Gilead Sciences - Q3 2023

Transcript

Operator (participant)

Hello, everyone, and welcome to the third quarter 2023 Gilead Sciences Earnings Conference Call. My name is Nadia, and I'll be coordinating the call today. If you would like to ask a question, please press Star followed by one on your telephone keypad. I will now hand over to your host, Jacquie Ross, Vice President of Investor Relations, to begin. Jacquie, please go ahead.

Jacquie Ross (VP, Investor Relations)

Thank you, and good afternoon, everyone. Just after market close today, we issued a press release with earnings results for the third quarter of 2023. 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 the call to Q&A, where the team will be joined by Cindy Perettie, the Executive Vice President 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. With that, I'll turn the call over to Dan.

Daniel O'Day (Chairman and CEO)

Thank you, Jacquie, and good afternoon, everyone. I'm pleased to share that Gilead teams have delivered another strong quarter that rounds out two years of continuous growth for our base business. Our track record of commercial execution continued in the third quarter, with our base business up 5% compared to the third quarter of 2022 and up 10% year-over-year for the first nine months of 2023. In the third quarter, our growth was driven by our leading therapies across virology and oncology. Biktarvy had another very strong quarter, up 12% from the same quarter in 2022 and contributing to 9% growth overall in HIV in the first nine months of 2023. Oncology is also driving growth and was up 33% in the third quarter compared to last year.

Revenue is now annualizing at more than $3 billion, with growing adoption of Trodelvy, the only approved Trop-2-directed ADC and our industry-leading cell therapies. This was also another very good quarter for clinical execution as we continued to advance our 60 clinical programs across virology, oncology and inflammation. Some of the highlights for the quarter included the European Commission approval of Trodelvy for pretreated hormone receptor-positive, HER2-negative metastatic breast cancer, allowing us to extend Trodelvy's reach to many more patients globally. The first data for Trodelvy, in combination with pembro, for first-line metastatic non-small cell lung cancer, presented at World Lung. phase II EVOKE-02 trial showed a strong objective response rate in the PD-L1-high cohort, which supports proof of concept for phase III EVOKE-03 trial.

Important new data at ESMO for phase II TROPICS-03 basket trial in our small cell lung cancer and head and neck squamous cell carcinoma cohorts. All of these milestones reinforce our conviction in Trodelvy as our cornerstone oncology asset with pan-tumor potential. Staying with oncology, today, we presented positive data from phase II EDGE-Gastric trial in partnership with Arcus, which further establishes proof of concept for phase III STAR-221 trial in first-line metastatic upper GI cancers. Additionally, we're encouraged by the continued strong data emerging from the ongoing phase I study of CART-ddBCMA in multiple myeloma. Together with our partner, Arcellx, we look forward to providing even more data during next month's ASH conference. The clinical momentum continues in virology.

In HIV treatment, we reviewed promising data from the phase I study of GS-1720, our once-weekly long-acting oral integrase inhibitor to be combined with lenacapavir, phase II ARTISTRY-1 trial, evaluating a once-daily oral lenacapavir and bictegravir combination. We expect to share the data with you at a medical conference in early 2024. In HIV prevention, we completed enrollment ahead of schedule phase III PURPOSE 1 trial, investigating a once every six months lenacapavir subcutaneous injection, and announced plans to initiate phase II PURPOSE 5 trial in 2024 to support access in Europe. In COVID-19, we completed enrollment phase III OAKTREE trial, evaluating obeldesivir in standard risk, non-hospitalized COVID-19 patients. We look forward to providing an update early next year. Veklury remains an important therapeutic option for hospitalized patients with COVID-19.

We recently received approvals from both the FDA and the European Commission to extend use of Veklury in patients with mild to severe hepatic impairment. Looking at our pipeline overall, our aggregate progress in 2023 is such that we have already completed most of the milestone events, as shown on slide 6. Our clinical pipeline now includes 27 programs in phase II and 19 in phase III. We are looking forward to a busy period of updates from many of these studies in 2024, including those evaluating lenacapavir, Trodelvy, and obeldesivir. In summary, it's been another strong quarter of commercial and clinical execution, resulting in important progress for Gilead and the people and communities we aim to serve. With that, I'll hand the call over to Johanna to cover our commercial results. Johanna?

Johanna Mercier (Chief Commercial Officer)

Thanks, Dan, and good afternoon, everyone. I'm pleased to share the details of another strong quarter for Gilead, and would like to thank the teams that have delivered 10% growth in our base business in the first nine months of 2023. Our third quarter results represent the eighth consecutive quarter of year-over-year growth in our base business, illustrating strong commercial execution and revenue growth as our virology and oncology products impact more patient lives. In the third quarter of 2023, total product sales, excluding Veklury, were up 5% to $6.4 billion, as shown on slide 8, with notable growth in our oncology and HIV businesses, partially offset by lower HCV sales.

Total product sales, including Veklury, were $7 billion, with a solid base business performance contributing $305 million of growth, offset, as we expected, by lower Veklury sales compared to the same quarter last year. Moving to HIV on slide 9, the treatment market continued to grow in line with our expectations of 2%-3% annually. And as we've discussed previously, the favorable pricing dynamics in recent quarters have begun to normalize, with HIV sales growth more closely mirroring market and demand growth. This was evident in the third quarter, where HIV sales were up 4% year-over-year to $4.7 billion, driven by higher treatment and prevention demand and higher channel inventory, partially offset by lower average realized price due to a shift in channel mix. Sequentially, sales were up 1%.

Looking to the full year, we continue to expect HIV product sales to grow slightly more than the 5% reported in 2022. Turning to slide 10, third quarter Biktarvy sales were $3.1 billion, up 12% year-over-year, driven by higher demand as well as higher channel inventory. Sequentially, sales were up 4%. Once again, Biktarvy gained market share, up over 2% year-over-year in the U.S., to over 47% share in the third quarter. Thanks to its robust clinical profile, Biktarvy remains the number one prescribed regimen for new starts and number one in treatment switches across most major markets, including the U.S.

Descovy sales in the third quarter were $511 million, up 2% year-over-year, with strong year-over-year growth in demand for Descovy for PrEP, offset by less favorable pricing dynamics to ensure broad access ahead of the potential launch of lenacapavir as early as late 2025. The U.S. PrEP market grew about 15% year-over-year, and Descovy for PrEP continues to maintain more than 40% market share due to its strong clinical profile and despite the availability of other regimens, including generics. Moving to the liver disease portfolio on slide 11, sales were down 10% year-over-year to $706 million, primarily due to the resolution of a rebate claim in HCV recognized in the third quarter of 2022, as well as other pricing dynamics.

From a demand perspective, HCV new starts increased compared to the third quarter of 2022 in both the U.S. and Europe, driven by our continued efforts to link HCV patients to care. Given the curative nature of our treatment, we expect HCV new starts to trend down over time, but are pleased that we are maintaining 50%-60% market shares in the U.S. and Europe, and that our liver portfolio more broadly has stabilized from a revenue perspective. On to slide 12. Veklury sales continue to be highly variable and declined 31% year-over-year in the third quarter to $636 million. On a quarter-over-quarter basis, sales were up 149%, driven by an uptick in hospitalizations during the third quarter. Over the last few weeks, we have seen a slowdown in COVID-related hospitalizations.

Veklury's strong clinical profile continues to be recognized, most recently by the FDA and the European Commission, for use in patients with mild to severe hepatic impairment. While the COVID environment remains ever-changing, Veklury's performance in the third quarter further reinforces its established role as a key part of the standard of care for patients hospitalized with COVID-19. Moving to slide 13, our oncology business achieved another strong quarter, with sales up 33% year-over-year to $769 million, representing an annual run rate that now exceeds $3 billion. With clear momentum and a solid infrastructure in place, in addition to our compelling clinical pipeline, we look forward to providing more patients with potentially new and effective options. Looking at Trodelvy on slide 14, sales were up 58% year-over-year and 9% sequentially to $283 million.

As a reminder, Trodelvy is the only approved Trop-2 directed antibody-drug conjugate, and to date, we have delivered this therapy to more than 20,000 patients, reinforcing the clinically meaningful benefit Trodelvy can provide across multiple tumor types. Trodelvy remains the leading regimen in second-line metastatic triple-negative breast cancer across both the U.S. and Europe. In pretreated HR-positive, HER2-negative metastatic breast cancer, Trodelvy is showing particular strength in the IHC zero setting and as a later-line treatment in the HER2-low setting, consistent with expectations. Altogether, these dynamics reflect the notable work the team has done to raise awareness in both indications, as well as the strength of Trodelvy's clinical profile.

Turning to slide 15, and on behalf of Cindy and the Kite team, cell therapy sales in the third quarter were $486 million, up 22% year-over-year and 4% quarter-over-quarter, reflecting strong demand with particular strength outside the U.S. in the third quarter. Yescarta sales grew 23% year-over-year to $391 million, primarily driven by strong growth ex-U.S. in second- and third-line relapsed or refractory large B-cell lymphoma. Tecartus sales were $96 million, up 18% year-over-year, reflecting increased demand in both the U.S. and Europe for relapsed or refractory mantle cell lymphoma, as well as adult acute lymphoblastic leukemia.

Given the strong clinical data, it's surprising that only about 10% of eligible second-line large B-cell lymphoma patients in the U.S. are treated with a cell therapy, and it is clear that there is still a significant opportunity to drive adoption. As cell therapies are offered and delivered to more and more patients, we are confident that Kite remains well positioned to benefit from this expansion, with its differentiated overall survival data for Yescarta and industry-leading manufacturing capabilities. We understand the importance of delivering these potentially curative medicines as quickly as possible to patients with severe and challenging diseases. To that end, we continue to identify opportunities to bring our therapies to patients faster and are actively working on initiatives to shorten even further our industry-leading 16-day median turnaround time in the U.S.

Wrapping up the third quarter, I'd like to recognize the strong execution of commercial teams and our cross-functional partners across Gilead and Kite. Thanks to their efforts, our therapies are positively impacting more and more people, driven by growing market share and expanding reach as we bring our therapies to new geographies around the world. With that, I'll hand the call over to Merdad for an update on our pipeline.

Merdad Parsey (Chief Medical Officer)

Thank you, Johanna. The clinical highlight of our third quarter was the release of our promising phase II data for Trodelvy in combination with pembrolizumab in first-line metastatic non-small cell lung cancer, highlighting Trodelvy's potential to bring a much-needed treatment alternative for patients. More broadly, we continue to progress our increasingly diverse pipeline of 60 ongoing clinical programs spanning virology, oncology, and inflammation. Starting with our virology programs on Slide 17, we have 10 clinical programs with our long-acting capsid inhibitor, lenacapavir, including two phase III studies underway in PrEP. I'm pleased to share that we have completed enrollment earlier than anticipated for our phase III PURPOSE 1 trial, evaluating lenacapavir for prevention in adolescent girls and young women.

Our phase III PURPOSE 2 trial in cis men and trans women and men and non-binary people continues to enroll well, and we could have an opportunity to share data from one or both PURPOSE trials in late 2024, ahead of schedule. We are targeting our first approval for lenacapavir in prevention in late 2025, potentially making lenacapavir the first six-monthly dosing regimen available for PrEP. Turning to treatment, we continue to make strong progress on evaluating nine candidate partners for lenacapavir. Of the remaining candidates, six are already in phase I or II.

We expect to share updates on at least 4 of these in 2024, including data from our phase I trial of GS-1720, our once-weekly, long-acting oral integrase inhibitor to be combined with lenacapavir, and from our phase II ARTISTRY-1 trial, evaluating a once-daily oral combination of lenacapavir and bictegravir for virologically suppressed, treatment-experienced people living with HIV. We plan to share results from both trials at a conference in early 2024, and we look forward to advancing these programs into the next phase of development. We're also pleased to share that enrollment for our phase II program, evaluating our lenacapavir plus bnAb combination dosed every 6 months, is progressing very well and is another program we expect to update you on next year. Putting this all together, our data continues to support our confidence that lenacapavir has the potential to transform HIV treatment and prevention globally.

Turning to oncology on Slide 18, to date, Trodelvy has been delivered to more than 20,000 patients across 3 approved indications since our launch 3 years ago. Trodelvy remains the first and only marketed Trop-2-directed antibody-drug conjugate to achieve meaningful overall survival benefit in 2 of its indications. With that said, we're seeing both growing real-world evidence and clinical trial data supporting not only the approach we're taking for Trodelvy's clinical development across tumor types, but also Trodelvy's unique ADC construct. In particular, Trodelvy is the only ADC to have a high 7-8 drug-to-antibody ratio that's able to deliver a highly potent SN-38 payload directly into the tumor microenvironment through its hydrolyzable linker. As a result, in our studies to date, Trodelvy has shown a potentially differentiated safety profile with regards to ILD and stomatitis.

We look forward to sharing more emerging Trodelvy data in 2024 as we continue to expand Trodelvy across tumor types and lines of therapy. Our comprehensive clinical development program for Trodelvy consists of more than 30 active or planned clinical trials across eight tumor types. In 2023, we've shared several datasets demonstrating clear signals of activity for Trodelvy across several indications. For example, in the ASCO meeting this past June, we presented data for Trodelvy that demonstrated encouraging preliminary ORR and PFS data in relapsed or refractory endometrial cancer patients in phase II TROPICS-03 basket trial. More recently, at the ESMO meeting, we presented additional early data from TROPICS-03, showing promising ORR in both relapsed or refractory head and neck squamous cell carcinoma and previously treated extensive stage small cell lung cancer.

We reported strong data from EVOCO-2 at World Lung in September, shown on slide 19, establishing clear proof of concept for Trodelvy plus pembro in first-line metastatic non-small cell lung cancer. In the PDL1 high cohort, Trodelvy plus pembro demonstrated an ORR of 69%, including unconfirmed responses. This compares favorably to the historical pembro monotherapy benchmark, with response rates of 45% and 39% in KEYNOTE-024 and KEYNOTE-042, respectively. As a reminder, we are currently enrolling patients with first-line PDL1 high metastatic non-small cell lung cancer in our registrational phase III EVOCO-3 study. Preliminary data from the PDL1 TPS less than 50% cohort has also been encouraging, demonstrating an ORR of 44%, similar to previous trials that evaluated pembro plus chemotherapy.

These results inform our plans to expand into broader first-line non-small cell lung cancer patient populations across all PDL1 expression levels. We're looking forward to sharing further analysis from EVOCO-2 that will highlight the efficacy of Trodelvy and pembro across both squamous and non-squamous histologies in first-line metastatic non-small cell lung cancer patients. Moving to our TIGIT program on slide 20, an initial update of one arm of the phase II EDGE gastric study was presented in an ASCO plenary session earlier today. The study found that the addition of dom and zim to a FOLFOX chemo regimen showed an encouraging 77% six-month PFS and 59% ORR, including unconfirmed responses, in first-line metastatic upper GI cancer. In patients with PDL1 high tumors, the ORR was an impressive 80%, and the six-month PFS was 93%.

We're pleased to see that dom and zim added to the standard of care was generally well-tolerated, with an adverse event profile similar to anti-PD-1 plus FOLFOX. These results increase our confidence in the phase III star-221 trial in a similar first-line gastric-gastroesophageal junction and esophageal adenocarcinoma population and our broader anti-TIGIT program. Although anti-TIGIT will not work in every tumor type, we're excited to see that dom has shown encouraging efficacy and tolerability in the tumor types we have phase III studies, including first-line non-small cell lung cancer and upper GI cancer. Turning to cell therapy on slide 21, we are continuing to work to expand the benefits of cell therapy to even more patients, with 8 ongoing trials in earlier lines, new indications, or new settings.

We also have an extensive early-stage pipeline, where we are exploring allogeneic CAR-Ts, including healthy donor and iPSC-derived cell therapies, as well as natural killer and invariant natural killer T-cell therapies. Beyond therapies, we continue to invest in manufacturing innovation to maintain our position as the world's leading cell therapy manufacturer and drive more rapid treatment for patients. We will continue to explore emerging disease areas in cell therapy, where we have the potential to apply our expertise to the treatment of difficult diseases. This includes multiple myeloma, where we are pleased that phase II iMMagine-1 trial, CAR-T ddBCMA, has resumed enrollment, and we share in Arcellx's confidence in the therapeutic profile of CAR-T ddBCMA to be able to deliver benefit to patients.

To that end, the data unveiled in last week's abstract release of the upcoming American Society of Hematology meeting further reinforced CAR-T ddBCMA's robust efficacy and safety profile, where at 22 months follow-up in the ongoing phase I trial, two-thirds of patients continued to respond, and median survival has not yet been reached. We look forward to additional data and even longer median follow-up next month. In the meantime, we are further strengthening the body of clinical evidence highlighting the long-term durability and survival benefits of both Yescarta and Tecartus at the ASH meeting in December. Finally, and before I hand over to Andy, the team's progress on key 2023 clinical milestones is shown on slide 22. As is expected with a diverse and large clinical portfolio, not all our programs will benefit patients the way we hope they will.

The ENHANCE and ENHANCE-2 programs evaluating magrolimab have both been discontinued based on futility analyses. The ENHANCE-3 study remains under partial clinical hold in frontline unfit AML, and we continue to evaluate the progress of this and phase II solid tumor trials for magrolimab. With regards to some of the remaining milestones for 2023, as referenced previously, we look forward to sharing data from ARTISTRY-1 at a medical conference in 2024. For our HIV prevention studies, we continue to expect to have our first patient in for the PURPOSE 3 and PURPOSE 4 clinical trials by the end of this year. Additionally, we remain on track to initiate phase II palicona trial, evaluating our potential first-in-class TYK2 inhibitor for ulcerative colitis later this year. Our TYK2 inhibitor represents one of our many oral agents for inflammation.

Looking beyond 2023, we will share our target 2024 milestones in due course, but it's already clear that it will be a rich year for data updates for Gilead, including potential updates or regulatory filings for obeldesivir, lenacapavir, Trodelvy, and CAR-T ddBCMA. With that, I'll hand the call over to Andy. Andy?

Andrew Dickinson (CFO)

Thank you, Merdad, and good afternoon, everyone. We had another solid quarter, as shown on slide 24, with total product sales, excluding Veklury, up 5% year-over-year, driven by growth across oncology and HIV, partially offset by lower HCV sales. Total product sales were $7 billion, flat year-over-year, with lower Veklury sales offsetting more than $300 million of growth in our base business. Our non-GAAP results are shown on slide 25. Product gross margin was 86%, down 85 basis points from last year. R&D was $1.5 billion, up 24% year-over-year, reflecting ongoing clinical trial activities.

Third quarter R&D expenses also reflected some sizable wind down costs related to the discontinuation of two phase III magrolimab ENHANCE studies and faster than anticipated enrollment in our phase III PURPOSE 1 and OAKTREE studies, both of which have recently completed enrollment and could accelerate timelines for data readouts in due course. Acquired IP R&D was $91 million, reflecting the Tentarix collaboration announced in August, in addition to other payments associated with ongoing partnerships. SG&A was $1.3 billion, up 7% year-over-year, primarily driven by increased commercial investments, namely in oncology. Moving to tax. Our effective tax rate in the third quarter was 7%, primarily reflecting a decrease in tax reserves as a result of reaching an agreement with a tax authority on certain tax positions. Excluding this settlement, our non-GAAP effective tax rate would have been approximately 16%.

Our non-GAAP diluted earnings per share were $2.29, compared to $1.90 for the same period last year. This was primarily driven by growth in our base business, lower tax and lower acquired IP R&D expenses compared to the third quarter of 2022, partially offset by lower Veklury sales and higher R&D and commercial investments. Moving to slide 26. Year-to-date base business revenue has grown 10% year-over-year, highlighting strong performance across virology and oncology. From an OpEx perspective, the investment we have made this year in R&D is notable. With a robust and diverse clinical pipeline, and with our commercial sales and marketing organization scaled to meet growing demand for our on-market oncology portfolio, we continue to expect a moderation of expense growth in 2024 and beyond. Moving to slide 27.

We are updating many of our guidance ranges to reflect our year-to-date performance and our expectations for the rest of the year. Total product sales is now expected to be in the range of $26.7 billion-$26.9 billion, up from $26.3 billion-$26.7 billion previously. We are increasing total product sales, excluding Veklury, at the midpoint. We now expect the range to be between $24.8 billoni-$25 billion, up from $24.6 billion-$25 billion previously. This range represents growth of 7%-8% for our base business year-over-year, and an increase of $650 million at the midpoint from the initial guidance we issued in February.

On Veklury, based on our results year to date, we now expect full year Veklury sales of approximately $1.9 billion. As always, this remains highly variable and correlated with COVID-related hospitalizations. Moving to the rest of the P&L, we continue to expect non-GAAP gross margin to be approximately 86%. On R&D, reflecting the accelerated enrollments and magrolimab discontinuation expenses, our full-year non-GAAP R&D expense is now expected to grow approximately 15% in 2023 compared to 2022. Excluding these items, our full-year R&D expense is consistent with our prior guidance in the low double digits. Reflecting the Tentarix collaboration closed in the third quarter, as well as previously committed acquired IP R&D amounts and known milestone payments from existing collaborations, we now expect non-GAAP acquired IP R&D of approximately $1 billion in 2023.

Similar to prior quarters, we will update expected acquired IP R&D expenses if they are incurred during the fourth quarter. We continue to expect non-GAAP SG&A expenses to increase by a high single-digit percentage compared to 2022. As a reminder, this includes the one-time legal settlement accrual of $525 million in the second quarter. Excluding this, we continue to expect non-GAAP SG&A expense for 2023 to be down a low single-digit percentage compared to 2022. Non-GAAP operating income is expected to be $10.5 billion-$10.8 billion, as compared to $10.4 billion-$10.9 billion previously, driven by higher R&D expenses, offset by higher product sales. Given certain one-time tax benefits in 2023, we now expect our non-GAAP effective tax rate to be approximately 16% for the full year.

Altogether, we now expect our non-GAAP diluted EPS to be between $6.65-$6.85 per share, as compared to $6.45 and $6.80 per share previously. As shown on slide 28, the chart highlights the continued strength of our business, with higher total product sales guidance flowing into the bottom line, which, together with a lower expected tax rate, more than offsets the higher R&D expenses in the third quarter. On a GAAP basis, our diluted EPS is expected to be in the range of $4.55-$4.75 per share. Moving to slide 29, our capital allocation priorities remain focused and unchanged.

In the third quarter, we returned $1.3 billion to shareholders through our dividend and repurchase of shares, totaling $3.7 billion year to date. In the third quarter, we repaid $2.25 billion of senior notes and issued $2 billion in senior notes, maturing in 2033 and 2053. Overall, the third quarter was another solid quarter of commercial and clinical execution in an extremely strong 2023 for Gilead so far. Our planning for 2024 is well underway, and we've taken steps in the third quarter to continue to evolve our business model and expense structure to set us up for strong execution next year. 2023 has been a year of considerable investment, notably in R&D, and we are excited to finally be at the point where many of our key programs will start reading out data.

With that in mind, we are preparing for a catalyst-rich 2024, and we look forward to sharing more early next year. With that, I'll invite the operator to open the Q&A.

Operator (participant)

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to retract your question, please press star followed by two. When preparing to ask your question, please ensure your phone isn't muted locally. We ask you please limit yourself to one question. Our first question today goes to Geoff Meacham of Bank of America. Geoff, please, your line is open.

Geoff Meacham (Managing Director, Equity Research, Biotechnology & Pharmaceuticals)

Okay, great. Hi, everyone, thanks for the question. I guess this is for maybe Johanna or for Merdad. I just on lenacapavir, you know, your competitor highlighted some of the derm tox, and I wanted to get your perspective on what you've seen in clinical studies, you know, really as well as the early commercial experience. I wasn't sure if you guys view that as a non-issue or something to navigate as you develop lenacapavir for PrEP or various doublets and HIV treatment. Thank you.

Merdad Parsey (Chief Medical Officer)

Sure. Hey, Jeff, this is Merdad. Thanks for the question. I would say that our DDI profile has been pretty well characterized and is in our label, and laid out, as you noted, lenacapavir is metabolized by CYP3A and, like many other drugs in the class, and we've—you know, that's been available on label for quite some time. We don't anticipate any changes to our programs based on that. There are no adaptations that we're making in our clinical development program based on that.

As you know, we're well on our way in our PURPOSE 1 and 2 lenacapavir PrEP studies and have the approval in highly treatment-experienced people and have not made any modifications based on any DDI concerns in those trials. I'd encourage folks to take a look at the label. You can see what's laid out fairly clearly there.

Johanna Mercier (Chief Commercial Officer)

Yeah, and maybe just to add to what Merdad said, so we launched Sunlenca, so lenacapavir for heavily treatment-experienced earlier this year. As per Merdad's comments, the label has no contraindication specific to what you were referring to, to opioids or ED drugs. And the launch thus far is well underway, and access is increasing every day across the U.S., but also other markets, including Japan and Europe. And we're excited to have an option for these patients that unfortunately have really no other option at this point in time. So very small market opportunity today, with the potential for lenacapavir for PrEP as early as late 2025. So we're very excited as we continue our plans for that.

Jacquie Ross (VP, Investor Relations)

Nadia, may we have our next question, please?

Operator (participant)

Our next question goes to Michael Yee of Jefferies. Michael, please your headline is open.

Michael Yee (Managing Director and Senior Biotechnology Analyst)

Thanks, great, appreciate the question. Maybe for Merdad, coming away from ESMO and some of the recent conferences, obviously a ton of Trop-2 data, and there's a lot of talk around the benefit, particularly in lung for non-squamous versus squamous, and some of your competitors have modified their studies to be more focused on non-squamous. Can you maybe just talk about how you see the benefits here in the different populations and whether you would consider emphasizing or modifying to be a non-squamous as well to improve probability of success? Thank you.

Merdad Parsey (Chief Medical Officer)

Thanks, Michael, for the question. Yeah, look, we had a really interesting ESMO, I think, for all concerned. And I think something that we've been saying for quite some time is that not all Trop-2 ADCs are equivalent, right? It's really important to note that there are differences between Trodelvy and the other Trop-2 ADCs in all three components. The affinity of the antibody is two orders of magnitude better. We have a different linker, and we have a different payload. That has played out in many ways along the safety spectrum, where we have different adverse event profiles of the two drugs that have clearly emerged. And it's possible now that we're starting to see divergence on the efficacy side as well.

Recall that we have shared our EVOCO-2 data, which comprised both squamous and non-squamous patients. We have enrolled both squamous and non-squamous patients in our trials, and as one would expect, we do stratify those patients in our in the studies and will continue to do so. But we're very confident in our approach and with what we've seen so far and really look forward to being able to share more data from EVOCO-1 next year.

Jacquie Ross (VP, Investor Relations)

Nadia, next question, please.

Operator (participant)

Our next question goes to Daina Graybosch of Leerink Partners. Dana, please go ahead. Your line is open.

Daina Graybosch (Analyst, Biotechnology)

Thank you. A question about Kite. I wonder if you can talk through the specific barriers that are limiting uptake of CAR T in the second-line large B-cell lymphoma indication, and what do you think will be required to upshift the earlier line demand for cell therapy in large B-cell lymphoma and maybe even in multiple myeloma as well?

Cindy Perettie (EVP, Kite)

Thank you very much for the question, Daina. I think some of the specific barriers that we're observing are more in the U.S., so I might first talk about what we're observing in Europe, where we have socialized medicine, we're seeing uptake as soon as we are granted access and reimbursement, and it goes very quickly into the system because it's a non-fragmented healthcare system. In the U.S., things look a little bit different given the fragmentation of the healthcare system. So the barriers that we're observing in the U.S. are really our ability to treat patients where they are, so moving into community oncology. Today, 80% of oncology patients are seen in the community.

Most of our academic or most of our authorized treatment centers exist in large academic hospitals, and so what we're doing for the future and what we think is going to be very important, is that we're able to have authorized treatment centers in the community closer to patients. So that's one important piece, and we continue to open up new treatment centers in the United States. In fact, this year, we should end with somewhere around 140 treatment centers in the U.S., and that will continue to grow in 2024. I think the second piece for barriers is converting stem cell transplant. So physicians who are transplanting patients, they will have a better outcome via the data if they have CAR T.

And so we're working with transplanters on education and really making sure those patients have access to CAR T in the earlier lines. I think those are two of the larger barriers that we're observing today. And the last piece I would say is the excitement with multiple myeloma therapies coming forward. You can imagine the ATCs now are seeing both lymphoma patients as well as multiple myeloma patients, and that's causing a crunch within those authorized treatment centers, and that's why it's important in the academic medical centers that we're able to expand the number of beds, and secondly, open new authorized treatment centers that can serve both lymphoma and multiple myeloma.

Jacquie Ross (VP, Investor Relations)

Nadia, may we have our next question, please?

Operator (participant)

Our next question goes to Chris Schott of J.P. Morgan. Chris, please, go ahead. Your line is open.

Chris Schott (Managing Director and Senior Biotechnology Analyst)

Great. Thanks so much for the question. Can you elaborate a little bit more on HIV channel mix dynamics this quarter and how you're thinking about that for Q4 and beyond? I know channel's been a bit of a tailwind over the past year or two. Seems like we're now maybe starting to see some headwinds, at least sequentially, and I just was wondering how you think about that progressing from here. Thanks so much.

Johanna Mercier (Chief Commercial Officer)

Sure, Chris. Thanks for the question. So you're right, right. As expected, we've seen some of those favorable pricing dynamics that we've seen in the last couple of quarters, including in 2022, due to the channel mix kind of begin to normalize, and you should expect to see kind of the same play from Q3 into Q4. One of the reasons for that had to do with some of the channel, specifically around the channel mix, to use what you referenced, having to do with some of our government channels being less utilized, where we have higher rebates, and therefore we had pricing variability. We believe a lot of that had to do with stabilization post-COVID around employment rates, inflation, et cetera.

So we had a benefit that we saw over that, probably, I would say, 6, you know, 4-6 quarters or so. And as we kind of shared with you in Q2, we are seeing that normalize out for the second half of this year, and I think you should expect that not only for the next quarter, but then, you know, as we go into 2024. The... And therefore, because of all that, we believe that our HIV sales growth is closely mirroring now more of the market and the demand growth, where we're seeing real strength.

Both from a market standpoint in treatment and prevention, we're seeing about 2-3 points growth in the market when you look at retail and non-retail market, and then, of course, 15% growth in the prep market. And then from a demand standpoint, I think obviously with Biktarvy growing at 12 points year-on-year, and Descovy continuing to hold on to a very strong share, over 40% or so in a competitive market with generics and of course, new formulations. So more to come as we go into Q4, but hopefully that gives you a better picture of some of the mix of channels.

Jacquie Ross (VP, Investor Relations)

Thank you. May we have our next caller, please?

Operator (participant)

Our next question goes to Tim Anderson of Wolfe Research. Tim, please, your line is open.

Speaker 17

Hi, thanks for taking our question. This is, Adam on for Tim Anderson at Wolfe Research. Also on Trop-2, just in light of competitor data, can you provide some more color on just latest thoughts on the competitive dynamics within the class? For example, if AstraZeneca gets a label for HR-positive breast cancer in the second-line, and Trodelvy only has a label for the third-line, won't that displace Trodelvy? Thanks.

Johanna Mercier (Chief Commercial Officer)

You want me to start?

Merdad Parsey (Chief Medical Officer)

Yes.

Johanna Mercier (Chief Commercial Officer)

Yeah, good question, Adam. So I'm assuming you're referring to some of the data we saw at ESMO with Dato-DXd. We don't believe there is a material impact for now anyway, or even in the future for Trodelvy. And the reason for that really has to do with the data itself and the lines of therapy, to your point. I think we've proven very clearly with Trodelvy in second-line TNBC and beyond around the overall survival data that we've shown, and then, of course, showing OS again in HR-positive, HER2-negative, although in later lines.

I think what we're seeing today in the marketplace is not only are we the leaders in TNBC, we're also leading from an IHC zero population, and then, of course, looking at sequencing of ADCs post in HER2, as expected in the HR-positive, HER2-negative population. So quite pleased with our positioning, and we don't believe the data that we've seen thus far is going to have the direct impact there.

Merdad Parsey (Chief Medical Officer)

Yeah, I would just add that we continue to expand our programs and continue to want to generate additional data for Trodelvy. So, we're very comfortable with where we are, and I think our ability to interact with our caregivers and patients now, having been on the market for quite some time, is really helping us, you know, make sure that we get Trodelvy to as many patients who could benefit from it as possible.

Jacquie Ross (VP, Investor Relations)

Nadia, may we have our next question, please?

Operator (participant)

Of course. Our next question goes to Salveen Richter of Goldman Sachs. Salveen, please, your line is open.

Salveen Richter (Biotechnology Analyst)

Good afternoon, thanks for taking my question. Just a question here on the pipeline, just given two data releases that came out. So on the TIGIT gastric data that was presented today, how do we think of, or how do you think about the terms, have the opportunity, the competitiveness versus standard of care combos and next steps? And then with regard to the multiple myeloma for Arcellx that was presented, it looks to be tracking a Carvykti-like profile in relapsed refractory multiple myeloma. Could you just walk us through next steps, path to market, competitive positioning here? Thank you.

Merdad Parsey (Chief Medical Officer)

Sure. Maybe I'll start with TIGIT, and I'll hand it off to Cindy for the multiple myeloma discussion. Yeah, I think, look, we find the data that we presented today at the ASCO plenary to really be promising for continued momentum for TIGIT. The data from an ORR standpoint, and I think importantly, the landmark PFS analysis, are very promising. It's early data, it's single-arm data, and I think those are all caveats that are appropriate when looking at these. But when you think about the context around what the standard of care PFS and OS are, we think there's certainly promising signals that we could do better than that.

So you know, obviously, what we need to do next is allow these data to mature in ARC 220, in ARC 21. And then, of course, we have the 221 study that is our phase III study, where we will be comparing to standard of care in a randomized phase III trial. We think the data shown today really will help us with momentum in accruing that trial and hopefully demonstrating the promise of TIGIT added on to standard of care, a standard of care-like regimen with Zim and FOLFOX. We were excited about that phase III outcome, and it really gives us the opportunity to be, you know, we think ahead on that indication compared to the competition in TIGIT. And Cindy, do you want to-

Cindy Perettie (EVP, Kite)

Yeah, happy to. Thank you. So it is—this is early days, obviously, for the ddBCMA molecule. We have 38 patients worth of data. If I compare it to Carvykti, it's—the population looks more like the LEGEND-2 population. We have 34% extramedullary disease, which is a high-risk prognosis patient. And if you look at the LEGEND-2 data, they had 30%. Our overall response rate to date in those 38 patients at 22 months is 100%, and in the LEGEND-2 data is 88% at 25 months. So I do think there is a potential to differentiate on efficacy. We're seeing a differentiation as it relates to the safety profile around the Parkinson's syndrome. We are not observing that in any of our patients to date.

Obviously, we're going to continue to watch that as we enroll the Imagine 1 study and move into our next studies as well.

Multiple myeloma is a large market. There is enough room in multiple myeloma to have multiple competitors, but we also feel like we will have a differentiated molecule with Arcellx. So we're looking forward to generating more data and talking to folks about it at ASH.

Jacquie Ross (VP, Investor Relations)

Thank you. Nadia, we're ready for our next question.

Operator (participant)

Our next question goes to Tyler Van Buren of TD Cowen. Tyler, please go ahead. Your line is open.

Tyler Van Buren (Managing Director and Senior Equity Research Analyst)

Hey, guys. Thanks for the presentation. I have another question, actually, on the myeloma program. So assuming that Arcellx's CAR-T ddBCMA data continue to look great at ASH, and the Imagine One trial does later next year and leads to approval, how prepared have you guys gotten on the manufacturing front in the past year? And do you expect the launch to have a similar trajectory to Yescarta in terms of supply or be significantly better?

Cindy Perettie (EVP, Kite)

There's a number of things that we have learned over the course of the years with Yescarta and around manufacturing, all of which we're applying that knowledge to the manufacturing of the ddBCMA CAR T. So we plan to launch that out of our facilities at Kite and expect to have a strong launch. Again, we will be applying the Yescarta learnings, so our goal is to be significantly better than we were at the launch of Yescarta.

Jacquie Ross (VP, Investor Relations)

Thank you. Nadia, we're ready for our next question.

Operator (participant)

Thank you. Our next question goes to Brian Abrahams of RBC Capital Markets. Brian, please go ahead, your line is open.

Brian Abrahams (Managing Director, Biotechnology Equity Research)

Hi there. Thanks for taking my question. It seems like the long-acting HIV combos are moving ahead really well. I was wondering if you could talk a little bit more about the strategic role that the lenacapavir, bictegravir, daily oral, or the weekly GS-1720-based combo could play in the HIV competitive landscape. Do you think these could move beyond treatment-experienced patients on complex regimens into the earlier lines? Thanks.

Merdad Parsey (Chief Medical Officer)

Sure. Maybe, Johanna, do you want to talk about-

Johanna Mercier (Chief Commercial Officer)

Yes.

Merdad Parsey (Chief Medical Officer)

The weekly, and I'll do the weekly?

Johanna Mercier (Chief Commercial Officer)

The weeklies?

Merdad Parsey (Chief Medical Officer)

Mm-hmm.

Johanna Mercier (Chief Commercial Officer)

Sure. Thanks for the question, Brian. I think the way we're looking at lenacapavir, bictegravir in the virologically suppressed really has to do with, we've set the standard of care with Biktarvy, and the opportunity now is to ensure that if for some reason there was a reason to switch Biktarvy, from a tolerability profile or anything else, that they have an option to go to that has, a really interesting combination, right? When you think about a capsid inhibitor as well as an integrase inhibitor. So for us, it's really about the optionality for patients and making sure that, this could offer something a little bit different in the daily oral market. And, and I do think that this will also be a longer-term strategy for us as we think about beyond Biktarvy's, LOE in 2033.

So I would go there. And on the weekly, just to start, and then I'll kick it over to Merdad to share with you our plans there. On the weekly oral, it's clear from the patient research that we've done in treatment that we really do see benefit not only in the daily oral market, but also in the oral weekly, or even potentially even a little bit longer, as we think about what patients are asking for today.

So as much as we're very interested in the long-acting that are every three months or every six months, we are also making sure that we meet the needs of patients and their requests as they're looking at, for some really don't like any injectables or subQ, and really looking at that weekly oral as potentially extending a little bit the time they don't think about the fact that they have HIV.

Merdad Parsey (Chief Medical Officer)

Yeah, just minor things to add. I would say, you know, we have been focusing our development on what people living with HIV and people who are looking for PrEP options have told us that they're interested in, and that's longer-acting oral options and injectable options that are every 3 months, every 6 months. And that's what we've been focusing our development program on, and we want to make sure that we provide that optionality to different folks. The other thing about the bictegravir to remember is, remember that len is a new class of antiretroviral, and that provides caregivers the option to leverage that new class for the appropriate people living with HIV.

So, you know, our goal as the leader in HIV is to continue to provide as many of the relevant options to people living with HIV and people looking for prevention options as we think are going to be reasonable and valuable. And remember that we think the weekly oral is important enough that we have two programs. So you mentioned 1720. Remember, we also have the program with lenacapavir with islatravir and lenacapavir. So we're very happy with the progress we've made, as you noted and really on track to provide better options.

Jacquie Ross (VP, Investor Relations)

Nadia, may we have our next question, please?

Operator (participant)

Our next question goes to Terence Flynn of Morgan Stanley. Terence, please go ahead. Your line is open.

Terence Flynn (Managing Director, Equity Research Pharma & Biotech Analyst)

Thanks for taking the question. I was just wondering if you can provide any preliminary thoughts on 2024, spend or margins, Andy. Thanks so much.

Andrew Dickinson (CFO)

Hey, Terence. Thanks for the question. Happy to, happy to take that. Obviously, in late January or early February, as we, as we customarily do, we'll provide very specific guidance in 2024. What we've said, and I would continue to reiterate, is that as you've seen our expenses increase over the last couple of years as our portfolio has increased-... And again, from our perspective, a very necessary and appropriate increase as we, as we developed a, what we feel is one of the best and broadest pipelines in the industry, both in virology, oncology, across cell therapy. And at Gilead, we're finally at the level where we're spending on par with our peers, especially on the R&D side. You saw that in, in the third quarter.

So, as you think about expenses going forward, we expect that you will see more moderate growth in expenses over time. We're doing a lot to manage our expenses, as you heard on the last couple of quarters. Maybe the best evidence of that, Terence, is if you look at our first quarter R&D expenses, our third quarter R&D expenses are essentially flat. So you saw a little bit of a step down from the first quarter in the second quarter, in the third quarter we're flat. So you already see that we're kind of, as we said, we're approaching kind of the peak spend, recognizing that we have 60 different clinical programs. If I remember correctly, we have 27 programs in phase II, 19 programs in phase III. That is very different than the Gilead of prior years that you remember.

And it's part of what makes it us so excited about where we're going as a company. And the final thing I'd say is, you're already seeing the benefits of those investments in the commercial performance that we've talked about for the last two years. So we expect that you'll continue to see those benefits in our commercial performance across the entire business, and you're going to see a moderation of expense growth. And again, we'll provide much more specific detail early, early next year, and look forward to talking about this further. Thank you.

Jacquie Ross (VP, Investor Relations)

Nadia, our next caller, please.

Operator (participant)

Our next question goes to Evan Seigerman of BMO Capital Markets. Evan, please. Your line is open.

Evan Seigerman (Managing Director, Senior Biotechnology & Pharmaceutical Analyst)

Hi, guys. Thank you so much for taking my question. I want one on kind of capital allocation as a function of competitiveness in your respective markets. For example, you have a great moat in virology. How do you think about investment there, say, versus oncology, where it's a more competitive marketplace and where we're seeing incremental kind of benefit, you know, over time? Give me some thoughts there. Thank you so much.

Andrew Dickinson (CFO)

Hey, Evan, it's Andy. I'll start, and others may want to jump in as well. Look, I mean, what we've said historically, and I'd reiterate, is we're always going to follow the science. So we are completely committed to virology, not just HIV, but virology broadly. You see that, for instance, with our progress with obeldesivir as well as other programs. We've also said in virology that a lot of what happens in virology happens in our internal research, and that there are less opportunities externally to invest in. That doesn't mean that we won't continue to look for them. And we're going to continue to invest in oncology. We have a much larger oncology organization today. We've increased our internal research and development, and we're still very focused as the third pillar on inflammation.

So I would remind people that we have a number of early inflammation programs, including a number in phase II, that we're excited about. Merdad highlighted the TYK2 program in his remarks earlier. But that's just one of the programs that we expect to build out over time. So we'll follow the science. We're going to, we're going to apply capital to each of those areas. If you look back, our capital investment has risen and fallen over time in each of those areas as we've looked at different opportunities. And of course, we're going to continue to invest in cell therapy as part of oncology and more broadly. I should have highlighted that earlier.

You know, the short summary is we'll follow the science, but all of the areas will receive additional capital over time. Merdad, do you want to add anything to that?

Merdad Parsey (Chief Medical Officer)

I would just add that our goal has been to diversify the portfolio. We remain committed and think one of our key competitive advantages is our track record and strength in virology. I would agree with you, Evan, that that's critical to our continued success and growth. We also believe that having more diversity in our portfolio, whether it's oncology or inflammation, is going to be really important to our long-term future. So, our capital allocation will happen on where the best data are, and we make those trade-offs virtually every day.

Jacquie Ross (VP, Investor Relations)

Nadia, I think we have time for one last question, please.

Operator (participant)

Our final question goes to Joe Catanzaro of Piper Sandler. Joe, please go ahead, your line is open.

Joseph Catanzaro (Director, Senior Biotechnology Analyst)

Hey, everybody, appreciate you taking my question. I actually had one on Trodelvy within bladder cancer, and appreciate this is a smaller proportion of Trodelvy sales. But just wanted to ask about the potential impact of Padcev's EV-302 data and it moving into the front line, and what you could potentially see there, with Trodelvy, both maybe in the near term and longer term. Thanks.

Cindy Perettie (EVP, Kite)

So maybe I'll start and then throw it over to Merdad first from a clinical standpoint, what we're thinking. From a commercial standpoint, with the data that we saw, I think the standard of care is going to change in first line, clearly with that data. And we see that as a potential opportunity to actually move up Trodelvy in lines of therapy. So right now in the U.S., we do have accelerated approval in the U.S., and we're seeing about 15-16% share in bladder cancer, but later lines of therapy, so third line plus. I think with the opportunity to have Padcev kind of move up in the first line setting with pembro, I think it'll be interesting to see how Trodelvy kind of moves up as we've seen a lot of sequencing from ADCs here as well.

So that's in the here and now, and maybe, Merdad, you want to comment on the clinical development?

Merdad Parsey (Chief Medical Officer)

Yeah. Yeah, look, I think it's great news for patients with the data that's come out, and we think it does change the paradigm for bladder cancer. I think the other thing I would add to what Johanna said is that we're looking with interest. We don't have data on sequencing, but we're certainly hearing about sequencing. And there were data that were shown at ESMO around combining Padcev and Trodelvy, where the tolerability profile looked good and the responses looked good. Small study, but we think there continues to be opportunity there for us, and having this clarity will help us design where we're going to go from here after our confirmatory trial in second line completes.

Operator (participant)

Thank you. That's all the questions that we have time for today. I'll now hand back to Dan for any closing comments.

Daniel O'Day (Chairman and CEO)

Well, just wanna thank the team here and all of you for joining, and just maybe end with this, with this reflection, which is, at Gilead, I don't think we could be more excited about, as we wrap up 2023 and head into 2024, about the evolution of our, of our commercial and clinical execution. In particular, 2024 will be a year that's full of key clinical catalysts across our portfolio, and that's really been a culmination over the past several years of investing in a robust and diversified portfolio, many of which phase II studies that phase III studies that we'll be reading out, over the course of not only next year, but the years to come.

We'll provide more details on all of our 2024 clinical milestones early next year, but in the meantime, maybe just a couple to highlight in a busy year. Obviously, on Trodelvy, where the clinical data increasingly highlight that all Trop-2 ADCs are not alike, we'll be rolling out data across a variety of disease states in oncology, and we're excited to share data on lung cancer in the first half of 2024. And then maybe to highlight one other one, lenacapavir will have a rich year of data on the treatment combination candidates, and we continue to target being first to market with our six-month long-acting PrEP, starting with readouts next year on our phase III trials and a commercial launch as early as late 2025.

With that, as always, feel free to reach out to the IR team here at Gilead if you have any questions or feedback for our team, and we'll look forward to updating you again early in the new year. Thank you for joining.

Operator (participant)

Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.