Gilead Sciences Inc (GILD) Q2 2021 Earnings Call Transcript

Gilead Sciences Inc (NASDAQ: GILD) Q2 2021 earnings call dated Jul. 29, 2021.

Corporate Participants:

Jacquie Ross — Investor Relations

Daniel O’Day — Chairman And Chief Executive Officer

Johanna Mercier — Chief Commercial Officer

Merdad V. Parsey — Chief Medical Officer

Andrew Dickinson — Chief Financial Officer

Analysts:

Gavin Scott — JPMorgan — Analyst

Terence Flynn — Goldman Sachs — Analyst

Brian Abrahams — RBC Capital Markets — Analyst

Geoffrey Porges — SVB Leerink — Analyst

Geoff Meacham — Bank of America — Analyst

Umer Raffat — Evercore — Analyst

Michael Yee — Jefferies — Analyst

Alethia Young — Cantor — Analyst

Ronny Gal — Bernstein — Analyst

Presentation:

Operator

Good day, and thank you for standing by. Welcome to the Gilead Sciences Second Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Jacquie Ross, Vice President, Investor Relations. Please go ahead.

Jacquie Ross — Investor Relations

Thank you, Joelle, and good afternoon, everyone. Just after market close today, we issued a press release with earnings results for the second quarter of 2021. 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 the impact of the COVID-19 pandemic on Gilead’s business; financial condition and results of operations; plans and expectations with respect to products; product candidates; corporate strategy; financial projections and the use of capital; and 2021 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.

I will now turn the call over to Dan.

Daniel O’Day — Chairman And Chief Executive Officer

Thank you, Jacquie, and good afternoon, everyone. Thanks for taking the time to join us here today. We’re pleased to provide you with an update on our second quarter, where we delivered solid financial performance and significant progress on our increasingly diverse pipeline. 2021 is an important year for our pipeline, and we’re very encouraged by the milestones we’ve achieved for therapies that are potentially transformative for Gilead and for patients. All of this reinforces our confidence in our strategic direction. I want to take this opportunity to thank our global community of Gilead and Kite employees, who consistently go above and beyond to drive progress with resilience and dedication.

Different parts of the world are riding the ebb and flow of COVID-19 cases at various times. And while the vaccines give us hope and optimism, we are still very much living with the pandemic. Remdesivir continues to play an important role in fighting the virus and has now been used to treat an estimated seven million hospitalized patients worldwide. Turning to the main highlights of the quarter on Slide four, the second quarter was a solid quarter overall. Veklury sales of $829 million were once again higher than anticipated, offsetting the lingering impact of the pandemic, particularly on HIV treatment. In light of this pandemic impact, Biktarvy’s performance is quite encouraging, revenue for the quarter was USD two billion, up 24% or $390 million from the same quarter last year. This more than offset the $322 million headwind associated with the impact of the Truvada and Atripla LOEs. Much of that headwind is now, of course, behind us. Overall, our share of the HIV treatment market held steady quarter-over-quarter, and our PrEP share remains steady even with generic entries.

These dynamics give us confidence that the underlying demand for our HIV products remains strong and positions us well for growth as the overall HIV market recovery gains momentum. Moving to our clinical pipeline, 2021 is a catalyst-heavy year for Gilead, and we’ve delivered all of our key first half pipeline commitments. Among other milestones, we shared top line data from the highly anticipated ZUMA-7 trial, where Yescarta improved event-free survival for second-line large B-cell lymphoma or LBCL patients by 60% compared to the standard of care. This is truly a landmark trial, the first and largest reported Phase III trial readout that demonstrates the efficacy and safety of cell therapy, and we are excited by the opportunity to bring the potential benefits of cell therapy to patients in earlier lines. We shared positive Phase III data from MYR301, which will help support our anticipated BLA filing for Hepcludex for HDV in the U.S. later this year, and we submitted our NDA for use of lenacapavir in the heavily treatment-experienced population with multidrug resistance.

This filing was based on data from the Phase II/III CAPELLA study presented earlier this month. We also shared strong lenacapavir data from the Phase II CALIBRATE study in HIV treatment, which will be used to inform our broader lenacapavir efforts. Our partner, Arcus provided an interim update from ARC-7 that supports the continuation of both ARC-7 and ARC-10 trials for their anti-TIGIT candidate, domvanalimab. Lastly, on Slide four, we’re beginning to see the positive impact of our strategy, which we introduced early last year. The business is diversified across indications and therapies. In particular, we are seeing Cell Therapy and Trodelvy contribute to growth and expect they will be key growth drivers for Gilead.

While we build out the oncology business, we remain focused and committed on ensuring the long-term competitive positioning of our virology portfolio. Next, on Slide five, we highlighted our pipeline execution so far this year. And I’d like to thank all those who helped us to deliver on this ambitious agenda, including our employees, the people who participated in the studies, our partners and the study investigators. As we look ahead to the rest of the year, our target milestones include a progression-free survival or PFS readout in our event-driven Phase III TROPiCS-02 study evaluating Trodelvy in hormone receptor HER2-negative metastatic breast cancer. A Phase Ib readout for magrolimab and myelodysplastic syndrome or MDS.

Depending on the data, timing and results, this could result in a BLA submission for accelerated approval and initiation of the potential Phase III lenacapavir and islatravir long-acting oral combination. As you know, this is in collaboration with Merck and the development and formulation work remains on track. We look forward to updating you next quarter about the additional milestone progress. We understand the continued strong and consistent pipeline execution is critical to the extending the virology business and expanding further into oncology. We believe our current and pipeline therapies can address significant unmet medical needs. We are very encouraged by the progress Gilead and Kite are making. We are well on our way in our journey to expand and diversify into new therapeutic areas and we are already seeing the evolution of both our pipeline and commercial portfolio.

With that, I’ll hand over to Johanna, who will share an update on our commercial performance for the second quarter.

Johanna Mercier — Chief Commercial Officer

Thanks, Dan, and good afternoon, everyone. Starting on Slide seven, total product sales of $6.2 billion were up 21% year-over-year, primarily reflecting Veklury, which was not a contributor to revenue in the second quarter of 2020. On Slide eight, Veklury second quarter revenues of $829 million declined sequentially, reflecting the impact of higher vaccination rates and lower infection and hospitalization in many regions. While hospitalizations trended lower in the second quarter, Veklury remains the therapy of choice in three out of five patients hospitalized with COVID-19. We estimate that since the launch in May 2020, roughly seven million patients globally have been treated with remdesivir. It’s truly remarkable and encouraging to see how remdesivir continues to play such a key role in fighting this global pandemic. Excluding Veklury, total product sales of $5.3 billion were up 5% year-over-year. We saw growth in Cell Therapy and HCV in addition to new revenue contributions from Trodelvy and more modestly Hepcludex for HDV. Additionally, other product revenues of $291 million grew 20% year-over-year, driven by increased demand for AmBisome outside of the U.S. to treat mucormycosis, which has seen a rise in incidents in patients hospitalized with COVID-19. Sequentially, we saw 9% growth for total product sales, excluding Veklury, primarily driven by growth in Biktarvy.

Moving to Slide nine, HIV product sales were $3.9 billion, up 8% sequentially and down 2% year-over-year. Compared to the second quarter of 2020, total HIV revenue reflected strong Biktarvy growth that more than offset the $322 million lower revenue from Truvada and Atripla following their loss of exclusivity. Compared to last quarter, HIV grew $288 million, reflecting customary seasonal inventory dynamics and growing demand for treatment. Biktarvy revenue of $2 billion was up 24% year-over-year and 9% sequentially, with quarter-over-quarter growth, primarily driven by increased demand. Biktarvy remains the number once prescribed therapy in the U.S. across naive, switch and continuing patients and remains number one in naive across all EU5 countries. Approximately 70% of switches from both Gilead and non-Gilead regimens, result in incremental revenue. Overall, and despite the ongoing impact of the pandemic, Biktarvy continues to gain market share with 1% share growth versus last quarter in both the U.S. as well as the EU5. Descovy revenues of $435 million grew 21% sequentially due to a modest improvement in the demand for prep and more favorable inventory and pricing dynamics that we typically see in the second quarter relative to the first. As we highlighted in prior quarters, we’ve been working with payers to ensure patients’ community to have access to Descovy in light of entry of generic alternatives for Truvada. We’re really pleased to see the strong sequential growth in Descovy, and we continue to maintain mid-40% share despite generic impacts. Year-over-year, Descovy grew 4%, largely due to higher demand for PrEP. And overall, PrEP demand is showing signs of recovery and is expected to continue to improve as pandemic restrictions phase out.

Earlier this month, federal FAQs for the U.S. Preventative Services Task Force were released. It provided greater clarity as to the importance of PrEP in ending the epidemic, and we’re really encouraged by this recent development. We hope it will help to minimize the barriers of PrEP use going forward. Before I transition to other products, I just wanted to take a moment to share some perspective on the HIV treatment market, given the longer-than-expected pandemic impact. In regions outside of the U.S., such as Europe, we’re beginning to see signs of recovery in the dynamic market with second quarter trends generally in line with our expectations. In the U.S., however, the pace of the pandemic recovery was slower than we expected in this last quarter. And while we’re seeing signs of recovery in PrEP and some sequential growth in the treatment market, it’s clear that it will take several quarters for treatment to return to pre-pandemic levels. In treatment, there are really two pandemic-related headwinds that we observed. First, lower HIV screening and diagnosis resulting in lower treatment initiation; and second, due to the limited support services available during the pandemic, we’ve seen a higher number of patients discontinue their HIV treatments. Taken together, these two factors have reduced the number of active patients on HIV therapy entering 2021, thereby reducing the overall volume of new and refill prescriptions we would expect to see in 2021.

We did, however, see growth resume from this lower base in the second quarter. After prior quarter-over-quarter decline, second quarter U.S. HIV treatment prescriptions grew 2% and we expect the market to grow at historical rates once screening and diagnosis rates return to pre-pandemic levels. To continue our efforts to advance progress against the HIV epidemic, we are partnering with health care professionals, advocacy groups and policymakers to raise awareness of the unique challenges COVID-19 poses to HIV screening, diagnosis and adherence. Our goal is to help health care providers ensure that patients continue to be diagnosed and treated. Given the strength of the demand fundamentals for Biktarvy, Descovy for PrEP and other Gilead HIV products, we remain confident in our competitive positioning now that many communities aren’t using social distancing requirements.

In the meantime, we continue to see strength in underlying treatment demand with no material changes in the competitive landscape, with our total Gilead treatment market share holding steady at 75% in the U.S. and just under 50% in Europe despite competition and the entry of new generics. Next, on Slide 10, HCV product sales in the second quarter were $549 million, up 23% compared to last year, but patient starts remain well below pre-pandemic levels. The growth reflects a modest sequential recovery in HCV patient starts in the U.S. in Q2 2021, in addition to an artificially low Q2 of 2020 that was impacted by unfavorable government rebate adjustments. We’ll be watching for further signs of recovery in the third quarter. Both U.S. and EU Gilead market shares remain steady at around 60% and 50%, respectively.

Moving to Slide 11, HBV and HDV product sales were $237 million, up 8% year-over-year with improving patient starts on Vemlidy, particularly in ex U.S. markets. In its first full quarter as part of Gilead Hepcludex contributed $7 million and is currently available in France, Germany and Austria. We’re excited to be working with the various reimbursement authorities to increase patient access and expect to secure full reimbursement in the major European markets in 2022. Moving to Trodelvy on Slide 12, product sales in the second quarter were $89 million, up 24% quarter-over-quarter, driven by demand for the two new indications approved in April, namely second-line plus metastatic triple-negative breast cancer and urothelial cancer. We continue to be encouraged by the positive feedback from physicians on the Phase III ASCENT data, which demonstrated a one-year medium overall survival benefit for second-line metastatic TNBC patients treated with Trodelvy. To build on this growing interest, we’re increasing community awareness, especially the expanded indication to second line in TNBC.

And we expect to see growing demand as breast cancer screening ramps back up to pre-pandemic levels. IQVIA data suggests that breast cancer screening volumes were about 20% lower in the U.S. in 2020 compared to 2019. This suggests as many as 41,500 breast cancer patients have not been diagnosed during the pandemic. On behalf of Christi and the Kite team, I’m pleased to share a Cell Therapy commercial update on Slide 13. Total cell therapy product sales totaled $219 million in the second quarter, representing 39% growth year-over-year, driven by both Yescarta and Tecartus. Yescarta growth was driven by strong demand in Europe as well as successful follicular lymphoma launch in the U.S. Increased competition, particularly in third-line LBCL, continues to raise the profile of cell therapy and is positive to Kite overall. We remain confident in Yescarta’s competitive profile and positioning, and are particularly proud of Kite’s industry-leading manufacturing turnaround time and reliability.

Our results also reflected strong momentum from the Tecartus mantle cell lymphoma launch, highlighting the unmet medical need for MCL patients. We continue to add new indications and geographies for our cell therapy products. For example, the Fosun-Kite joint venture recently received approval in China for Yescarta as the first cell therapy to treat third-line LBCL. And we’re excited to see the top line data for ZUMA-seven, getting us a step closer to second-line LBCL cell therapy. Even as we prepare for discussions with regulatory agencies later this year, commercial and manufacturing preparations are ramping up to ensure sufficient capacity and support for second-line LBCL demand in both the U.S. and in Europe. Christi is here with the team to take your questions on cell therapy later in the call.

But for now, I’ll hand it over to Merdad to walk us through the pipeline updates.

Merdad V. Parsey — Chief Medical Officer

Thank you, Johanna. As Dan mentioned, it’s been a gratifying year so far, delivering on all our key pipeline commitments, supporting Gilead’s ambitions to extend our leadership in HIV and creating a broader portfolio spanning virology and oncology and building our portfolio in inflammation. I’ll spend our time today on the highlights of the quarter and pointed to the appendix of the earnings presentation for a more complete view of our pipeline activities. First, in HIV, as you can see on Slide 15, programs for our investigational lenacapavir agent continued to progress. At the recent International Aid Society Meeting, we shared data from the Phase II/III CAPELLA study that evaluated heavily treatment experienced individuals who’ve already developed resistance to multiple antiretroviral drugs.

CAPELLA demonstrated lenacapavir’s potency in this difficult-to-treat population. Despite significant prior resistance, antiviral activity was observed starting at day 15. By week 26, 81% of individuals had viral suppression when lenacapavir was combined with an optimized background regimen. Based on these data, we filed a new drug application. If approved, this would become the first six month long-acting subcutaneous injection regimen available and deliver a welcome new option for people living with HIV, who have developed multidrug resistance to other antiretrovirals. Also with IAS, we presented strong interim results from the Phase II CALIBRATE study, evaluating lenacapavir in a treatment-naive population. In CALIBRATE, participants receive lenacapavir either as a subcutaneous injection or as a daily oral pill in combination with Descovy. At week 28, six 794% of subjects achieved HIV-1 RNA loads of less than 50 copies per ml. These findings will be used to help inform our broader efforts establishing lenacapavir as a foundational agent for our long-acting franchise. Late last month, we screened the first patient for the Phase III PURPOSE-II trial, studying lenacapavir for HIV prevention in cisgender men, transgender women, transgender men and gender nonbinary people who have sex with men and are at risk of HIV infection.

We expect to initiate the Phase III PURPOSE-I study of lenacapavir for HIV prevention in adolescent girls and young women later this year. Finally, we’re actively working on the co-formulation for the long-acting investigational oral and injectable combination of lenacapavir and islatravir and expect to initiate the oral Phase II trial by the end of the year. Moving on to HDV on Slide 16. Last month at the International Liver Congress, we presented data from the MYR301 and MYR204 programs. MYR301 is a Phase III registrational study evaluating bulevirtide as monotherapy for the treatment of HDV. Interim results demonstrated that bulevirtide was well tolerated in both cirrhotic and noncirrhotic patients, with compensated chronic HDV infections.

At week 24, bulevirtide treatment was associated with significantly greater HDV RNA declines and improvements in biochemical measures of disease activity compared to no treatment. Moreover, there were no treatment-related serious adverse events leading to discontinuation. These results continue to support the effectiveness of the two milligram dose, which has received conditional approval from the EMA and will form the basis of the BLA filing plan for later this year in the U.S. As part of our HDV cure efforts, we also presented interim data from the MYR204 Phase IIb study, investigating finite regimens of bulevirtide, both as monotherapy and in combination with PEG interferon alpha. Both monotherapy and combination treatments of bulevirtide were found to be generally well tolerated and more effective than PEG interferon alone through 24 weeks of therapy. The primary endpoint analysis occurs at 24 weeks after completion of therapy and includes virologic and biochemical response data. We look forward to sharing those data when available. Moving to Slide 17 and on behalf of Christi and the Kite team, as you know, we shared earlier the strong positive top line data from ZUMA Seven, the landmark 359-patient Phase III study evaluating Yescarta in second-line LBCL. The study met the primary endpoint for event-free survival with a hazard ratio of 0.398, representing a 60% improvement in event-free survival compared to standard of care stem cell transplant. Yescarta had a safety profile comparable to or better than what we have seen in the third-line setting.

This is a clinically and statistically meaningful improvement in outcomes that, if approved in the U.S., could extend Yescarta’s reach to a total unique population of 14,000 patients annually in the second and third-line LBCL setting. ZUMA Seven also met the key secondary endpoint of objective response rate. As expected, data for overall survival is immature at this time, but the interim analysis suggests a favorable trend in this critical milestone. In summary, we’re very excited about the potential benefit to patients demonstrated in ZUMA-seven and look forward to beginning discussions with regulatory agencies later this year as we work towards potential SBLA and MAA filings for Yescarta in second-line LBCL. And separately, we’re on track for the Phase II readout for our first line LBCL study before the end of the year. Beyond LBCL, we’ve completed filing Yescarta with the EMA for patients with follicular lymphoma after three or more lines of systemic therapy. We also have a PDUFA date of October one under accelerated review with the FDA for Yescarta’s MALL.

And of course, while our internal focus remains on ontologist cell therapies, we continue our engagement in alternative approaches. Most recently partnering with Shoreline Biosciences to develop novel off the shelf allogeneic cell therapies based on natural killer targets for hematologic cancers. Slide 18 is a recap of our pipeline execution so far this year. In addition to the items we have discussed already, our partner Arcus has provided an early interim update of their Phase II ARC-7 trial in late June, demonstrating clinical activity in the anti-TIGIT domvanalimab-based doublet and triplet combinations. Zimberelimab, our anti-PD-1 antibody, saw similar levels of activity in the monotherapy arm compared to marketed anti-PD-1s. Based on the interim analysis, we’re pleased that ARC-7 and the confirmatory Phase III ARC-10 trial will continue to enroll as planned. We look forward to seeing how the data mature with additional patients and duration of follow-up to inform our opt-in decision.

Separately, our partner, Galapagos, also shared data readouts from their Toledo SIK2/3 programs across psoriasis, ulcerative colitis and rheumatoid arthritis and the plaque psoriasis data from their TYK2 program. Both studies were early and had small samples, and we look forward to additional data. We also remain focused on the following upcoming milestones. For Trodelvy, we continue to target a TROPiCS-02 PFS readout this year. The study is an event-driven Phase III trial in patients with hormone receptor positive HER2-negative metastatic breast cancer. Pending data, we will evaluate and then determine the appropriate regulatory next steps. We estimate there are roughly 17,000 patients in the U.S. who could benefit from Trodelvy in this setting. We continue to expect the Phase III non-small cell lung cancer for Trodelvy to initiate in the second half of this year. We plan to share an update from the TROPiCS-03 basket study on lung cancer later this year and will separately provide updates on head and neck squamous cell carcinoma and endometrial cancer as those data mature.

We anticipate a Phase Ib readout from magrolimab in MDS later this year, and pending data will engage with regulators as we explore potential BLA filing for accelerated approval. If approved, magrolimab will be the first-in-class checkpoint inhibitor targeting CD47 and Gilead’s first frontline oncology indication. There’s a significant unmet need for MDS, with no new treatments approved in 14 years despite 15,000 new patients being diagnosed each year in the U.S. alone. We continue our development efforts in AML and have enrolled our first patient in the Phase III frontline AML magrolimab study. Before I wrap up the pipeline discussion, I wanted to share an update on remdesivir. We’ve decided not to move forward with an inhaled formulation of remdesivir based on the results of our initial proof-of-concept study, suggesting suboptimal lung deposition. To address patient needs in the evolving pandemic, we are continuing our efforts on advancing multiple novel antivirals.

We expect to submit IND filings later this year or early next year for these agents. We remain committed to supporting patients through this pandemic and continuing our legacy of developing antiviral therapeutics for the treatment of emerging diseases. Finally, on Slide 19, I want to recognize the teams at Gilead and Kite. Compared to just two years ago, our pipeline has grown from 30 clinical stage programs to over 50 today, and resulted in a considerably more diverse set of assets that can be transformative, not only for patients but for Gilead. The Gilead and Kite teams have worked tirelessly to deliver on our pipeline programs during this time of dramatic growth despite the pandemic. It’s a thrilling time to be part of the team, with tireless dedication and commitment to helping patients. I look forward to updating you on our progress in the quarters ahead.

With that, I’ll hand the call over to Andy to walk us through the financial results of the quarter.

Andrew Dickinson — Chief Financial Officer

Thank you, Merdad, and good afternoon, everyone. Moving to Slide 21, our financial results in the second quarter were solid overall, with total product sales up 21% year-over-year, given the important role Veklury continues to play in this pandemic. Excluding Veklury, total product sales grew 5% year-over-year, with strong Biktarvy growth more than offsetting lower Truvada and Atripla revenues. In addition to impressive growth in cell therapy and, of course, the new revenue contribution associated with Trodelvy, which was not part of our portfolio in the second quarter of last year. Moving down the P&L, non-GAAP product gross margin was 86.4% in the second quarter, 210 basis points higher year-over-year and primarily associated with a lower royalty expense.

Non-GAAP R&D was $1.1 billion, down 9% year-over-year, with lower remdesivir-related investments as compared to the same period last year, partly offset by higher investments across our pipeline, notably Trodelvy and magrolimab. Non-GAAP SG&A expense was $1.1 billion, down 4% year-over-year, primarily due to lower legal expenses, offset in part by continued commercial investment in Trodelvy and Veklury outside the United States. Moving to tax, we realized a lower effective tax rate of 19.6% for the quarter or down 320 basis points year-over-year due to a shift in geographic earnings mix. Overall, our non-GAAP diluted earnings per share was $1.87 per share in the second quarter of 2021 compared to $1.11 for the same period last year. The year-over-year improvement primarily reflects higher product sales due to Veklury, higher gross margin as well as lower operating expenses and a lower effective tax rate, offset by lower interest income.

Overall, we’re encouraged by our first half results shown on Slide 22. Moving to Slide 23, you can see that we are updating our guidance for 2021. As always, the duration and magnitude of the COVID-19 pandemic continue to be uncertain and the rate and degree of these pandemic impacts as well as the corresponding recovery from the pandemic may vary across our business. With that said, we now expect full year total product sales in the range of $24.4 billion to $25 billion compared to our previous range of $23.7 billion to $25.1 billion. The new range increases the midpoint from $24.4 billion to $24.7 billion, and reflects our solid results year-to-date as well as our updated expectations for the second half of the year.

With first half Veklury revenue of $2.3 billion, we now expect full year Veklury revenue in the range of $2.7 billion to $3.1 billion compared to our previous $2 billion to $3 billion range. Our updated range reflects the ongoing role of Veklury in this pandemic and assumes we’ll continue to see regional outbreaks. The situation continues to be dynamic, and we’ll likely update our thinking again when we report our earnings after the third quarter. Back to our guidance, we now expect total product sales excluding Veklury for the year to be in the range of USD21.7 billion to $21.9 billion compared to our previous range of $21.7 billion to $22.1 billion. This tightening of the range reflects the longer-than-expected pandemic impact on our business, including the latest increase in COVID-19 cases. As Johanna discussed, the pandemic has most notably impacted our HIV treatment business, where we saw substantially fewer treatment initiations and a greater number of discontinuations than expected in 2020.

It’s taking longer than we expected for treated patient volumes to ramp back up to more normal levels, particularly in the United States. That said, we saw encouraging signs of recovery in the HIV market in the second quarter, and our guidance assumes recovery will continue through the remainder of the year. Based on market share dynamics, we remain very confident in our competitive positioning, and we believe we’re well positioned as the recovery continues. Looking at the rest of our P&L. We now expect non-GAAP product gross margin in the range of 86% to 87%, reflecting the lower mix of HIV revenue. We now expect non-GAAP R&D to decline low to mid-single-digit percentage compared to 2020 levels. This primarily reflects the timing of investments, and we remind you that the expenses in both R&D and SG&A are back-end loaded this year, increasing sequentially from Q2 into Q3 and then even more from Q3 into Q4.

Our non-GAAP SG&A guidance remains unchanged at flat to low single-digit percentage decline over 2020. In R&D, we’ll be ramping up additional studies with magrolimab, Trodelvy, long-acting combination work with lenacapavir for the treatment of HIV and other pipeline activities. And in SG&A, we will be ramping up marketing activities to support our growing portfolio of indications such as with Trodelvy and Tecartus. Finally, reflecting the updates to our revenue, gross margin and operating expense guidance, we now project non-GAAP diluted EPS between $6.90 per share and $7.25 per share for the year, and GAAP diluted EPS between $4.70 and $5.05. Additionally, our capital allocation priorities have not changed, and we remain committed to our dividend. Year-to-date, we’ve paid down $1 billion — $1.25 billion in debt, and we’re on track to repay at least $4 billion in debt by the end of the year.

With that, I’ll invite the operator to begin the question-and-answer session.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Cory Kasimov with JPMorgan. Your line is open.

Gavin Scott — JPMorgan — Analyst

Hello, This is Gavin on for Cory. Thanks for taking my question. Just wanted to go back to the U.S. HIV business. Can you provide additional color, particularly in the context of why this is so much different from the ex U.S. markets? And what is the most important factor you’ll be watching for to have confidence in the U.S. market normalizing? Thank you.

Daniel O’Day — Chairman And Chief Executive Officer

Yes. Thanks a lot, Gavin, for joining. I’m obviously going to turn that over to Johanna. I’d just point out that we continue to do really well in our share and certainly, Biktarvy growth and are well positioned as the market rebounds. And with that, I’ll turn it over to Johanna for some specifics.

Johanna Mercier — Chief Commercial Officer

Thanks. Gavin, thanks for your question. I think from a market dynamic standpoint, what we’re seeing is we saw a little bit last year in Q2, most of the industry was actually slowing down pretty quickly in Q2. HIV took a little bit longer, and it’s kind of that playing out in 2021. It’s taking a little bit longer to come back and bounce back. One of the major reasons for that has to do with your dynamic market being much smaller in this market. You have a very large pool of patients that are just continuing patients. And you’re really playing in the dynamic market with your naive patients coming in and your switches and your restarts, really around 5% or so. And so that’s why it’s taking a little bit longer as we’re going through this. From a different standpoint between U.S. and Europe, I think it has more to do with the fact that in Europe, there’s diversity across some of the different countries as to the pandemics and the timing of kind of the recoveries or even some of the surges that happened.

So it’s a little bit more blended than what we’ve seen in the U.S. thus far. And so I think that’s just what’s playing out here. Obviously, the bigger impact being in the U.S. because that’s where most of our business lies in HIV. And just to close out on that, the — that’s from a market standpoint, and it’s very different than kind of the fundamentals of our HIV business. I think what we’ve seen with Biktarvy, we’re really quite pleased with in light of the fact that not only it’s grown quarter-over-quarter by one point, both in the U.S. as well as in the EU5. But also, if you think about it over the last 12 months, it’s grown six point share over a very strong base. We’re just under 40%, we’re at 39% share at this point in time. So we’re very pleased with the continued growth of Biktarvy, and you can appreciate that because it’s such a larger base, that’s going to get more challenging as we move forward. And that’s why I think we’re excited about the market coming back a little bit. We’ve seen it come back in Q2. Where the market goes, obviously, our HIV business goes because we own 75% of the market. And so therefore, we’re watching that very closely, but we would expect that recovery to continue, although at a slower pace than we had originally expected.

Daniel O’Day — Chairman And Chief Executive Officer

That’s great, Johanna. Anything on the indicators. I think you’ve mentioned but anything more on the indicators that you’ll be looking for.

Johanna Mercier — Chief Commercial Officer

Yes. So we’ve been looking, of course, at the HIV screening and the diagnosis and how that’s playing out. And we’re still under by about 13% to — below pre-COVID levels. So I think once those come back up, I think that would be something that we’re watching very closely and also the drop-off rates. We talked a little bit in — earlier about the adherence piece of the puzzle, because you have less patient support groups around, you have less surround sound around those HIV patients. You have a lot of those case managers and physicians that have moved over to treat COVID-19 and so for impacting HIV, a little bit disproportionately. And so we’re also looking at those drop-offs. And we’ve seen those drop-offs come back to normal to pre-COVID levels just most recently. And so that’s another positive sign to that recovery of the market.

Daniel O’Day — Chairman And Chief Executive Officer

And Gavin, obviously, just from a patient perspective, we have been and will continue to be dedicated to helping patients, particularly in underserved communities get back into the care system. I think that’s something that Gilead prides itself on. And it’s exceptionally important as a leader in HIV medicines to make sure we are always on the side of the patients as we emerge from this pandemic. So thanks for the question, Gavin.

Operator

Thank you. Our next question comes from Terence Flynn with Goldman Sachs. Your line is open.

Terence Flynn — Goldman Sachs — Analyst

Great. Thank you for taking my question. Maybe a two-part for me. First for Johanna, just wondering if you can provide any more insight on the Trodelvy launch, specifically the split of sales by either setting or indication. And then for Merdad, can you remind us of the size of the lung cancer cohort in TROPiCS-03? And then how are you thinking about the potential risk of ILD in that population? Thank you.

Daniel O’Day — Chairman And Chief Executive Officer

Thanks, Terence. Yes, go ahead, Johanna.

Johanna Mercier — Chief Commercial Officer

Sure. Thanks for the question. So yes, so we’re really pleased with the Trodelvy sales. I had 24% growth quarter-over-quarter. I think, is a very strong quarter, and I think that really has to do with the approval, the second line plus approval that we got in metastatic triple negative breast cancer early April. It’s also related to the fact that because now we have the full approval, we have the opportunity to promote the incredible overall survival data that we have with the ASCENT data. And so that’s been a big piece of the puzzle. If you’re asking me to split the sales per line of therapy, that’s very challenging in light of the claims data that we have. But what I would say if it’s more about bladder cancer versus triple-negative breast cancer, I would say most of that is triple-negative breast cancer, probably about a 90-10 ratio as our bladder cancer is much smaller. Although we’ve done some nice inroads there already and are looking at about just under 10% share in bladder right now with Trodelvy. So we’re excited about that as well. Merdad?

Merdad V. Parsey — Chief Medical Officer

And then with TROPiCS-03, it’s a basket study. So the ends per arm are not hard and fast. We’ll probably be looking at data once we get to the 20, 30 range in there. But it’s not predetermined. So I wouldn’t want to overstate it. Regarding ILD, we are definitely very sensitive to and watching for it, as you can imagine. To date, we haven’t had any reports of that, but we’re ever vigilant. So.

Daniel O’Day — Chairman And Chief Executive Officer

Great. Thank you both. Thanks Terence. We’ll get the next question now, please.

Operator

Thank you. Our next question comes from Brian Abrahams with RBC Capital Markets. Your line is open.

Brian Abrahams — RBC Capital Markets — Analyst

Hey, Good afternoon. Thanks for taking my question. A question regarding HIV life cycle. You recently reported data for subcu lenacapavir-based combo with treatment-naive HIV. I’m curious, how do the learnings there with respect to the resistance profile you’re observing, shape how you think about the future development steps vis-a-vis potentially exploring higher doses, more frequently — more frequent than every six month injections and/or combining with agents that might have a higher intrinsic barrier resistance versus F/TAF. And then, I guess, along the lines of HIV life cycle, I’m also curious your level of confidence as to the potential of F/TAF to have exclusivity beyond 2025?

Daniel O’Day — Chairman And Chief Executive Officer

Great. Why don’t we have you start, Merdad, and perhaps Andy can comment a little bit on the second piece, too.

Merdad V. Parsey — Chief Medical Officer

Yes, thanks. It’s a very good question. And I think if you think about the patients in that trial, these are highly treatment-experienced patients who often develop resistance because of noncompliance. And when these subjects are getting a subcu injection of lenacapavir, remember that these patients are going to potentially continue to go off and on their oral regimens. As we think about the future, as you know, we are — for treatment going outside the highly treatment-experienced population, we’re really thinking about how we’re going to combine lenacapavir with other long-acting agents like islatravir. And as we do so, I think the concerns about patients potentially having effective monotherapy with lenacapavir go away in some regards, right, ensuring that patients are taking multiple agents at the same time is going to be really important for us.

Daniel O’Day — Chairman And Chief Executive Officer

Thanks, Merdad. And perhaps, Andy, you want to comment on the exclusivity question for Brian?

Andrew Dickinson — Chief Financial Officer

Sure. I’d be happy to. Brian, thanks for the question. As you know, there’s litigation that’s underway. There are some recent developments that the number of analysts wrote about. Our base case continues to be that there will be generics arriving in 2025 and 2026 in the U.S. and EU respectively, but we think we have a strong case and that there — we look forward to continuing to prosecute the case and we’ll see where it plays out. We should have an additional update later this year. So that’s really where it stands.

Brian Abrahams — RBC Capital Markets — Analyst

Thank you. If you have a next question please.

Operator

Thank you. [Operator Instructions] Our next question comes from Geoffrey Porges with SVB Leerink. Your line is open.

Geoffrey Porges — SVB Leerink — Analyst

Thank you very much for taking my question. So just a couple of parts in my question. Could you clarify a couple of your partnerships? There’s been some news from Galapagos, you’ve invested over $5 billion there. Are you going to take on any of those drugs from the Toledo portfolio that the company recently highlighted? And then related to that, your Arcus partnership. Does your guidance include the mild upfront cost of opting in for any of those programs? And what’s the trigger and the window for when you can opt in to any of those three programs? Because they sort of appear on your pipeline slide, but it’s not completely clear whether they’re in or out. So could you clarify where you’re going with those two partnerships?

Daniel O’Day — Chairman And Chief Executive Officer

Sure, Geoff. Thank you very much for the question. And I’ll start a little bit and then ask Merdad and Andy, if he wants to add anything as well. So I think, first and foremost, I think we’re — we believe deeply in partnerships. We have a robust internal portfolio. And we also, as you know, have designed these opt-ins as a way to expand our portfolio in different therapeutic areas. Starting with Galapagos, as you know, which was predominantly focused on inflammation. At this stage, we don’t have any opt-in milestones right now with Galapagos. We’re working closely with them on their science and their discovery platform and some of their preclinical to clinical molecules to support them in their efforts. But at this stage, we don’t have anything more to report other than like Galapagos has reported on the, for instance, Geoff, to your question on the Toledo program. But rest assured that as those programs evolve and mature and develop, we’ll keep you informed. Perhaps, Merdad, if you want to say anything else in Galapagos and bridge to Arcus?

Merdad V. Parsey — Chief Medical Officer

Yes. I think the stories are similar. We like to keep you apprised of what could potentially come into our portfolio, and we have the opt-in rights too for Arcus. I mean I think Dan laid out Galapagos well. For Arcus, we continue to wait for data to mature. And once the data get to a level of maturity where we can really make the call, that’s when we’ll have our opt-in. We have not included, and Andy will confirm for me, but we have not included the financials of a potential opt-in in our guidance at this point.

Daniel O’Day — Chairman And Chief Executive Officer

Andy, you want to [Indecipherable]

Andrew Dickinson — Chief Financial Officer

That’s correct. Yes. No, I’m happy to follow up here, Geoff, good question. And nothing has changed from the guidance at the beginning of the year. So our R&D spend and all of our expense guidance does not include the opt-ins on any of the programs that we have options to, including the three programs that you mentioned at Arcus. You also asked about the opt-in windows. The opt-in window for the first TIGIT antibody should be coming most likely at the end of this year. It could be early next year, but it’s most likely at the end of this year, we’ll have enough patient data to trigger the opt-in or our desire to opt in potentially early. On the other two programs, the adenosine programs at Arcus, that’s most likely next year. And again, there may be additional data that comes this year that if it looks really strong. We want to move as quickly as we can, and we can opt in early, Geoff, on those programs. And then on Toledo, it’s relatively simple. And all of the Galapagos programs that opt-in comes after Phase II enabling studies. So the Toledo programs are a long ways away from a potential opt-in decision.

Merdad V. Parsey — Chief Medical Officer

Phase III enabling.

Andrew Dickinson — Chief Financial Officer

Yes, I’m sorry, Phase III enabling. Thank you.

Daniel O’Day — Chairman And Chief Executive Officer

Geoff, and I’d just kind of round out to your question. I mean, there’s obviously many other partnerships we have that we’re working closely with at different phases, but those are the specific ones you asked about. Thank you very much for the question. Can we have the next question please?

Operator

Thank you. Our next question comes from Geoff Meacham with Bank of America. Your line is open.

Geoff Meacham — Bank of America — Analyst

Good Afternoon guys, Thanks for taking my question. A question for Dan or Merdad on COVID. There’s a high expectation that vaccines are here for a while now that the Delta variant has really changed the dynamic. The question is, has the strategic value of Veklury change for you guys as new cases have ticked up? I know you decided not to pursue inhale, but is there a life cycle here worth investing in over the long term?

Daniel O’Day — Chairman And Chief Executive Officer

Thanks, Geoff. I’ll start, and then Merdad will either correct me or add important information to it. But I think — I mean, just to emphasize, the importance of Gilead’s legacy in antivirals and frankly, our strength in that too, to us as well. So being, of course, the first company to have — and the only company to have an approved antiviral for COVID is no accident. Obviously, it’s decades of experience, decades of investments in a variety of emerging viruses, including COVID, and we haven’t stopped. So to your point, Geoff, I think we’re all learning about this pandemic as it rolls out. And it’s certainly going through different phases, and we think will continue to go through different phases. And therefore, we are, if you like, kind of doubling down on an ability to think about antivirals outside the hospital setting, where remdesivir plays such an important role. And maybe with that, I’ll hand it over to Merdad, as a clinician, how you might also see the future [Indecipherable] and also our role in it.

Merdad V. Parsey — Chief Medical Officer

Yes, thanks. I think we have, I think, been pretty consistently of the mindset that the vaccines will make a tremendous impact in the case numbers and those sorts of things. Even though I think even when we get to some sort of equilibrium, unfortunately, they’ll continue to be, we believe, infections. People will continue to get infected and some proportion of those patients will end up in the hospital. So we do believe that Veklury in the hospitalized setting is going to be — continue to be really important for treating those patients. And as Dan alluded to, we continue to believe and are committed to treatments — making treatments available in the outpatient setting. So I wouldn’t — the inhaled nebulized approach didn’t give us the results we were hoping for, the consistency we were looking for. But because we have other agents in our pipeline based on our virology expertise, we will be bringing those forward and really focusing on the outpatient setting there. So we continue to believe that having a treatment available for people, whether they’re vaccinated or not, is going to be important for the foreseeable future.

Daniel O’Day — Chairman And Chief Executive Officer

And Geoff, what I might add is that our preclinical folks continue to study remdesivir against a variety of variants. In fact, all four major variants of concerns, so the Alpha from the U.K., the Beta from South Africa, the Gamma from Brazil and the Delta from India, and all are fully sensitive against — or remdesivir is as sensitive against all those strains. Which would make sense because we’re not seeing any mutations in the polymerase remdesivir binding site. And so I think it’s important as we think about next-generation products to also think about medicines that will be effective against these ongoing variants like remdesivir. It’s an important bar for us as we move forward. Thanks, Geoff, for the question.

Operator

Thank you. Our next question comes from Umer Raffat with Evercore. Your line is open.

Umer Raffat — Evercore — Analyst

I had two quick ones as well. First, have you had an interim PFS on the HR positive study of Trodelvy? And secondly, congrats on Bill Grossman’s hire from Arcus. And I was wondering to what extent was the decision of Bill bring on board driven exclusively by Bill’s familiarity with Arcus programs? Thank you very much.

Daniel O’Day — Chairman And Chief Executive Officer

Yes. Why don’t you start, Merdad?

Merdad V. Parsey — Chief Medical Officer

Yes. Thanks, Umer. Great questions. Yes, we have not done the interim PFS analysis as we’ve talked about, that will happen certainly before the end of the year, we hope. And we’re — that’s still what we’re tracking to. But we have not done the analysis yet. So we remain blinded to those data. And then in terms of Bill, I think I wouldn’t necessarily tie it as you’re suggesting to Arcus, it’s certainly an advantage for us that should we opt into Arcus programs, Bill will bring familiarity. But for us, Bill’s experience and leadership and his excitement about being here and overseeing the overall portfolio were the drivers for Bill coming on board.

Daniel O’Day — Chairman And Chief Executive Officer

Yes. And I would just add, Umer, I mean, look, many of us know Bill, you know him as well. Our relationship with Arcus is extremely important and continues to be. And this was an example of Bill seeing a career opportunity and seeing an evolution for his career that made sense for him. We certainly want to make sure that Arcus continues to have the skill set that it needs to be successful. We have the skill set that we need to be successful. I think it’s just a good example of how partners collaborate at times. And so I just wanted to emphasize, our relationship with Arcus is unchanged and as strong as ever.

Operator

Our next question comes from Michael Yee with Jefferies.

Michael Yee — Jefferies — Analyst

Maybe a question for Merdad on Trodelvy a couple of parts. In the TROPiCS-02 study, you had the smart decision to take a look at that, enlarge it, powered for PFS, etc. Did you have any information that could help give you confidence around the powering? And any information that would help you give confidence in the overall study such as the number of events that have passed or anything like that? Or even knowing that it had passed a futility, if you could even comment on that. And then on the lung data that’s coming up, can you just comment around your belief in the profile versus the competitor? Is it similar efficacy, better safety? Or how should we interpret that data when it comes later this year?

Daniel O’Day — Chairman And Chief Executive Officer

Nice to hear your voice, Michael. Over to you, Merdad.

Merdad V. Parsey — Chief Medical Officer

Yes. Thanks, Michael. On the TROPiCS-02 study, we have not done a futility analysis. We are — we continue to look to those data maturing and getting the number of events that we need for the PFS analysis that we have planned. We’re pretty confident in our powering. And in particular, since we expanded the sample size to make sure that we are able to hit the PFS endpoint. Of course, the relevant issue is more the duration of PFS that we get. But from a powering standpoint, we’re comfortable. And it’s just a matter of seeing those data. From an ongoing event standpoint, I think we are where we thought we would be at this point, and it’s really around just letting the events come in, make sure they get adjudicated, we clean the data in time to do the analysis properly. So that’s where we are with that. And then in terms of the lung data on efficacy, yes, I mean, I think — as I think we’ve said before, we’re really proceeding somewhat at risk and pretty aggressively, partly based on our belief in the drug, partly because of what we’ve seen with other agents in lung and partly based on our early data that you’re familiar with in lung that we’ve seen. Of course, we want to make those data more robust while we go into the Phase III world. So we are going to augment our existing data to make sure that we are mitigating our risk somewhat. But thus far, I think what we are hoping for is efficacy that certainly is comparable to what the benchmark might be, even though I think it’s too early to say what that benchmark is with the direct competitor. But we are, again, I think, confident about our ability to bring safety profile that hopefully, will be better for patients.

Daniel O’Day — Chairman And Chief Executive Officer

Excellent. Thank you, Michael. Can we have the next question, please?

Operator

Our next question comes from Alethia Young with Cantor.

Alethia Young — Cantor — Analyst

I’m just curious about, again, going back to the Arcus collaboration with ARC-7. How do you think about what the hurdle is for a triple? Do you think that it has to be more than like some of the competitors like Roche happen in double think?

Daniel O’Day — Chairman And Chief Executive Officer

Thanks, Alethia. Merdad?

Merdad V. Parsey — Chief Medical Officer

I think we have the luxury of being able to look at a singlet, a doublet and a triple here. We would be, of course, excited if the triplet differentiates from the doublet and provides better efficacy. I think that’s what we’d be looking for. And so as the data mature, looking for some signals, some — a reason to believe that the triplet is performing more robustly than the doublet is probably going to be our focus. We’d be very excited if that plays out. It gives us, I think, a pretty unique position.

Daniel O’Day — Chairman And Chief Executive Officer

Thanks, Alethia. So I think we have time for one more question, and thanks, everybody, for your involvement. Can I have the last question, please?

Operator

And the last question comes from Ronny Gal with Bernstein.

Ronny Gal — Bernstein — Analyst

Question about the projections for HIV for the next couple of years. Part one, I guess, is you changed your reimbursement policy on 340B clinics next year. How big essentially is that difference in terms of what it creates for you? And where on P&L will it appear on revenue on SG&A? And the second one, you already mentioned the PrEP barriers are dropping with preventative treatment designation for PrEP. I can’t figure if this is good or bad for you from the perspective of branded drug adoption, given that they don’t have to cover branded drugs.

Daniel O’Day — Chairman And Chief Executive Officer

Thanks, Ronny. So over to you, Johanna.

Johanna Mercier — Chief Commercial Officer

Sure. Ronny, I’m assuming you’re talking about the patient assistance program changes?

Ronny Gal — Bernstein — Analyst

Correct. Yes.

Johanna Mercier — Chief Commercial Officer

Okay. So I want to differentiate that. Those aren’t 340B changes. That’s actually a program that’s really in line with our commitment to help end the HIV epidemic. To date, the program has actually provided free drug to more than 250,000 individuals. And really, that’s what it is. It’s a free program that was always intended and will continue to provide free Gilead medication to eligible individuals to treat and prevent HIV. Unfortunately, it was not intended to be a source of funding for organizations to deliver services, and that’s what we’re trying to reset a little bit.

So the changes to our program model will protect our ability to be able to do this in the longer term and make it a sustainable program for us and more importantly, for patients. So that’s the patient assistance program on that front. The question you’re asking me about PrEP, we’re actually quite encouraged with the FAQs that came out from the U.S. PSTF. The — and here’s why. In the FAQ, they provide a lot more clarity than they had in the past, right? This isn’t new. The recommendation actually came out, the Affordable Care Act recommendation came out two years ago.

But what this provided was actually more details to it and clarity on the importance of PrEP in ending the epidemic and minimizing the barriers of use. And there’s a couple of things in the FAQ that pop out for me. One is it truly supports physician and patient choice. And that’s the piece where generics or nongenerics, right? So Truvada generics or Descovy would then need to be really — the physicians and the p

Atients get to decide together what is the right medicine for which patient. And of course, with the bone and renal safety benefits that Descovy brings, I think this is a great addition to the FAQs. In addition to that, there’s also some guidance around timely management of the request for this by payers, so to turn it around within 24 hours, which is quite different. than what’s happening today. And then the last piece is $0 of out-of-pocket costs. So I think for patients, this is great news. And I also think for patient choice and physician choice, this is quite promising as well.

Daniel O’Day — Chairman And Chief Executive Officer

Ronny, I wanted to make sure we covered your question. Did we understand you correctly? I assume so, Ronny. Great. Well, thank you all very much.

Jacquie Ross — Investor Relations

So thank you all for joining us today. We appreciate your continued interest in Gilead and look forward to updating you on our progress.

Operator

[Operator Closing Remarks]