in Germany's already across TAF-based regimens, but it's also Descovy, as Jim makes a great point.

If you look at the uptick and we've supplied you with some slides, you look at the uptick in Italy, Descovy is going terrifically. And that's a great platform for B/F/TAF. So we couldn't be happier about how we're doing this year with our HIV portfolio..

Great. Thanks a lot..

Thank you. Our next question comes from the line of Cory Kasimov with JPMorgan..

Hey. Good afternoon, guys. Thanks for taking the question. So now that you relatively quickly wrapped up the Kite deal, I'm curious where your mindset is at this point regarding potential additional M&A.

And if you do have an appetite for it, what types of assets would be of greatest interest to you now that you have a new commercial product and platform in the fold. Thanks..

Hey, Cory. It's John Milligan. Thanks for the question. So a couple things to say. The Kite acquisition was done very rapidly, and, of course, we are spending a lot of time now figuring out how to best work with our colleagues at Kite.

I can say that they had – and we are quite interested in bringing in technology that will enhance our ability to move CAR-T forward to the next generations of CAR-T. As we had mentioned on the call when we acquired Kite, when we announced the acquisition, that we see this as a platform that will require continuous innovation.

And so we are quite active in bringing in technologies, which will help us move this CAR-T forward.

Having said that, it's also true that M&A is going to be an ongoing activity at Gilead, where we will be in a constant state of evaluation of opportunities to bring in revenues or technologies that we think will help enhance our portfolio and our top line for the future. So I can tell you we're very, very active.

I'm not going give you hints as to what we might be looking at. But I can say the group that we've put together is very, very good. And we are constantly evaluating stuff internally and with our board. So I would expect us to continue to be quite active in the coming years..

Great. Thank you..

Thank you. And our next question comes from the line of Andrew Peters with Deutsche Bank..

Thanks for taking my questions. One more on the new patient start side. I guess I just wanted to drill into the third quarter a bit more. If we look at first quarter to second quarter, it was kind of more flattish on the new patient start side and then we saw kind of a bit of a dip now.

Just wanted to understand if there's any kind of seasonality within that new patient start component, or is it really just more consistently that fewer patients are actually starting therapy? And on the seasonality side, if you look historically, say, to last year, how has the fourth quarter performed relative to prior quarters? Thank you..

Yeah. I'll start. This is Jim. I would say I agree, it looks like it was a larger drop in the third quarter relative to earlier quarters. Obviously, what helped us in the beginning of the year was the fact that we had the midyear launch of Epclusa, and that had obviously some carryover into the early part of the year.

The other thing I'd say – and again, I don't mean to get into the weeds here, but I will just say that when you actually normalize this year based upon holidays and trading days, which a lot of the IMS and other companies will do for you, but don't routinely do, we've pretty much seen a fairly steady 2% month-on-month decline in patient starts basically since the start of the year.

Again, there's different numbers of days and holidays in each area. So in reality, it's been less of a drop just from the second to the third quarter and more consistent and steady decline. The reason we were saying very correctly that we saw higher levels of starts than we thought was we actually started at a higher point than we thought.

So there was more starts in the first half of the year than we thought. But the general trend of patient starts declining relatively consistently throughout the year has really been in place since January. And we don't expect that to change in the fourth quarter..

Andrew, typically, Europe is more seasonally sort of orientated. We did see France and Spain come down a little bit in the third quarter, although nicely, Italy was quite strong, because there's a lot bigger opening now there is general access across all genotypes to HCV therapy, and there's a lot of untreated patients there.

Typically, fourth quarter is as good if not a little bit stronger than third quarter in Europe. I don't think there's really much seasonality, as Jim points out, between third and fourth quarter in the U.S..

Great. Thank you for the additional color..

Thank you. And our next question comes from the line of Umer Raffat with Evercore..

Hi, guys. Thanks so much for taking my question. I actually wanted to drill down on Hep C a little more. And I just want to make sure I'm thinking about this correctly because these numbers sounded – I just want to make sure I've locked them in.

So the high end of 2017 guidance for your Hep C implies that the fourth quarter will have a run rate of somewhere between $4 billion and $5.4 billion.

So am I doing the math right there? And is that the starting number we should think about as we head into 2018?.

patient starts, which still continues to be a big variable, there is the pricing and there is the share. The one thing that's now come off the table really is duration, because the use of Harvoni, use of Epclusa is pretty standardized now. So that's not really a variable.

Yes, you can do the maths of taking away our first three quarters from the guidance that Robin took you through. But we really don't wish to go any further than where we are with, I think, a 2017 that we delivered on our original guidance in hepatitis C and have done superbly with over-exceeding our HIV guidance.

But we'll get to 2018 when we get to 2018..

Thank you..

Thank you. And our next question comes from the line of Katherine Xu with William Blair..

Yeah. Hi. Good afternoon. I'm just wondering about the HCV China business that you guys could potentially drum up there, considering 10 million people infected, although I have the number of 43 million. Let's just say 10% of them could potentially pay out of pocket, that could be a third of the U.S. market. So that could be quite substantial.

I wonder what's your overall thoughts on that market..

Well, Katherine, you're making me nervous here. I think it'll be – I think a staged launch in China. What's remarkable is in the last 12 months how the China FDA have changed their regulations and, particularly for products that we've got in the viral area, are very, very motivated to see these products come to market.

We will have a relatively small organization in China. That's quite deliberate. We want to really do the right thing and be highly compliant and bring our therapies very responsibly to the Chinese market. We've known the Chinese opinion leaders for a long time, even though we haven't actually had an office in China.

So that gave us the confidence and the platform upon which to start to put in our organization. We have a very seasoned General Manager. It will be, as you say, a private market launch to begin with.

We have missed the national listings, which are now closed for the coming year, but in 2018, we will be trying to bridge from the private market into provincial reimbursement and when the next round of national authorization opens, then we will try to get Sovaldi, Harvoni, and Epclusa and Vemlidy, for that matter, because HBV is a very prevalent disease in China onto national listings.

So we want to walk before we can run. But there's no doubt that our antivirals are much needed for the infection rates in China..

Thank you. And we have time for one more question. Our final question for today comes from the line of Ying Huang with Bank of America Merrill Lynch. Please go ahead..

Hi. Thanks for taking my question. I have one for Genvoya, on slide 29 last month, we see a dip in TRx. Am I reading the teal leaf too much? Or there's something behind dip or just one blip in the market? And then secondly on HCV, if I take your high end of the guidance for this year, $9 billion, I get to about $1.36 billion in 4Q.

So that's still 40% drop from 3Q. Do you think that's mostly because of the U.S. market dynamics or also you're seeing a drop-off in Europe and the other countries as well for HCV? Thank you..

Yes. Maybe start with Genvoya, no, we are not seeing anything. There's month-to-month fluctuations just based on – I wouldn't call it seasonality, but just the number of holidays and so forth. But there is – the uptake of Genvoya has not shown any attenuation at all and couldn't be going stronger.

Again, as we said, 56% we expect to get to about two-thirds by the time of the launch of the B/F/TAF in terms of the presented TAF. So no worries there. The second question was just in terms of the drop-off in the fourth quarter.

Again, that's the first quarter on Hep C where will see the – more fully, the impact of both the dynamics we spoke about in pricing, where it is now consistent across genotypes and has come down more towards genotype one eight-week levels. And again, also, more of the impact of share. So both of those things were reflected in that.

And again, that's reflective of the updated guidance that was provided earlier in this call..

And, Ying, we will see some competitive effects running into Europe that will be a country-by-country. I have to say that Epclusa is doing really, really well in Europe, and is the number 1 Hepatitis C product, that's being used across all genotypes in the European market.

So we believe we've got a very able competitor to the new market entrant in Epclusa..

And just to reiterate, again, maybe it didn't play out exactly from the four different dynamics that drive revenue as we thought. Patient starts were higher. Price and share, at least, later in the year, were lower. But 2017 HCV revenue will fall within the original guidance that was issued last February. So we feel very good about that..

Thanks very much..

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

Thank you, Karen, 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 your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day..