Gilead Sciences, Inc. (GILD) Q4 2022 Earnings Report, Transcript and Summary

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

Thank you, operator, and good afternoon everyone. Just after market close today, we issued a press release with earnings results for the fourth quarter and full year 2022. The press release slides and supplementary data are available on the investors section of our website at gilead.com. The speakers on today’s call will be our Chairman and Chief Executive Officer, Daniel O'Day, our Chief Commercial Officer, Johanna Mercier, our Chief Medical Officer, Merdad Parsey, and our Chief Financial Officer, Andrew Dickinson. After that, we’ll open up the call to Q&A, where the team will be joined by Christi Shaw, the Chief Executive Officer of Kite. Before we get started, let me remind you that we will be making forward‐looking statements, including those related to Gilead’s business, financial condition and results of operations; plans and expectations with respect to products, product candidates, corporate strategy, business and operations, financial projections and the use of capital; and 2023 financial guidance, all of which involve certain assumptions, risks and uncertainties that are beyond our control and could cause actual results to differ materially from these statements. A description of these risks can be found in the earnings press release and our latest SEC disclosure documents. All forward‐looking statements are based on information currently available to Gilead, and Gilead assumes no obligation to update any such forward‐looking statements. Non‐GAAP financial measures will be used to help you understand the Company’s underlying business performance. The GAAP to non‐GAAP reconciliations are provided in the earnings press release, in our supplementary data sheet, as well as on the Gilead website. Now, I’ll turn the call over to Dan.

Thank you, Jacquie, and good afternoon, everyone. We had the opportunity to connect with many of you a few weeks ago in San Francisco. And I’m excited to be able to reconnect now to share our strong fourth quarter and full year results for 2022 in addition to our guidance for 2023. These show the tangible impact of our business transformation, notably the growth trajectory for HIV portfolio and our fast-growing oncology business. The team will take you through our quarterly results in detail, but I am very pleased to highlight on Slide 4 the strongest full year growth in our base business since 2015 when growth was driven by the peak of HCV sales. Full year 2022 sales of Biktarvy grew 20% year-over-year to $10.4 billion, exceeding $10 billion for the first time. Excluding Biktarvy, our base business in 2022 grew 8% year-over-year and I’m pleased to share that our initial 2023 guidance points the base business growth between 4% and 6%. Andy will share our revenue guidance in detail, but I do want to take this opportunity to recognize the Gilead team for the progress we made in returning to growth. Thanks to their commitment to improving the health of people and communities around the world, Gilead is now poised to extend its reach to more patients and more challenging disesases and conditions than ever before. Beyond our financial results, our clinical progress in 2022 reinforces how far we’ve come. At the end of the year, Sunlenca received its first approval in the U.S. for heavily treatment-experienced adults with multi drug-resistant HIV infection. This follows a European approval in the third quarter. Sunlenca is the first six monthly subcutaneous medicines to be approved and we believe it represents the most exciting innovation in HIV therapeutics in recent years, with significant potential across prevention and treatment. We look forward to partnering with the HIV community to increase awareness of Sunlenca and to advancing our portfolio of long acting options. We are anticipating an another potential approval any day now with the upcoming PDUFA date for Trodelvy in pre-treated HR-positive/HER2-negative metastatic breast cancer. We also expect to hear from European regulators later this year. In the meantime, Trodelvy’s commercial momentum is building, with full year 2022 sales growth of 79%. In cell therapy, we continue to reinforce our leadership and to execute on plans to broaden availability, with Yescarta most recently approved in Japan for a second-line relapsed refractory large B cell lymphoma. Merdad will take you through our pipeline updates and key milestones in a few moments. For now, I'll simply note the significant expansion in our clinical programs, which are more than doubled in the last four years. We continue to add further programs, including our new preclinical candidates to partner with lenacapavir for a long-acting HIV treatment programs, the new Phase III OAK CRE study for a Novel Oral COVID-19 nucleoside, and the five Phase III trials that we expect to initiate this year. Before I hand over to Johanna, I want to briefly review the clinical goals we shared with you a year ago. The Gilead and Kite teams have done a terrific job in both delivering as plan and acting with agility in response to changing circumstances. We had an impressive year of discipline and determine execution in 2022 and fully expect to further strengthen our track record of execution in 2023 and beyond. With that, I'll hand over to Johanna for a review of our fourth quarter and full year commercial performance. Johanna?

Thanks, Dan, and good afternoon, everyone. Before discussing our commercial results, I want to acknowledge our Gilead team for delivering another outstanding quarter and closing out a very successful year. 2022 was an exceptional year for Gilead with our virology franchise well positioned to continue its leadership for years to come. And significant progress in executing our oncology strategy and bringing new medicines to improve the lives of more patients all around the world. Starting on Slide 7, we had a very strong quarter, delivering a total product sales excluding Veklury at $6.3 billion, up 9% year-over-year, or 12%, excluding the impact of FX and the loss of exclusivity of Truvada and Atripla. With solid growth in each of our core franchises and growth across all geographies, once again, led by HIV and oncology. Quarter-over-quarter sales grew 5%, driven by HIV, Trodelvy and cell therapy, partially offset by HCV. For the full year, total product sales, excluding Veklury, were $23.1 billion, up 8% year-over-year, or 11%, excluding the impact of FX and the Truvada Atripla LOE, driven by HIV and oncology. As expected, full year Veklury sales were down meaningfully in 2022 compared to 2021. That said, Veklury’s performance has been more sustainable than we previously expected. And it's clear that it continues to play an essential role for hospitalized patients treated for COVID-19. In 2022, Veklury delivered $3.9 billion, including $1 billion in the fourth quarter. Overall, full year total product sales of $27 billion was flat compared to 2021, as growth in our base business was offset by the decline in Veklury sales. On Slide 8, HIV sales for the fourth quarter were $4.8 billion, a 5% year-over-year, driven by higher demand as well as favorable pricing dynamics. This was offset in part by a smaller than usual inventory build in the fourth quarter, reflecting our early efforts on seasonal inventory management. Sequentially, HIV sales in the fourth quarter were up 6%, primarily driven by favorable pricing and inventory dynamics as well as higher demand. For the full year, HIV sales of $17.2 billion were up 5% year-over-year due to higher demand primarily related to the continued strength of Biktarvy, in addition to channel mix, leading to higher average realized price. This was partially offset by inventory dynamics and FX. Overall, the HIV treatment market in the fourth quarter grew 1.5% year-over-year in the U.S. and over 2% in Europe. On an annual basis, the market has grown in line with our expectations of 2% to 3%. Moving to Prevention, the U.S. PrEP market grew 18% year-over-year and 3% sequentially in the fourth quarter of 2022, reflecting growing awareness. Descovy sales for the fourth quarter were $537 million, up 13% year-over-year and 7% sequentially. Notably, despite generics and other entrants, demand for Descovy for PrEP continues to increase up more than 20% for the full year, in addition to maintaining a stable market share of over 40%. With these trends and the TAF IP settlement last year, Descovy’s position in the growing PrEP market has only strengthened. Overall, this provides a strong foundation as we look to the potential launch of lenacapavir for PrEP as a true long acting every six months regimen in the middle part of the decade. Moving to Biktarvy on Slide 9, sales for the quarter were $2.9 billion, up 15% year-over-year, primarily driven by higher demand, as well as favorable pricing dynamics, offset in part by lower channel inventory. Quarter-over-quarter, sales were up 6%, similarly driven by higher demand, as well as favorable pricing and inventory dynamics. In every quarter since our launch, we've seen Biktarvy continue to gain market share, and the fourth quarter was no exception, getting more than 3 percentage points in share year-over-year. This continued momentum is a testament to Biktarvy’s differentiated clinical profile, reinforced by the long-term five-year data we presented last year. Notably in U.S., Europe and other major markets, Biktarvy remains the number one regimen for new starts in addition to its number one position in treatments, which is across most of the major markets, including the U.S. At the end of 2022, there were almost 1 million people managing their HIV with Biktarvy worldwide. Taken all together, this has led Biktarvy for the first time to achieve full year sales of over $10 billion in 2022. Looking ahead, we're confident Biktarvy will remain the leading medicine for the treatment of HIV in U.S., Europe and other major markets for years to come. Now looking ahead for the first quarter of 2023 for HIV, a few points I just wanted to call out. First, with respect to pricing dynamics as we enter the New Year, we expect a typical first quarter reset in patient co-pay and deductibles. As always, these will have an unfavorable impact on average realized price in the first quarter. Second, a reminder that we've historically seen inventory build-up in Q4 that has led to notable drawdowns by wholesalers in Q1. While we've implemented new processes to better manage inventory dynamics from the fourth quarter into the first quarter, we continue to expect an inventory drawdown to occur in Q1, albeit at more modest levels compared to prior year. So with this in mind, we expect HIV sales for the first quarter to decline by low teens sequentially from the fourth quarter. This compares to the 18% sequential decline we reported in the first quarter of 2022. For the full year 2023, I'd like to remind you that some of our HIV performance in 2022 was driven by shifts in channel mix that had a favorable impact on average realized price, contributing in part to the 5% year-over-year revenue growth we reported in 2022. We expect channel mix in 2023 to be relatively similar to last year, and therefore do not expect HIV growth to benefit from changes in average realized price like we saw in 2022. As a result, we continue to expect HIV to grow in 2023, albeit at a modestly lower growth rate than 2022. As we think about the future of the HIV market, Gilead is well positioned to provide many people living with HIV and those at risk of HIV with multiple options for care. To that end, we're excited about the recent approvals for Sunlenca in U.S. and Europe for heavily treatment experienced adults with multi drug resistant HIV infection. This first indication represents only 1% to 2% of people living with HIV. There's a huge unmet medical need. These individuals have cycled through multiple antiretroviral regimen, and until now have had very few if any, effective options left available. Sunlenca is now approved in the U.S., U.K. and European markets and we're working as quickly as possible with regulators and reimbursement bodies to make Sunlenca available in many more countries. We believe that first launch of Sunlenca represents a key milestone for Gilead and looking forward in the treatment and potential prevention of HIV. With Sunlenca, a true long acting regimen is a reality as awareness and familiarity of Sunlenca every six months subcutaneous administration grow among health care providers, community groups and people living with and at risk of HIV, we believe Sunlenca is well positioned for the future. Turning to HCV on Slide 10, sales for the fourth quarter were $439 million up 12% year-over-year, reflecting timing of Department of Corrections or DOC purchases, and favorable pricing dynamics in the U.S. Quarter-over-quarter HCV sales were down 16% primarily due to resolution of a rebate claim in Europe in the third quarter of 2022 that did not repeat, as well as other pricing dynamics in the U.S. offset in part by timing of DOC purchases. Going forward, we continue to expect new starts to decline, but are encouraged that our market share remains over 50% in both U.S. and Europe. Sales of HPV and HDD for the fourth quarter were $255 million as shown on slide 11. Sales were down 4% year-over-year and down 3% sequentially, primarily due to lower than ready demand and pricing dynamics outside of the U.S. Moving to Veklury on slide 12, sales the fourth quarter $1 billion with a full year totaling $3.9 billion. It's clear that the pandemic has evolved Veklury’s role in the treatment of COVID-19 has remained unchanged as a key part of the standard-of-care for hospitalized patients. In fact, Veklury is still the only antiviral approved and it's setting and in the U.S. Veklury continues to be used in over 50% of hospitalized patients who are being treated for COVID-19. We're excited to continue to work on our oral COVID-19 nucleoside which Merdad will discuss shortly. Moving to oncology, and beginning with Trodelvy on Slide 13. Sales of $195 million in the fourth quarter grew 65% year-over-year, and 8% sequentially. For the full year Trodelvy's sales were $680 million up 79% year-over-year. As we continue to broaden access to Trodelvy around the world, we're encouraged by the growing demand and existing market. Trodelvy is now reimbursed across the major European markets. And in the U.S. demand was up 13% quarter-over-quarter, a growth rate almost doubled from the prior quarter, reflecting the solid contribution of our expanded field force and growing awareness. We're also excited by the expected decision from the FDA later this month, which could expand Trodelvy’s potentially clinically meaningful benefits into the pre-treated HR-positive/HER2-negative metastatic breast cancer setting. We estimate this represents at least 6000 addressable patients in the U.S. and our U.S. field force has just wrapped up its launch meeting and is energized for the upcoming approval. The opportunity for Trodelvy to benefit patients with pre-treated HR-positive/HER2-negative metastatic disease is supported by the recent NCCN Category 1 preferred recommendation for Trodelvy based on the TROPiCS-02 data. Additionally, the European Medicines Agency recently validated our marketing authorization application for Trodelvy in HR-positive/HER2-negative and we look forward to a decision later this year. Now on to Slide 14 and on behalf of Christi and the Kite team Cell Therapy sales in the fourth quarter were $490 million up 75% year-over-year and 5% sequentially. Full year Cell Therapy sales were $1.5 billion up 68% year-over-year. The growth in the fourth quarter and full year were driven by continued uptake of Yescarta in large B cell lymphoma, notably in the U.S. Growing physician familiarity with Yescarta data and Kite industry leading manufacturing continue to be key growth drivers. Yescarta sales was $337 million up 85% compared to the fourth quarter of 2021 and 6% sequentially. We're pleased to see not only strong momentum and second line LBCL in the U.S., but also continued uptake in third line LBCL in both the U.S. and across European market. Yescarta sales were $82 million in the fourth quarter up 2% quarter-over-quarter with growing volume demand in both mantle cell lymphoma and adult acute lymphoblastic leukemia. Year-over-year Yescarta sales were up 44%. We're pleased to see the building momentum of CAR-T Cell Therapy as a treatment class with curative potential and Yescarta and Tecartus as the leading cell therapies of choice globally. More patients are getting access due to Kite’s industry leading reliable manufacturing capabilities and the team's expanding footprint of authorized treatment centers around the world. And just last week, U.K’s National Institute for Health and Care Excellence or NICE, recommended Yescarta for routine use in third line large B cell lymphoma. This makes Yescarta the first party available for commissioning in England. Approvals and reimbursement into additional indications that are currently available in the U.S. and other markets is expected to continue over the next year. Yescarta was recently approved for second-line LBCL in Japan, which has the potential to be the second largest cell therapy market outside of the U.S. And we look forward to the transfer of the marketing authorization to Gilead and Kite later this year. In the interim, other still early days, we'll continue to work with our partner Daiichi Sankyo to make Yescarta available to approximately 7000 patients in the second line plus setting. Kite will begin manufacturing supplies for the Japanese market through our El Segundo, California, facility. And with that, I'll hand the call over to Merdad for an update on our pipeline. Merdad?

Thanks, Johanna. I'm pleased to be starting 2023 with all the momentum and 2022 behind us. The positive data readouts for Trodelvy and domvanalimab and the recent approvals for lenacapavir the team is really excited to progress our programs in 2023 and beyond. Starting with Brage [ph] on slide 16 and as I just mentioned, Lenacapavir received its first U.S. FDA approval for people living with multi drug resistant HIV in combination with other anti retrovirals. Marketed as Sunlenca, Lenacapavir is the first and only twice yearly subcutaneous HIV treatment, bringing much needed option for people living with multi-drug resistant HIV, that until now had limited alternatives. Combined with the approval from the European Commission, the FDA approval is an important validation, while we continue to progress our other Lenacapavir based treatment and prevention programs. For HIV treatment, we currently have 10 partner agents for Lenacapavir in various stages of development, including two new integrase inhibitors or INSTI in the pre-IND space. We expect to share data this year from the Phase 1/b proof-of-concept study for Lenacapavir and two broadly neutralizing antibodies or bNAb directed at HIV. And in PrEP, our clinical development of Lenacapavir as a monotherapy for HIV prevention continues to progress with two trials underway, and two additional trials expected to achieve FPI in the second half of 2023. Moving to slide 17, we continue to progress our novel oral nucleoside for COVID-19 GS-5245. Treatments such as Gilead Veklury and vaccinations have improved the outlook for patients with COVID-19. But there's still a significant need for effective and convenient oral treatment options. We've been working with the FDA and other global regulators to launch a clinical development program that could enable global filings. We've initiated a Phase III [ph] Birch trial in high risk patients defined as unvaccinated patients with one or more risk factors, or vaccinated patients with two or more risk factors. The Phase III Oaktree trial will evaluate standard risk patients, which includes people aged 12 and older with no CDC defined risk factors. We expect this trial to enroll its first patients in the U.S. in the first quarter. And we'll share progress when we can just depends in part on the prevalence of COVID-19 year study sites. Moving to oncology on slide 18, and starting with Trodelvy, we continue to build on the momentum of our TOPiCS-02 data. And we announced the European Medicines agency's validation of our marketing authorization application for pre-treated HR-positive/HER2-negative metastatic breast cancer in early January. As Johanna noted, we expect a regulatory decision of our sBLA in the U.S. later this month, and a decision Europe in the latter part of the year. Trodelvy has already changed the standard-of-care for many patients with metastatic TNBC and advanced bladder cancer. And we expect that these regulatory approvals will be an important step forward in bringing this potentially practice changing therapy to certain HR-positive/HER2-negative metastatic breast cancer patients. Moreover, recently presented data demonstrated Trodelvy's PFS and OS benefit was consistent across a range of tumor Trop-2 expression levels. This late breaking post-hoc analysis presented at the San Antonio Breast Cancer Symposium was consistent with Trodelvy's data in metastatic triple-negative breast cancer, where baseline Trop-2 expression was not associated with treatment response. Moving on to slide 19, we were pleased to share data from the fourth interim analysis of the ARC-7 trial with our partner Arcus in December, as presented at the ASCO Plenary session. ARC-7 is a randomized Phase II proof-of-concept study that enrolled 150 patients, the largest dataset in anti-digit studies released today with more than 100 patients across the 2-DOM containing arms. We were pleased to see both DOM containing arms demonstrate clinically meaningful differentiation compared to ZIM monotherapy across all efficacy measures evaluated, clearly establishing that the addition of Domvanalimab improved the clinical responses to anti PD-1 therapy in this population. We were also encouraged by the consistency of the safety data in the DOM containing treatment arms, which showed no unexpected safety signals. This is an on-going trial, and we look forward to sharing updated data at ASCO 2023. While these efficacy and safety data will mature over time, this fourth interim analysis fully supports our joint DOM’s in-clinical development program, and the importance of interrupting the TIGIT pathway. Based on the totality of the data seen today, we're very confident that DOM with an Fc-silent design has the potential to be differentiated compared to other anti-TIGIT molecules in this space. The on-going Phase III trials of DOM added to anti PD-1 treatments in non-small cell lung cancer will provide the opportunity to confirm this activity. We're moving very quickly with our partners in both proof-of-concept studies, as well as late stage trials, including the 4 on-going Phase III trials. Moving to magrolimab, our anti-CD47 therapeutics on Slide 20, we have three on-going pivotal trials, and six proof-of-concept studies across six solid tumor indications. As we shared last month, the independent data monitoring committee met to review data from the first interim analysis from the enhanced study in first line high risk MDS. I'm pleased to share that there were no new safety signals, and the study continues unchanged. As a reminder, based on previous discussions with the FDA, we are now pursuing mature OS data for filing. The study is powered for the final OS analysis and Gilead remains blinded to the data to preserve study integrity. We will update you again in the second half of 2023 after the second interim analysis, noting that these interim analyses are event driven so timing is provisional. Moving on to slide 21, and on behalf of Christi and the Kite team, I'm pleased to share details of another strong quarter of clinical progress in our cell therapy programs. At ASH, Kite had more than 25 data presentations, further demonstrating the transformative impact of cell therapies, including three year follow up data from ZUMA-5 showing that 52% of patients with indolent lymphomas treated with Yescarta continued to respond. Following the compelling ZUMA-12 data on Yescarta in frontline LBCL, shared at ASH in 2021, we expect to achieve FPI in our Phase III ZUMA-23 trial and Frontline high risk LBCL in the first half of the year. We are also progressing our Phase II ZUMA-24 outpatient study in second line LBCL and look forward to sharing interim safety data in the first half of this year. While there's still so much we can explore with the Yescarta and Tecartus, we are also building out the pipeline to ensure the Kite will extend its leadership into new indications and next generation cell therapy technologies. In December, we announced the strategic collaboration with Arcellx for the late-stage product candidate, CART-ddBCMA, which is currently being evaluated for the treatment of multiple myeloma. If approved, together with our industry leading manufacturing capabilities, we believe we can reliably and consistently deliver much needed therapy to patients. Additionally, we announced the pending acquisition of Tmunity Therapeutics, which adds an armored CAR T platform and rapid manufacturing technology to Kite. The Arcellx transaction closed earlier this week and Tmunity is expected to close later this quarter. Both highlight Kite’s continued leadership in cell therapy, and our commitment to building a robust and exciting pipeline in cell therapies. Wrapping up on slide 22, we are sharing the key pipeline milestones that we expect in 2023 which as you can see, spans FPI, data readouts, updates and regulatory approvals across oncology and neurology. This highlights the progress that Gilead has made on its transformation journey with 59 clinical programs that are well diversified across indications in stage. As the clinical pipeline has grown, our focus on execution has intensified, and we look forward to updating you on our programs as we progress through 2023. With that, I'll hand the call over to Andy. Andy?

Thank you, Merdad, and good afternoon, everyone. Gilead closed out the year with a strong fourth quarter, driven by Biktarvy, Veklury and oncology. For the full year, our sales, excluding Veklury, grew 8%, which is by far the strongest full year growth rate Gilead has reported since HCV sales peaked in 2015. Of note, and excluding the impact of the Atripla and Truvada LOEs, HIV grew 8% year-over-year, driven by continued strong performance of Biktarvy, which grew 20% from 2021 to $10.4 billion. Biktarvy continues to demonstrate strong potential for further growth in 2023 and beyond. Oncology full year revenues exceeded $2 billion for the first time and grew 71% from 2021. Moving to our quarterly results starting on Slide 24. The fourth quarter demonstrated another strong performance across our business. Total product sales, excluding Veklury, grew 9% year-over-year despite an approximately $130 million headwind from FX. If we exclude FX in addition to the impact of HIV LOEs, total underlying sales growth for the fourth quarter was 12% compared with the prior year. Moving to Slide 25. Veklury was down as expected, year-over-year although it grew 8% on a sequential basis from the third quarter, highlighting that Veklury will continue to play an important role even as COVID-19 progresses into its endemic phase. Non-GAAP product gross margin was 86.8%, up more than 16 percentage points from last year, primarily due to a $1.25 billion charge related to a legal settlement recorded in COGS in the fourth quarter of 2021. Non-GAAP R&D expenses for the fourth quarter 2022 were $1.5 billion compared to $1.3 billion in the same period in 2021. Higher R&D expenses were driven by timing of clinical investments, mainly in oncology in addition to the impact of inflation on expenses. Fourth quarter acquired IP R&D was $158 million, primarily reflecting the MacroGenics collaboration and the license amendment with Jounce. And lower than prior year due to the $625 million charge related to the exercise of opt-in rights for Arcus assets in the fourth quarter of 2021. Non-GAAP SG&A was $2 billion, up 23% year-over-year, primarily reflecting a charge of $406 million associated with the termination of the Trodelvy collaboration with Everest Medicines. This $406 million charge includes the $280 million that we agreed to pay Everest to acquire the development and commercial rights to Trodelvy in China and other Asian territories in addition to some other termination-related expenses. Excluding this Everest impact, SG&A was down 2% year-over-year. Fourth quarter non-GAAP operating margin was 37%, down sequentially due to the factors referenced earlier, including the $406 million Everest charge and up year-over-year. Excluding the Everest charge, non-GAAP operating margin was 42%. Non-GAAP effective tax rate in the fourth quarter was 16.8%, lower than the prior year, driven by discrete tax charges recorded in the fourth quarter of 2021. Overall, our non-GAAP diluted earnings per share was $1.67 in the fourth quarter compared to $0.69 in the fourth quarter of 2021. Of note, the Everest contract termination impacted non-GAAP diluted EPS by $0.25 a share. This was not reflected in the guidance we shared back in October. Moving to the full year on Slide 26. Total product sales were $27 billion. Excluding Veklury, total product sales were $23.1 billion, up 8% compared to 2021, primarily driven by Biktarvy and oncology. Excluding around $380 million of FX headwinds and the $350 million impact of the Truvada and Atripla LOEs, total product sales, excluding Veklury, were up 11% as compared to 2021. I touched on the main P&L impacts in the overview, but we'll highlight on Slide 27 that our non-GAAP effective tax rate for 2022 was 19.3% and non-GAAP diluted EPS was $7.26 per share compared to $7.18 per share reported in 2021. I'll move now to guidance on Slide 28. We recognize that the macro environment continues to be uncertain. Our initial 2023 guidance assumes an overall stable macro environment and relatively stable FX at current rates. While inflation is expected to moderate, our 2023 guidance reflects a full year of higher expenses experienced in 2022 associated with inflation. With that in mind, we expect total product sales in the range of $26 billion to $26.5 billion. For total product sales, excluding Veklury, we expect sales in the range of $24 billion to $24.5 billion, representing growth of 4% to 6% for our base business year-over-year. And we expect Biktarvy sales of approximately $2 billion. As always, Biktarvy sales will continue to track hospitalization rates and will remain highly variable depending on the frequency and severity of surges. Notably, we have seen a decline in hospitalization rates in recent weeks, and we'll continue to monitor the landscape carefully. As a result and similar to last year, we will update you on our Biktarvy expectations on a quarterly basis. Moving to the rest of the P&L. We expect our non-GAAP product gross margin to be approximately 86%, just slightly below our 2022 results and primarily reflecting the growing contribution from oncology. For non-GAAP operating expenses, we expect R&D to increase by a high single-digit percentage compared to 2022 levels, reflecting our on-going investment in strategic areas of growth and an increase in activity from later-stage trials. As a reminder, we had 8 Phase III trials start in 2022, and we expect to have 23 active Phase III trials by the end of 2023. Looking ahead, we expect R&D growth to moderate although we will step up investments as needed to support promising programs based on clinical data. Acquired IP R&D includes previously announced payments for our SELEX community and milestone payments for existing collaborations. Consistent with our approach in 2022, we will continue to share our expected acquired IP R&D expenses as we announced additional transactions. Finally, we expect SG&A to decrease by a low single-digit percentage compared to 2022. However, this is primarily due to some expenses reported in 2022 that we don't expect to repeat in 2023. If we normalize the 2022 SG&A expense for these items, we expect full year 2023 SG&A expense to increase by a mid-single-digit percentage on a basis of approximately $5.1 billion in 2022. Altogether, we expect our non-GAAP operating income for 2023 to be $11 billion to $11.6 billion. Our non-GAAP effective tax rate is expected to be approximately 20% again this year. And finally, we expect our non-GAAP diluted EPS to be between $6.60 and $7 for the full year and GAAP diluted EPS to be between $5.30 and $5.70 per share. Moving to capital allocation on Slide 29. Our priorities have not changed. In 2022, we returned over $5 billion to shareholders. This included dividend payments and $1.4 billion in share repurchases. Fourth quarter share repurchases were approximately $800 million. For 2023, we have announced today a 2.7% increase in our quarterly cash dividend to $0.75 per share and remain committed to growing our dividend over time in line with earnings growth. You can also expect to see continued judicious investments in our business, both internally and externally through select partnerships and business development transactions. Finally, we will continue to use share repurchases to offset equity dilution as well as additional repurchases on an opportunistic basis. With that, I'll invite the operator to open the call up for questions.

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

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

Hey Tyler, it's Andy. Thanks for the question. We appreciate it. Look, what we've said and obviously, we don't provide longer-term guidance, but I'll reiterate that the -- as you highlighted, the base business is performing very well. We had another good year with Veklury, but we expect, as you heard in our prepared comments that the COVID-19 market will continue to be dynamic. And again, this year, you saw -- if you look at our EPS, the growth of the base business offset the decline in Veklury despite the increase in expenses. Going forward, again, a lot of our shareholders, as you know, focus on non-GAAP EPS, excluding Veklury, based on their assumptions. We expect using kind of that metric for our EPS to grow and for that growth to accelerate over the longer run as our products continue to deliver with additional commercial approvals, expanded indications, new products entering the market, et cetera. So again, I think what you're highlighting is the difficulty of looking through the impact of Veklury. When we look at the base business, we have a lot of confidence in terms of the health of the business and the growth it's going to deliver over time, both on the top line and the bottom line.

Hannah, may we have our next question please?

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

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

Thanks, Geoff, for your question. It's Johanna. I think that we're super excited with Sunlenca approval. Do remember, though, it's really for a very specific patient population for the heavily treatment experienced multi-drug resistant population. And so that's about 1% to 2% of people living without HIV. That's about 5,000 patients or so in the U.S. So just to give you a little bit of a perspective on it. The – that’s one piece of the puzzle. So far, so we just launched. So it's still early days and we're excited about it. And I think physicians' response has been very strong as well. The -- I think they really see the innovation of having something every 6 months coming in and also the promise of what it could mean in future with prevention indication as well as treatment combination. So more to come on that one. I think it's an incredible opportunity for us to gain awareness for Sunlenca. How to use it the reimbursement systems. And as to your point about pre-COVID to COVID, I think that actually, we've really normalized the market. I think we're back on track, when it comes to HIV, both screening, diagnosis, et cetera, and treatment. So we do believe that, that's probably not in play as we go forward in 2023. But again, small revenue, huge unmet medical need, and an incredible opportunity for patients to have something to ensure that they don't proceed to more like Aids disease versus just saying HIV positive.

Hannah, may we have our next question, please?

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

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

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

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

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

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

Hannah, may we have our next question, please?

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

Hey, can you guys hear me?

Yes.

Good afternoon and congrats on all the progress. Maybe one on TIGIT and dompenanumab. The -- just what is it that gives you the confidence that the Fc silent construct is the right approach when I think at least the animal data suggest that this may not be preferred. And then as you think about the upcoming study, ARC-7, could you talk about the frequency of scanter [ph] because this has come up as a point of at least discussion with regards to the comparator trials and the frequency of scans. Thank you.

Sure. This is Merdad again. Excellent question. Thank you for that. We -- in terms of our confidence, I think to your point, look, I think there was a lot of debate a couple of years ago. We shared in that debate, with what the preclinical data was showing. And as you know, the data they were conflicting preclinical data, including some data that suggested maybe an FC-silent may not work. But which is why we ran the studies the way we did and very importantly, why we ran ARC-7. The objective there was really to establish whether an FC-silent now would demonstrate a benefit relative to FC-active molecule. Part of the hypothesis there is what happens in the periphery and whether depleting effector cells with TIGIT could actually be harmful with FC-competent molecule relative to an FC-nonmolecule. And our confidence really comes from our ARC-7 data. I think the ARC-7 data really answered that question. We clearly show a benefit when added on to a PD-1. The PFS data exceed our bar for moving forward. And so we really think that we've answered that question in the clinic as to whether the FC-now matters.

Hannah, let’s move to our next question.

The next question is from Chris Schott with JPMorgan. Please proceed.

Hi, great. Thanks so much. Just a question on the COVID business. I know it's volatile, and I know at the same time, the Street doesn't seem to model much of a tail for Veklury or GS-5245 at all in numbers beyond this year. We've got Pfizer's and others, then talking about more sustainable COVID businesses, I guess, off of 2023 level. So I just missing your thoughts on just how you're thinking about the business longer term? And is this a meaningful franchise for you over time? Or are you really thinking of this continuing to fade down beyond this year? Thank you.

Sure, Chris. It's Johanna. Yes. So definitely, we've changed a little bit. Our position on this one has evolved from 2020 to where we are today, obviously. I think we do truly believe that the Veklury business is much more sustainable than we've ever seen before, let alone as we think about kind of where we're going with COVID-19, including the oral that Merdad can speak to. The one piece that we've seen is -- it's maybe a little bit different than some of the orals that you're referring to is One is Veklury has been part of a commercial model since October of 2020. So we haven't had such big inventory lows at the government level like some others have had. So really, what you see probably 85% to 90% of revenues in 2022 are truly reflecting the demand for Veklury in 2022. And so therefore, coming into 2023, we feel very strongly that Veklury, because it's still the only antiviral indicated at the hospital level at this point in time because of the fact that in many countries around the world, it is the treatment of choice when they decide to treat hospitalized patients. I think there's really an incredible continuing opportunity for us to ensure that Veklury has is accessible to all these patients. And so that's why we think the model is quite sustainable moving forward. I would also just add that our label has broadened over the last year in some. We have a very strong body of evidence, including mortality as well as we have guidelines endorsement with the NIH as well as the WHO. So all of those people all of those pieces together actually make for a strong Veklury color position in 2023, but actually and beyond. And maybe I'll just pass it over to Merdad to talk a little bit to how we're thinking about COVID-19 as a whole with the oral.

Yes. Just 2 seconds. I think you're right to point out the uncertainties that we all have and that we've seen with outpatient COVID. And we have a lot of confidence in the mechanism of 5245 given what our expertise in the molecule itself and how well behaved it is. And we are going to push forward and do our best with both the high-risk and standard risk study and the uncertainties in terms of the pandemic will really determine what happens from here. So we will definitely keep you updated as to how that goes from here on out.

Thank you. The next question is from Brian Abrahams with RBC. Please proceed.

Hey good afternoon. And congrats on the quarter, and thanks for taking my question. Maybe continuing on the COVID theme on 5245, the Oaktree study. Can you talk a little bit more about the assumptions you've made in powering the primary endpoint here for the standard risk patients? And then help us understand how Oaktree and Birch might fit together to support U.S. and ex-U.S. approvals across the 2 populations you're studying? Thanks.

Sure. Very briefly. The -- to your point, one is in the high-risk population, right? So I think that's important. Those are people who have risk factors, whether or not they've been vaccinated and then the standard risk, which is people without risk factors. And -- those are very different populations. The end points are different in terms of what we're looking for and the high risk we're going to be looking for the ability to prevent things like hospitalization. And the standard risk, it would be looking for things like symptom improvement. And I think, again, I'll just reiterate that I think the uncertainties in terms of those factors and importantly, the underlying event rate is real. And so we've made a number of assumptions around what that background rate will be. And we've built into the trials, checkpoints to make sure that our assumptions are correct. And we have the ability to modify our program based on what the underlying event rates are. So that sort of helps mitigate the risks and the uncertainties. So we've gone in fairly eyes open to that.

Thank you. The next question is from Mohit Bansal with Wells Fargo. Please proceed.

Great. Thanks for taking my question and congrats on the progress. Maybe if you could comment on your overall market share in HIV space and how it has been progressing. What I want to understand is that is there a scenario where your entire business growth could be better than the market growth as you gain share at this point? Thank you.

Sure. Hi, Mohit, it's Johanna. I think as we look at HIV as a whole, we're looking at about a 5% year-on-year growth. And of course, that's mostly driven by demand, namely Biktarvy. And so it's probably important to talk about the share there. So our total Gilead share is still in the low 70s, and we've been quite stable at that level. We saw a little bit of the dip when we got the Truvada, Atripla LOEs, and that's the only decline that we've seen there and really held steady, where you see nice growth, of course, is Biktarvy. Our year-on-year growth for Biktarvy is 20% in 50-year post launch. And I think that's the piece of the puzzle that's really driving the overall HIV business. In addition, to what's going on in PrEP with Descovy. To your point about the market growth, we've seen market growth around 2% to 3% year-on-year, both in the U.S. as well as in Europe, and we've assumed that we're kind of assuming that for some years to come. And I do think there's still enormous opportunity for continued growth in that market. And one of the main reasons why is there's still an opportunity for increasing treatment rates so from diagnosis to treatment, but also further penetration in underserved patient populations. And so at this point in time, with United Nations goal at 95,95,95 for testing, treatment and virologic suppression we're only about 70%, 75%. So if we were to get to those goals, you're looking at over 350,000 more patients into the system. So I think you're absolutely right. I think there's a great opportunity for us to continue to grow Biktarvy and our HIV business at Gilead.

Thank you. The next question is from Umer Raffat at Evercore. Please proceed.

Hi guys. I have a question on the model today. I feel like consensus models have a lot of operating leverage in the long-term estimates for Gilead. And don't -- consensus doesn't carry more than low single-digit OpEx growth across SG&A and R&D. So with SG&A growing mid-single digits this year after the onetimers and R&D growing high single digits, I guess, should we assume that given all the collaborations and recent acquisitions that you really do need to be growing R&D meaningfully from current levels? I'm just trying to understand where the OpEx is heading longer term.

Hey Omar, it's Andy. Thanks for the question. maybe a couple of things. First, I'd highlight that as you'd expect, we are mindful of expenses and don't expect R&D or SG&A to grow indefinitely. That said, we're going to continue to invest thoughtfully in the pipeline, and you're already seeing, I'd highlight the tangible benefits of doing that. So that's a really important point. We started on the R&D side. As you know, we started 8 Phase III trials this year. We're going to -- as you heard, start at least another 5 in 2023. So we are in an investment cycle. Over the longer run, and maybe one other thing before I kind of talk about the long-run picture to your question, again, when you benchmark us relative to competitors, as you know, historically, for both SG&A and R&D we underspent. And it's partly why we didn't have the pipeline that would drive the top quartile sustainable growth, that we aspire to, and we think we're on track to achieve today. So we're going to continue to invest. As you've heard and especially in these late Phase III trials that have started, we'll continue to do BD not at the same pace or level that we have over the last 4 or 5 years as we've rebuilt the pipeline. But our percent, our R&D as a percent of revenue this past year was below industry averages, I think, right around 19%. Same thing is true for SG&A as a percent of revenue. And even our guide suggests, I think, reasonable spend levels relative to comps. In the longer run, to your point, so we think about things over a longer cycle, we will not -- we do not expect to grow R&D or SG&A above the rate of earnings growth. And there is a lot of leverage in the model, we expect over the long run. So we're getting to the point where you're starting to see that play through, especially at the top line and then over the coming years, we expect that you'll really see that play through on the bottom line as well. So thanks for the question.

Thank you. The next question is from Olivia Brayer with Cantor Fitzgerald. Please proceed.

Hey good afternoon guys. Thank you for the question. What's the latest thinking with respect to the regulatory path forward for magrolimab? I guess the question really is, could we see survival data from that ENHANCE interim later this year that's actually mature enough to file on? And is there anything beyond OS benefit that FDA has pointed to for a complete submission package? Thank you.

Hi, Olivia, this is Merdad. Yes. I think maybe it's good to step back and just clarify in the sense of -- how we're approaching interim analysis for our studies. So the pivotal macro study is powered for events at the final analysis. And of course, we run interim analyses, I think, as is norm for the industry to evaluate things like safety, but also we spend a little bit of alpha in case there is a dramatic improvement in the primary endpoint and offer ourselves the opportunity to start early to benefit patients. So the OS data continue to mature. The next interim this year dependent on events, of course, is not the final analysis. So it really depends on how big the magnitude of improvement is in OS, whether that leads to a stop in the study or an unblinding in the study. Our expectation is that we go to the final OS analysis. Of course, we always hope an upside surprise at one of the earlier interim analysis. And then in terms of approval, I think we really need to have OS. We initially had hoped that we could get, for example, an accelerated approval with CR rates alone. We think we need to do both now to have both a complete response rate, but primarily be driven -- not primarily be driven but importantly, have OS data as well in order to support a file.

Thank you. The next question is from Simon Baker with Redburn. Please proceed.

Thank you. First on [indiscernible] on the NICE recommendation. Clearly, that's good from a U.K. perspective, but it's the case that NICE recommendations are closely followed by a much larger range of countries. So I just wondered if this does indeed have a spill over benefit beyond the U.K. for Yescarta. How important is this approval in the U.K.?

Hey there Simon, it's Christi. Thank you for the question. So we think it's very important because first of all, it's the number of patients is still very similar at 450, but the process by which patients get approved, obviously should be much smoother and really giving access to -- this recommendation really helps patients get access much more quickly. And so to your point, we do think as you see this approval that this hopefully, will have an influence on other countries, just like we saw with reimbursement as we look at the reimbursement of Yescarta in over 20 countries, it was one at a time. And as certain countries starting to improve. We saw the other countries also do the same. So based on the second-line ZUMA-7 trial as well, that will be our next step, too to continue to provide the data that giving a patient a onetime treatment can really help the health care system and improve patient outcomes. So yes, we're very hopeful that it could have some influence.

Thank you. The next question is from Robyn Karnauskas with Truist. Please proceed.

Good afternoon, and thanks for taking the question. This is Nicole on for Robyn. Are you seeing any safety signals in a sense for NFLSC [Ph] with Trodelvy and pembro? Like are the safety probes comparable to both populations? And if so, would this hamper uptake in the first line?

Hi, Nicole, this is Merdad. We haven't really disclosed anything on the safety. Those studies have really just gotten underway. So I don't think we have anything to share yet. We'll, of course, be following that to see if anything emerges. Your question is exactly the one that we want to make sure we address as we move forward. But I don't -- we don't have enough data at this point to make a comment one way or the other.

Thank you. Our last question will be from Evan Seigerman with BMO. Please proceed.

Hi guys, thanks for taking my question. One for Christi. You're annualizing well above $1 billion for cell therapy products. Can you talk about the recent work you've done to expand manufacturing and how you could think that could support further growth this year and beyond? Thank you.

Sure. So that was our focus and has been our focus is really on the supply side and being able to ensure that we have the capacity to provide for patients. I think that's what you're seeing is our industry-leading manufacturing piece. And if you look at GCFO3 here in California, adding the new site to TCFO-4 in Amsterdam and in TCFO-5 in Maryland, we're really able to leverage that footprint to grow not only in the assets that we have today, but in future pipeline, especially as we look at the partnership we have now with our select to multiple myeloma. So we're very confident about our ability to supply and the capacity that we've built and today and for tomorrow. And really the next focus for us is we've had some really good gains on our margin improvements. But as we look at our operational -- our optimization of our manufacturing footprint. Yes, we need to continue to ensure the capacity, which we feel like we've really done. And now we're able to put a big focus too on the optimization piece, which we've made progress on but we have several levers there to pull as well. So I hope you're hearing from me a big confidence in our ability to deliver for patients from a capacity standpoint.

Thank you. That concludes today's question-and-answer session. I will now turn the call over to the management team for any closing remarks.

Great. This is Dan. I just want to do a couple of things here. First of all, thank you all for joining and your on-going interest and questions for Gilead. As usual, if we didn't get to all of your questions, please reach out to Investor Relations. As you know, we're very happy to answer those on an on-going basis. Now let me just close by emphasizing that Gilead is in a very different place than it was a few years ago, thanks to the work the team has done to transform the company. We're going into 2023 in a very strong position with our current medicines performing well and tremendous growth potential in our neuro therapies as well as those in development. So what you can expect to see next is quarter-on-quarter execution and even faster progress and greater impact in the future. Thank you very much for your time today, and we look forward to speaking to you again soon.

That concludes today's fourth quarter and full year 2022 Gilead Sciences earnings conference call. Thank you for your participation.